A second season for “McMafia” wealth orders? - The implications of Unexplained Wealth Orders for trustees

As reported in our briefing of 7 February (which you can read here), earlier this month, the Court of Appeal dismissed the wife of an imprisoned Azerbaijani state banker, Zamira Hajiyeva’s, attempt to prevent the implementation of the UK's first Unexplained Wealth Order (“UWO”). Despite the media brouhaha that surrounds UWOs or “McMafia” orders, as they have become colloquially known, they have remained a somewhat sparingly used tool for enforcement agencies. However, this decision provides a useful precedent and may give renewed zeal to enforcement agencies looking to use UWOs. In this article, Tom Williams examines the potential implications of UWOs for trustees.

Unexplained Wealth Orders

Since their introduction in January 2018, UWOs have provided a civil mechanism for enforcement agencies (such as the National Crime Agency, HMRC, the Financial Conduct Authority and the Serious Fraud Office), upon application to the High Court, to investigate a person’s interest in certain property, to establish it has a legitimate provenance. Individuals or companies in receipt of a UWO, must then provide information or documents explaining the nature and extent of their interest in the property, how it was obtained and, where applicable, provide details of any trust in which the property is held.

The scope of UWOs is potentially significant, as neither the property nor the respondent need be located in the UK. Jointly owned property may also be the subject of a UWO. Typically, a UWO will be accompanied by an interim freezing order restraining the respondent from disposing of the property.

From the existing cases, it appears that the principal targets of the legislation are Politically Exposed Persons (“PEPs”) or significantly, those connected to a PEP from outside the European Economic Area (“EEA”). A PEP is defined as a person entrusted with a prominent public function by an international organisation or any country outside of the UK and the EEA. However, the use of UWOs also encompasses those suspected of being involved in serious crime or people connected to such a person.

Where a respondent fails to comply with a UWO within the timeframe specified by the Court, without reasonable excuse, the property is presumed to be recoverable for the purposes of civil recovery proceedings under the Proceeds of Crime Act 2002, unless the contrary is shown. Further, where a respondent recklessly or knowingly makes a false or misleading statement in response to a UWO, they may well be subject to criminal sanctions, including a fine and/or imprisonment.

Implications for trustees

Given that many targets of UWOs will have significant wealth, often in offshore structures, trustees are likely to be involved in dealing with UWOs, either directly or indirectly. Indeed, the legislation makes specific provision for property held in trust.

Perhaps less frequently, trustees may themselves be subject to a UWO where they are PEPs. A more common scenario is likely to be where trustees are connected to a PEP (such as the settlor or a beneficiary) or where the trustees hold shares in a corporate structure connected to a PEP.  In both cases, trustees may be subject to a UWO personally. However, where the settlor or a beneficiary is subject to a UWO, trustees may be indirectly involved through being asked to provide information or documents relating to the trust to enable the respondent to satisfy the requirements of the UWO. It may be that trustees are required under the UWO to provide information regarding not only the property, but on the trust itself. Such information may include: the name of the trust; where it was settled; and the identities of the settlor and beneficiaries; or even details concerning distributions. The UWO may also require the trustees to provide documents such as the trust instrument.

As with any other respondent, trustees of trusts subject to English law must comply with the requirements of the UWO. Non-compliance can lead to steps being taken to recover the property. Under English law, the duty to disclose information under the UWO overrides any duty of confidentiality owed by the trustees to the beneficiaries. However, careful consideration should be given by the trustees to their obligations to the beneficiaries, including their duties under the trust deed. A UWO may create tension between beneficiaries, where some may be reluctant to disclose confidential information concerning the trust that may disadvantage their own position, in circumstances where another beneficiary has received a UWO and faces sanctions for non-compliance.

As UWOs may also involve trustees of trusts established in offshore jurisdictions, the requirements of the UWO may conflict with the trust laws in those jurisdictions, in particular, the laws concerning confidentiality. However, it remains to be seen how offshore jurisdictions will respond to the use of UWOs. Trustees dealing with a UWO should therefore obtain legal advice as soon as possible upon receipt and, if necessary, seek directions from the Court in the relevant jurisdiction on the issue of disclosure. 

Given the media interest that exists regarding UWOs, in conjunction with the lack of anonymity granted to those subject to them in the existing cases, trustees should also consider any reputational risks for themselves and the beneficiaries when dealing with a UWO. This should encompass the potential scrutiny of the trustees’ professional conduct and anti-money laundering procedures. Finally, as always with matters involving trusts, the treatment of any costs incurred in dealing with a UWO will also need to be considered; in particular, whether those costs should be paid out of the trust fund.   

Conclusion

The Hajiyeva case is just one of a number of high-profile cases that have been making their way through the Courts and has widely been seen as a test case that will determine the future use of UWOs. The decision demonstrates that it will not be easy to challenge a UWO and may cause concern to many international investors and other relevant high-net worth individuals and those connected to them. Trustees may well be involved, either directly or indirectly, in responding to a UWO. Trustees should therefore identify any clients or those connected to the trust, that may be the target of a UWO, and be prepared to explain sources of wealth within a relatively short time frame. Trustees must also be aware of their duties under the trust deed and trust laws of any relevant jurisdiction and how these might conflict with the requirements of any UWO.

If you require further information about anything covered in this briefing, or regarding UWOs generally, please contact Tom Williams, Will Hanson, or your usual contact at the firm on +44 (0)20 3375 7000.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, February 2020