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UK Unexplained Wealth Orders – relevance to overseas investors

UK Unexplained Wealth Orders – relevance to overseas investors

On 31 January 2018, the UK government introduced Unexplained Wealth Orders (UWOs).

Summary of recent regulatory and tax changes for inward investment into UK real estate

On the regulatory side, in April 2016, the UK introduced a register of beneficial ownership of companies, known as the register of people with significant control (PSC) or PSC register, which allows the public access to a central record of this information.  However, the PSC register does not apply to companies incorporated outside the UK.  Therefore, in April 2017, the government's attention shifted to the ownership of UK real estate by overseas companies.

In a recent response document, the UK government proposed that as from 2021, all legal forms of overseas entity which can hold UK real estate will be required to disclose details of the underlying beneficial owner(s) in a register based on the PSC register mentioned above.  This will apply to both existing owners and intending purchasers.

In recent years, the UK tax environment for inward investment into UK real estate has been in a state of almost constant change.  New taxes have been introduced, such as the Annual Tax on Enveloped Dwellings, and Non-Resident Capital Gains Tax; and the existing tax regime has been revised on numerous occasions, for example, restrictions on deductible borrowing costs and the expansion of the corporation tax regime.

The introduction of UWOs continues the tightening of the regulatory environment, but, as will become clear on further reading, will not be something which is a concern for all investors.

What is a UWO?

A UWO is an investigation order issued by the High Court in England (or Court of Session in Scotland) upon satisfaction of a number of tests.  A UWO can and will usually be accompanied by an “interim freezing order” ("IFO") to prevent the property being dealt with in any way while subject to the UWO.

A UWO requires a person to explain the nature and extent of their interest in a particular property, and to explain how the property was obtained.

Procedure for obtaining a UWO

A UWO can only be obtained by certain agencies, such as (in England and Wales) the National Crime Agency (NCA), HM Revenue and Customs and the Serious Fraud Office.

An application must be made to the High Court (or Court of Session in Scotland) which may (but is not obliged to) grant a UWO if certain conditions are met.

In broad terms, the referring agency should have “reasonable grounds to suspect” (not a particularly onerous test) that an individual (the respondent), who – (i) is a Politically Exposed Person ("PEP"), or (ii) is, or has been, involved in serious crime, or (iii) is a person connected with the respondent who is, or has been, involved in serious crime – has insufficient legitimate income for the purposes of enabling the respondent to obtain specific identified property (of a value over £50,000), which can be shown to be in his/her possession.  Note that a UWO can be targeted against individuals, companies or trustees.

It is notable that a UWO made in relation to a non-EEA PEP does not require suspicion of serious criminality.

A PEP is defined as follows:

  • an individual who is, or has been, entrusted with prominent public functions by an international organisation or by a State other than the United Kingdom or another EEA State;
  • a family member of a person within the above first paragraph;
  • someone known to be a close associate of a person within the above first paragraph; or
  • someone otherwise connected with a person within the above first paragraph.

Examples of PEPs include persons (and connections, see above) who are or have been Heads of State or of government, senior politicians, senior government, judicial or military officials (e.g. ministers, ambassadors, chargés d'affaires and high ranking officers in the armed forces), senior executives of state owned corporations, and important political party officials.

In February 2018, the NCA secured two UWOs to investigate two properties totalling £22 million believed to be ultimately owned by a PEP, reportedly a politician from central Asia.  In addition to the UWOs, IFOs were granted.

Effect of a UWO

If a UWO is granted, the relevant person must provide the following information relating to the property under investigation:

• the nature and extent of the person’s interest in the property;
• how the person obtained the property (including, in particular, how any costs incurred in obtaining it were met);
• where the property is held by the trustees of a settlement, details of the settlement; and
• such other information in connection with the property as specified in the UWO.

No immediate investigatory or enforcement action needs to be taken, it can be done at a later stage.  However, if an IFO has been granted, agencies must decide within 60 days of compliance with a UWO whether to take further investigatory or enforcement action.

Sanctions

If a person fails, without reasonable excuse to, comply with a UWO within the time frame set by the Court, the property is presumed to be recoverable property in any recovery proceedings under Part 5 of the Proceeds of Crime Act 2002 (POCA), unless the contrary is shown.

Part 5 of POCA enables an enforcement authority to recover, in civil proceedings, property which is, or represents, property obtained through unlawful conduct.  Additionally, it enables such property, or property which is intended to be used in unlawful conduct, to be forfeited.

It is a criminal offence to make a statement in response to a UWO that the person knows to be false or misleading in a material way, or recklessly to make a statement that is false or misleading in a material way.

Use of the information obtained by a UWO

The information can be used in a variety of ways, although as an investigation power, a UWO is not (by itself) a power to recover assets.  Rather, it is designed to support the potential recovery and seizure of assets.

A government agency (not necessarily the referring agency) can consider civil or criminal action based on the information obtained by way of a UWO.  The information can, for example, be used to support civil recovery and money laundering investigations.  However, evidence compelled under a UWO cannot normally be used against the person who provided it in any subsequent criminal prosecution.

The new landscape

As ever with any new regulatory powers, the extent and effectiveness of the use of UWOs will only become clear after a period of time.  Given that regulatory wheels often grind very slowly, it may take some time to make an assessment.