U.K.'s 'Unexplained Wealth Orders' puts teeth into money-laundering fight

The United Kingdom is a haven for dirty money. Some estimate that money launderers might be hiding 90 billion pounds per year — primarily through high-end real estate. The “Unexplained Wealth Orders,” introduced in 2018, might be stanching the flow.

The U.K. appears to be showing it wants to combat its reputation — especially in London — as a haven for international money launderers. Several high-profile cases seem to show that the country is increasing its anti-money laundering controls and enforcement.

A watershed moment in the U.K.’s anti-money laundering fight occurred in October 2018 when the Court of Appeals revealed the identity of Zamira Hajiyeva, wife of jailed former chairman of the International Bank of Azerbaijan, Jahangir Hajiyev, in court proceedings related to the purchase of two expensive properties. Earlier in the year, Hajiyeva became the first recipient of an Unexplained Wealth Order (UWO), a newly introduced law enforcement mechanism that forces “politically exposed persons” (PEPs) to explain the origin of their assets. (See UK court lifts anonymity for woman who spent £16 million at Harrods in unexplained wealth case, by Laura Smith-Spark, CNN, Oct. 10, 2018.)

Hajiyeva’s properties and spending came under scrutiny because her husband had received a 15-year prison sentence in Azerbaijan on fraud and embezzlement charges. He’d been chairman of the state-controlled International Bank of Azerbaijan from 2001 until his resignation in 2015. Authorities sought to understand how Hajiyeva could afford two luxury U.K. properties worth more than $12 million each, a Gulfstream private jet and shopping sprees at Harrods department store in London totaling more than $20 million over a decade, given that her husband reportedly never earned more than a $68,000 salary from the bank. (See Revealed: Mystery woman who blew £16million at Harrods is wife of disgraced Azerbaijan banker jailed for stealing £125 million, by Nick Fagge, Daily Mail, Oct. 10, 2018.)

Also, in October of last year, the U.K. Serious Fraud Office (SFO) announced a civil recovery case involving three properties and other assets allegedly purchased with proceeds of fraud and corruption by Gulnara Karimova, the daughter of former Uzbekistan president Islam Karimov. (See UK fraud prosecutor seeks UK property, assets in Uzbek Karimova case, Reuters, Oct. 3, 2018.)

In December, the Solicitors Regulation Authority (SRA), which regulates the professional conduct of solicitors in England and Wales, fined Khalid Sharif, a senior partner of the Child and Child law firm, for failing to carry out money-laundering checks and breaching his professional code while trying to arrange two expensive real-estate deals for relatives of Azerbaijan’s President Ilham Aliyev, which were part of the Panama Papers data leak.

According to the findings of an SRA disciplinary tribunal, Sharif directed a paralegal to indicate that his clients weren’t PEPs, despite that in one deal his clients were Aliyev’s daughters and in the other, the cousin of Azerbaijain’s first lady and vice president. Sharif’s fine marked the first time a U.K. professional received a punishment linked to the Panama Papers. (See Azerbaijan leader’s daughters tried to buy £60m London home with offshore funds, by Luke Harding, The Guardian, Dec. 21, 2018, and UK law firm accused of failings over Azerbaijan leader’s daughters’ offshore assets, by Luke Harding, The Guardian, May 16, 2018.)

Ritzy real estate bought with dirty money

A 2017 report by Transparency International (TI) UK estimated the value of U.K. properties bought with suspicious wealth at more than $5.3 billion because of the reliability of U.K. real estate as assets that attract what the report refers to as “crisis capital,” or funds rapidly transferred out of a country because of corruption that has caused its economic instability and political uncertainty.

The report cited the use of “anonymous” companies registered in the U.K.’s overseas territories and crown dependencies as contributing to the purchase of U.K. real estate with laundered money and called for reform of the country’s anti-money laundering system. TI UK recommended introducing greater transparency to the property market, increasing enforcement action on property bought with proceeds of fraud and the professionals enabling it, and the U.K. continuing its role as a leader in fighting global corruption. (See Faulty Towers: Understanding the impact of overseas corruption on the London property market, Transparency International, March 2017.)

The U.K. government has also acknowledged the phenomenon of illicit capital laundered into and through the U.K. property market. The National Crime Agency (NCA) issued a 2016 report that specifically mentioned the U.K. property market as a preferred destination for the criminal proceeds of corrupt foreign PEPs using offshore companies that obscure ultimate beneficial ownership and professional enablers. (See National Strategic Assessment of Serious and Organized Crime 2016, National Crime Agency, Sept. 9, 2016.) Even before that report, former prime minister David Cameron spoke publicly in 2015 about the need to expose the use of anonymous shell companies to purchase U.K. properties with “plundered or laundered cash.” (See David Cameron: UK property no safe haven for ‘dirty money’, BBC, July 28, 2015.)

... According to the home office, fraud costs individuals in the U.K. more than $8.6 billion per year, and the scale of money laundering affecting the U.K. is likely more than $113 billion per year.

Based on the U.K. Home Office’s statistics, the $9 million in funds frozen over the course of almost a year pales in comparison to the $113 billion laundered through the U.K. every year. The release of those statistics coincided with the announcement of another mechanism to combat fraud and financial crime, the new National Economic Crime Centre (NECC) — perhaps not coincidentally.

Concerted efforts to address issues receive praise

The NECC partnership features officers from the NCA, Her Majesty’s Revenue & Customs, the City of London Police, the Home Office and the Financial Conduct Authority. It will help with the enforcement of financial crime laws in the U.K. by coordinating tasks and activities among the agencies, and also identify and prioritize investigations, promote new powers (including UWOs), and provide guidance on preventing economic crime. (See National Economic Crime Centre Launched, National Crime Agency.)

In addition to the announcement of the NECC, which officially began operations in November, the U.K. enacted several other important measures in 2018 that led to praise from non-governmental organizations as well as the high-profile enforcement actions reported in this column.

The Financial Action Task Force (FATF) published a mutual evaluation of the U.K.’s compliance with FATF recommendations in December 2018 in which it gave the country its highest ratings for eight out of 11 key goals — a better assessment than the U.S. or Switzerland. (See UK receives top marks in fight against money laundering, by Caroline Binham and Barney Thompson, Financial Times, Dec. 7, 2018.)

The UWOs probably received the most attention in 2018 after their introduction in January. UWOs give U.K. law enforcement an advantage in money laundering cases involving assets worth more than $63,000 by shifting the burden of proof from prosecutors to the asset’s owner.

Further anti-money laundering measures introduced in 2018 take aim at two types of business structures commonly used in the U.K. for these purposes — limited partnerships (LPs) and Scottish limited partnerships (SLPs) — by requiring more transparency and stringent checks in their business filings. (See New measures to tackle international money laundering, U.K. government, Dec. 10, 2018.)

U.K. authorities continued adding to their arsenal of anti-money laundering tools in early 2019 when they announced a new taskforce, the Economic Crime Strategic Board (ECSB), comprised of government officials and “senior figures from the U.K. financial sector,” according to a U.K. government release, New taskforce to tackle economic crime, U.K. government, Jan. 14.

The ECSB will meet twice a year to “set priorities, direct resources and scrutinise performance against the economic crime threat,” and will first focus on reforming the suspicious activity reports (SAR) regime, according to the government.

Takeaways for fraud examiners

It remains to be seen whether these new anti-fraud mechanisms and their enforcement significantly decrease or deter money laundering. But they do illustrate the importance of carrying out thorough due diligence and other know-your-customer (KYC) practices to avoid any potential penalties, such as those levied against Sharif.

Financial institutions and professionals can implement KYC programs with these procedures:

• Identify the customer and verify the customer’s identity through reliable, independent source documents of data.
• Identify the beneficial owner of the account or service, including the ownership and control structure of organizations.
• Obtain information and understand the purpose and intended nature of the business relationships involved in the account or service.
• Conduct ongoing due diligence on the customer’s business relationship and transactions to ensure they’re consistent with the customer’s profile.

(See ACFE Fraud Examiner’s Manual, Law/Money Laundering/Enforcement and Prevention Strategies.)

Mason Wilder, CFE, is a research specialist with the ACFE. Contact him at mwilder@ACFE.com.