Since 31 January 2018, law enforcement agencies (including HMRC) have a new wide-reaching tool at their disposal – the Unexplained Wealth Order (“UWO”). Non-EEA Politically Exposed Persons (“PEPs”) and those suspected of involvement with serious crime may be targeted by UWOs and recipients of the same could potentially be stripped of properties exceeding £50,000 if they cannot account for their purchase or acquisition from their legally obtained income and/or wealth.
Given the serious nature of the potential sanctions under a UWO, unsurprisingly, they have attracted media attention and it was reported last week that a politician from central Asia with two prime UK properties (a house and an office) is subject to the first UWO.
Owing to the severe consequences of non-compliance with a UWO, PEPs and advisors should be fully aware of how UWOs operate, potential pitfalls and how they should be dealt with.
What is a UWO?
A UWO is a new civil recovery tool available to five UK enforcement authorities (the National Crime Agency, HMRC, the Financial Conduct Authority, the Serious Fraud Office and the Director of Public Prosecutions).
The UWO is aimed at specific properties held by either a PEP or an individual involved in serious crime (or a person connected with the individual if involved in serious crime e.g. a spouse with a joint interest in the property). The aim is to expose illicit wealth.
A UWO requires the individual to provide a statement setting out the nature and extent of their interest in the property, explaining how the property was obtained and how any costs were met.
Where the property is held in trust, the statement may require details of the trust settlement, even going so far as to require the production of certain documents.
How is a UWO Obtained?
The High Court may, on an application by any of the enforcement authorities (without notice to the individual), make a UWO in relation to property held by an individual if the High Court is satisfied that:
1) the individual holds the property;
2) the value of the property is greater than £50,000;
3) there are reasonable grounds for suspecting that the known sources of income (lawfully obtained) are insufficient for the purposes of enabling the individual to obtain the property; and
4) the individual is either a PEP or has been involved in serious crime or a person connected with the individual is or has been involved in serious crime.
It does not matter that the property was obtained before or after the legislation came into force.
UWOs & Interim Freezing Orders
In addition to the UWO, the High Court may also make an interim freezing order in respect of the property if it is considered necessary to do so for the purposes of avoiding the risk of the individual frustrating any recovery order that might subsequently be obtained. Essentially, the freezing order restrains an individual from disposing of the property.
Although it is currently unclear whether simultaneous interim freezing orders and UWOs will be standard practice, to prevent the risk of dissipation of assets as a result of the respondent being put on notice by the UWO, it is likely that a UWO will be accompanied by an interim freezing order.
There is scope for the individual to apply to the High Court for the interim freezing order to be varied or discharged. The legislation allows for compensation to be paid by the enforcement authority to the individual where an interim freezing order is subsequently discharged. However, the individual will have to prove that they have suffered loss as a result of the making of the interim freezing order and this will depend on the individual circumstances of each case.
If an individual fails to comply with a UWO (without reasonable excuse) the property is presumed to be recoverable and may result in the commencement of recovery proceedings against the property. The legislation also provides that false or misleading statements in response to a UWO is an offence punishable by a fine and/or potentially imprisonment for a period not exceeding 2 years. Given the serious nature of the sanctions for non-compliance it is paramount for individuals to seek appropriate legal advice when responding to a UWO.
Cross-jurisdictional application (including enforcement).
Although only UK enforcement agencies can apply for a UWO, the subject of the order can relate to property situated anywhere in the world and there is no requirement for the respondent to be based in the UK.
However, to enforce a UWO (or any ancillary freezing order), it follows that such orders must be registered or recognised in the relevant jurisdiction where the respondent or the property is situated. This presents an additional bar to the effectiveness of UWOs in overseas jurisdictions as their enforceability will be subject to the willingness of overseas authorities to assist, especially in relation to jurisdictions where there is state immunity for foreign officials.
In light of this, it will be interesting to see whether UK enforcement agencies target UK properties and respondents in the first instance.
UWOs and the trustee
The legislation confirms that a person, for the purpose of holding the property subject to the UWO, can include a trustee of a settlement in which the property is comprised or even a beneficiary (whether actual or potential) of such a settlement.
Therefore, trustees may find themselves on the receiving end of a UWO and be required to provide information not only about the property subject to the UWO but also the settlement itself. Moreover, trustees may also be required to provide information on distributions to beneficiaries as part of an individual’s statement in reply to a UWO.
As a matter of course, trustees should be prepared with the information required to provide a response to a UWO within the timeframe stipulated by the High Court – this will be particularly important where a PEP is involved within a trust structure. However, trustees will need to balance their duties of confidentiality against the need to respond to the UWO.
UWOs and HMRC
As tax evasion falls within the scope of “serious crime” the UWO may be of significant use to HMRC. For HMRC to meet the “serious crime” criteria to apply for a UWO they only need “reasonable grounds” to suspect involvement in tax evasion – there is no requirement for actual proof of tax evasion or tax fraud.
From experience, what constitutes reasonable grounds for pursuing individuals suspected of tax fraud can be extremely limited. The addition of UWOs to HMRCs armoury is a decisive step towards a more robust Revenue with wide, and arguably draconian, powers of investigation.
Those responding to UWOs by way of statement should also be aware that the information provided, although cannot be used as evidence in a criminal investigation, may be relied upon as intelligence to initiate or further a subsequent civil investigation. The enforcement agencies are also granted the power to retain such documents for the duration of legal proceedings if they have reasonable grounds to believe the may need to be produced for the purpose of those proceedings or may become unavailable for those purposes.
It is important that advisors are aware of the risk of UWOs being used as a tool to compel the respondent to provide information as part of a wider information gathering exercise to further or strengthen an alternate investigation in to the respondent’s affairs. This may be especially prevalent following the recent “leaks” relating to offshore entities and trust structures.
The Druces Disputes Resolution Team are experienced in responding to freezing injunction applications and the Druces International Wealth and Fiduciary Team have acted for a number of individuals who may have been affected by the leaked Panama papers and Paradise papers in the subsequent investigations initiated by HMRC. If you are served with a UWO, do not delay in taking advice on how to respond to the UWO or whether to consider challenging the legality of the grounds on which the UWO has been obtained.
For further information, please do not hesitate to contact Christopher Louth, Julian Johnstone or Charles Spragge in our Commercial Litigation Team or Katie Underhill and Robert Macro in our Private Client – International Wealth and Fiduciary Team.
This briefing was posted on 8 March 2018