These provide UK law enforcement with potentially ground-breaking new powers to freeze and recover the alleged proceeds of crime.
While there has been significant focus on unexplained wealth orders, lesser known provisions, which involve the freezing and forfeiture of money held in bank and building society accounts, will most likely prove of most relevance and concern to financial institutions and bank account holders.
This also signals a change in approach by UK law enforcement, with civil recovery set to become the new norm.
These new powers were introduced to counter a number of obstacles that UK law enforcement faced in recovering funds held in ‘suspicious’ accounts, where the funds were either alleged to be derived from, or intended for use in, unlawful activity.
While the new provisions are modelled on the cash seizure regime, they arguably go much further and will increase the regulatory burden faced by financial institutions.Although financial institutions can administratively suspend and/or close suspicious or high-risk accounts, the subsequent freezing and forfeiture of these funds by law enforcement was not straightforward.
In criminal cases, this required the prosecution to succeed in persuading a Crown Court to restrain the assets and, after a successful criminal prosecution, secure a confiscation order. In civil recovery, this was dependent on the enforcement authority commencing civil recovery proceedings in the High Court and the value in the accounts being above £10,000.
Regulatory burden to increase
So, what does this mean for financial institutions?
While the new provisions are modelled on the cash seizure regime, they arguably go much further and will increase the regulatory burden faced by financial institutions.
The new provisions allow an officer – for example an Serious Fraud Office officer or an accredited financial investigator – to apply for an account freezing order from a Magistrates’ Court if they have reasonable grounds to suspect that the funds in an account maintained by a bank or building society are recoverable property: either obtained by unlawful conduct or intended for use in unlawful conduct.
The account must hold at least £1,000. A ‘bank’ is defined as an ‘authorised deposit taker’ – that is, a person with permission under the Financial Services and Markets Act 2000 to accept deposits – otherthan a building society, thathas its head office or a branch in the UK.
However, the new legislation is unclear as to whether the account to be frozen must in fact be maintained by a UK branch.
The application for the AFO must be made by a senior officer at a Magistrates’ Court and can be made without notice in circumstances where this would prejudice the forfeiture of the funds. This would appear to provide law enforcement with a wide discretion as to whether to inform the account holder in advance of the application being made.
When the introduction of these new powers was under discussion, it was acknowledged that in the majority of cases the financial institution would already have made a suspicious activity report and have ringfenced the funds – such as by suspending the account.
Key points
- UK law enforcement has new powers to recover the alleged proceeds of crime
- An officer can apply for an account freezing order if they have reasonable grounds to suspect that the funds in an account are recoverable property
- The maximum period for an AFO is two years
In such circumstances, it is difficult to understand why an application for an AFO would need to be made without notice. This is likely to be the subject of future litigation, particularly given the limited disclosure requirements for an AFO to be obtained.
Any person affected by the AFO can apply for the freezing order to be varied or set aside, and the Act has included certain exclusions, such as for the purposes of reasonable living expenses, to carry on a business or for reasonable legal expenses.
The maximum period for an AFO is two years. Importantly, at any point during that period, a senior officer can issue an account forfeiture notice if satisfied that the money is recoverable property.
This effectively allows UK law enforcement to forfeit the funds administratively, without any recourse to the courts. If no objection is made to the AFN within 30 days, the money can be forfeited and the bank and building society must transfer that money into an account nominated by the officer.
Objection
Where there has been an objection, UK law enforcement must make an application for an account forfeiture order or apply for an extension to the AFO, if the two-year period has not expired. Any party aggrieved by the order can appeal to the Crown Court.
Interestingly, where an AFO is subsequently discharged, parliament has sought to impose a higher threshold, than in cash seizure cases at least, for parties seeking compensation. The provisions specifically limit any order for compensation to circumstances that are “exceptional” and where the court is satisfied that a party has suffered loss.
As a result, there is a risk that an aggrieved party would seek financial redress in the civil courts against the financial institution that complied with the forfeiture notice and/or that filed the initial SAR, particularly if the party has suffered financial loss.
A word of caution: financial institutions will be also aware that when they file a SAR this may be disclosable to the account holder in future civil litigation.
Therefore, financial institutions must ensure that any SAR is well drafted, preferably in consultation with their legal teams, and that they are able to evidence a reasonable suspicion about the account or transaction before the SAR is filed.
In light of the lower evidential threshold required by AFOs, and the ease with which UK authorities will be able to secure these, financial institutions are likely to be served with these in increasing numbers.
With derisking in the financial sector only set to get worse, more and more accounts will be flagged as suspicious or high risk, leading to further account closures or suspensions. Financial institutions will benefit from having in place, if they do not have already, procedures, policies and trained staff to deal with AFOs, AFNs and potential account forfeiture orders – and now unexplained wealth orders.
They will also need to ensure that the terms of business allow for client accounts and funds to be dealt with in this way. It should be considered that affected account holders may seek to bring civil action against the bank as a result of frozen transactions, account closures or suspensions.
It is therefore essential that the financial institution maintains a clear audit trail documenting the steps that were taken, in the event that this forms the subject of scrutiny before the court.
Maria Cronin is a partner and Eamon McCarthy-Keen is an associate at Peters & Peters
