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9 April 2020

What can we learn from NCA v Baker & ors?

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By Sangeeta Bedi

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In a judgment delivered by email on 8 April 2020, Mrs Justice Lang dealt a blow to the National Crime Agency in dismissing three Unexplained Wealth Orders (UWOs), in the first successful appeal against such orders since their inception in January 2018.

We should not get overly animated by this being the first such victory by a UWO respondent. Although the impression (helped by enthusiastic NCA press releases at every opportunity) has been of one-way traffic in respect of the powers introduced by the Criminal Finances Act 2017, which include Account Freezing Orders and Account Forfeiture Orders alongside UWOs, it was inevitable that the subject of such an order would eventually prevail in court.

As with any judgment, the facts involved also limit the breadth of the conclusions which can be drawn. In Baker, it appears that the ultimate beneficial owners (the ‘UBOs’ – Dariga Nazarbayeva and Nurali Aliyez, the ex-wife and son of Rakhat Aliyev, a deceased former senior Kazakh official accused of bribery and corruption, amongst other offences) of the assets concerned (three London properties worth a combined £80m) were able to produce sufficient evidence that their own lawful income was sufficient to have acquired them. Where this is the case, the High Court will always have to discharge a UWO, with the ‘unexplained’ wealth now having been explained.

In this regard, Baker can be distinguished from the failed UWO appeal on behalf of Zamira Hajiyeva in February 2020. In that case, Mrs Hajiyeva accepted that her husband was the source of her wealth, but disputed that his position as former Chairman of International Bank of Azerbaijan amounted to his being a Politically Exposed Person, or that there was sufficient evidence to suspect that his lawful income was insufficient to have acquired the assets concerned. Unfortunately for her, the Court of Appeal agreed with the NCA on both points.

Taking these caveats into account, what can we (or perhaps more importantly, the NCA) take away from Baker when considering future UWOs?

 

Beware complex structures

Although the focus of the reporting in Baker has been on the ex-wife and son of the Kazakh official, the subject of the UWOs was in fact a UK solicitor (the eponymous Mr Baker) and various corporate entities holding the properties on their behalf.

Mrs Justice Lang’s decision was no doubt hugely simplified by the UBOs providing evidence of their own sources of income (i.e. distinct from the alleged misconduct of their ex-husband and father) and claiming that they (not he) had founded the structures involved. Furthermore, that Mr Baker and the other corporate entities became involved only after the family had become estranged. However, Mrs Justice Lang also concluded that, for the properties where he acted as a nominee and under Panamanian law, Mr Baker did not have sufficient control to be regarded as ‘holding’ the properties as required by the statute. This in itself, concluded Mrs Justice Lang, would have been sufficient to discharge two of the three UWOs.

Mrs Justice Lang also identified a flaw common to all three UWOs, which would have been sufficient to justify their discharge. She noted that, in making its application, the NCA had treated the subjects of the UWOs (i.e. Mr Baker and the corporate entities) as holding the legal and beneficial ownership of the properties. In fact, this was not the case, as proven by the subsequent evidence of the UBOs. As such, the NCA had been wrong to assess the ‘income’ requirement by asking whether the subjects of the UWOs had sufficient legitimate income to acquire the legal and beneficial interest in the properties. Rather, the proper approach was to consider the subject’s actual interest (particularly difficult in the case of Mr Baker’s limited role) and ask whether his or its income was sufficient to have acquired it. In reaching this conclusion, Mrs Justice Lang indicated that the statute may be insufficiently clear as to how this ‘income requirement’ should be applied where property is held by trusts or corporate nominees.

Whilst in this case, the NCA might have been able to overcome these obstacles (for example, by redirecting its application to those who admitted holding the beneficial interest), it may encounter similar difficulties when dealing with such complex structures in the future, particularly if the trustees and/or UBOs are not so forthcoming or cooperative.

 

UWOs are an investigative tool, and an invasive one

In some respects, Baker demonstrates UWOs functioning properly. The NCA have been pre-emptively criticised in some quarters by the suggestion that their powers under the Criminal Finances Act 2017 would only be used to target the ‘low-hanging fruit’. However, we should remember that UWOs are not an end in themselves; they are intended to establish the source of assets, where there is sufficient suspicion to warrant an explanation, with a view to civil recovery where the explanation is insufficient.

It is inevitable that sometimes a UWO will go nowhere, at least in respect of recovery of property. However, we should also not forget that in order to prevent a presumption that property is the proceeds of misconduct, the respondent must reveal information which he or she would otherwise have been entitled to keep confidential. In this case, ex-wife and son were obliged to reveal to the world how and where some £80m of their private property is held. As Mrs Justice Lang noted in her judgment, there are many legitimate purposes for using offshore and corporate structures. If secrecy was one of the purposes in this case, it has been entirely undermined by the NCA’s application.

 

Criticism for the NCA

True to form, the NCA has already issued its press release pledging to appeal the decision, noting that ‘these hearings will establish the case law on which future judgments will be based, so it is vital that we get this right.’

The basis of any appeal is unclear, but if it does do so, the NCA would do well to consider carefully Mrs Justice Lang’s comments as to its conduct. As well as criticising an overreliance on the use of complex and offshore structures as evidence in itself of underlying misconduct, she described the NCA’s initial ex parte application as being ‘flawed by inadequate investigation into some obvious lines of enquiry’.

For example, the NCA had apparently failed to take into account (i) that a Kazakh confiscation investigation had concluded that the ex-wife did not hold any unlawfully acquired assets, (ii) that the family had become estranged after the divorce in 2007, thus making it unlikely that the Kazakh official would have transferred any assets to his ex-wife or son and (iii) that both the ex-wife and the son had legitimate and publicly-known business interests which would have been sufficient to acquire the assets concerned.

Furthermore, even once the UBOs had provided considerable evidence as to the true ownership of the assets, the NCA had failed to carry out a ‘fair-minded evaluation’.

It is one thing for the NCA to lose on the evidence; it is quite another to have its conduct criticised as inadequate and unfair. As such, there is still much to be done in order to ‘get it right’, in Baker and in future.

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