Financial Services and Markets Dispute Resolution Quarterly Update: Winter 2019
Highlights include the Court considering (once more) the scope of litigation privilege; the application of boilerplate clauses (jurisdiction and service agents) in practice; and the duty of good faith when exercising contractual rights.
The FCA issued its first Final Notice in relation to a cyberattack, and provided substantive guidance on its expectations of senior managers in the context of systems and controls failures.
There continued to be a lot of activity in the Financial Crime area, and we have taken the opportunity here to provide a round-up of the recent statements issued by the SFO, and the NCA’s deployment of Unexplained Wealth Orders.
- Litigation privilege found not to apply to communications relating to a commercial settlement proposal
- ISDA Master Agreement - competing jurisdiction clauses in international disputes
- Beware termination of service agents
- High Court considers limits of the Braganza duty to act rationally in the context of a mortgage contract
- Restrictions on the collateral use of disclosed documents, including derived information
- s166 (FSMA) Skilled Person is not amenable to judicial review
- The FCA’s first cyberattack Final Notice
- Upper Tribunal increases FCA’s record £75m fine and ban of former Keydata executives
- FCA publishes Decision Notice against former CEO of Sonali Bank for AML failings
- High Court confirms application of the new test for dishonesty
- Consolidating recent statements by the SFO
- Unexplained Wealth Orders
Litigation privilege found not to apply to communications relating to a commercial settlement proposal
The Court of Appeal has held that internal board correspondence relating to a commercial settlement proposal was not protected by litigation privilege.
In WH Holding Ltd & Anor v E20 Stadium LLP  EWCA Civ 2652, the documents in question consisted of six emails between the Defendants’ board members and between board members and stakeholders. The emails discussed a commercial proposal for the settlement of a dispute with the Claimant. The Court of Appeal overturned the judge at first instance (who had found that the emails were privileged). The Court of Appeal held that it had not been shown any authority which would extend the scope of litigation privilege to purely commercial decisions and emphasised that the decision in SFO v ENRC did not extend the scope of documents covered by litigation privilege.
The Court summarised its conclusions as follows:
- litigation privilege is engaged when adversarial litigation is in reasonable contemplation;
- once engaged, litigation privilege covers communications between parties or their solicitors and third parties for the purpose of obtaining information or advice in connection with the conduct of litigation, provided the communications are for the sole or dominant purpose of the conduct of the litigation;
- conducting the litigation includes deciding whether to litigate and also whether to settle the dispute;
- documents which contain advice or information obtained for the sole or dominant purpose of deciding whether to litigate or to settle, and which cannot be disentangled, or which would otherwise reveal the nature of the advice or information, are protected by litigation privilege; and
- there is no separate head of privilege covering internal communications within a corporate body.
This decision is an important reminder that not all internal communications produced by a party to litigation will be protected by privilege, even where the communications relate to the underlying dispute. Care should be taken in creating any documents when litigation is in prospect (or underway), particularly at board level. Strict protocols should be put in place as soon as litigation becomes in reasonable contemplation to ensure that any claims to privilege are preserved.
ISDA Master Agreement - competing jurisdiction clauses in international disputes
In BNP Paribas SA v Trattamento Rifiuti Metropolitani SPA  EWHC 1670 (Comm), the Commercial Court (Knowles J) had to consider whether an Italian jurisdiction clause in a Financing Agreement between the parties prevailed over an English jurisdiction clause in a separate ISDA Master Agreement entered into by the same parties as part of a hedging strategy.
On 23 September 2016, BNP commenced proceedings against TRM seeking declarations in connection with a financial transaction pursuant to which TRM had entered into interest rate hedging arrangements with BNP. The declarations sought included declarations that TRM was acting for its own account, made its own independent decisions to enter into the transaction and was not relying on any communications (written or oral) of BNP as investment advice or as a recommendation to enter into the transaction.
On 14 April 2017, TRM commenced proceedings in Italy, claiming that BNP was in breach of the Financing Agreement and an implied advisory contract in respect of the offer of financial services made by BNP and accepted by TRM, as well as violation of Italian law duties owed to TRM, including one of acting in good faith.
TRM's argument in challenging the English Court's jurisdiction relied upon the Schedule to the ISDA Master Agreement which stated that, for the purpose of the Master Agreement, the parties acknowledged that their respective rights under the Master Agreement were subject to the terms of the Financing Agreement.
In the judgement of Knowles J, TRM's argument was not engaged as there was no conflict between agreements in this case, and the brief details of BNP's claim, as formulated, only related to the Master Agreement and the swap transaction entered into under it.
In short, BNP had much the better of the argument on jurisdiction. The two jurisdiction clauses as a matter of language readily bore the interpretation that one was concerned with the Master Agreement and the other with the Financing Agreement. This fitted perfectly well in the context of the parties' dealings, and recognised that the parties had more than one relationship.
Knowles J accepted that HHJ Wacksman QC in Deutsche Bank AG v Comune di Savona  EWHC 1013 (Comm) had considered it appropriate to look at wider context and consider how declarations in English proceedings would act as defences in a claim in another jurisdiction. However, Knowles J considered that this risked taking the focus away from the relevant dispute for the purposes of the question whether the English Court has jurisdiction, which is the dispute over the grant of the declarations. In Knowles J's judgement, the most powerful point of context was the use of ISDA documentation and the ISDA jurisdiction clause within it.
It is important to note that following Knowles J's judgment in this case, the Court of Appeal in the Deutsche Bank case ( EWCA Civ 1740) effectively agreed with him when finding (also in the context of an Italian jurisdiction clause) that it was clear that the declarations sought by Deutsche Bank were within the scope of the relevant jurisdiction clause.
For the purposes of the interlocutory application in the present case, both parties had adduced expert evidence of Italian law without applying to the Court for permission to do so. Knowles J stated that he had not found it necessary to use any of the expert evidence to decide the application, and noted that in future parties should avoid the time and cost incurred by seeking directions first if they consider that expert evidence may be required.
Beware termination of service agents
In July 2018, the Claimant Bank issued a Part 8 Claim in the High Court for declarations that sums of money were owed to it by Essar Steel India Limited (The Bank of New York Mellon, London Branch v Essar Steel India Limited  EWHC 3177 (Ch)).
Under the terms of the parties’ Trust Deed, the Defendant had appointed a service agent to receive service of process for any proceedings in England. The Bank duly served its claim form on the process agent named in the Trust Deed, unaware that the Defendant had in fact terminated the appointment of this process agent in 2006.
Nevertheless, the judge held that there had been “good and sufficient service”. He noted that the terms of the Trust Deed did not deal with a situation where the service agent’s authority had been withdrawn by the Defendant.
The relevant clause in the Trust Deed was drafted such that the Defendant could only appoint a replacement service agent if the original service agent “ceases to be able to act as such or no longer has an address in England”. Given that these criteria had not been met, the judge found that the Trust Deed operated as “an irrevocable promise, by the Defendant to the [Bank], to accept service of Proceedings in England in this way”.
Thus, whenever drafting or including service agent clauses, parties should ensure that these are flexible enough to allow for a change in service agents or a situation where the appointment of a service agent has been terminated. If not, an opposing party may effect valid service on a process agent whose appointment has already been terminated.
High Court considers limits of the Braganza duty to act rationally in the context of a mortgage contract
In UBS AG v Rose Capital Ventures Limited and Others  EWHC 3137 (Ch) the Court confirmed the limits of the Braganza duty. In March 2012, the Bank granted a mortgage of £20.4m to the First Defendant for a term of five years (the “Mortgage”). The Mortgage was granted on an interest only basis and contained a number of special conditions including reserving the right for the Bank to demand early repayment at its ‘absolute discretion’ on three months’ notice without the need for a ‘triggering event’ (the “Special Condition”).
In March 2016, four years into the five year term, the Bank served notice demanding repayment in full. The Bank subsequently issued possession proceedings and, upon receiving the Defendants’ Defence, applied to strike out large portions. The Defendants argued that the Special Condition was ineffective as the Bank’s ‘absolute discretion’ was subject to an implied requirement that it be exercised in a manner which was not ‘irrational, arbitrary, capricious and / or unreasonable’, i.e. the ‘Braganza duty'.
The Court considered the scope of the mortgagee’s duty of good faith and whilst it accepted that the Bank had such a duty, it determined that, so long as the Bank’s purpose was to obtain repayment of the loan or to enforce its security, the Bank was not required to have a complete ‘purity of purpose’. The Bank was only under a duty not to call in the loan other than for proper purposes. It was also relevant that the Defendants failed to provide any evidence demonstrating that the Bank had acted in bad faith.
The Court noted that, where one party has the ability to make decisions which affect the rights of both parties, there is inherently a conflict of interest and the duty to act rationally arises. However, the Bank’s right to terminate in this case was unilateral, at its absolute discretion and therefore no such conflict arose. The Court distinguished Braganza (which related to an employment contract) from the current case of a mortgage where the parties’ bargaining power is on a more equal footing. The Court also considered the law on implication of terms and found there to be no basis for implying a term as mortgage lending had built up its own protections in the form of the duty of good faith. The Court found that, even if such a term was to be implied, its scope would be no wider than the scope of the duty of good faith.
Parties should be aware that a stronger duty of good faith may be more likely to apply where the contracting parties have unequal bargaining power (for example, in an employment contract as compared with a normal commercial contract). Not every contractual power or discretion will be subject to a Braganza limitation and the language of the contract will be an important factor in determining whether the duty applies.
Restrictions on the collateral use of disclosed documents, including derived information
In the case of The Ecu Group Plc v HSBC Bank Plc  EWHC 3045 (Comm) the High Court has delivered a strong reminder of the importance of the rules relating to collateral use of disclosed documents. Under CPR 31.22, disclosed documents can only be used for the purpose of the proceedings in which they are disclosed, except where they have been read or referred to at a public hearing, or the Court or disclosing party gives permission for their collateral usage.
In the present case, the Bank had provided pre-action disclosure. The Claimant sought a further order in relation to pre-action disclosure, and provided a witness statement in support of that application. The witness statement in support provided a detailed description of some of the contents of the Bank’s disclosed documents, as well as conclusions the Claimant said could be drawn from those documents. The Claimant’s solicitor provided a copy of the witness statement to a financial journalist, who published an article based on the contents. Thereafter, the Claimant applied for retrospective permission for prior use of the disclosed documents, in providing the witness statement to the journalist.
In refusing the application, the judge was highly critical of the solicitor’s conduct, describing disclosure of the witness statement to the journalist, as a “very serious breach, neither sensibly explicable nor remotely excusable”. The criticism was underpinned throughout by the solicitor’s failure to appreciate that showing the witness statement to the journalist would constitute collateral use of disclosed documents.
The Court ordered the Claimant to pay all of the Bank’s costs of the present application on the indemnity basis.
This case serves as a salutary reminder of some of the key points associated with the use of disclosed documents. In particular, that the restrictions on the collateral use of documents apply to documents provided by way of pre-action disclosure just as they do to documents disclosed in the action, and to information derived from those documents, as well as to the documents themselves.
s166 (FSMA) Skilled Person is not amenable to judicial review
The Court of Appeal has affirmed that a Section 166 (FSMA) Skilled Person appointed in relation to the FCA review into the mis-selling of Interest Rate Hedging Products (IRHPs) (the “FCA’s Review”) is not amenable to judicial review (The Queen on the application of Holmcroft Properties Limited v KPMG LLP  EWCA Civ 2093). For our summary of the decision of the Divisional Court (DC) at first instance, please click here.
The issue before the Court was whether the Skilled Person, KPMG, as a private entity, was carrying out a public law function when acting as an independent reviewer, sufficient to make it amenable to judicial review. Whilst the Court agreed with the DC that decisions made by KPMG in relation to this scheme were not amenable to judicial review, it considered that the DC had focussed too narrowly on the source of the skilled person’s power (which were contractual, between the Bank and KPMG). It stated that the Court must take a wider view of the regulatory position and factual context, having regard to all of the circumstances relating to the nature and function of the power. The fact that the Skilled Person’s engagement was contractual was only part of the factual matrix showing KPMG was not performing a public function.
In determining that the nature of the scheme was for the pursuit of private rights, the CoA had regard to a number of factors. It observed that (i) a customer’s legal rights were unaffected by the FCA’s Review; (ii) the FCA did not seek to be involved in negotiations with the individual customers, and therefore arriving at an outcome whereby the customer was to receive compensation rested with the relevant bank and the customer, in the pursuit of private law rights; (iii) that compensation was “to be negotiated on private law principles: limitation, heads of recoverable damage and causation”; and (iv) if compensation was agreed, any such agreement was enforceable through the courts.
The Court also stated that on the specific facts of the case it would have refused judicial review in its discretion.
Whilst this decision will be welcomed by firms appointed to act as Skilled Persons, the Court’s decision is ultimately fact-specific to the FCA’s Review.
The FCA’s first cyberattack Final Notice
On 1 October 2018, the FCA issued its first Final Notice in relation to a cyberattack against Tesco Personal Finance plc (Tesco Bank). The FCA found that there had been failings in the debit card security and fraud detection processes of Tesco Bank, and concluded that the bank had failed to respond with sufficient rigour, skill and urgency to the cyberattack. The regulator imposed a financial penalty of £16.4m in relation to the bank’s failings: a sum significantly greater than the attackers’ profit (£2.26m) or the total amount debited from customers’ accounts (£1,830).
Although the financial loss to customers was relatively limited and the loss to Tesco Bank itself was comfortably below its external fraud risk loss appetite (£13m for the year), the FCA found that the bank’s response was flawed in a number of respects and imposed a considerable fine calculated as an adjusted proportion of the average balance of customer accounts at risk (including those accounts which were not in fact subject to the attack).
The FCA weighed a number of negative or aggravating factors and failures in its decision, as well as the level of financial penalty, including:
- the vulnerability of Tesco Bank’s systems to a foreseeable cyberattack (including insufficiently sophisticated aspects of its fraud detection rules and authorisation system);
- failure by staff to follow applicable internal procedures;
- insufficient crisis management training;
- failure to monitor the effectiveness of an emergency measure between 1.45am and 7am on Sunday 6 November 2016 (the day following the cyberattack);
- the inconvenience and distress caused to customers, including alarming automated numbers in the early hours of the morning;
- that the breach facilitated financial crime and profit for the attackers; and
- that the various teams did not respond as effectively as they could have: there were various other avoidable delays and coding errors in responding to the attack (and notably the FCA made no allowance for the difficulties in communicating at night and during the weekend).
The level of fine reflected a 30 per cent mitigation credit to reflect the subsequent response by management and Tesco Bank’s regulatory cooperation, and a further 30 per cent discount for early settlement.
The Final Notice demonstrates the robust approach which the FCA is prepared to take in response to cyberattacks and the scope for larger fines if more customer funds are put at risk or a financial institution does not fully cooperate.
Upper Tribunal increases FCA’s record £75m fine and ban of former Keydata executives
In Ford and Owen v The Financial Conduct Authority  UKUT 0358 (TCC), the Upper Tribunal upheld the FCA’s decision to ban two former executives of Keydata Investment Services Ltd (Keydata) from practising in the regulated financial services sector, and imposed significant financial penalties.
The individuals previously held the positions of CEO and Sales Director. Keydata produced and distributed, via independent financial advisors, structured products designed for retail customers. From July 2005 to June 2009 (the Relevant Period), Keydata marketed and distributed four structured products (the Products) based on bonds in Luxembourg special purpose vehicles. In turn, the Luxembourg vehicles purchased second-hand US life insurance policies. During the Relevant Period, more than 37,000 retail investors invested over £475m in the Products.
Over a three-year period, the CEO extracted unjustified fees totalling £73.3m from the Lifemark structure. The Sales Director received £2.5m in undisclosed commissions from the CEO, later claimed by both individuals to be loans.
In its Decision Notices dated 7 November 2014, the FCA found that Keydata marketed and distributed the Products on the basis of misleading promotional materials and without conducting adequate due diligence. In particular, the individuals had failed to disclose to investors, independent financial advisors or the FCA that the Products were failing. The FCA therefore decided to impose: (i) prohibition orders on both individuals, preventing each of them from performing any regulated activities; and (ii) financial penalties of £75m against the CEO and £4m against the Sales Director.
Upholding the FCA’s decision, the Upper Tribunal approved the prohibition orders and directed the FCA to impose revised financial penalties:
- In respect of the CEO, the Upper Tribunal had “no doubt” that the financial penalty proposed by the FCA (revised upwards to £76m, in light of new evidence) was justified in the circumstances. The £76m penalty comprised c.73.3m, as disgorgement of fees received by the individual, and an additional penal element of £3.2m.
- In respect of the Sales Director, the Upper Tribunal held that the penal element of the FCA’s proposed financial penalty was disproportionately high (amounting to £2.6m). The Upper Tribunal, therefore, imposed a reduced overall penalty of £3.2m, comprising c.£2.5m, as disgorgement of the undisclosed commissions received from the individual, and a penal element of £700k.
Although the CEO’s £76m penalty was the highest recorded fine imposed by the FCA against an individual to date, it is important to consider that the vast majority was repayment of illegitimate profits. However, given that the process since the first Warning Notice took approximately seven years, the case demonstrates the FCA’s commitment to holding individuals to account for misconduct.
FCA publishes Decision Notice against former CEO of Sonali Bank for AML failings
In December 2018, the FCA published a Decision Notice in respect of the former CEO of Sonali Bank (UK) Limited, fining him £76,400 for breaches of Statement of Principle 6 (exercising due skill, care and diligence in managing the business of the firm for which he was responsible) and Principle 3 (which requires that a firm take reasonable steps to ensure that it has organised its affairs responsibly and effectively, with adequate risk management systems).
This is one of the first Decision Notices to provide detailed (if not somewhat obvious) examples of what the FCA considers to constitute reasonable steps for an approved person performing an accountable significant-influence function, which will be of interest to banks and financial institutions given the implementation of the Senior Managers and Certification Regime.
Examples of “reasonable steps” for the CEO included:
- to ensure that he was sufficiently well-informed about the risks affecting the Bank, in particular those related to AML (given that he was the senior manager responsible) and how they were being handled;
- to ensure that the importance of robust AML systems and controls was clearly and unambiguously articulated throughout the Bank;
- that risks were identified, documented and mitigated, and that the relevant systems and controls were working effectively;
- that the Board were sufficiently informed of the risks to which the Bank was exposed; and
- to ensure that resources were appropriately allocated to the MLRO department, in a timely manner.
The FCA was clear that the burden rests on the approved person to ensure that s/he has the adequate skills for the functions which s/he performs; the FCA expects a CEO to challenge assurances received from other senior managers and by definition, maintain overall oversight.
Readers may recall that in October 2016, the FCA had fined Sonali Bank for breaches of Principle 3 and 11 (£3,250,600) and also imposed a restriction preventing the Bank from accepting deposits from new customers for 168 days. In parallel, the FCA fined the Bank’s former MLRO (£17,900) and prohibited him from performing the MLRO or compliance oversight functions at regulated firms.
The CEO has referred the Decision Notice to the Upper Tribunal and, therefore, a final outcome is still awaited. It is notable that the proceedings against him remain an open issue, some two years after the penalties imposed on the Bank and the MLRO.
High Court confirms application of the new test for dishonesty
In the recent decision in Carr v Formation Group  EWHC 3116 (Ch), the High Court applied the new test of dishonesty that was established earlier in the year in the case of Ivey v Genting Casinos (UK) Ltd  AC 391.
- the test for dishonesty in criminal law is now a single, objective test of whether – by ordinary standards – a defendant’s mental state would be characterised as dishonest.
- Bringing expert evidence to show that certain conduct was market practice will not assist a defendant to show that his conduct was not dishonest.
- The defence “everybody was doing it” is even less likely to be effective than it was prior to this judgment. Industries are not able to set their own standards of honesty or reasonable conduct. Juries should be free to apply an uncomplicated lay objective standard of honesty to complex practices.
In Carr, multiple Claimants brought proceedings against various agents who had referred them to a financial advisory firm – Formation Asset Management Limited (Formation) – which gave the Claimants financial advice (Formation was also a Defendant in the case). Formation received commission from the parties with whom it recommended that the Claimants should invest. Formation then shared this commission with the agents who had originally referred the Claimants to it.
The Claimants knew about the payment of commission to Formation, but they were not aware that Formation was also sharing commission with the agents. It was alleged that this constituted unlawful conduct and raised the question of whether Formation and the other Defendants had acted dishonestly.
Two of the Defendants sought to bring expert evidence as to the market practice and regulatory requirements relating to the sharing of commission at the relevant time. This was intended to show that the Defendants’ actions were in accordance with normal market practice and, therefore, they did not have dishonest intent when acting.
Morgan J rejected this approach. He upheld the decision in Ivey and applied the new test, which he summarised as follows:
“… it is now clear that in the criminal law an allegation of dishonesty is to be judged by applying the objective standard and there is no need for an inquiry into the defendant’s appreciation of whether his conduct fell below that objective standard” (emphasis added).
Carr was a good example of this test being applied and illustrates the impact that Ivey v Genting continues to have. In this case, Morgan J concluded that the Defendants could not adduce expert evidence to show that they were not dishonest.
Morgan J drew heavily on the decision in R v Hayes  1 Cr App R 10 when explaining his reasoning. Quoting from the judgment in that case, Morgan J highlighted comments previously made by the Court of Appeal that:
“The history of the markets have shown that, from time to time, markets adopt patterns of behaviour which are dishonest by the standards of honest and reasonable people; in such cases, the market has simply abandoned ordinary standards of honesty… to depart from the view that standards of honesty are determined by the standards of ordinary reasonable and honest people is not only unsupported by authority, but would undermine the maintenance of ordinary standards of honesty and integrity that are essential to the conduct of business and markets”.
Morgan J summarised this position succinctly in his judgment, concluding that:
“… it [is] clear that it is the court, rather than market practice, which sets the standard of honesty”.
This decision clearly highlights the new test of dishonesty and is a salient reminder that even though industries might develop working practices that fall outside the standards of ordinary behaviour, the individuals working in them must hold themselves to the same standard of honesty as everyone else.
Consolidating recent statements by the SFO
On 28 August 2018, Lisa Osofsky began her five-year term as Director of the Serious Fraud Office (SFO). Since that date, the SFO has experienced various successes and failures. In the last quarter of 2018, in particular:
- the High Court confirmed that charges brought by the SFO against Barclays PLC and Barclays Bank PLC could not be reinstated, having already been dismissed in the Crown Court;
- the first Deferred Prosecution Agreement (DPA) (entered into by the SFO with Standard Bank PLC) was successfully concluded;
- the SFO’s case against two former executives of Tesco was thrown out of court; and
- the SFO secured five convictions of a mixture of executives and a subsidiary company of the French engineering firm Alstom. However, these convictions were achieved alongside six acquittals.
During this period, senior members of the SFO have been giving various speeches in which they have mentioned ways in which companies can improve their chances of agreeing a DPA. This is possibly an indication that the SFO is going to consciously focus its attention in this direction in the future. In particular:
- On 8 November, Ms Osofsky gave a speech to the Trace European Forum where she encouraged companies to “Tell us something we don’t know” and be as forthcoming as possible with information in order to improve their chances of agreeing a DPA. She also took this opportunity to highlight that there would be an increasing focus on compliance in the SFO’s investigations in the future. This is likely to result in the SFO hiring some compliance specialists and providing dedicated training to prosecutors to better understand this aspect of businesses.
- On the same day the Joint Head of Fraud at the SFO, Hannah von Dadelszen, gave a speech in which she warned companies: “engage now or hide behind smoke and mirrors at your peril” in the context of encouraging companies to be more transparent; and
- More recently on 6 December Matthew Wagstaff, Joint Head of Bribery and Corruption at the SFO, urged companies seeking a DPA to waive privilege over factual accounts saying: “the refusal to do so may well be incompatible with an assertion of a desire to cooperate”.
These statements by representatives of the SFO are similar to the comments made by Sir Brian Leveson in the context of the 2017 DPA with Rolls Royce, where he emphasised how important cooperation and transparency are for companies seeking to agree a DPA. In reiterating these points in regard to companies, the SFO continues to encourage firms to self-report (which is similar to the FCA’s approach), and demonstrates a commitment to DPAs as a means of achieving results from investigations.
Alongside this push for companies to be more co-operative, Ms Osofsky has also been calling for an expansion of corporate liability offences in the UK, pointing out that UK prosecutors can be “hamstrung” when prosecuting corporate entities.
When appearing in front of the Bribery Act 2010 Committee in November, Ms Osofsky called for an expansion of “failure to prevent” offences to cover business crime more widely in the UK. Later, she also appeared in front of the Commons Justice Committee, calling again for expanded offences of corporate criminal liability. She also set out her hope to adopt a more American approach to cases, trying to “flip” insiders at companies and persuade them to co-operate with the SFO’s investigations. With this approach the SFO hopes to significantly reduce the amount of time it currently takes to conclude investigations.
It remains to be seen where these proposals will end up, but 2019 clearly holds the potential for more interesting developments.
In our Autumn 2018 Quarterly Update, we discussed the SFO’s use of an Unexplained Wealth Order (UWO) in the case of Zamira Hajiyeva.
UWOs are an important, game-changing tool available to UK Enforcement Authorities. They enable enforcement authorities to require individuals and companies in specified categories to explain how they acquired and hold property (including real estate or other assets) in the UK. If they fail to provide an explanation, the normal burden of proof is reversed and the assets in question will be presumed to be the proceeds of crime and subject to the POCA civil recovery regime.
Mrs Hajiyeva is the wife of an Azerbijani central banker who became the subject of the UK’s first UWO. Since our previous update, Mrs Hajiyeva’s case has demonstrated that imposition of a UWO is not a one-off event, but has continuing and lasting implications for the subject’s affairs. Jewellery worth £400,000 was seized by the National Crime Agency (NCA) after being valued for her daughter at Christie’s. The authorities have also engaged more conventional powers: she has been arrested by the Metropolitan Police following an extradition request from Azerbaijan and is now on strict bail conditions whilst she fights extradition to her home country. This creates an interesting choice for the UK Enforcement Authorities: Mrs Hajiyeva is currently obliged to answer the UWO by explaining how she could fund her spending and London properties, but such a responsibility would likely be discharged if she were held in jail overseas.
We expect to see developments in this area during 2019 – the NCA is, in its own words, "enthusiastically" using its new tools to target suspicious funds whilst carefully selecting respondents. Rachael Herbert, Head of NCA Anti-Money Laundering Threat Lead at the National Economic Crime Centre, recently hinted that the NCA was looking into “matters that involve a variety of jurisdictions, some African states, Russia and some former Soviet Union states”.
UWOs as a valuable tool in the high-end property market
It has been interesting to see the extent to which UK Enforcement Authorities focus on London property in their use of UWOs. One political justification for the introduction of the UWO legislation was the high-end property market, particularly in London, where for some time criticism has been directed at the transparency of property purchases and ownership. The introduction of a compulsory register for individuals with significant control over a company (commonly referred to as the “PSC Register”) has been one response from the Government to these pressures, and the introduction of UWOs is another. Advocacy group Transparency International has listed 150 UK-based properties which, cumulatively, are worth approximately £4.4 billion and which it suggests should be targeted under the new regime. Although premium property values in London have fallen considerably over the last few years, London continues to boast some of the world’s most valuable private real estate.
The basic principle behind the UWO legislation is that wealth is suspicious unless proven otherwise. Proving the negative can be factually challenging: although wealth may not have originated from illicit sources, foreign buyers in particular may struggle if their wealth originates from less regulated jurisdictions which may lack the requisite documentation. In the case of Mrs Hajiyeva, the NCA took a conservative approach: it selected a case where there was strong evidence against the source of her wealth because her husband had already been imprisoned on a number of corruption charges, and the overseas enforcement agency was willing to co-operate. An interesting question, as the use of UWOs develops, will be the extent to which enforcement bodies are able to utilise them effectively in situations where such cooperation is absent.