Proceeds of Crime and the Professional Trustee: The End of the Unexplained Wealth Order?
NCA v Baker - High Court discharges a UWO requiring a professional trustee to give an account of property acquisition, ruling he is the wrong respondent
The unexplained wealth order (“UWO”) is a useful tool for the authorities, particularly the National Crime Agency in its efforts to assemble evidence for a civil recovery action. It was trumpeted by the UK Government as salvation to deal with corrupt foreign state officials (described in the legislation, the Proceeds of Crime Act 2002, as “politically exposed persons” - or PEPs). The idea is that such orders would force PEPs (and other serious criminals) to explain how their assets – particularly expensive London homes wrapped in offshore structures - were acquired. A failure to respond to such an order creates a presumption in civil recovery proceedings that the property is the proceeds of crime. This is a necessary and central ingredient to effect the property’s forfeiture in High Court proceedings without a prosecution under PoCA.
The legislation was introduced whilst McMafia was being aired on television and during a period of widespread public outrage at the Salisbury poisoning. Inevitably therefore, the UWO legislation gained media traction and the press has followed the cases more carefully than it might do for the usual PoCA case.
The recent decision of Lang J in National Crime Agency v Baker [2020] EWHC 822 (Admin) should generate interest amongst professional trustees and lawyers practising in this field. It was widely publicised in the national press as a case where the NCA could not sustain UWOs because there was insufficient evidence connecting the property to any criminality, PEP or criminal. And so it was. But it also highlights a serious fault in the drafting of the legislation, rendering its utility against trustees questionable.
In Baker the NCA obtained UWOs without notice in respect of three real properties in London on the basis that they were connected to Rakhav Aliyev a (deceased) Kazakhstan national. The background facts are intricate, but important to an appreciation of the true effect of the judgment. Aliyev was the former Director of the Kazakhstan Tax Police, First Deputy Head of the National Security Committee, ambassador to Austria and Deputy Foreign Affairs Minister. He died in prison in 2015. He plainly was a PEP.
Aliyev’s ex-wife and son however contended that they were the beneficial owners of the London properties subject to the UWOs and provided the purchase price from their own resources. These properties were held by complex off-shore structures. Two of the three properties were held by separate Panamanian foundations (the Villa Magna Foundation and the Tropicana Assets Foundation respectively). Such a foundation is similar, although not exactly analogous, to a trust. The UWOs sought an explanation and documents relating to the acquisition of the properties.
The order was sought against a number of respondents, the first of which was Mr Baker. Mr Baker was an English solicitor and he was president of each of the foundation’s council, their governing body in his professional capacity. The last of the three properties was held in the joint names of a Curacao foundation and an Anguillan company.
Although voluntary information was provided to the NCA that the ex-wife and son were the beneficial owners of the properties and set out how they were acquired, the NCA nonetheless pressed for compliance with the UWOs which required material relating to ownership and funds used for purchase.
Lang J discharged all the UWOs. The NCA’s case was based on Aliyev’s connection to the properties, but it failed on its facts. There was no proper basis for any assumption that Aliyev was connected to the foundations or company which held the properties or provided the funds for their purchase. This was plainly a fact-sensitive issue which does not go wider than this particular case. This is subject to one observation with wider implication. The NCA relied on the fact that the properties were held in complex off-shore structures as evidence of a wrongful purpose or money laundering. This kind of assertion by the police or NCA is frequently encountered in criminal and civil cases. However, Lang J explained that such evidence is not, without more, evidence of any dishonest or unlawful purpose since such structures are often established for perfectly lawful reasons.
Of more interest to the legal practitioner and professional trustee is the court’s consideration of Mr Baker and the UWO against him. There are three requirements for the making of a UWO against a person (the “respondent”) requiring an explanation in respect of property: (i) the property must be “held” by the respondent; (ii) the property must be inconsistent with the “known income” of the respondent (the “disparity requirement”); and (iii) the respondent must be a PEP or there are grounds for suspecting he is involved in serious crime.
The court explained that Mr Baker fulfilled none of these criteria. As to (i) the “holding” requirement, Mr Baker did not hold the property (within the definition of PoCA). True it was “held” by the foundation (of which Mr Baker was the president of its council, its governing body) since the foundation was the legal title holder, but Mr Baker was not the title holder. Clearly this means that trustees who hold title to property will meet this requirement. Further, although Mr Baker was the president of the foundation, he did not have “effective control” over the property; that lay with the foundation council itself.
On requirement (iii) – Mr Baker as a PEP or involved in serious crime – the court accepted that the definition of PEP was broad enough, in principle, to cover trustees as it includes persons “closely connected” to a PEP (which Aliyev may well have been). However, there was no connection between Aliyev and the property or Mr Baker. As to the serious crime requirement, the NCA relied upon facilitating serious crime, particularly money laundering. However, again there was no evidence of any connection between Aliyev and the property or Mr Baker (who was not approached to be president of the foundation until after Aliyev had died). So there were no reasonable grounds for any suspicion that Mr Baker was involved in serious crime.
As said, these were mainly fact sensitive points. More importantly for the wider interest, is requirement (ii), the disparity requirement. The NCA’s case was that this is aimed at whether the beneficial owner’s known income explains the acquisition of the property. However, as the author pointed out in Mitchell, Taylor and Talbot on Confiscation and the Proceeds of Crime (v2, para XIII-154), the wording of the statutory provisions is not apt to embrace this proposition and so does not capture professional trustees who rarely hold an interest of any value in the property which is unexplained by their known income. Lang J interpreted the provisions in this way, explaining that the disparity requirement required an assessment of the actual interest held by the respondent (here Mr Baker as the President of a Foundation Council) and then ask whether the known sources of his income explained the holding of that interest. Plainly it did and so this requirement was not satisfied.
This ruling on the disparity requirement has the capacity seriously to derail the utility of UWOs in cases where they are most needed. The use of corporate and trust structures is commonplace to hold expensive real property in the UK. A UWO can plainly be made against the person with the beneficial interest in the property, if it can be shown that he is a PEP or a serious criminal with income inconsistent with the property’s value. But he is probably the person least likely to give a true account of the acquisition of the property and an untruthful response is probably “purported compliance” with a UWO. Purported compliance is treated by PoCA as actual compliance and does not create the presumption that the property is the proceeds of crime, the real purpose of the UWO regime. The person most likely to give an accurate account is bound to be the professional trustee yet, on this ruling, he cannot properly be made subject to a UWO at all.
It is thought that the NCA will seek to appeal this judgment. A decision from the Court of Appeal is awaited with interest.