MONEY LAUNDERING UWO Unexplained Wealth Orders

U.K. Court Strikes Down “Unexplained Wealth Orders” By Parsing Facts and Making Value Judgments About Meaning of Corporate Complexity

Pin it

A Court Ruling that May Resonate Across the Globe

The High Court in London recent­ly struck down three “Unexplained Wealth Orders” that U.K. law enforce­ment had hoped would foil an alleged mon­ey laun­der­ing scheme by Kazakh polit­i­cal elites. Instead, the Court found that the government’s evi­dence was insuf­fi­cient to com­pel fam­i­ly mem­bers of the for­mer Kazakh President to explain how they acquired approx­i­mate­ly £80 mil­lion worth of prop­er­ty in the U.K.

The Court’s Order is detailed, and it care­ful­ly pars­es through some poten­tial­ly eye­brow-rais­ing facts regard­ing the play­ers and prop­er­ties embroiled in this saga. Ultimately, the pri­ma­ry point of con­tention between the Court and the U.K. enforce­ment author­i­ties comes down to a very basic ques­tion in all glob­al mon­ey laun­der­ing enforce­ment: if cor­po­rate struc­tures are com­plex and poten­tial­ly opaque, is that nec­es­sar­i­ly a strong sign of under­ly­ing ille­gal­i­ty? Here, the Court seemed to answer that ques­tion in the neg­a­tive. This appears to be a clas­sic sto­ry of sus­pi­cion ver­sus per­sua­sive proof, and how that dynam­ic can play out in a court of law in a con­crete dis­pute. This out­come, and the lan­guage used by the Court, like­ly will res­onate for some time.

The “Unexplained Wealth Order,” Explained

In 2017, the U.K. passed the Criminal Finances Act (CFA) “to tack­le mon­ey laun­der­ing, cor­rup­tion, and ter­ror­ist financ­ing.” There are sev­er­al meth­ods that U.K. law enforce­ment have been using to com­bat mon­ey laun­der­ing, about which we pre­vi­ous­ly have blogged. The Unexplained Wealth Order (UWO) is one of these tools, and per­haps the pri­ma­ry tool, aimed specif­i­cal­ly at access­ing evi­dence to jus­ti­fy large pur­chas­es made by alleged high-risk indi­vid­u­als.

The UWO is intend­ed to fill the gaps of pre­vi­ous laws, which often left law enforce­ment in a bind: even if they had rea­son­able sus­pi­cion to con­clude that someone’s assets were the fruit of ill-got­ten gains, with­out a tool to freeze or recov­er those assets, they could not pro­duce enough evi­dence to bring a charge. This was espe­cial­ly prob­lem­at­ic in the mon­ey laun­der­ing con­text because of the inter­na­tion­al, mul­ti-juris­dic­tion­al nature of many mon­ey laun­der­ing schemes.

Two pri­ma­ry set of cir­cum­stances can cause a UWO to be issued: 1) a per­son sus­pect­ed of being involved in crim­i­nal activ­i­ty, and 2) that person’s pro­cure­ment of assets that are dis­pro­por­tion­ate to their income. The first com­po­nent is intend­ed to cov­er not only indi­vid­u­als involved in or con­nect­ed to seri­ous crimes, but also “Politically Exposed Persons” (PEPs). PEPs are politi­cians or pub­lic offi­cials from out­side the European Economic Area, and include fam­i­ly mem­bers and close asso­ciates of such offi­cials. Because of con­cern over the cor­rup­tion of for­eign gov­ern­ments, PEPs are con­sid­ered high-risk indi­vid­u­als in the mon­ey laun­der­ing con­text; thus, they them­selves do not need to be sus­pect­ed of seri­ous crim­i­nal activ­i­ty to fall with­in a UWO.

Procedurally, enforce­ment agen­cies must file an appli­ca­tion for the High Court to issue a UWO, and be able to prove that all require­ments for the UWO were met. The court retains ulti­mate dis­cre­tion over the issu­ing of a UWO. The court also can issue an inter­im freez­ing order, which tem­porar­i­ly pre­vents the own­er of the prop­er­ty from sell­ing or trans­fer­ring it while law enforce­ment inves­ti­gates fur­ther. If the inves­ti­ga­tion shows that the prop­er­ty was obtained through unlaw­ful con­duct, law enforce­ment then can apply for civ­il for­fei­ture of the prop­er­ty.

Once the UWO is issued, it requires the respon­dent to explain, among oth­er things, how they obtained the prop­er­ty in ques­tion. If the respon­dent fails to reply to the UWO, the prop­er­ty is “pre­sumed” to have been obtained through ill-got­ten gains. This pre­sump­tion makes the respondent’s inter­est in the prop­er­ty recov­er­able by civ­il for­fei­ture. If the respon­dent does com­ply with the UWO by explain­ing, among oth­er things, how they obtained the prop­er­ty in ques­tion, the UWO does not give rise to a pre­sump­tion of ille­gal­i­ty.

The Government’s Case

This case sur­round­ed the alleged prop­er­ties and assets of Rakhat Aliyev (RA), the for­mer chief of Kazakhstan’s tax police, deputy chief of the KNB state secu­ri­ty ser­vice, ambas­sador to Austria, and first vice for­eign min­is­ter, who had faced mul­ti­ple crim­i­nal charges of mon­ey laun­der­ing, as well as the alleged kid­nap and mur­der of two Nurbank employ­ees. RA died in prison before he could be adju­di­cat­ed on those charges.

There were three prop­er­ties in the U.K. that law enforce­ment sought to poten­tial­ly seize with UWOs. Property #1, whose ulti­mate ben­e­fi­cial own­er is Dariga Nazarbayeva (DN), the ex-wife of RA and the daugh­ter of the for­mer President of Kazakhstan, was val­ued at £6 mil­lion. Property #2, whose ulti­mate ben­e­fi­cial own­er is Nurali Aliyev (NA), the son of RA and DN, was pur­chased with a $65 mil­lion loan (from Nurbank). Property #3, also owned by DN, was pur­chased for £32 mil­lion. Together, the three prop­er­ties are val­ued at over £80 mil­lion, or $100 mil­lion U.S. dol­lars.

The government’s over­ar­ch­ing the­o­ry was that these three high­ly-val­ued prop­er­ties were acquired as a means to laun­der the mon­ey that RA had obtained ille­gal­ly pri­or to his death. The gov­ern­ment hinged its the­o­ry on a series of links among RA, mem­bers of his fam­i­ly, and the prop­er­ties at issue. The gov­ern­ment appar­ent­ly did not argue that the prop­er­ties were acquired through any ille­gal activ­i­ties direct­ly com­mit­ted by the ben­e­fi­cial own­ers them­selves.

On appeal in the High Court of London, Justice Lang found that links between RA and the prop­er­ties were insuf­fi­cient to jus­ti­fy the UWOs. A key fac­tor for Justice Lang was the time­line: RA and DN had divorced in 2007; they were sep­a­rat­ed before their divorce; NA was estranged from his father by the time of the divorce; and the acqui­si­tion of the prop­er­ties by DN and NA occurred after the divorce. Further, the Kazahk gov­ern­ment already had seized assets which it found had been acquired by RA through ille­gal activ­i­ty, and those assets were not linked with the three prop­er­ties at issue in the UWOs. Stated oth­er­wise, if dirty mon­ey had been used by RA to acquire assets, it pre­sum­ably had been account­ed for already by the Kazahk gov­ern­ment.

The out­come seemed to turn on the inabil­i­ty or unwill­ing­ness of the U.K. gov­ern­ment to mean­ing­ful­ly engage with, or try to refute, the alter­na­tive fac­tu­al expla­na­tions offered by the defense for the (legal) source of the funds for the acqui­si­tions. In her opin­ion, Justice Lang point­ed to these alter­na­tive expla­na­tions for many of the government’s the­o­ries; for exam­ple, that DN, a busi­ness­women who was once named in Forbes rich­est peo­ple of Kazakhstan (and the daugh­ter of a for­mer President of Kazakhstan), aquired wealth inde­pen­dent­ly of her ex-hus­band. Another gap in the government’s proof was that DN acquired prop­er­ties #1 and #3 after her sep­a­ra­tion and divorce from RA. There was no evi­dence to sug­gest that the two were in con­tact through­out the pur­chase of any of the prop­er­ties. Again, the the­o­ry of the gov­ern­ment was not that the prop­er­ties were acquired through any ille­gal pro­ceeds, but specif­i­cal­ly through RA’s ille­gal pro­ceeds.

As to prop­er­ty #2, Justice Lang found that NA pur­chased the estate inde­pen­dent of influ­ence from his par­ents, using funds law­ful­ly bor­rowed from a Nurbank loan, through a trans­ac­tion vet­ted by third-par­ty con­sul­tants. Although RA had faced charges for the kid­nap­ping and mur­der of Nurbank employ­ees, Justice Lang found that “there was no longer any con­nec­tion between Nurbank and RA at the time of the loan in August 2008.”

Takeaways for Global Money Laundering Enforcement and Forfeiture: Corporate Complexity Does Not Equal Illegality

The care­ful pars­ing of the facts by Justice Lang was informed by a basic val­ue judg­ment regard­ing the poten­tial evi­den­tiary mean­ing of com­plex cor­po­rate struc­tures in mon­ey laun­der­ing and for­fei­ture cas­es. This is the fund­man­tal con­tro­ver­sy pre­sent­ed by this case. The Court imposed a rel­a­tive­ly rig­or­ous stan­dard of proof for the gov­ern­ment. Here, the seem­ing­ly mun­dane deci­sion regard­ing an evi­den­tiary stan­dard of proof actu­al­ly rep­re­sents a much larg­er debate over basic prin­ci­ples. On the one hand, cor­po­rate opac­i­ty and com­plex­i­ty are often cit­ed as masks for ille­gal­i­ty, par­tic­u­lar­ly by glob­al watch­dog groups right­ful­ly con­cerned about cor­rup­tion, klep­toc­ra­cy and the social inequal­i­ties they fuel. However, the rule of law also means that the depri­va­tion of lib­er­ty and prop­er­ty should not occur until after due process: a rig­or­ous inves­ti­ga­tion and the pre­sen­ta­tion of reli­able and com­pelling proof of cul­pa­bil­i­ty, sub­ject to being test­ed by the defense. Generalized social con­cerns regard­ing cor­rup­tion and income inequal­i­ty do not nec­es­sar­i­ly equate to actu­al proof of ille­gal­i­ty in a spe­cif­ic case, although the social con­cerns always form a back­drop.

Specifically, Justice Lang stressed a “need for cau­tion in treat­ing com­plex­i­ty of prop­er­ty hold­ing through cor­po­rate struc­tures as grounds for sus­pi­cion,” and stat­ed:

The use of com­plex off­shore cor­po­rate struc­tures or trusts is not, with­out more, a ground for believ­ing that they have been set up, or are being used, for wrong­ful pur­pos­es, such as mon­ey laun­der­ing. There are law­ful rea­sons – pri­va­cy, secu­ri­ty, tax mit­i­ga­tion – why very wealthy peo­ple invest their cap­i­tal in com­plex off­shore cor­po­rate struc­tures or trusts. Of course, such struc­tures may also be used to dis­guise mon­ey laun­der­ing, but there must be some addi­tion­al evi­den­tial basis for such a belief, going beyond the com­plex struc­tures used.

Justice Lang’s opin­ion also set forth the stan­dard for sim­i­lar cas­es that may come up: “where the Crown seeks to prove that prop­er­ty derives from crime by evi­dence of the cir­cum­stances in which the prop­er­ty is han­dled, it must be ‘such as to give rise to the irre­sistible infer­ence that it can only be derived from crime.’”

Of course, cor­po­rate com­plex­i­ty and its con­se­quences has been a major issue in the AML realm across the globe for years, par­tic­u­lar­ly the issue of ben­e­fi­cial own­er­ship and the scourge of anony­mous shell com­pa­nies – high­light­ed by the Panama Papers scan­dal. Although this is just one case out­come – which the U.K. gov­ern­ment has stat­ed that it will appeal – it sin­gu­lar­ly illus­trates the clas­sic ten­sion between gen­er­al­ized sus­pi­cion of ille­gal­i­ty, which can dri­ve both finan­cial insti­tu­tions’ AML sys­tems and leg­isla­tive efforts, and the need to prove ille­gal­i­ty and effec­tive­ly refute expla­na­tions of inno­cence in spe­cif­ic enforce­ment actions.

Shauna Pierson Ballard Spahr LLP

Log In or Create an account