Unexplained Wealth Orders: the context for Financial Institutions

The High Court has considered the definitions of Politically Exposed Persons and State Owned Entities in the context of a challenge to an Unexplained Wealth Order.

Earlier this month, the High Court published its judgment in the first challenge to an Unexplained Wealth Order (UWO) in the matter of National Crime Agency (NCA) v Mrs A. The Court held in the NCA’s favour and dismissed each of the eight grounds to discharge the UWO advanced by Mrs A.

The judgment has given commentators a lot to mull over, not least the identify of Mrs A (and her shopping habits at Harrods), which on the lifting of the anonymity order by the Court of Appeal was revealed to be Mrs Hajiyeva, the wife of the former Head of the Central Bank of Azerbaijan (the Bank).

However, it was the Court’s determination and reasoning that Mr Hajiyeva was a Political Exposed Person (PEP) under the 4th Money Laundering Directive which should be the key take-away for financial crime compliance teams at financial institutions.

Background

We wrote about UWOs here, setting out their essential features. In order to make an UWO the Court must be satisfied that the following criteria are met:

  • 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, most pertinently for banks, and
  • the respondent is a non-EEA PEP 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.

The NCA applied for a UWO on 27 February 2018 in respect of a Mayfair property purchased in 2009 by a BVI company for £11.5m. Mrs A is the beneficial owner of the property. In a nutshell, the Court accepted, in making the UWO, that Mr A was a PEP as defined in s.362B(7) of the Proceeds of Crime Act 2002 (POCA) and made an UWO requiring Mrs A, as a family member of a PEP, to explain how her husband’s earnings as a public official enabled her to purchase the property. It does not appear that the NCA alleged that Mr A was involved in serious crime (within the meaning of the UWO regime), despite Mr A being sentenced in Azerbaijan to 15 years imprisonment, and ordered to pay the Bank $39m.

The application to discharge

The first ground of Mrs A’s application to dismiss the UWO was that Mr A was not a PEP on the basis: a) that the Bank was not a State Owned Entity (SOE) within the meaning of the 4th Money Laundering Directive; and / or b) as Chairman of the Bank he was not entrusted with “prominent public functions by an international organisation or by a State other than the United Kingdom or another EEA State”.

The Court disagreed, finding both that the Bank was an SOE and that Mr A exercised a prominent public function.

What is an SOE?

At the time of the hearing, no European Court had defined the term SOE. And while the Court itself shied away from creating a definition, its grappling with the issues should provide helpful commentary for any financial institution seeking to define an SOE. What the Court did say is that:

  • The test for whether an entity is an SOE is based on ownership and control and not legal status or powers.

  • Whether an entity is an SOE is fact dependent. A good deal of documentary information, including auditor’s reports, was adduced to evidence that the Bank was, as a matter of fact, a state-owned Bank.

  • The percentage of the shares owned by the public will be relevant but not determinative. At all material times, the Azerbaijan Ministry of Finance had a majority shareholding and, it was held, had ultimate control of the Bank. As a result, the Court did not have to determine whether the Bank would have been an SOE if the government held a minority shareholding.

  • In obiter comments, the Judge sought to purposively interpret this aspect of the 4th Money Laundering Directive to “cover the widest possible range of legal entities” and suggested that a minority ownership of more than 25% would be enough to identify who ultimately owns or controls a legal entity. Indeed, where a member state had decided on a lower percentage to represent a beneficial ownership, the ownership for an SOE may be similarly reduced.

Given the Court’s finding, not unsurprisingly, the Court held that Mr A performed a public function as a senior executive of a non-EEA SOE.

Comment

In light of the Court’s discussion of Mr A’s PEP status under the 4th Money Laundering Directive, financial institutions would be advised to review and, if necessary, revise their internal ownership threshold test for an SOE. While ownership and control of an entity is fact-specific, given the Judge’s obiter comments, an English Court is likely to consider that, prima facie, an entity which has a minority Government ownership of more than 25% should be treated as an SOE.

This was a relatively clear-cut case for the NCA to test the first UWO. In June 2018, the Head of the NCA’s Economic Crime Command suggested that there were as many as 140 potential UWOs under consideration. We understand that many of these proposed UWOs relate to Russian / CIS PEPs, and their family members or associates. While the PEP’s property is a target for a civil recovery order, arguably the key objective for the NCA is to obtain information to investigate and criminally prosecute UK-based professional gate-keepers, such as accountants, estate agents and solicitors who facilitate the laundering of these funds in the UK. In the future, it will be interesting to see what appetite the NCA has to take on more UWOs, particularly where the respondent is not a non-EEA PEP (or connected to such a PEP) or the facts on PEP status are more challenging and, for instance, involve entities which are minority owned by governments.

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.