In January 2018, the British government introduced a new tool to combat money laundering, in particular in the London property market, that is known as “Unexplained Wealth Order” (UWO).
Politicians and top state officials outside Europe, persons related to them and individuals suspected of having illegally acquired ownership of assets in the UK may be forced to present their financial situation as a result of UWOs.
This investigative instrument may superficially be conducive to fighting corruption and crime. Upon closer inspection, however, we can quickly see that implementing UWOs conflicts with the key principles of the rule of law. In fact, the legal barriers imposed on British authorities when issuing UWOs are comparably low. In addition, the approach of the competent offices sometimes borders on arbitrariness. As UWOs target the assets of wealthy foreigners in particular, there is the risk that investors will be scared off and refrain from investing in the UK in the future. Such a development could have further negative effects on the attractiveness of the UK as a place of business, especially as the consequences of Brexit are still uncertain.
Means of combating money laundering
UWOs serve as an investigative tool to help British authorities understand how a suspected person has acquired assets and how they acquired the ownership of the material resources used to do so. Pursuant to the Proceeds of Crime Act 2002, an enforcement authority (National Crime Agency, NCA) request the issuance of a UWO by the High Court to issue a UWO on assets worth over £50,000. In addition to real estate, jewellery, cars and other goods may be affected. UWOs will be approved if there is justified suspicion that the legally acquired financial resources of the owner are not sufficient to acquire the assets. In other words, it would be approved if the enforcement authority assumes that the owner acquired the assets illegally and laundered them by acquiring the assets in question in the UK.
If the person in question is unable to credibly disclose the grounds for acquiring the assets in question and the origin of the resources used within the deadline set, suspicion of money laundering shall be cemented, thereby paving the way for judicial seizure. Should the owner disclose the origin of the resources, the NCA can use this disclosure as evidence of the illegal origin of the resources and request the judicial seizure of the assets. The owner may be dispossessed of the assets and should also expect to be subject to a fine or a prison sentence.
Greater room for interpretation
UWOs can target assets if their owner can be assigned to one of two categories: either persons suspected of serious crime or individuals connected with such persons. In contrast, for persons outside the European Economic Area, it suffices to be considered a politically exposed person (PEP) or to be connected with such a person. A PEP is defined as a person who presents a higher risk for corruption by virtue of their prominent public position. Suspicion of criminal activities is not required in this case. The rule of law is clearly strained as a result of this categorisation. Relatives, business partners, employees, trustees, management boards in related companies and other persons may be considered as persons connected with a PEP in such cases.
Enforcement authorities are given a large scope for interpretation when identifying suspicious persons. For example, it is possible to issue a UWO against the former spouse of a suspected criminal or PEP, even if one or more decades have passed since their divorce and the assets in question were acquired considerably later. Cases of inheritance would also be possible where the assets of a PEP or their related persons have transferred to another person. Even if there has not been any connection between the individuals for many years, the inheritor may be forced to present the asset acquisition of the testator as a result of a UWO and, if evidence is insufficient, they may be dispossessed of the assets in question.
The nature of the connection with a PEP, a related party or a suspected criminal and the time that has passed since the existence of this connection therefore hardly play any role when issuing a UWO. In addition, the burden of proof is reversed, the presumption of innocence is suspended, and the owner is compelled to provide evidence of acquiring the assets through transactions, also when these transactions date back ten or twenty years – or even longer. The legal hurdles for enforcement authorities to enforce a UWO are extremely low, and the limits to arbitrariness quickly exceeded. In one UWO for example, a custodian was considered to be a trustee for a PEP who, by the time the custodian had heard of the assets in question for the first time, had already been deceased for over a year. In the view of the NCA, the death of the PEP did not prevent the custodian from being the PEP’s posthumous trustee.
Deterrent for investors
In light of the foregoing, the question is raised as to the extent to which the constitutional principles of legal certainty and equality and the guarantee of the fundamental right to ownership are still ensured. In particular, legal certainty seems greatly jeopardised if, for example, the ownership of property depends on the ability to produce decades-old commercial documents. Investors, who do not originate from the European Economic Area and who often seek security by investing in Europe in particular, may increasingly shy away from investing their capital in the UK under these new legal practices. For any connection to a PEP, they must now expect to be in the sights of British authorities and to justify, or even lose, their investments as a result of a UWO. These PEP connections do not even need to be very close. In addition, UWO procedures are almost inevitably becoming public knowledge, which may lead to freezing bank balances in third-party countries.
The consequences of the increasing lack of foreign investment may be severe. As a report from the consulting firm Deloitte states, 6.7% of global foreign direct investment flowed into the United Kingdom between 2015 and 2018. On an international scale, the UK was therefore in second place behind the US. A large part of these investments came from Europe or the US; however, an analysis from the British Office for National Statistics showed that, in 2016, 17% of the direct investment supposedly originating from Europe had a country of origin outside Europe. On account of the immense significance of foreign investment for the British economy, a slight decrease in investments as a consequence of the deterrent effect of UWOs would already entail negative consequences.
At a time when the UK is becoming less attractive for investors and property prices are falling as a result of the hardly foreseeable consequences of Brexit and its associated uncertainty, the UK’s position as a place of business will be further weakened by the lack of legal certainty in the wake of UWOs. In light of this future outlook, British authorities would therefore be well advised to establish clearer bases for issuing UWOs and not to further strain the principles of the rule of law, even when fighting corruption and money laundering. Investors are skittish deer that can easily be scared off.