UK: An Introduction to Financial Crime: High Net Worth Individuals
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A safe place to do business?
HNW individuals have traditionally had a high degree of faith in the ability of the UK’s justice system to uphold due process and to secure fair outcomes. But how far is this faith being tested in an increasingly uncertain world?
One of the principal reasons why businesses, investors and families continue to locate themselves and their assets in the UK is its robust regulatory environment. Laws on bribery, fraud, market abuse, money laundering, sanctions, and tax evasion, and the regulation of the financial and professional sectors, have a reputation for strictness and propriety.
Enforcement agencies and regulators abound in the UK, including the Financial Conduct Authority (FCA), HM Revenue and Customs (HMRC), the National Crime Agency (NCA), the Office for Financial Sanctions Implementation (OFSI), and the Serious Fraud Office (SFO). The proliferation of agencies is something of a mixed blessing, with risks that cases and issues might fall through the cracks.
Increasingly, too, the UK’s place in the world, now freed from the EU and taking its own independent lead on international issues, notably on Russia and Ukraine, brings both benefits and risks, particularly in connection with sanctions.
The risks to individual rights
Where state agencies’ work conflicts (as it inevitably does) with individuals’ fundamental rights, they are sadly very far from immune to error. Arrests, asset and bank account freezes, dawn raids, interviews under caution, leaks, press releases, property seizures, and sanctions designations can be the cause of significant financial and reputational cost to individuals, as well as their businesses and families.
Allegations and suspicions can, sadly, be based on ignorance or even prejudice, particularly where complex financial affairs and structures, often involving offshore jurisdictions, are not properly understood. And the consequences can be far-reaching, with financial institutions often looking to divest themselves of potentially problematic client relationships, as they become increasingly risk averse.
The risk of injustice is often increased in cases with an international dimension. Processes of mutual legal assistance (MLA) are complex and will not always screen out allegations that are flawed or politically motivated. At worst, individuals may find themselves subject to an extradition request, an Interpol Red Notice, or a sanctions designation, all of which can severely restrict their ability to travel internationally. Even lower-level MLA processes, such as those designed to obtain documentary records, can make significant inroads into an individual’s private financial affairs and reputation.
Both domestic and international cases are increasingly pursued in the UK by way of asset freezing and forfeiture, including under the Proceeds of Crime Act 2002 (POCA). Public and private prosecutions can be accompanied by draconian measures of confiscation and restraint, while the High Court continues to be a favourite tool for those keen to trace civil claims into funds and property in the UK (backed by the threat of imprisonment for contempt of court).
Significantly, law enforcement agencies are increasingly able to use civil powers in POCA to investigate, freeze and obtain forfeiture of assets that are said to represent the proceeds of criminal conduct, while UK Government ministers can freeze assets under an increasing variety of financial sanctions regimes. Additionally, banks and others have increasing obligations under money laundering regulations (MLRs), including to maintain beneficial ownership registers as demands for transparency increase.
The impact of recent developments
The risks to individuals from these processes has been exacerbated by years of austerity in the UK’s public finances. The SFO has been driven to agree Deferred Prosecution Agreements (DPAs) with a string of high-profile corporates, particularly under the Bribery Act, that have generated significant sums for the UK Treasury, but which also implicate individuals who have not been charged or convicted (and, in some cases, have even been acquitted because of the weakness of the case against them).
The coronavirus pandemic put extra pressure on the procedures and resources of the FCA, NCA and others, by expanding opportunities for fraud, forcing compliance and investigation methods to adapt to home-working, and lengthening delays to jury trials. Investigation of potential fraudulent use of various government support schemes, such as furlough and bounce-back loans, are on the increase.
The impact of Brexit on MLA procedures and extradition continues to be felt, with the withdrawal of access to streamlined processes. Freed from its obligations to act as part of the EU, a UK-specific framework for imposing financial and other targeted sanctions includes so-called Magnitsky measures against people suspected of involvement in human rights abuses or corruption, and trade and financial sanctions (notably in connection with Russia) that interact with other countries’ equivalents in frustratingly complicated ways.
Significant changes to the civil recovery scheme of POCA were put in place a few years ago by the Criminal Finances Act 2017 (CFA). The most eye-catching innovation was the Unexplained Wealth Order (UWOs), by which the High Court can order a holder of property to explain their interest in it and how it was acquired. Less trumpeted, but so far more widely used, are Account Freezing and Forfeiture Orders (AFFOs), which have proved devastating to holders of funds that can be frozen on a basis of ‘reasonable suspicion’. More recent amendments have made it easier to impose sanctions and to seek UWOs, while requiring greater transparency from overseas corporates that are registered as owners of UK property.
What can be done about these risks?
Fortunately, the courts in the UK remain a viable forum for challenge wherever individual rights are threatened. The powers of enforcement agencies (and decisions by courts, such as to grant search warrants) are susceptible to challenge in the High Court by way of judicial review, while much can be done by way of negotiation, including for instance to protect seized material that is subject to legal professional privilege (LPP).
Extradition requests, sanctions designations, and POCA applications – including UWOs and AFFOs – are also capable of being resisted, and adverse findings can often be appealed to higher courts. While the principal route of challenge to Interpol notices remains internal (via the Commissioner for Control of its Files (CCF)), much can be achieved by the targeting of individual bureaux, and the use of data protection laws. Despite Brexit, the UK has retained a version of the General Data Protection Regulation (GDPR), and the European Convention on Human Rights (ECHR) remains enforceable, via the Human Rights Act 1998 (the HRA) or by application to the court in Strasbourg.
A mixed picture
Given all the above, the prospects for a HNW individual (or associated parties, such as family offices) seeking to enforce, from the UK, their rights in a financial crime investigation are complicated. A combination of austerity, Brexit, the CFA, DPAs, the MLRs, the pandemic, and the war in Ukraine have undoubtedly made it a less predictable, and in many ways riskier, place to do business, to live, and to hold assets. On one view, the upshot of recent changes is that it is increasingly easy to make allegations of financial crime outside of a traditional criminal investigative process, and increasingly hard to disprove them.
Despite the complexity, however, the existence of due process and judicially independent procedures, while far from perfect, can provide real hope for redress. While the use of CCF or GDPR processes or the protection of LPP material can seem esoteric, the UK’s courts continue to provide an invaluable degree of scrutiny to the errors and excesses of the executive, protecting individual rights, with the HRA and the ECHR as a backstop. It is, perhaps, for that reason that HNW individuals’ efforts to respond to financial crime investigations, where multiple jurisdictions are involved, are so often coordinated from the UK. While there are myriad laws and risks to engage and contend with in the UK, it is also often the best jurisdiction in which to find solutions.