Latest UWO judgment shows that the checks and balances built into the process work

In an interesting and important judgment, on 8 April 2020, Lang J granted the applications of the respondents in NCA v Andrew Baker, Villa Magna Foundation and others [2020] EWHC 822 (Admin) to discharge three unexplained wealth orders (“UWOs”) and related interim freezing orders against three high-value properties in London.

This is the first high-profile discharge of UWOs obtained by the NCA. However, some of the reporting of the judgment is quite misleading. The outcome does not mean there is something wrong with the law, as some have suggested. The threshold requirements that the authorities have to meet to obtain a UWO ex parte are deliberately relatively low and have the onerous effect of reversing the burden of proof onto the recipient of a UWO to demonstrate the legitimate source of funds for acquiring the property in question, or risk losing the property without it ever having been proven that they committed any crime.

In this case, the judge determined that the NCA had overreached itself: it had made unjustified assumptions and leaps in its analysis, relying on “inadequate investigation into some obvious lines of enquiry… Furthermore… the NCA failed to carry out a fair-minded evaluation of the new information provided” by the respondents and ultimate beneficial owners (“UBOs”) to show that the NCA’s assumptions were incorrect. In particular, the NCA had not properly considered the evidence that the properties were purchased on behalf of the UBOs and that there was no link between the respondents and Mr Rakhat Aliyev (”RA”), a Kazakh national and politically exposed person (“PEP”) who was found guilty of various crimes in Kazakhstan in his absence and is since deceased. The NCA’s case was that the properties were acquired to launder the proceeds of his unlawful conduct.

UWOs – the requirements

All that the applying authority needs to do to get a UWO is to satisfy a High Court judge that:

• There is reasonable cause to believe that the respondent holds the property (which has a value of more than £50,000) for which the UWO is sought; and
• There are “reasonable grounds for suspecting that the known sources of the respondent's lawfully obtained income would have been insufficient for the purposes of enabling the respondent to obtain the property”; and
• Either:
  • The respondent is a politically exposed person (which includes family members and close associates), or
  • There are reasonable grounds for suspecting that the respondent (or a person connected with the respondent) is, or has been, involved in serious crime (whether in a part of the United Kingdom or elsewhere).

These threshold requirements are broadly interpreted.

In this case, the respondents and UBOs responded to the UWOs by letter and voluntarily provided extensive information about the purchase and transfer of the properties, their registered owners, and the UBOs. The letter explained that the UBO of Property 1 and Property 3 was RA’s ex-wife, Mrs Dariga Nazarbayeva. The UBO of Property 2 was their son, Nurali Aliyev. The letter also explained that the NCA's application was made on a factually incorrect basis, as the purchases were unconnected to RA and his supposed criminal activities, and he was never the UBO of the properties.

However, the NCA refused to withdraw the UWOs and insisted that the respondents had to comply with their terms. That refusal ultimately led to this discharge application.

The judgment analysed the NCA’s case in detail on Property 1 and then applied those findings as relevant to the other two properties. It was a central premise of the NCA’s application for the UWO concerning Property 1 that RA was the founder of the second respondent, Villa Magna (which owned Property 1), and that RA provided its funds from the proceeds of unlawful conduct.

The court noted that the properties were acquired after RA and his ex-wife divorced and that she was independently wealthy. She did not receive any non-Kazakh assets as part of the divorce settlement, and those of RA's assets which were held in Kazakhstan and were deemed to derive from the proceeds of crime had been confiscated in January 2008 by the Kazakh authorities. The Kazakh authorities specifically looked into whether any suspect funds had been transferred to RA’s ex-wife or son and concluded that they had not. Further RA’s son had no contact with his father after the divorce in 2007. That made it “improbable” that RA’s ex-wife and son were subsequently involved in property transactions and money laundering on RA's behalf.

The court also noted that the respondents had given a detailed account of how RA’s ex-wife acquired the beneficial interest in Property 1 and subsequently founded Villa Magna and arranged for Property 1 to be transferred to its ownership to mitigate tax. The judge concluded that the information provided by RA’s wife demonstrated that “the NCA's assumption that RA was the founder of Villa Magna and the source of its funds was probably mistaken. There is cogent evidence that [RA’s ex-wife] was the founder of Villa Magna and the source of its funds.”

Complex and secretive ownership structures do not provide sufficient grounds for suspicion

As for the NCA’s reliance on the “complex and secretive” manner in which Property 1 was obtained and subsequently handled, eventually being transferred to a Panamanian foundation which is subject to strict secrecy laws, whilst being managed by property management companies in the UK, the judge noted that this raised an important point of principle. She referred to various authorities on the risk of dissipation of assets in civil proceedings highlighting the need for caution in treating complexity of property holding through corporate structures as grounds for suspicion, and considered that the principles from those cases apply equally in the context of UWOs:

“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”.

Instead, the Judge agreed with the Respondents submission, relying on the principle established in R v Anwoir [2008] EWCA Crim 1354, [2008] All ER 582, that “where the Crown seeks to prove that property derives from crime by evidence of the circumstances in which the property is handled, it must be ‘such as to give rise to the irresistible inference that it can only be derived from crime’”. The judge concluded that the evidence as to the manner in which Property 1 had been handled did not give rise to such an “irresistible inference”.

The court went on to consider the position of the president of Villa Magna, Mr Baker, who was also the president of the entity that owned Property 3. The NCA submitted that there was reasonable cause to believe that Mr Baker “held” Property 1 because he had effective control over it, or could exercise such control, or that he was a trustee of a settlement in which the property was comprised. The Judge did not accept the NCA’s analysis. Based on an analysis of the relevant Panamanian laws, she considered it “clear … that effective control over the Foundation and its assets is vested in the founder and the Foundation Council, not the President. In my view, [the NCA] has erroneously conflated the position of President with that of the Foundation Council, which is a separate body. This provision merely gives the President the authority to sign legally-binding documents on behalf of the Foundation and the Foundation Council. It does not give the President power to act in any way other than in accordance with the regulations and resolutions of the Founder and/or Foundation Council.”

The Judge also did not think there was reasonable cause to believe that the arrangement by which Villa Magna had acquired the legal interest in Property 1 and held it on behalf of the named beneficiaries was a “settlement” or that Mr Baker was a trustee of the settlement. Property 1 was not “vested” in Mr Baker, but in the Foundation. Management of the property was also not “vested” in Mr Baker, but in the Foundation and its governing body, the Foundation Council.

The value of the property must be the value of the alleged interest held in it

As for the value of the property acquired by Mr Baker, the NCA applied an assumption that what he acquired had the market value of Property 1 at the time he became president of Villa Magna, estimated at or above £6m. The NCA then submitted that there were reasonable grounds for suspecting that the known sources of Mr Baker's lawfully obtained income, as President of Villa Magna Foundation, would have been insufficient for him to obtain the property because there was no publicly available information about the income of the president or the Villa Magna Foundation. Alternatively, there were grounds to suspect that any source of income was likely to have arisen from RA and therefore obtained unlawfully because of his criminal offending.

The judge considered this analysis was “artificial and flawed”. The NCA did not claim that Mr Baker was the legal or beneficial owner of Property 1, nor that he was involved in the funding of its purchase. All that was claimed was that Mr Baker was a trustee or had “effective control” over the property. The NCA claimed that the income requirement was notional in a case like this, because it could never be satisfied. However, in the judge’s view, “it cannot have been the intention of Parliament to dispense with the need for a meaningful application of the income requirement. If the income requirement is not met, there is no proper basis upon which to make an order”. Instead, the NCA should have considered the actual extent of Mr Baker’s interest in the property and then asked whether the known sources of his lawfully obtained income would have been insufficient for him to obtain that interest. The market price of the property was not the correct valuation and, while it may be difficult for the NCA to identify and value the alleged interest, that was only “because Mr Baker was not the appropriate respondent in this case, as he does not hold the property”. Further, again, the NCA had made a wrong assumption that RA was the founder of Villa Magna and funded it out of proceeds of crime. For the reasons explained above, that assumption had been rebutted.

Further still, the Court was not satisfied that the NCA had sufficiently demonstrated that Mr Baker was a PEP on the basis that he was “connected with” RA. Nor was the Judge satisfied that there were reasonable grounds for believing that Mr Baker was or had been involved in serious crime, or that he was connected to persons who had been so involved. The court noted that Mr Baker had given a witness statement that he did not know, never met and never had any contact with RA and had no involvement with his ex-wife or any of the companies holding any of the properties before August 2015, seven years after the acquisitions. The NCA had not produced any evidence that undermines this.

In the Court’s view, the NCA’s suspicions flowed “entirely from … assumptions that RA was the founder of Villa Magna (whether directly or indirectly), and that the funds for the purchase of Property 1 derived from RA's unlawful conduct”. But those assumptions had been rebutted. “On the evidence there was no connection between Mr Baker and RA, nor between Villa Magna and RA.”

Turning to Property 3 and UWO 3, the Court applied a similar analysis and similarly found that the information provided by RA’s ex-wife demonstrated that the NCA's assumption that RA was the founder of Tropicana (the owner of Property 3) and the source of its funds “was probably mistaken” and that she was its founder and source of funds.

Property 2 was slightly different in that the respondents’ evidence was that its UBO was RA’s son, rather than his ex-wife. It was key to the NCA's application for UWO 2 that RA was the founder of Manrick (the owner of Property 2) and provided it with funds derived from unlawful conduct. However, the respondents gave a detailed account of how RA’s son had acquired the beneficial interest in Property 2, including the source of funds, which were not provided by RA.

The NCA’s case placed reliance on the fact that Manrick was established in April 2001, when NA was only 16 years old; the NCA concluded that RA was the likely founder of Manrick. However, the Judge considered this analysis was flawed, as the evidence indicated that Manrick was purchased as an “off the shelf” entity and only activated in 2013. There was no direct or indirect evidence to link RA to Manrick, which only became a relevant entity in the handling of Property 2 in 2013, long after RA’s son had ceased to have any involvement with his father.

Comment

Ultimately, the discharge of the UWOs in this case flowed from the facts available to the court (and NCA), which provided a cogent explanation for how the UBOs came to own the properties covered by the UWOs and demonstrated that the source of funds for their acquisition was legitimate and unconnected to the individual that the NCA considered to be behind their acquisition. As such, there was no reasonable basis for believing or suspecting that the relevant UWO threshold requirements were met. This was not a case of the law failing, but rather proof that the checks and balances intended to protect against unjustified use of this onerous tool are working.

For our guide to the Criminal Finances Act 2017, which introduced the UWO tool, please click here.

For further information, please email the authors or your usual CMS contact.