Fighting back against a draconian regime: Berkeley Rowe’s approach to Asset Freezing Orders, Suspicious Activity Reports, Unexplained Wealth Orders and the NCA
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Introduction
There has been considerable amount of comment in the press and by other lawyers about the success of the National Crime Agency (NCA) in obtaining Account Freezing Orders (AFOs) and ultimately Asset Forfeiture Orders (AssFOs).
This firm has acted in relation to a number of high profile cases in this area and have some discrete observations to make about the developing landscape of this quasi-criminal remedy.
It will come as no surprise that we believe that the power to apply for AFOs and AssFOs (as inserted by s16 of Criminal Finances Act 2017) can be properly described as draconian.
This article will give some context to how we arrived at a situation where the UK’s law enforcement agencies have some of the most powerful and extensive asset forfeiture tools in the world at their disposal.
It will also outline the regime that now is in place as a result of the Criminal Finances Act 2017 and describe how banks and other financial institution are the primary source of intelligence for UK Law enforcement through the Suspicious Activity Report (SAR) regime – which includes the almost identical Suspicious Transaction and Order Report (STOR).
Financial institutions and the prevention of financial crime
All regulated firms are required to comply with the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2019. If a firm is regulated, they must try to identify any activity linked to money laundering or terrorist financing, for all parts of their business:
“The Regulations require the financial, accountancy, legal and other sectors to apply risk-based customer due diligence measures and take other steps to prevent their services being used for money laundering or terrorist financing.”
Banks and most other financial institutions are regulated by the Financial Conduct Authority.
The Unexplained Wealth Order regime: a blockbuster start for the NCA
What originally caught the eye about the £190m settlement that Malik Riaz Hussain, a Pakistani national, whose business is one of the biggest private sector employers in Pakistan, agreed with the NCA, was that it included the proceeds of the sale of a One Hyde Park property worth £50m.
But the public responses of the NCA and Mr Malik were actually of more interest: the NCA acknowledged the existence of an investigation and a settlement; and Mr Malik acknowledged the existence of a settlement with NCA but stressed its civil nature and the lack of any finding of guilt.
But why did the NCA choose the AFO options here over a restraint order under s41 POCA?
A restraint order could have encompassed the property (although not forced its sale) whereas an AFO could not (because housing in not defined as property for AFOs).
The key to understanding its choice is the missing word in the NCA statement: criminal.
Prevention: SARS and STORS
If a regulated firm knows about or suspects money laundering or terrorist financing, they must consider telling the NCA by sending a:
· Suspicious Activity Report (SAR); or
· Suspicious Transaction and Order Report (STOR).
Role of the MLRO
A regulated firm must appoint a nominated reporter who is normally called a Money Laundering Reporting Officer (MLRO) to receive internal disclosures and to submit a SAR or STOR to NCA. The FCA must approve the nomination of a candidate for MLRO in a financial institution.
The role of the MLRO is to act as the focal point within the regulated firm for the oversight of all activity relating to anti-money laundering. They will be a senior person, free to act on their authority and be informed of any relevant knowledge or suspicion in the regulated firm. In turn, they have to notify matters to NCA as they think appropriate. They can be expected to liaise with NCA on any question whether to proceed with a transaction in the circumstances.
The MLRO must report to NCA any transaction or activity that, after their assessment, they know, suspects, or have reasonable grounds to know or suspect, may be linked to money laundering or terrorist financing or attempted money laundering or terrorist financing.
Intelligence vs Consent
The MLRO may submit a SAR or STOR to NCA for information or intelligence purposes, or they may submit a SAR or STOR and ask for ‘consent’ to proceed with the transaction – this is also known as a Defence against money-laundering request (DAML).
For whichever reason the MLRO chooses to submit, the SAR or STOR also provides UK law enforcement agencies with intelligence about individuals and organisation who may be engaged in a suspected predicate offence.
Predicate offences are the serious crimes underlying money laundering or terrorist financing. For example, drug trafficking, people trafficking, tax evasion, fraud and bribery and corruption are all predicate offences that underlie money laundering.
What if an MLRO fails to comply with their obligations?
If a person fails to comply with the obligation under POCA or the Terrorism Act to make disclosures to the MLRO, and, or NCA, as soon as practicable after the information giving rise to the knowledge or suspicion comes to them, the individual and/or the firm, is open to criminal prosecution or regulatory censure. The criminal sanction, under POCA 2002 or the Terrorism Act, is a prison term of up to five years, and or a fine.
Why SARs and STORs matter?
The NCA’s Financial Investigation Unit (FIU) report into SAR (& STOR) and DAML requests for the period 2018/19 was published in November 2019. Unsurprisingly the largest SAR (& STOR) makers were banks (383,733).
This FIU report is the first one where the provisions of the Criminal Finances Act 2017 have had a significant impact on the headline figures.
Breaking down the figures, it is the impact of Account Freezing Orders that catches the eye.
UK Law enforcement intervention after consent SAR/ DAML requests were made and refused resulted in £131.6m being restrained (including restraint, Account Freezing Orders, Cash seizure and Funds recovered by HMRC). Of that figure, £66.9m was restrained, £7,501 cash was seized, £7.94m was recovered by HMRC and £242,552 was subject to indemnity procedures.
That means the remainder, £56.4m, was the subject of AFOs. Without AFOs the headline funds restrained increased 29% (from £51.9m) but add in AFOs and the increase was 153%. Given the number of AFOs are still small this is a staggering impact.
AFOs & AssFOs vs s41 POCA Restraint order
The grant of a restraint order under s41 POCA against an individual is dependent on there being:
- a criminal investigation opened;
- reasonable grounds to suspect the individual has benefitted from criminal conduct; and
- adherence by the applicant to the duty of full and frank disclosure (i.e. the UK law enforcement agency must put forward any evidence that weighs against the imposition of restraint order)
To obtain an AFO all that UK law enforcement has to do is show a magistrate that it has:
- reasonable grounds to suspect that funds (over £1,000) held in a bank account are the proceeds of unlawful conduct.
Once an AFO has been granted there are two methods of forfeiture. Firstly, an enforcement officer may issue an Account Forfeiture Notice, which operates to forfeit all or part of the funds in a frozen account. If no objection to such a notice is received, the balance of funds in the frozen account must be transferred to a nominated account at the end of the objection period.
Alternatively, an application may be made to the Magistrates’ Court for forfeiture of money in an account subject to an AFO – an AssFO. The threshold for forfeiture is higher than for the initial grant of an AFO; rather than merely needing “reasonable grounds for suspicion”, the officer or the Court must be satisfied that the funds are either recoverable property or are intended for use in unlawful conduct. This must be proved on the balance of probabilities – the civil, rather than criminal, standard of proof.
AFOs & AssFOs – the NCA’s new weapon of choice
It is unsurprising then that AFOs & AssFOs have seemingly become the favoured option for the NCA:
· no need to formally open a criminal investigation;
· no need to show the subject of the AFO benefitted from criminal conduct; and
· (with the settlement that followed (in other instances it will be through a Forfeiture Order)) no need to have to charge an individual with a criminal offence, have a contested trial and conduct confiscation proceedings.
AFOs: criminal or civil orders?
Because AFOs are ex parte civil orders (i.e. without notice: the subject is not informed that a court application is going to be made and therefore has no chance to object) , the duty of full and frank disclosure applies, just as it does for s41 POCA Restraint Orders.
The duty was pithily summarised by Hughes LJ at para. 191 in Re Stanford International Bank Ltd (in Receivership) [2010] 3 WLR 941:
‘…In effect a prosecutor seeking an ex parte order must put on his defence hat and ask himself what, if he were representing the defendant or a third party with a relevant interest, he would be saying to the judge, and, having answered that question, that is what he must tell the judge.’
Unfortunately, it is unlikely that UK law enforcement are being sufficiently scrutinised by magistrates when they apply for AFOs and meeting the standard set out by Hughes LJ.
This negative conclusion is based upon the continued failure of UK law enforcement to adhere to this duty in ex parte applications under a wide range of other mature statutory regimes – see Re Stanford (SFO and civil freezing orders) Golfrate (Metropolitan Police and PACE search warrants); Chatwani (NCA and PACE search warrants); Tchenquiz (SFO and CJA 1987 search warrants) and Newcastle United (HMRC and PACE search warrants). The same can be said for private prosecutors – see Zinga (Metropolitan Police & Virgin Media and PACE search warrants). It is worth stating that along with the NCA, the Serious Fraud Office, Police (in England & Wales), Her Majesty’s Revenue & Customs and accredited financial investigators (who are also employed at the Financial Conduct Authority and City of London Police) can apply for AFOs.
Berkeley Rowe’s approach to challenging an AFO: demand the application, a record of the hearing and the judgment
s3(3) of The Magistrates’ Courts (Freezing and Forfeiture of Money in Bank and Building Society Accounts) Rules 2017 entitles those subject to AFOs to be in receipt of the application.
In practice this will almost always be post-hearing because of the likelihood that the applicant UK law enforcement agency will have chosen to make its application ex parte.
But being able to scrutinise the application for proper adherence by the applicant to the duty of full and frank disclosure is essential for any challenge (either variation or set aside) under s303Z4 (1) POCA.
Encompassed in that scrutiny should be a demand for a full note of the hearing. It being a civil ex parte application the guidance of Pumfrey J in Cinpres Gas Injection v Melea Ltd [2005] EWHC 3180 (Pat) applies:
‘…the defendant must know if it is not present at the hearing what case it has to meet. There should therefore be a full note and the normal practice is to enforce this desirable state of affairs by requiring the party obtaining interim relief without notice to give undertakings to reduce the allegations made before the judge into a witness statement to be served as soon as practicable upon the respondent.’
Recent criticism of court decision making in ex parte applications (Tchenguiz and Newcastle United in particular) has also focused on the poverty of detail in judicial recording. It must be right that those whose financial affairs are interfered with in such a heavy handed way, by an applicant satisfying a very low threshold, should be in a position to understand the basis on which a court decided to grant an AFO and in the absence of a proper judicial record challenge its validity.
Practical points to note
The initial test for a freeze is on the basis of ‘reasonable grounds to suspect’ and an application for forfeiture can be granted on the balance of probabilities. It is not necessary for there to be a direct link between the balance and the crime from which it has been obtained—the magistrates can draw inferences from the way in which the account has been operated.
Secondly, results in these applications can be achieved more speedily compared to other asset recovery routes. These applications take advantage of the streamlined system in the magistrates’ court which operate specific and limited rules.
There are no formal pleadings and no formal disclosure.
This can be contrasted with civil recovery claims in the High Court which are governed by the Civil Procedure Rules and the Civil Recovery Practice Direction.
Thirdly, and as a result of the above considerations, these applications are cost-effective.
Fourthly, the litigation risk to law enforcement is low because, based on existing case law, in the event of an unsuccessful account forfeiture application and unless law enforcement has behaved unreasonably, there will likely be ‘no order for costs.’
Finally, it is worth noting that AFOs can have a duration of up to two years. That means that individuals not themselves the subject of an AFO, but having lent money to someone who is, can be effected just as significantly (third parties). Third parties are then faced with two unenviable choices: (1) allow the court proceedings to progress without intervening, rely on the credibility of the lendee and increase the high likelihood of losing an asset; or (2) intervene and increase the risk of scrutiny from UK law enforcement.
Case Study: Mr Vlad Luca Filat
Background
In May 2018, on the application of the NCA, the Westminster Magistrates’ Court granted three AFOs over the balances of Mr Vlad Luca Filat’s bank accounts.
The orders permitted the NCA time to investigate the origin and intended use of those funds on the basis that there were reasonable grounds to suspect the balances were recoverable property : obtained by or in return for unlawful conduct or were intended for use in unlawful conduct.
In September 2018 NCA further applied for the forfeiture of the balances of the accounts on the grounds that it could now be proved, on the balance of probabilities, that the sums were recoverable property or intended for use in unlawful conduct: Mr Vlad Luca Filat was a full-time student with no UK financial profile and it could properly be inferred that his account balances had derived from his father Mr Vlad Filat, a former Prime Minister of Moldova; Mr Vlad Filat had been convicted of bribery and corruption in Moldova; an examination of the way in which the balances of Mr Vlad Luca Filat’s accounts had been generated, namely via international transfers from companies based in the Cayman Islands and in Turkey (in respect of which there was no narrative explanation), as well as approximately £90,000 of cash paid into the account over a four day period was consistent with the money having been obtained through Mr Vlad Filat’s corruption offences and money laundering.
At a hearing, in February 2019 the Westminster Magistrates’ Court agreed with the NCA and made the Asset Forfeiture Orders. Mr Vlad Luca Filat appealed within the 30-day statutory time limit and there was a fresh hearing of the application at Southwark Crown Court.
The Crown Court appeal
In his ruling dismissing Mr Vlad Luca Filat’s appeal, HHJ Gledhill was at pains to point out that there was no criminal allegation against Mr Vlad Luca Filat, but in refusing the appeal he ruled that although there was no direct link between the funds in Mr Vlad Luca Filat’s accounts and his father’s criminal conduct, in the absence of an innocent explanation, the court had been entitled to draw the inference that they were the proceeds of unlawful conduct.
Lessons learned?
Where unlawful conduct has been proven, even in another jurisdiction, a successful response and defence to an AFO application, will involve showing the court, by way of documentary evidence, the origin of money that forms the balance of the frozen account and presenting a credible explanation about the source and intended use of the funds.
The impact on PEPs (‘Politically Exposed Persons’) and Ultra High Net-Worth Individuals (UHNWIs)
PEPS
Individuals who have, or have had, a high political profile, or hold, or have held; the public office can pose a higher money laundering risk to firms as their position may make them vulnerable to corruption. This risk also extends to members of their immediate families and known close associates. PEP status itself does not, of course, incriminate individuals or entities. It does, however, put the customer, or the beneficial owner, into a higher risk category.
A PEP is defined as “an individual who is or has, at any time in the preceding year, been entrusted with prominent public functions and an immediate family member, or a known close associate, of such a person”. his definition only applies to those holding such a position in a state outside the UK, or in a Community institution or an international body.
When a potential client or existing customer is identified as a PEP by a regulated firm, Enhanced Due Diligence (EDD) must be applied to that client.
UHNWI
Ultra high-net-worth individuals (UHNWI) are defined as having a net worth of at least US$30 million in constant 2018 dollars, usually excluding personal assets and property such as a primary residence, collectibles, and consumer durables.
The significance of AFOs and AssFOs for PEPs and UHNWIs
A stable political system, low tax rate, good schools & universities, not to mention the attractions of investing in the London property market mean that wealthy and influential people are always going to be drawn to settling in the UK. PEPs and UHNWI will often retain property and assets in other jurisdictions even if they choose to make London their permanent home. Maintaining foreign bank accounts and transferring funds into UK bank accounts (and vice versa) therefore becomes a necessary circumstance to maintain individuals’ worldwide interests. This makes them uniquely vulnerable to the vagaries of UK law enforcement priorities and the low threshold needed to obtain AFOs. This is especially so where PEPs and UHNWIs are nationals of countries such as Pakistan and Iran (& the fourteen other jurisdictions identified by the EU’s Fifth Money-Laundering Directive as ‘high risk third countries’).
How Berkeley Rowe can assist
Berkeley Rowe can assist with comprehensive analysis on the legal risks assets and business relationships expose individuals to and provide robust and clear advice as to measures that can be taken to address weaknesses. In the event of UK law enforcement intervention Berkley Rowe has dynamic litigators and advocates to ensure clients achieve the most favourable outcomes.
AFOs and AssFOs need not be ‘Black Swan’ events. Berkeley Rowe’s holistic approach, which it adopts across all practice areas, is to assist individuals and corporates in identifying problems, propose the best cost-effective solutions and build a strong and lasting working relationship that survives a crisis.