Anita Clifford, senior associate at barrister law firm, Bright Line Law, explains the impact Unexplained Wealth Orders (UWOs) will have on the banking sector and how they form part of the UK’s artillery against suspicious property.
Since 31 January 2018, enforcement authorities such as the National Crime Agency and Financial Conduct Authority can obtain a High Court order compelling a person to explain the source of their funds or other property.
Extra-territorial in scope, the provisions capture people and property located anywhere. Politically Exposed Persons (PEPs) and criminal suspects are targets, but the new investigative tool holds consequences for banks.
If a person is compelled to provide financial information about funds held by a bank, inevitably this will trigger an investigation into the source of the funds and what the bank knew about them.
In this way, the extent of the bank’s anti-money laundering (AML) scrutiny in relation to their customers will come into sharp focus.
What is a UWO?
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By GlobalDataFor a UWO to be made, three conditions need to be satisfied. A person must be either a non-EEA PEP or there must be reasonable grounds for suspecting they have committed serious crime in the UK or elsewhere.
Once a person falls into either category, there is a need for a reasonable basis to believe they hold specific property, which may comprise funds or other property, worth at least £50,000.
Finally, the authority seeking the order must show there is a reasonable basis to suspect the person’s lawful income is insufficient to justify the funds or property held in their name or on their behalf.
The low threshold of suspicion as opposed to belief means that obtaining a UWO will not too be difficult. The potential pool of respondents is also wide.
A PEP includes close family and associates of holders of prominent political functions. So long as a person is a PEP, there is no need to suspect criminal activity.
This feature has attracted controversy as it imposes a heavy burden on a person to explain themselves even though they are not the subject of criminal investigation.
Any information provided in answer to a UWO will be assessed by the authorities with a view to using it to support a civil action to forfeit the property.
Will banks be respondents?
The government’s explanatory material accompanying the UWO provisions clarifies they are directed at individuals. A bank is unlikely therefore to itself face a UWO.
Instead, at least initially, the impact of a UWO is likely to be felt by banks in two ways.
In the main, banks will be involved in providing information.
A respondent seeking to satisfy the authorities that an investment is clean can be expected to request financial records so that the explanation is well supported. As part of a UWO, a court may also order that the respondent deliver up documents.
Accordingly, banks can expect to find themselves providing material to aid UWO compliance.
Additionally, banks are likely to become involved with UWOs when asked to freeze accounts. A UWO can be made in the absence of the respondent and accompanied by a new type of interim freezing order applicable to the property in question.
Value of the explanation
One further important impact of UWOs is on the horizon. When a person subject to a UWO explains the source of funds, banking transactions will be highlighted and financial statements provided in support.
The information may be used to progress civil property forfeiture proceedings, but it will also have a much wider value.
Nothing prevents use of the information to launch an investigation or a review of the conduct of connected individuals, corporates or the bank itself. The derivative value of any information provided to enforcement authorities is potentially enormous.
Hidden impact
The hidden consequence for banks is that more information about transactions, accounts and source of funds in the hands of the authorities will inevitably lead to greater scrutiny of the conduct of financial institutions.
Where someone is thought to have unexplained wealth, consideration will turn to whether the bank discharged its duties in relation to anti-money laundering compliance, and in particular, Customer Due Diligence, relationship monitoring and risk assessment.
In this way, the new UWO provisions may trigger an inquiry by authorities such as the FCA into whether a bank failed to notice any red flags, acted responsibly in relation to a client and had in place and followed adequate AML systems and controls when the transaction occurred. The peril for bankers is obvious.
