The UK’s Unexplained Wealth Orders: 5 Points for Middle East Investors

The UK has recently demonstrated the effectiveness of one of its instruments in combatting money laundering - the UWO - and how this may lead to an attachment of assets in the UK. The UK's domestic mechanisms will be of particular interest to GCC investors as the UK remains the preferred location globally for Middle Eastern investors for residential property purchases¹.

An Unexplained Wealth Order (UWO) is a UK civil enforcement instrument that can be deployed by UK authorities to obtain information about the source of funds and assist in attaching assets that cannot properly be explained. UWOs were introduced in the UK in 2018 under part 8 of the Proceeds of Crime Act 2002 (POCA) by the Criminal Finances Act 2017.

1. Likely increased enforcement appetite

In February 2020, the UK's National Crime Agency (NCA) successfully had the first appeal against the imposition of a UWO dismissed. This has served two purposes:

1. it has provided judicial guidance on UWOs for various matters, including the reasonable grounds for suspecting that the lawful income of a respondent is insufficient to obtain an asset(s), which will offer greater certainty on the format of UWOs; and

2. it provides judicial support to the manner in which the NCA proceeded with the UWO in this test case.

This increased clarity and judicial support will likely lend itself to an increase in the use of UWOs in 2020.

2. The UK is continuing its drive to identify beneficial owners

The recitals relied upon by the UK High Court in the recent judgment, Zamira Hajiyeva v. National Crime Agency [2020] EWCA Civ 108 [2020] WLR(D) 75, have confirmed the need to identify any natural person who exercises ownership or control over a legal entity and how this is pivotal in the fight against money laundering and terrorist financing.

The Court explicitly referred to the fact that a lower ownership percentage may still be an indicator of ultimate ownership or control. As the European Union's Fifth Money Laundering Directive entered into force in January 2020, the evident trend is for increased transparency and piercing of the corporate veil with publicly accessible information.

3. Information remains key

UWOs are aimed at preventing the UK from being targeted by nefarious actors who seek to exploit the financial systems to hide the proceeds of crime. However, if the respondent can properly demonstrate that the asset in question was purchased with lawfully obtained income, then it is unlikely that a UWO would succeed. The fundamental goal is to be able to explain the source of funds and their legitimacy.

In the appeal judgment it is evident that the respondent to the UWO attempted to utilise a wealth report to explain her income. This report was criticised by the court for posing more questions to source of wealth than it answered and remarkably noted that in this case, the source of wealth was "...very vague and included a sum of US$20m said to have been acquired by [the respondent's husband] at a time when he was a student."

4. The UK's clarified definition of a Politically Exposed Person (PEP)

The definition of PEPs and foreign PEPs varies from state to state. In the recent UK judgment, the High Court re-iterated that the English law definition of a PEP will apply for their purposes. This can broadly be defined as a person who is entrusted with prominent public functions.  An individual who may not be defined as a PEP in a third country, such as the UAE, may still be viewed as a PEP for the purposes of UWOs in the UK. Therefore, appropriate consideration and due diligence must be conducted to ensure that an individual's identity and standing is clear and that the relevant jurisdiction's definition of a PEP is applied, which in the case of the UK is wide. 

5. A holistic approach will be paramount

In the UK, as with the UAE and other GCC Member States, the relevant authorities understand that the risks of money laundering and terror financing are distinct in every case. In the Hajiyeva appeal, the UK High Court reiterated that to properly mitigate the risks of exploitation, a holistic, risk-based approach should be adopted by those operating in the financial sphere.  This subjective approach should be centred upon proper due diligence reviews of customer, business, and sector. Such reviews should only be based upon accurate, credible and verifiable evidence. Rigorous checks should be conducted to ensure that not only are money laundering concerns addressed, but also that reputational risks are avoided.

In Summary

Whilst the deployment of UWOs will not likely have a material impact on the UK's status as a location of choice for the world's ultra-wealthy to invest, their introduction will ensure that there is more scrutiny in respect to the source of wealth for international investors, which will require more time, care, and due-diligence to deal with properly.   

For further guidance on the implications of the issues highlighted above, please contact Muneer Khan or Adam Wolstenholme.

¹According to Savills ‘Impacts – Global Markets Report’ Issue 02.2019