The impact of Unexplained Wealth Orders on the UK’s financial and property sectors

The UK has long had a reputation as a global hub for dirty money. This has brought many high-net-worth individuals (HNWIs) with dubious sources of funds into the country, which has had some positive effects on the country’s economy as they have spent significant funds here, including on luxury goods and private school fees. However, the negative effects are far more serious and have the potential to cause issues for many years to come. Rising inequality and many people’s inability to afford to buy a home are just some of the serious consequences money laundering can have on a country’s economy, not to mention the damage certain individuals, such as corrupt foreign officials, can cause to their own countries before laundering the stolen funds.

The UK government has made some efforts to tackle these issues but adopting effective anti-money laundering legislation is a slow and complex process. At the same time, money launderers have the means to hire whole teams of lawyers and accountants who can quickly find new ways to avoid scrutiny from law enforcement.

Unexplained Wealth Orders

One of the most prominent tools introduced by the UK government in the recent years is the Unexplained Wealth Order, or UWO, which is an investigative tool available since 2018. It was introduced as part of the Criminal Finances Act 2017 which focuses on asset recovery and money laundering in the UK. 

The UWO was designed to assist law enforcement with the recovery of proceeds of funds and can be used to target primarily Politically Exposed Persons (PEPs) outside the European Economic Area or in cases where there are reasonable grounds to suspect that the respondent is, or has been, involved in serious crime. The tool can be used to recover assets worth over GBP 50,000. A key condition for the use of UWOs is that the respondent does not have sufficient income to acquire the asset. This places the onus on the respondent to prove that the source of their wealth is legitimate. The enforcement authorities referenced in relation to the bill are the National Crime Agency, Her Majesty’s Revenue and Customs, the Financial Conduct Authority, the Director of the Serious Fraud Office, and the Directors of Public Prosecutions.

Since January 2018, there have been four cases in the public domain in which UWOs have been issued. Only one of these, the case against Mansoor Mahmood Hussain has been successful, with the UK authorities seizing GBP 10 million worth of property in a deal with the target, who was suspected of having links to organised crime.

The first and most high-profile case to date was the UWO case against Zamira Hajiyeva, whose husband is the former chair of an Azerbaijani state-owned bank. In January 2021, the Supreme Court refused her permission to appeal, and she is obliged to respond to the UWO and prove that her funds originate from a legitimate source. Failure to do so will result in civil recovery proceedings.

The thirds case was against Dariga Nazarbayeva and her son Nurali Aliyev. Nazarbayeva is a leading political figure in Kazakhstan and the daughter of the country’s former president. In this case, the UWO was served on a professional trustee and four corporate entities that were the owners of her property, originally purchased by her late former husband Rakhat Aliyev (who was a convicted criminal). However, Nazarbayeva won the case, which was a major setback for the NCA, particularly so given the expense involved in issuing UWOs and launching such proceedings.

The fourth UWO issued to date was against an unnamed Northern Irish woman with suspected links to organised crime groups.

Insufficient due diligence procedures

These examples show that the UWO is far from being the silver bullet against money laundering some expected it to be. Its introduction was greeted enthusiastically, and the media even called it “The McMafia law”, after the popular TV series about a wealthy Russian family in London and their links to organised crime. The significant media attention, relatively unusual considering the technical nature of UWOs, was certainly positive to some extent. It showed that the public are aware of the issues London and the UK are facing and are eager for the UK government to find a solution. However, it was perhaps also counterproductive as it created very high expectations which the UWO is unlikely to meet. It is important to remember that this is only one of the many investigative tools available to the UK’s law enforcement authorities and is to be used in very specific cases.

There is a range of preventative steps that companies can take to address money laundering risks, such as conducting thorough due diligence. Financial institutions, as well as professional services providers such as lawyers and accountants in the UK, are required to conduct due diligence on their clients. There have been several fines issued against financial institutions for their failure to comply with these requirements, but it appears that a cultural change is also needed in order to successfully target money laundering. While banks and lawyers are well placed to conduct due diligence on customers, others, such as auction houses and property agents (who must comply with the same requirement), might find these processes more complex. There are also likely to be challenges involved in handling potential clients whose source of wealth could not be verified. Additionally, significant investment and technical skills are needed to conduct these checks in a meaningful way.

A government money laundering risk assessment concluded in December 2020 that money laundering had probably increased since 2017, suggesting that UWOs are yet to have the desired impact. However, greater public attention and increasingly strict regulations will hopefully put more pressure on firms in multiple sectors to make sure they really know their clients.

We will be discussing this topic further during our webinar on 12 May, for which you can register here.

By Veronika Konečná

Senior Associate, Head of Russia, CEE & Central Asia Practice

veronika.konecna@aperio-intelligence.com

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