From 31 January 2018 a number of new civil recovery provisions became available to UK law enforcement. These powers provide substantial and potentially ground-breaking new powers to freeze and recover the proceeds of crime. This article addresses the two provisions most relevant to financial institutions:
- the freezing and forfeiture of money held in bank and building society accounts, and
- unexplained Wealth Orders (UWOs).
Forfeiture of money held in Bank and Building Society Accounts
In summary, this is a process which allows enforcement authorities to freeze “money” (of a value over £1,000) held in bank accounts by order of the magistrates’ court and which they suspect represents property obtained through unlawful conduct. The authority is able to forfeit these funds administratively ie without a final order from the court where the recovery is unchallenged. Or alternatively, apply for a final order from the court where the forfeiture may be contentious.
For as long as the Proceeds of Crime Act 2002 (PoCA) has been in force, UK banks have accumulated funds that they know or suspect may represent the proceeds of unlawful conduct. Customer funds that a bank suspects may be the proceeds of crime (for instance when put on notice by a third party institution that a customer is engaged in fraud) are frozen pending further inquiry and SAR filing. In due course (and where no attempt is made to recover the funds), the account may be closed and funds transferred into a separate deposit account for funds linked to criminality. The government estimates that UK banks may hold between £30 - 50m in these accounts which grow by £2.5m per annum. The true extent of the amount held by UK banks may be far higher.
The Government has found it challenging to recover individual customer balances as well as the large residual pots of criminal property referred to above. Presently Part 5 of PoCA contains two regimes for the forfeiture of property without a prosecution or conviction. The first regime is civil recovery in the High Court of any type of property (where the amount is above £10,000). The second is forfeiture in the magistrates’ court of cash (which includes cheques and bankers’ drafts). The target of both of these regimes is “recoverable property”, property obtained by or through crime (sections 241, 242, 304-306).
The High Court civil recovery route has been considered by law enforcement as a potential route to obtain the recoverable property “held” in accounts. However, since proceedings for a recovery order can only be taken against a person who “holds recoverable property”, a problem that has arisen when seeking to recover from these accounts is identifying who is the person holding the recoverable property (arguably this remains the fraudster account holder) and therefore who is the correct respondent to civil proceedings. The government’s impact assessment identified that that new powers (to be inserted into PoCA at Chapter 3B (sections 303Z1 - 303Z19)) will seek to address these concerns.
An “officer” (employed by HMRC, the SFO, a constable, or an accredited fraud investigator) can apply to the magistrates’ court for an account freezing order (AFO). The court may make such an AFO where it is satisfied that there are “reasonable grounds to suspect” money in the account is recoverable property or intended for use in unlawful conduct (section 303Z3). The AFO will specify the period the account will be frozen but which cannot exceed two years. The AFO can be varied or set aside on an application to the court by either an officer or “any person affected by the order”. The AFO can be varied to make allowance for reasonable living expenses and legal fees (section 303Z5).
Whilst the account is subject to an AFO, the enforcement officer may either issue a notice to forfeit the credit balance without a court order (section 303Z9(2)) (the notice) or apply to the court for a forfeiture order (pursuant to section 303Z14). In both instances the officer or the court must be “satisfied” that the money is recoverable property or intended for use in crime.
If the officer chooses to pursue the administrative route, the notice must inform the recipient that the credit balance will be automatically forfeited unless objection is taken within 30 days starting after the notice is given. Where a notice is given, it should be given to every person to whom the AFO was given, so in practice the account holder and the bank.
If there is no objection from the account holder, then the bank “must transfer” the amount in the notice to an account nominated by the enforcement officer (section 303Z9(6)(b)). In terms of safeguards, if there is an objection during the 30 day notice period, then the notice lapses (section 303Z11). If the authority still wants to pursue forfeiture, it must apply to the magistrates’ court for a forfeiture order. In addition, “a person aggrieved” by the forfeiture (which may include beneficial interests or third parties), may apply to the magistrates’ court for an order setting aside the forfeiture section 303Z12. This application must be made within 30 days of the objection period ending or else be made in exceptional circumstances.
Unlike the administrative notice process, when an officer applies to the court for a forfeiture order there is no defined period for a party to object to the forfeiture. However any party to the proceedings who is “aggrieved by the order” may appeal the magistrates’ decision to the Crown Court.
Advantages of this process for the enforcement authorities
The new process is entirely heard in the magistrates’ court. Using the summary cash forfeiture regime as a guide, if litigation is necessary, it will be far less complex than High Court proceedings: the Civil Procedure Rules do not apply, pleadings are minimal and there is generally no disclosure process. Further, there is little risk of exposure to a costs award if the enforcement authority’s application fails in any particular aspect.
A very significant potential advantage of the summary account seizure regime (as the Government’s impact assessment makes clear) is that the NCA is able to use the process to seize funds identified through the SAR disclosure regime. Hitherto when a financial institution seeks consent to carry out a prohibited money laundering act (such as transferring a credit balance linked to criminality), the NCA has had a limited 38 day window (7 plus 31 days), the moratorium period, to apply to the Crown Court for a PoCA restraint order to freeze credit balances identified through the disclosure. A relatively detailed witness statement is required to support the application, there must be a risk of dissipation and a likelihood that criminal proceedings will be commenced (since a restraint order must be discharged if criminal proceedings are not commenced within a reasonable period). While the Criminal Finances Act inserted a provision into PoCA that gives the Court power to extend the moratorium period in applicable circumstances (section 336A), given the procedural challenges associated with applications for restraint orders, it can be expected that the summary account forfeiture regime will come to be readily used by enforcement authorities when seeking to freeze and recover credit balances in bank accounts.
We expect that enforcement authorities will come to see this provision as an effective tool to forfeit credit balances linked to criminality and also a less evidentially onerous alternative to the criminal restraint order process presently required to freeze funds identified in a SAR notification.
However there is a cautionary note. The sums involved are likely to be far in excess of the amount typically considered in magistrates’ court (there is presently no maximum credit balance above which the matter should be referred to the High Court). No Code of Practice has as yet been created to guide parties on the process or indicate, for instance, whether High Court judges will be assigned to try potentially complex factual issues of very significant value. In circumstances where forfeiture is contested, the regime may therefore present significant practical administrative challenges at a time of stretched resources in the magistrates’ court - an issue not acknowledged in the government’s impact assessment.
Unexplained Wealth Orders (UWOs)
UWOs create a new enforcement tool which enables UK enforcement authorities to require individuals or companies suspected of money laundering to explain (by way of a written statement or providing documents) how their source of their wealth enabled them to obtain certain property (whether located in the UK or abroad) valued over £50,000.
The deployment of UWOs are intended to address the growing perception (supported by official figures) that the UK, and London particularly, is being used as a money laundering destination of choice for Politically Exposed Persons (PEPs) in developing countries and organised crime gangs. To date, the UK government has been criticised for not doing enough at home to assist developing countries seeking to recover stolen funds or to deter those seeking to use the UK (particularly the London property market) to launder those expropriated proceeds. However UWOs can go further, and can be directed at individuals or companies non-resident in the UK as well as property held outside the UK.
In summary, the High Court may grant a UWO where it is “satisfied” that:
- there is “reasonable cause to believe that the respondent holds the property (wherever located), which must be of a value greater than £50,000”
- there are “reasonable grounds for suspecting that the known source of the respondent’s lawfully obtained income would have been insufficient for the purposes of enabling the respondent to obtain the property”; and,
- the respondent is a non-EEA PEP (defined in section 362B (7)) or there are reasonable grounds for suspecting that the respondent “is, or has been, involved in serious crime (whether in the UK or not)” or a “person connected with the respondent is or has been, so involved” in serious crime (section 362B). This provision is cast broadly intending to catch the ultimate beneficiary of crime committed by connected associates.
Once satisfied on these matters, the High Court issues the UWO requiring the respondent to provide the information and documents required by the UWO within the “response period” set by the court (section 362C (4)). In addition, the High Court may also grant an interim freezing order necessary to avoid the risk of any recovery order being “frustrated” (section 362J) by the dissipation of assets.
Irrespective of whether the respondent complies, “purports to comply with” or fails to comply with the terms of the UWO, the enforcement authority is able to pursue recovery of the respondent’s assets further to the civil recovery process in Part 5 of PoCA. In any such application, the authority will have to show on the balance of probabilities that the respondent’s property represents recoverable property. The government has stated in its impact assessment that the civil recovery hearing will be in front of a High Court judge (although the High Court regime is not explicitly referred to in the legislation).
If an interim freezing order is in place, enforcement must take place within 60 days of the authority receiving the respondent’s response to the UWO (section 362D (3). If the respondent provides a sufficiently coherent and legitimate explanation for this source of wealth and the authority decides that no enforcement proceedings will be taken, the authority must notify the High Court within 60 days and the UWO lapses.
Importantly, a respondent may commit a criminal offence if they knowingly or recklessly provide a statement that is false or misleading in a material particular (section 362E).
The legislation also allows for extra-territorial enforcement against property which is: a) subject to a UWO; b) at risk of dissipation (further to s.362J(2)); and c) is outside the UK. In such circumstances the enforcement authority may request the assistance to the government of the receiving country to secure that the person (which may not be the respondent) is prohibited from dealing with the property. Quite what weight a receiving government will give to such a request will be one of many of the interesting areas to watch as this provision matures.
The relative simplicity of the new regime belies a deliberately draconian regime which has a number of contentious features particularly concerning extra-territorial applicability and the level of information required from a respondent to the UWO. The government indicated in its impact assessment that the offence of providing false or misleading information would be “subject to safeguards” including a “statutory code of practice”. To date, no code of practice has been published.
A further safeguard is that unlike the bank account forfeiture regime, UWOs and a recovery order can only be granted by a High Court judge. So while the evidential standard of proof to obtain the UWO is low, the High Court regime confers a level of expense, scrutiny and procedural formality which will safeguard against disproportionate or tactical applications.
This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.