BLOG: The Dangers of Prejudicial Assumptions – Unexplained Wealth Orders and the pitfalls of an inadequate investigation

John Carl Townsend looks at the recent authority of National Crime Agency and Baker & Ors and its dangerous presumptions in respect of offshore business interests.

Corporate structures that can be used to conceal identity are not inherently criminal. It also a fact that it can be perfectly legal to hold assets via companies in other jurisdictions such as Panama and the BVI. Unfortunately, investigative authorities in the UK have a tendency to believe that any asset held or transferred with anything less than high visibility must be criminal. 

It was this very thinking that resulted in the NCA obtaining UWOs against three London properties that were discharged by Mrs Justice Lang on 8 April 2020. 

Mrs Justice Lang’s 68-page judgment in Baker & Others does not reflect well on the NCA’s approach in many respects, but some highlights include: 

1)    a failure to pay any regard to the substantial independent wealth of the Ultimate Beneficial Owners (“UBO”) of the properties; and 

2)    an assertion that an independent solicitor and professional trustee was a politically exposed person (“PEP”) when there could be no reasonable belief that he was connected to the person that had held the relevant political positions. 

The NCA has made bullish public statements in respect of its intention to appeal the judgment, but it will be interesting to see whether the Court of Appeal will reach any different conclusion.  

WHAT IS AN UNEXPLAINED WEALTH ORDER?

In short, a UWO requires a person who is suspected of involvement in or association with serious criminality to explain the origin of assets that appear to be disproportionate to their known income. 

THE REQUIREMENTS FOR MAKING AN UNEXPLAINED WEALTH ORDER

Section 362B of the Proceeds of Crime Act 2002 (“POCA”) sets out the requirements for the making of a UWO as follows: 

(1)        These are the requirements for the making of an unexplained wealth order in respect of any property. 


(2)     The High Court must be satisfied that there is reasonable cause to believe that – 
        

(a)     the respondent holds the property, and 

(b)     the value of the property is greater than £50,000. 


(3)     The High Court must be satisfied that there are reasonable grounds for suspecting that the known sources of the Respondent’s lawfully obtained income would have been insufficient for the purposes of enabling the respondent to obtain the property. 


(4)     The High Court must be satisfied that 

(a)     the respondent is a politically exposed person, or 

(b)     there are reasonable grounds for suspecting that— 

    (i) the respondent is, or has been, involved in serious crime (whether in a part of the United Kingdom or elsewhere), or 

    (ii) a person connected with the respondent is, or has been, so involved. 
… 


(7)         In subsection (4) (a), ‘politically exposed person’ means a person who is – 

(a)     an individual who is, or has been, entrusted with prominent public functions by an international organisation or by a State other than the United Kingdom or another EEA State…

(8)     Article 3 of Directive 2015/849/EU of the European Parliament and of the Council of 20 May 2015 applies for the purposes of determining – 

(a)    whether a person has been entrusted with prominent public functions (see point (9) of that Article)
(b)    whether a person is a family member (see point (10) of that Article), and
(c)     whether a person is known to be a close associate of another (see point (11) of that Article).” 

Referencing R (Bright) v Central Criminal Court [2011] 1 WLR 662, Mrs Justice Lang reiterated that it was for the court, not the NCA to determine whether there is “reasonable cause to believe” and that the onus is on the NCA to satisfy the Court that the statutory conditions are met. 

The Respondent to a UWO can apply for discharge on the following grounds: 

(i)    Errors of law and approach by the NCA in the applications for the making of a UWO
(ii)    Material non-disclosure by the NCA to the judge at the ex parte hearing and inadequate inquiry by the NCA 
(iii)    The information now available demonstrates that the Orders were sought and made on a flawed basis. 

For brevity, the above is simply an overview of the statutory framework. A thorough recitation of the relevant law and procedure is helpfully provided at paragraphs [14] to [57] of Lang J’s judgment. 

The Background to the UWOs

Rakhat Aliyev was a government official in Kazakhstan before his death on 24 February 2015. In that capacity, he was chief of Kazakhstan’s tax police, deputy chief of the KNB state security service, ambassador to Austria and first vice foreign minister. During the time that he held those posts he made his fortune in banking, oil, news media, telecommunication and agricultural commodities. He had also been married to Dariga Nazarbayeva, the eldest daughter of the Kazakh President Nursultan Nazarbayev prior to their divorce in 2007. During the course of their marriage they had a son, Nurali Aliyev. 

As is often the case, Dariga Nazarbayeva and Rakhat Aliyev had lived apart for many years prior to their divorce with her remaining in Kazakhstan while he resided in Austria. In fact, Rakhat Aliyev had been in a relationship with a Ms Elnara Shorazova since 2002. Importantly, the assets in Kazakhstan of Rakhat Aliyev that were deemed to be derived from criminal conduct were confiscated in that jurisdiction and those assets were not received by Dariga Nazarbayeva as part of any divorce settlement. 

Dariga Nazarbayeva is also a successful businesswoman in her own right and has been named by Forbes in Kazakhstan as one of its richest people in 2013. Her son, Nurali Aliyev, is also a successful and independently wealthy businessman.

On 22 May 2019, the NCA applied for UWO’s in respect of three high value London properties. It is important to note that the properties had been purchased by corporate structures, which did not disclose the UBO. The subject of the UWO’s were the corporate entities and the solicitor Andrew Baker (who had acted as President of the entities). 

Mr Baker is a solicitor of Senior Courts of England and Wales and was admitted on 15 October 1985. He is a professional trustee, a leading expert on trusts law, a member of the Law Society, the International Tax Panning Association, the Offshore Institute and an honorary member of Fellows and Legal Scholars of the Centre for International Legal Studies. 

On 9 August 2019, the Respondent companies and the UBOs, Dariga Nazarbayeva and Nurali Aliyev, voluntarily provided extensive information regarding the purchase and transfer of the properties. That letter also explained the ways in which the NCA’s application was factually incorrect and that the properties were entirely unconnected to Rakhat Aliyev. The NCA refused to withdraw the UWO. 

The Application to discharge 

The Respondents relied on all three grounds and asserted that there had been:

(i)    Errors of law and approach by the NCA in the applications for the making of a UWO
(ii)    Material non-disclosure by the NCA to the judge at the ex parte hearing and inadequate inquiry by the NCA 
(iii)    The information now available demonstrates that the Orders were sought and made on a flawed basis. 

In discharging the orders, Mrs Justice Lang was not persuaded that there had been material non-disclosure. She was, however, content to accept the Respondents’ submissions on the remaining grounds. 

Given the length of the judgment, it is impractical to highlight every relevant factor in Lang J’s decision to discharge, but the following are interesting examples of the flaws in the NCA’s approach:

1)    The NCA had suggested that there were reasonable grounds for suggesting that Mr Baker is or was involved in serious crime. The NCA had asserted that there were grounds to suspect that Rakhat Aliyev was the founder of the entity Villa Magna and had provided its funds which were derived from unlawful conduct. They further asserted that Mr Baker was a PEP, as he was connected with Rakhat Aliyev. In discharging the order, Mrs Justice Lang found that: 

(a)    There was no evidence that Mr Baker had ever met Rakhat Aliyev;
(b)    Mr Baker’s involvement with the properties was after the death of Rakhat Aliyev;
(c)    It was clear that Mr Baker had no criminal record and that the NCA’s suspicions about Mr Baker flowed entirely from the assumption that Rakhat Aliyev was the founder of Villa Magna Foundation (the Second Respondent). 
(d)    Given that there was evidence of any connection between Rakhat Aliyev there was no reasonable suspicion that Mr Baker was a PEP. 

2)    The NCA had suggested that Dariga Nazarbayeva laundered the proceeds of Rakhat Aliyev’s criminal conduct. Mrs Justice Lang’s view was that: 

(a)    The NCA did not appear to take into account the breakdown of the relationship between Dariga Nazarbayeva and Rakhat Aliyev in assessing the likelihood of her involvement in laundering the suspected proceeds. 
(b)    The NCA did not take into account that the investigation and confiscation proceedings in Kazakhstan which confiscated Rakhat Aliyev’s assets and not the assets of Dariga Nazarbayeva. 
(c)    The NCA did not take into account that Dariga Nazarbayeva was so independently wealthy as to be perfectly capable of purchasing the relevant properties. 

Lessons to be Learned 

At the core of the NCA’s difficulties was the mistaken assumption that complex offshore structures suggest underlying criminal conduct. On any sensible analysis that assumption was inherently flawed (offshore entities are often a necessity for the dilution of political risk and asset protection for very high net worth individuals who are at risk of being targeted due to the extent of their wealth). Had the NCA cast aside its prejudicial view of offshore structures, it may well have conducted a better investigation and avoided the pitfalls in the UWOs applied for in this case.