The UK’s National Crime Agency (NCA) started 2020 on a high. In February, the Court of Appeal dismissed an appeal against the UK’s first Unexplained Wealth Order (UWO). When a challenge to a second UWO was made public on 10th March 2020, it looked as if the UK’s nascent UWO regime was hitting its stride.
The second UWO targeted property owned by the grandson of former president of Kazakhstan, Nursaltan Nazarbayev, Nurali Aliyev, and his mother, Dariga Nazarbayeva, widely touted as potential future president of the country. It typified exactly the kind of case which the NCA ought to be investigating, involving allegedly corrupt assets held by people close to power.
On 8th April, however, Mrs Justice Lang discharged the orders against the properties worth £80 million, in a major set-back to the UWO regime. The NCA has said that it is seeking permission to appeal.
The Hajiyeva UWO was widely acknowledged as a relatively easy and ‘obvious’ target for the UK’s first UWO. Zamira Hajiyeva was the wife of the chairman of the International Bank of Azerbaijan, already convicted of fraud in his own country, whose estimated worth of $72.5 million dwarfed his yearly salary that hovered around $30,000.
Her appeal against the UWO led to revelations about her £11.5 million town house in Knightbridge, a golf club near Ascot, a private jet and extraordinary spending habits including £16.3 million spent in Harrods over ten years, including £332,335 in the sandwich shop alone.
The UWO generated huge media interest, raising the profile of the problem of dirty money in the UK, and providing a significant boost to the NCA’s reputation.
Hajiyeva’s application to discharge the UWO and subsequent appeal raised issues about how broad the category of “Politically Exposed Persons” could be and how much state ownership a company had to have to be defined as a “State-owned Enterprises.” The courts upheld a wide interpretation backing up the NCA and rejecting the appeal.
However, as commentators said at the time, if the UWO regime is going to be effective, it needs to be able to target those in power, not just those who, like Mrs Hajiyeva’s husband, have fallen out with them. While the Hajiyeva UWO made good headlines, the real test of the regime was in many ways yet to come.
The ALIYEV UWO
The NCA were keen to stress when the second UWO was first announced against 3 properties worth £80 million in May 2019 that they “[would] not shy away from complex and detailed investigations against high profile individuals and professional enablers”.
The second UWO targeted properties owned by Ms Nazarbayeva and her son Nurali Aliyev was always going to be a bit trickier however. Ms Nazarbayeva, as well as being Speaker of Kazakhstan’s Senate, is also a successful business woman, named in Forbes as one of the richest people in Kazakhstan. Nurali her son is also an investor and entrepreneur, having founded Capital Holding JSC – a business which manages 25 companies spanning different industries.
The NCA suspected the source of Nurali’s property wealth in the UK to be from his father, Rakhat Aliyev – who had held several senior public roles in Kazakhstan including deputy chief of the Kazakh intelligence service, deputy Foreign Affairs Minister and Ambassador to Austria while amassing a large business empire. Rakhat Aliyev fell out with the Kazakh regime in 2007 after announcing he would run for President against Nazarbayev. He was charged with abducting and murdering two former bank managers at Nurbank – one of the banks mentioned in the UWO. He died (in suspicious circumstances) in an Austrian jail in 2015.
The NCA suspected that Aliyev senior had been involved in bribery, corruption, and money laundering. They cited a report by Global Witness connecting Rakhat Aliyev to property believed to be purchased as a means to launder money.
Owing to the extraordinarily complex and opaque structures used, the NCA had to serve the UWO against the offshore companies which owned the properties, and the London solicitor, Mr Andrew Baker, who was a trustee of the complex arrangements by which these properties were held. Two of the properties were bought by companies in the British Virgin Islands and sold onto to Panamanian companies. A third was sold from a BVI company to a company in Curacao and then in Anguilla.
However, in early April Mrs Justice Lang discharged the UWO that had been granted in May 2019 by Supperstone J, stating that on the more substantial evidence placed before the court during the application for discharge, she found the NCA’s assumption that the properties were bought with funds originating from Rakhat Aliyev to be ‘unreliable.’ She also ruled that the NCA had overlooked “obvious lines of enquiry”, such as Dariga Nazarbayeva’s divorce from Rakhat Aliyev in 2007, and both her and Nurali Aliyev’s legitimate income.
There is no doubt that the discharge of the Aliyev UWOs is a blow to the regime and that the NCA will face an uphill battle to prove that the judgement is unreasonable or wrong as a matter of law.
The Aliyev ruling raises some key questions in relation to the UWO regime that cut to the heart of the efficacy of the UWO regime itself:
1. When complex corporate structures can be grounds for suspicion
The Aliyev UWO clearly shows the huge hurdles for the NCA in trying to unravel the true owners and origins of property held in the UK by offshore trusts and companies.
Inevitably the NCA “placed significant weight on the ‘complex and secretive’ manner in which the [properties were] obtained and subsequently handled”. This ‘layering’ of transactions through multiple jurisdictions to disguise the origin of funds is widely recognised as a major red flag for money laundering.
However, the court gave the NCA’s reliance on this short shrift (§97) stating:
The use of complex offshore corporate structures or trusts is not, without more, a ground for believing that they have been set up, or are being used, for wrongful purposes, such as money laundering. There are lawful reasons – privacy, security, tax mitigation – why very wealthy people invest their capital in complex offshore corporate structures or trusts. Of course, such structures may also be used to disguise money laundering, but there must be some additional evidential basis for such a belief, going beyond the complex structures used.
According to some practitioners, this is the first time in a Proceeds of Crime Act application that holding property in a complex and opaque manner has not in and of itself been allowed as a grounds for suspicion. The ruling by the Court of Appeal in the Hajiyeva case in contrast specifically states that “the process by which an acquisition is made may be a legitimate starting point” for such suspicion (§41). A generous interpretation of how reasonable the NCA’s suspicion has to be was also made in a serious and organised crime related UWO judgement in February 2020.
The Aliyev ruling therefore raises a particular and concerning hurdle in the case of UWOs which will hopefully be strongly tested at appeal. As Transparency International noted in 2015, 75% of properties under criminal investigation use offshore corporate secrecy. One of the raisons d’être of the regime was to root out the laundering of illicit finance through UK property through complex company structures.
Furthermore, as the court notes, UWOs are ultimately only an investigative tool – nothing more and nothing less. To discount what is widely regarded as a major red flag for money laundering as a ground for suspicion risks undermining the tool’s effectiveness.
2. The difficulties of disentangling legitimate and illegitimate wealth
One of the oft-heard concerns raised in enforcement circles when UWOs were introduced was how difficult it would be, particularly in regions like Central Asia where politicians run massive business empires alongside running government, to disentangle wealth legitimately earned, that earned from having a monopoly on power and that earned illegally.
The Aliyev UWO shows the added complication of disentangling such wealth at one remove where it may have been handed down to children or to politically connected spouses with their own sources of income. Given that the distribution of corruptly gained assets to wives and children is a widespread feature of kleptocratic money laundering it is concerning if the courts take a narrow view on this.
3. Whose evidence the court relies on
The court placed strong reliance in reaching its judgement on documents produced by the defence from Kazakhstan – such as a Kazakh prosecutor’s account of the investigation into Rakhat Aliyev that confirmed that no illegally acquired funds had been handed to his wife in the divorce settlement (§§70-71). Given that Rakhat had fallen out with his wife’s father who was President at the time, one might have thought some caution should apply about relying on this documentation.
In contrast, the court was implicitly critical of the NCA’s reliance on a report by Global Witness into Rakhat Aliyev’s wealth (§87). It would be a real shame if the courts were to take a negative view of the forensic and painstaking investigative work by respected NGOs, given the role they have played in uncovering evidence of money laundering and corruption. And it would be an even greater shame if this criticism deterred the NCA from engaging with NGOs and other third parties thus cutting off vital sources of intelligence.
The case does raise questions however as to whether the NCA will need to start making greater use of expert evidence, both in country specialists and offshore experts, in these cases to land UWOs.
While the Aliyev judgement is a set back for the NCA, it is also perhaps unsurprising. There has long been unease in the legal community about the intrusive nature of UWOs and how they will be balanced against Article 8 of the ECHR, the right to a family and private life.
But UWOs have played an extraordinary role already in highlighting the issue of dirty money in the UK and around the world, and there is a strong policy imperative to ensure they keep playing that role. Authorities across the world are looking with interest and some with envy to see how effective UWOs are, as are those with their ill-gotten gains hidden in the UK.
And the real test of whether the UWO regime can provide a bulwark against kleptocrats who loot and pillage from their people, will be whether they can be used against those who are close to power and not just against the “fled and politically dead” or low-hanging fruit. All eyes are on the NCA’s appeal.