Unexplained Wealth Orders – High Court Dismisses First Legal Challenge

Russia and CIS Practice Group Alert | October.19.2018

The English High Court has dismissed an application to discharge an "unexplained wealth order" ("UWO") against the wife of the former chairman of the International Bank of Azerbaijan. The respondent will now be required to provide a statement explaining how she acquired her interest in an £11.5 million property.

What Is a UWO?

UWOs are an investigatory tool under the Proceeds of Crime Act 2002 ("POCA 2002"), as amended by the Criminal Finances Act 2017. A UWO is a court order requiring an individual (the "respondent") to explain the nature and extent of their interest in a specified property and the source of the funds used to acquire it. On the application of a law enforcement agency, the court may grant a UWO if it is satisfied that:

  • there is reasonable cause to believe that the respondent holds the property and the value of the property is greater than £50,000;
  • 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; and
  • the respondent is a politically exposed person ("PEP") or there are reasonable grounds for suspecting that the respondent, or a person connected with the respondent, is, or has been, involved in serious crime (whether in the UK or overseas).

Failure to comply with the UWO within the specified period will give rise to a rebuttable presumption that the respondent's interest in the property is recoverable property under POCA 2002.

Further details regarding the conditions for the making of a UWO can be found in our earlier update.

Background

In February 2018 the High Court granted a UWO against an individual identified only as "Mrs A", on the application of the National Crime Agency ("NCA"). The order protecting the identity of the respondent has since been lifted and the respondent named as Zamira Hajiyeva. Her husband, Jahangir Hajiyev, the former chairman of the International Bank of Azerbaijan (the "Bank"), was convicted in Azerbaijan in 2016 of fraud and embezzlement offences.

The property which is the subject of the UWO was purchased in 2009 for £11.5 million by a company incorporated in the British Virgin Islands. According to Mrs Hajiyeva's own statement to the Home Office in her application for indefinite leave to remain, she is the beneficial owner of the company.

Mrs Hajiyeva applied to the High Court to discharge the UWO.

The High Court's Decision

The High Court rejected all of the grounds for challenge and upheld the UWO. In doing so, the court made the following findings:

Meaning of "PEP": The definition of PEP in the EU Fourth Money Laundering Directive includes a member of the administrative and/or management body of a State-owned enterprise ("SOE"), or a family member of such a person. The question of whether an enterprise is an SOE must be determined by applying UK law. Both "PEP" and "SOE" were to be defined widely. At all material times, the Government of Azerbaijan was the majority owner, and had ultimate control, of the Bank. The court therefore held that the NCA had established that the Bank was an SOE, and that the respondent and her husband were PEPs.

The "income requirement test": The NCA had not been unreasonable in relying on the fact of Mr Hajiyev's conviction for fraud and embezzlement offences, notwithstanding the concerns raised regarding the fairness of his trial. The threshold for excluding reliance on a foreign conviction on human rights grounds was a high one, especially at this investigatory stage. The court also considered that there was some independent corroborative evidence in support of the conviction, including spending of £16 million on Harrods loyalty cards issued to Mrs Hajiyeva between 2006 and 2016. Further, the court considered that, as a state employee between 1993 and 2015, Mr Hajiyev was very unlikely to have generated sufficient lawful income to fund the acquisition of the property.

Human rights: The court rejected grounds for dismissal of the UWO based on Article 1, Protocol 1 of the European Convention on Human Rights ("ECHR") (the right to "peaceful enjoyment" of possessions). The UWO was, at most, a modest interference with the respondent's right to "peaceful enjoyment" of her property, and any such interference was proportionate given that there were grounds to believe that the property had been obtained through unlawful conduct.

Privilege: The court did not accept that the UWO offended the privilege against self-incrimination and spousal privilege. First, there was no statutory right to invoke either privilege in respect of an alleged risk of prosecution for criminal offences outside the UK. Second, the court considered that either POCA 2002 had abrogated the privileges by necessary implication, or they were excluded by the Fraud Act 2006 on the facts of this case. Third, the court did not consider that disclosure of information concerning the property under the UWO would give rise to a real or appreciable risk of prosecution for the respondent or her husband, in the UK or in Azerbaijan. There were, in any event, already sufficient safeguards concerning the use of any information provided by them to the NCA.

Exercise of the court's discretion: The High Court held that, in all the circumstances, it was appropriate for the UWO to be made. The statutory criteria had been met, any interference with Mrs Hajiyeva's rights under the ECHR was proportionate and the terms of the order were justified.

Implications of the Decision

Law enforcement agencies have been criticised for being slow to take advantage of their new powers to apply for UWOs under the Criminal Finances Act. This decision has been viewed as a test case for UWOs and the outcome may encourage further applications. The decision also confirms the broad definition of both "PEP" and "SOE" under the relevant legislation, which may catch individuals who do not necessarily regard themselves as employees of the State.

Ultimately, a UWO is an investigatory tool which only gives rise to disclosure obligations. However, the court held in this case that the provisions in POCA 2002 regarding the consequences of failure to comply with a UWO did not oust the court's power to attach a penal notice and enforce non-compliance with UWO through committal proceedings. Indeed, the court took the view that there was a "strong public interest" in ensuring that orders were not disobeyed and in filling what would otherwise be an "enforcement gap" in respect of UWOs. This is one way in which the courts may give the UWO regime more teeth.