With the current period of economic uncertainty caused by the coronavirus pandemic, there are many theories about how governments will seek to recover the costs of the emergency spending required to protect their citizens. After a decade of austerity in the UK, further cuts seem unlikely. The UK Government may therefore look to the other end of the spectrum – high net worth individuals.
Following the last global financial crisis in 2008, we witnessed a shift towards increased financial transparency. This was buoyed by public support for a crackdown on corruption and money laundering, which has resulted in demands for increased scrutiny of wealth and its origins. In the UK there was a perception that the London property market was a safe haven for less than scrupulous investors and that the anti-corruption legal framework was ineffective. This culminated in the implementation of a number of new mechanisms designed to increase transparency and combat money laundering.
These mechanisms include the much written about Unexplained Wealth Orders (“UWOs”), commonly known as “McMafia” orders (named after Misha Glenny’s 2008 book and the 2018 television series!)
On the face of it, the implementation of mechanisms such as UWOs places the use of trust structures and other such arrangements under greater scrutiny than ever before in the UK. Historically, one of the key benefits of these structures has been that sensitive information can be kept confidential. This raises an important question: could these new mechanisms erode a trustee’s ability to maintain the confidentiality of a trust?
Despite the enduring media carnival that surrounds UWOs, they have been used sparingly by enforcement agencies since their introduction in January 2018. This has led to accusations that they provide style over substance in combatting money laundering and scrutinising wealth. However, a number of recent Court decisions provide useful precedents as to how UWOs may be used by enforcement agencies and, indeed, their potential limitations.
In this briefing, we examine these recent cases and provide some thoughts and practical guidance to trustees on navigating the risks associated with UWOs, particularly when non-UK jurisdictions are involved.
Introduced in January 2018, UWOs have provided a mechanism for enforcement agencies (such as the National Crime Agency and HM Revenue & Customs) to investigate a person’s interest in certain property in order 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 international 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 also be accompanied by an interim freezing order (“IFO”) 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 those connected to a PEP (including family members and close associates) from outside the European Economic Area (“EEA”). A PEP is defined as a person who is (or has been) entrusted with prominent public functions by an international organisation or any country (including State-owned enterprises) outside of the UK and the EEA.
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 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.
Many targets of UWOs will have significant wealth, often in non-UK structures. It is therefore possible that trustees will be involved in dealing with UWOs, either directly or indirectly. Indeed, the legislation makes specific provision for property held in trust.
A trustee might receive a UWO directly in the following circumstances:
1. where the trustees are connected to a PEP (such as the settlor or a beneficiary of the trust);
2. where the trustees hold shares in a corporate structure connected to a PEP; or
3. (perhaps less frequently) where an individual trustee is a PEP.
Where the settlor or a beneficiary is subject to a UWO, trustees may also 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 also the terms of the trust. 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. In these circumstances, a UWO may create tension between beneficiaries as to the extent of the information provided. Some beneficiaries 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 affect trustees of trusts established outside the UK, the requirements of the UWO may conflict with the trust laws in those jurisdictions, in particular, the laws concerning confidentiality. It remains to be seen how jurisdictions outside the UK will respond to the use of UWOs - trustees 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. Trustees should be prepared for scrutiny of their 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.
In 2018, the Hajiyeva case saw the first UWOs granted by the High Court, against the backdrop of her now well documented extravagant spending, which included more than £16 million in Harrods and ownership with her husband of property in London held through a company incorporated in the British Virgin Islands. Mrs Hajiyeva challenged the UWO in the Court of Appeal, arguing that her incarcerated husband did not qualify as a PEP and that the reliance on her husband’s conviction was misplaced due to the grossly unfair nature of the criminal proceedings against him. This culminated in the Court of Appeal dismissing her appeal and upholding the broad definition of a PEP, confirming that a person may be deemed to be “entrusted with prominent public functions” simply due to their senior status (such as a Chairman or CEO) at a State-owned enterprise. Consequently, Mrs Hajiyeva is required to provide the NCA with details of how she acquired her substantial wealth and if she fails to do so, the NCA could seek to recover her assets under the Proceeds of Crime Act 2002. If the NCA believes that an account provided to it is false or misleading, she could face criminal sanctions.
The second of these cases is perhaps more interesting to trustees and other fiduciary service providers, particularly those involved in managing and administering complex international structures. In May 2019, the NCA obtained three UWOs in relation to three London properties totalling approximately £80 million which it suspected were acquired using the proceeds of unlawful conduct by the late Rakhat Aliyev, a former senior Kazakh official, who was married to Dariga Nazarbayeva (a prominent Kazakh politician and the daughter of former President of Kazakhstan, Nursultan Nazarbayev). Mr Aliyev, who styled himself as a political dissident, died in prison in Austria in 2015 while awaiting trial on kidnapping and murder charges. The UWOs were made against four entities registered in Panama, Anguilla and Curaçao, as the registered owners of the properties, as well as against Andrew Baker, a professional trustee and solicitor, who acted as ‘president’ of the Panamanian foundations. It was revealed during the proceedings that the ultimate beneficial owners of the properties were Ms Nazarbayeva and her son with Mr Aliyev, Nurali Aliyev.
In April this year, the High Court discharged the three UWOs and the related IFOs made in May 2019. Principally, the decision was founded on the unreliable assumptions and deficiencies in the NCA's evidence in proving that Mr Aliyev's funds had been used to set up the non-UK entities that held the properties. Further, the respondents were able to clarify the source of the funds used to acquire the properties and challenge the factual basis of the NCA’s case. The High Court concluded that there was sufficient evidence that Ms Nazarbayeva and Nurali Aliyev had independent and legitimate funds from which they were able to purchase the properties through the non-UK entities.
In relation to the “President” of the Panamanian entities, on the evidence before it, the High Court determined that Mr Baker was not the appropriate respondent as he did not “hold” the properties: he did not have effective control over them (instead, effective control lay with the foundation and its governing body) nor was he a trustee of a settlement in which the properties were held (as neither the properties nor the management of the properties were vested in him but were instead vested in the foundation and its governing body). The High Court was also not satisfied that Mr Baker was a PEP nor were there reasonable grounds for believing he was involved in serious crime. In making its decision the High Court observed that the NCA had placed significant weight on the “complex and secretive” manner in which the properties had been acquired and handled. The High Court commented on the use of offshore structures and trusts and noted that while such structures may be used to disguise money laundering, there must be some additional basis providing an irresistible inference that the property could only have been acquired as a result of criminal or unlawful conduct, going beyond simply the use of such structures. In what will be a welcome clarification for those involved in managing and administering such arrangements, the Judgment stated:
“The use of complex offshore corporate structures or trusts is not, without more, a ground for believing that they have been set up, or are being used, for wrongful purposes, such as money laundering. There are lawful reasons – privacy, security, tax mitigation - why very wealthy people invest their capital in complex offshore corporate structures or trusts. Of course, such structures may also be used to disguise money laundering, but there must be some additional evidential basis for such a belief, going beyond the complex structures used.”
The NCA, recognising the importance of obtaining a precedent against offshore structures, has indicated it will appeal the decision.
In the wake of the Hajiyeva decision there was much written about its status as a test case that will determine the future use and scope of UWOs. It is clear that the decision demonstrates that it will not be easy to challenge a UWO, or remain anonymous. This may cause concern to many international investors and other relevant high-net worth individuals and those connected to them, including trustees. In contrast, the Aliyev decision exposes the potential pitfalls for enforcement agencies when using UWOs. It highlights that the High Court will apply the UWO legislation meticulously and that the holding of assets in complex international arrangements or trusts does not, on its own, constitute a sufficient basis to establish that the underlying funds are ill-gotten. It also recognises the difficulty in ascertaining a trustee’s interest in the property in question. It is worth bearing in mind that it was a decision made largely on the facts of the case and the deficiencies in the NCA’s supporting evidence. Despite clearly being a setback, it will likely provide a valuable lesson to enforcement agencies for using UWOs in the future, particularly where voluntary information has been provided by a respondent. The decision should be treated with caution until the results of any appeal are clear.
The cases show the hard line that enforcement agencies may be prepared to take when dealing with wealth outside the UK, particularly when it involves a PEP or their family. However, it is also evident that jumping to conclusions about the use of non-UK structures, without proper examination of the facts, will not be acceptable to the Courts.
Since the global shift towards improved financial transparency, the supposition that offshore jurisdictions are simply havens for tax evasion and money laundering appears increasingly old-fashioned. Indeed, it is clear that such arrangements may be used for a wide range of lawful reasons, including asset protection and succession planning.
The Aliyev case highlights an intention to scrutinise trustees and other such fiduciary service providers that manage and administer complex cross-border structures. Such service providers could be exposed to high profile litigation and the associated costs and reputational risks as a consequence. Trustees should therefore continue to ensure that they are aware of the risks UWOs pose, and the steps required if they or their clients are served with one. Where appropriate, trustees should obtain preventive advice. As set out above, the current period of economic uncertainty caused by the global spread of coronavirus, and more pertinently, the steps that will be required to recover from it, may only add further fuel to the fire regarding the public scrutiny of wealth and further the UK’s push to be seen as an irreproachable bastion of financial transparency, anti-corruption and the prevention of money laundering.
- Ensure their anti-money laundering and general client on-boarding procedures are rigorous and accurate and that detailed records are kept.
- Identify any current clients or those connected to the trust (such as the settlor or beneficiaries), that may be the target of a UWO, particularly PEPs, and be prepared to explain sources of wealth within a relatively short time frame. This should include, to the extent possible, an awareness of their business interests (including historical ones), as while those activities may not always be connected to the trust structure directly, they may have a bearing on whether an individual could be the subject of a UWO.
- Be aware of their duties under the trust deed and the law governing the trust and how these might conflict with the requirements of any UWO. In particular, fiduciary obligations and duties of confidentiality must be taken into account when conducting any review and disclosing information. This applies whether trustees are responding to a UWO themselves or assisting an individual, such as a beneficiary, in responding to a UWO.
- Ensure comprehensive records and minutes are kept regarding distributions to beneficiaries and trustee decision making.
- Take pre-emptive legal advice if they are concerned about the risk of having to disclose information under a UWO.
- Ensure their anti-money laundering and general client on-boarding procedures are rigorous and accurate and that detailed records are kept.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, June 2020