Unexplained Wealth Orders (UWOs) were introduced this year as a new investigative tool to enable UK law enforcement agencies to demand an explanation of an individual or company’s source of funds for the acquisition of a property. The first UWO case, made public in October, suggests the implications of these new orders may reach beyond the individuals or companies targeted directly and affect third parties involved in managing and structuring their wealth.
THE FIRST UWO: THE HAJIYEVs
After the expiration of an anonymity order this month, Zamira Hajiyeva, the wife of the ex-chairman of an Azerbaijani state bank, was named as the subject of the UK’s first UWO. The order, issued in February by the National Crime Agency (NCA), requires Hajiyeva to explain the source of funds for the acquisition of two UK properties reportedly worth a combined GBP 22 million. Jahangir Hajiyev, her husband, was jailed in Azerbaijan in 2016 on charges of fraud and embezzlement relating to his tenure at the head of the International Bank of Azerbaijan (IBA).
WHAT IS A UWO?
UWOs came into force in January 2018 as part of the Criminal Finances Act 2017, which targets corruption, money laundering and tax evasion. Certain UK government agencies will be able to require individuals or companies to explain their source of funds for property with a value of over GBP 50,000 in cases where the respondent’s known sources of lawful income are suspected to have been insufficient for their purchase. Targets must either be politically exposed persons (PEPs) from a non-EEA jurisdiction, or suspected of having engaged in or of being close to individuals who have been engaged in serious criminal activities. If the recipient cannot explain their source of funds or fails to give a response, their property could be subject to civil recovery proceedings.
The Hajiyevs are the ideal test case for the UK authorities as they clearly satisfy the criteria required for an UWO to be issued: Hajiyev is the former head of a state-owned bank, has been convicted of fraud and embezzlement, and has made high value property purchases.
His wife’s lawyers nonetheless filed an appeal against the order, which was rejected by the UK High Court in October. The grounds of Hajiyeva’s appeal and its rejection provide an insight into how the political exposure and income criteria for UWOs will be interpreted in future cases.
UNPICKING POLITICAL EXPOSURE AND SOURCE OF WEALTH
Hajiyeva’s lawyers primarily disputed that she met the political exposure and income requirements of the UWO order. Her defence argued that the IBA was not a state-owned enterprise (SOE) at the time of Hajiyev’s tenure at the bank, and that as its chairman he had not been “entrusted with prominent functions by an international organisation or by a State”. Whilst Hajiyeva’s lawyers did not dispute that IBA was majority owned by the Azerbaijani state, they contended that this did not automatically designate it a SOE, highlighting its legal incorporation in Azerbaijan as a “commercial entity”.
The High Court ultimately ruled that IBA’s majority-ownership by the Azerbaijani state was sufficient to satisfy the definition of a SOE. The judge underlined the importance of the bank’s ownership and control, as opposed to its legal status or powers. As such, as a former chairman of the bank, Hajiyev was ruled to have met the political exposure requirement.
A simultaneous attempt by Hajiyeva’s defence team to cast her husband as a high-flying financier of substantial means – and thus able to afford expensive London real estate – was also unsuccessful. The court saw documentary evidence of Hajiyev’s relatively modest salary during the mid-2000s and concluded that his career in Azerbaijan had primarily been that of a civil servant and SOE employee, not that of an international banker. Undeterred, Hajiyeva’s lawyers have vowed to continue their appeal.
BARK VS BITE?
UWOs have been greeted by media fanfare, heralded as a sweeping new investigative tool to tackle ‘McMafia’-style corruption and money laundering in the City of London. However, their practical application and reach may be limited – not every case will be as clear cut as that of the Hajiyevs. A Russian tycoon with informal ties to the Kremlin, for example, may be much harder to designate as a PEP than the chairman of a state-owned bank. There will also be ambiguity around whether an individual’s wealth is unexplained or simply contentious. Finally, if the prospective target of a UWO is politically connected in their home country, there are diplomatic ramifications for the UK to consider before it pursues the subject publicly.
UWOS AND REPUTATIONAL RISK
For now, it appears that UWOs will focus on the individuals suspected of laundering funds rather than their wider financial eco-system. As such, perhaps the most significant implication of the new legislation for banks and financial services companies is the potential reputational fallout. In the case of the Hajiyevs, the Swiss arm of a UK bank that provided the family with a mortgage has already been named. The public disclosure could go further; the legislation states that trustees of a property may be required to disclose details not only of the property and the source of funds for its acquisition, but of the entire trust arrangement – including its beneficiaries. While there is no wrongdoing implied on the part of these third parties, the increasing appetite in the UK for those naming and shaming of those suspected of corruption may result in unwanted – and perhaps unwarranted – reputational damage for those caught in the crossfire.