The rise of Asset Freezing Orders and Unexplained Wealth Orders

It has been just over two years since Asset Freezing and Forfeiture Orders ("AFFO") and Unexplained Wealth Orders ("UWO") were introduced into UK criminal law enforcement agencies' arsenal of civil recovery tools by the Criminal Finances Act 2017. At the time we commented that, "(t)hese powers provide substantial and potentially ground-breaking new powers to freeze and recover the proceeds of crime".

We now take a step back to take stock of the effectiveness of these powers in seizing the proceeds of crime and their uptake by law enforcement, including the Serious Fraud Office ("SFO"), the National Crime Agency ("NCA") and HMRC.

The powers explained

Put simply, AFFOs allow law enforcement officers to apply to a Magistrates' Court to freeze funds over £1000 (located in UK bank accounts or building societies) for up to two years, if there are reasonable grounds to suspect that they are "recoverable property" i.e. the proceeds of crime or intended for use in unlawful conduct. The funds can subsequently be forfeited upon a further application if the Court is satisfied, applying the civil "balance of probabilities" test, that the funds are recoverable property. An AFFO can be made before an investigation is initiated, and on a "without notice" basis. It is therefore a relatively easy route to recovery of funds in comparison with an application to the Crown Court for a restraint order pursuant to section 40 of the Proceeds of Crime Act 2002 (which requires an investigation to be opened and imposes on the applicant a  duty of full and frank disclosure) followed by a conviction and confiscation order, or the complex procedure of bringing a civil recovery action in the High Court.

UWOs enable law enforcement authorities to apply to the High Court for an order requiring individuals to explain how they obtained any property / asset valued over £50,000 (located anywhere in the world) where the value of that property appears to be disproportionate to their legitimate income. A failure to provide a reasonable explanation within the prescribed time limit will give rise to a presumption that the property which is the subject of the UWO is recoverable for the purpose of a civil recovery order and may amount to contempt of court. Prior to the introduction of UWOs, there was no similar power available to law enforcement.

The uptake of both UWOs and AFFOs by law enforcement was slow at first but is rapidly gaining momentum. For example, although the powers came into force on 31 January 2018, no funds were seized using AFFOs (although some were frozen) and no UWOs were made in 2018. The NCA has been a leader of firsts in this area obtaining the first forfeiture order in February 2019 and the first UWO in July 2019. By September 2019, AFFOs had been made in relation to 650 bank accounts covering £110 million, and UWOs had been made in relation to 15 properties with an estimated total value of £143 million. Since then, these numbers have increased significantly.

Enforcement of UWOs

The only enforcement authority to seek to deploy the UWO so far is the NCA. Although the NCA began strongly with winning a streak of high profile cases (including the Court of Appeal upholding its very first UWO earlier this year (covered here)), it has recently suffered its first defeat in the case of NCA v Baker and Others [2020] EWHC 822 (Admin).

This case involved three UWOs made in respect of London properties worth £80 million, which the NCA alleged had been obtained "as a means of laundering the proceed of unlawful conduct of Mr Rakhat Aliyev, a national of Kazakhstan". The ultimate beneficial owners of the properties were Mr. Aliyev's ex-wife and son. The respondents successfully applied to the High Court to discharge all three orders on the basis that there had been* 'material non-disclosure and inadequate investigation'* on the part of the NCA. The judge agreed, noting that the NCA's case was "*flawed by inadequate investigation into some obvious lines of enquiry", including a failure to gather *publicly available information relating to the independent wealth of Mr Aliyev's ex-wife and son, and a failure to explore whether Mr Aliyev's ex-wife or children were involved in laundering the proceeds of his suspected criminal conduct in light of the fact that their relationship had broken down.

Last month, the Court of Appeal refused permission for the NCA to appeal the judgment, noting that there was "no compelling reason" why an appeal should be heard. With no chance to overturn this ruling, the NCA is left with a £1.5million legal bill and the realisation that, whilst the UWO is a useful investigative tool that places the burden of explaining the source of wealth on a respondent, it cannot substitute the investigatory ground work needed to satisfy the court that a UWO is justified.

It should also be noted that the UWOs that the NCA has thus far obtained have not yet translated to the physical recovery of the proceeds of crime. Further, although UWOs can be made in respect of all types of property, tangible or intangible, located anywhere in the world, the NCA has so far only sought to deploy this tool in relation to high value UK residential properties.

Enforcement of AFFOs

Unlike UWOs, AFFO's have been used by nearly all the major criminal law enforcement agencies. However, it is again the case that the NCA has been at the forefront in exploiting this power, freezing over £275 million in 2019 and obtaining forfeiture of approximately £7 million (using AFFOs and other tools). In contrast, the SFO has issued only 7 AFFOs to date, and has obtained just one forfeiture order for £1.52 million.

The NCA first sought an AFFO in February 2019 in respect of three bank accounts owned by a London based student, Luca Filat, the son of the ex-Prime Minister of Moldova, whose extravagant lifestyle was at odds with his lack of registered income. This case was contested but eventually resolved in the NCAs favour and resulted in the forfeiture of over £460,000. Hot on the heels of the NCA's success, the National Economic Crime Centre has used AFFOs to freeze the bank accounts of 95 students where there were suspicions of money laundering.

The use of AFFOs has become ever more popular this year, with the police using these orders to target agents running unlicensed money remittance services. Further, in April 2020, the Metropolitan Police obtained an AFFO to forfeit 1.9 million euros following a cross-border money laundering probe.

HMRC has also accelerated its use of AFFOs to freeze and seize suspicious funds. In the 2019/20 tax year, it froze 166 bank and building society accounts preventing access to approximately £19.5 million suspected to have been derived from tax fraud and other criminal activity, and ultimately secured the forfeiture of £4.7 million. This amounted to a significant increase from previous years: only 60 AFFOs were obtained in 2018/19 (with £7.9 million frozen and £1.15 eventually forfeited) and only 1 AFFO was granted in 2017/2018 (with £200,000 frozen and nothing forfeited).

Conclusion

The powers introduced by the Criminal Finances Act 2017 have provided law enforcement with investigatory powers that allow them not only to bare their teeth, but to bite too. It is undoubtedly much easier for authorities to obtain an AFFO or even a UWO than to conduct a more traditional,  lengthy money laundering or corruption investigation (especially when the evidence is based overseas). The use of these powers is consistent with the NCA’s remit, including to act quickly to freeze and/or secure alleged criminal funds, especially in situations where a Suspicious Activity Report has been submitted. They also have the potential to be converted into a substantial revenue stream for the Government.

Although UWOs have been the subject of greater media attention owing to juicy facts involving Kensington properties boasting underground cinemas, shady characters and casual £16 million shopping trips, they have not been effective in securing the recovery of funds derived from criminal activity. Law enforcement agencies now appear to be warming up to AFFOs as a tool of choice in tackling illicit finance and recovering funds and, given the relatively low thresholds for securing these orders, this is a trend that is likely to continue. We may also see a continued increase in cases where AFFOs are used together with a UWO following the NCA's success in January 2020, when after securing a combination of these orders to freeze £1.13 million of funds tied to a businessman named Mansoor Mahmood Hussain with suspected links to organised crime, it successfully achieved a settlement resulting in the forfeiture of £190 million worth of funds.

The increased use AFFOs, however, bring with it some cause for concern. In particular:

• There is a lack of guidance on what constitutes “reasonable” grounds, which might result in them being used as fishing expeditions by law enforcement agencies.

• Funds can be frozen for a lengthy period (up to two years) and ultimately forfeited before a criminal investigation has been concluded (and in some cases, commenced) and in the absence of any conviction made by reference to the criminal standard of proof.

• Unlike freezing injunctions in High Court Proceedings or section 40 POCA restraint orders, AFFO's can attract a lesser degree of scrutiny as applications are made before Magistrates who may not have requisite specialist knowledge.