The rise in civil remedies for the growing criminalisation of business practices

August 2018  |  PROFESSIONAL INSIGHT  |  FRAUD & CORRUPTION

Financier Worldwide Magazine

August 2018 Issue

Corporations and companies worldwide thrive on financial profit, and organised crime is no different. Starving criminal organisations and terrorists of financial livelihood prevents them from recruiting and functioning. As a major and complex financial hub, it is crucial that the UK possess the means to accurately trace and recover the proceeds of crime ─ the social and economic costs of which are estimated at £24bn a year. Despite the general criminalisation of business practices, however, one important aspect in the fight against money laundering, asset recovery, is increasingly falling within the purview of civil courts.

The current building blocks for laundered asset confiscation, the Proceeds of Crime Act 2002 (POCA), sets out the asset recovery framework via four routes: one criminal (confiscation), the rest civil (civil recovery, cash forfeiture and seizure, and taxation).

Setting aside taxation for now, the two main POCA civil asset recovery mechanisms are civil recovery and cash seizure and forfeiture. Civil recovery is the process of recovering the proceeds of unlawful conduct in the UK High Court (proved to the civil standard of ‘the balance of probabilities’), but does not require a conviction. This allows for asset recovery where criminal conviction may prove difficult, either because the crime occurred outside the UK and could not be prosecuted in the UK, or the assets were too removed from the criminal conduct. In particular, civil recovery proceedings touch upon the property itself (i.e., in rem) rather than the individual suspected of criminal conduct. Enforcement agencies need not prove a particular type of unlawful conduct but do need to establish a link between the asset and the criminal conduct for it to be recoverable.

Cash forfeiture orders are civil injunctions brought before the Magistrate’s Court, and, similarly to civil recovery, are taken against the asset itself (here, cash) and not an individual. Specific conduct need not be proven. The enforcement agency only needs to establish that the relevant cash is ‘on the balance of probabilities’ related to a number of different types of activities, any one of which could be unlawful.

Confiscation orders, whose regime is set out in Part 2 of the POCA, aim to recover the financial benefit that an individual has gained through their crime. A confiscation order can only be requested upon criminal conviction via the Magistrate’s and Crown Court, and enables the Treasury to recoup a sum equivalent to the value of the benefit obtained. The court must determine whether, on the balance of probabilities, the defendant has a ‘criminal lifestyle’ or benefited from ‘general criminal conduct’. A confiscation order does not provide for the confiscation of particular property, but rather orders the defendant to pay a set amount – equivalent to the benefit gained from the criminal activity – out of whatever resources are available to him or her. Therefore, it is not an injunction taken against a particular asset, but against the individual (in personam rather than in rem).

These civil and criminal measures, however, have been deemed insufficient to combat money laundering effectively. The UK National Risk Assessment of money laundering and terrorist financing singles out POCA’s failure to prevent criminal use of legal services and estate agency to secure UK property with criminal proceeds. This could be explained by the fact that under POCA, it was up to law enforcement agencies to prove that the asset was the instrument or proceeds of crime. This could be a significant hurdle ─ even on the lower civil standard of the ‘balance of probabilities’ ─ given limited enforcement agency resources, reliance on mutual assistance from other (sometimes corrupt) jurisdictions and potential remoteness of the criminal activity.

To address this issue, parliament introduced additional civil asset recovery schemes in the Criminal Finances Act 2017. These include the Unexplained Wealth Order (UWO) and forfeiture of moveable property and bank accounts, shoehorned into POCA’s civil recovery and forfeiture architectures.

The UWO is an order, granted by the High Court at the request of an enforcement agency – such as the Serious Fraud Office (SFO), the National Crime Agency (NCA), the Crown Prosecution Service (CPS), the Financial Conduct Authority (FCA) or HM Revenue & Customs (HMRC) – requiring the owner of property worth more than £50,000 located in the UK to explain how the property was paid for. Crucially, the enforcement agency need only prove that 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 the respondent is either a non-EEA politically exposed person or is involved in (or connected to someone involved in) serious crime (UK or foreign). Once satisfied on these matters, the High Court issues the UWO requiring the respondent to provide certain information and documents within the “response period” set by the court. The burden thus shifts onto the respondent to prove the source of funding.

In support of UWOs, the High Court may also grant an interim freezing order (IFO) necessary to avoid the risk of any recovery order being ‘frustrated’ by the dissipation of assets. Irrespective of whether the respondent complies with the terms of the UWO, the enforcement authority is able to pursue recovery of the respondent’s assets further to the civil recovery process in Part 5 of the POCA. The relevant agency will merely have to show that “on the balance of probabilities” the respondent’s property was obtained through unlawful conduct.

The Criminal Finances Act also provides for a new procedure for the detention and forfeiture of money held in bank accounts and of moveable property, such as artistic works, precious stones, jewellery or precious metals. A senior officer, or officer authorised by a senior officer, may apply for an account freezing order (AFO) in the Magistrate’s Court if they are satisfied that there are “reasonable grounds to suspect” that the money in the bank account is recoverable property or is intended to be used in unlawful conduct. Similarly to civil measures, the standard of proof to be applied is “on the balance of probabilities”. An application can be made by an officer of HMRC, a police officer, an SFO officer or an accredited financial officer.

While the proliferation of civil injunctions in aid of criminal proceedings and investigations can only be applauded, their effectiveness remains to be seen. For example, to date, only two UWOs have been secured. In February 2018, the NCA was granted two orders worth £22m ($30m) combined relating to two UK properties and freezing the assets of the ultimate owner, whose identity was not released. Similarly, only one bank account forfeiture order has been granted so far (on a mechanic in Ipswich).

According to the National Risk Assessment of Money Laundering and Terrorist Financing, criminal confiscation orders under the POCA remain the most common asset recovery mechanism, despite the existence of civil recovery. Admittedly, this is in large part because schemes such as the UWO and bank accounts forfeiture are still in their infancy. Civil measures may take the upper hand over the next few years.

To ensure their success, however, other elements must fall into place. First, enforcement agencies will need to select their targets carefully. Cash-restrained and time-pressured, they will have to face off against wealthy individuals with extensive means to challenge the orders. It is likely that once an order has been granted by the Magistrate’s Court, it will be appealed in the High Court, with significant added cost. Thus, for applications to be worthwhile, cases must be well put together by experienced practitioners. Second, improved inter-agency cooperation will be necessary to share expertise, reduce costs and enhance applications’ success rate. Third, the High Court will have to balance money laundering risks with human rights considerations carefully for the orders to be seen as legitimate. In the case of UWOs, the shift in burden of proof to the assets’ owner to establish proof of funding has come under fire from legal practitioners as going against the presumption of innocence. Fourth, and most importantly, the government must show commitment for the new measures by appropriately allocating resources and training. If the new measures are left unsupported, they will not work in practice.

 

Ian Hargreaves is a partner and Stephanie Sarzana is special counsel at Covington & Burling LLP. Mr Hargreaves can be contacted on +44 (0)20 7067 2128 or by email: ihargreaves@cov.com. Ms Sarzana can be contacted on +44 (0)20 7067 2351 or by email: ssarzana@cov.com.

© Financier Worldwide

BY

Ian Hargreaves and Stephanie Sarzana

Covington & Burling LLP

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