A Court Ruling that May Resonate Across the Globe

The High Court in London recently struck down three “Unexplained Wealth Orders” that U.K. law enforcement had hoped would foil an alleged money laundering scheme by Kazakh political elites. Instead, the Court found that the government’s evidence was insufficient to compel family members of the former Kazakh President to explain how they acquired approximately £80 million worth of property in the U.K.

The Court’s Order is detailed, and it carefully parses through some potentially eyebrow-raising facts regarding the players and properties embroiled in this saga. Ultimately, the primary point of contention between the Court and the U.K. enforcement authorities comes down to a very basic question in all global money laundering enforcement: if corporate structures are complex and potentially opaque, is that necessarily a strong sign of underlying illegality? Here, the Court seemed to answer that question in the negative. This appears to be a classic story of suspicion versus persuasive proof, and how that dynamic can play out in a court of law in a concrete dispute. This outcome, and the language used by the Court, likely will resonate for some time.

The “Unexplained Wealth Order,” Explained

In 2017, the U.K. passed the Criminal Finances Act (CFA) “to tackle money laundering, corruption, and terrorist financing.” There are several methods that U.K. law enforcement have been using to combat money laundering, about which we previously have blogged. The Unexplained Wealth Order (UWO) is one of these tools, and perhaps the primary tool, aimed specifically at accessing evidence to justify large purchases made by alleged high-risk individuals.

The UWO is intended to fill the gaps of previous laws, which often left law enforcement in a bind: even if they had reasonable suspicion to conclude that someone’s assets were the fruit of ill-gotten gains, without a tool to freeze or recover those assets, they could not produce enough evidence to bring a charge. This was especially problematic in the money laundering context because of the international, multi-jurisdictional nature of many money laundering schemes.

Two primary set of circumstances can cause a UWO to be issued: 1) a person suspected of being involved in criminal activity, and 2) that person’s procurement of assets that are disproportionate to their income. The first component is intended to cover not only individuals involved in or connected to serious crimes, but also “Politically Exposed Persons” (PEPs). PEPs are politicians or public officials from outside the European Economic Area, and include family members and close associates of such officials. Because of concern over the corruption of foreign governments, PEPs are considered high-risk individuals in the money laundering context; thus, they themselves do not need to be suspected of serious criminal activity to fall within a UWO.

Procedurally, enforcement agencies must file an application for the High Court to issue a UWO, and be able to prove that all requirements for the UWO were met. The court retains ultimate discretion over the issuing of a UWO. The court also can issue an interim freezing order, which temporarily prevents the owner of the property from selling or transferring it while law enforcement investigates further. If the investigation shows that the property was obtained through unlawful conduct, law enforcement then can apply for civil forfeiture of the property.

Once the UWO is issued, it requires the respondent to explain, among other things, how they obtained the property in question. If the respondent fails to reply to the UWO, the property is “presumed” to have been obtained through ill-gotten gains. This presumption makes the respondent’s interest in the property recoverable by civil forfeiture. If the respondent does comply with the UWO by explaining, among other things, how they obtained the property in question, the UWO does not give rise to a presumption of illegality.

The Government’s Case

This case surrounded the alleged properties and assets of Rakhat Aliyev (RA), the former chief of Kazakhstan’s tax police, deputy chief of the KNB state security service, ambassador to Austria, and first vice foreign minister, who had faced multiple criminal charges of money laundering, as well as the alleged kidnap and murder of two Nurbank employees. RA died in prison before he could be adjudicated on those charges.

There were three properties in the U.K. that law enforcement sought to potentially seize with UWOs. Property #1, whose ultimate beneficial owner is Dariga Nazarbayeva (DN), the ex-wife of RA and the daughter of the former President of Kazakhstan, was valued at £6 million. Property #2, whose ultimate beneficial owner is Nurali Aliyev (NA), the son of RA and DN, was purchased with a $65 million loan (from Nurbank). Property #3, also owned by DN, was purchased for £32 million. Together, the three properties are valued at over £80 million, or $100 million U.S. dollars.

The government’s overarching theory was that these three highly-valued properties were acquired as a means to launder the money that RA had obtained illegally prior to his death. The government hinged its theory on a series of links among RA, members of his family, and the properties at issue. The government apparently did not argue that the properties were acquired through any illegal activities directly committed by the beneficial owners themselves.

On appeal in the High Court of London, Justice Lang found that links between RA and the properties were insufficient to justify the UWOs. A key factor for Justice Lang was the timeline: RA and DN had divorced in 2007; they were separated before their divorce; NA was estranged from his father by the time of the divorce; and the acquisition of the properties by DN and NA occurred after the divorce. Further, the Kazahk government already had seized assets which it found had been acquired by RA through illegal activity, and those assets were not linked with the three properties at issue in the UWOs. Stated otherwise, if dirty money had been used by RA to acquire assets, it presumably had been accounted for already by the Kazahk government.

The outcome seemed to turn on the inability or unwillingness of the U.K. government to meaningfully engage with, or try to refute, the alternative factual explanations offered by the defense for the (legal) source of the funds for the acquisitions. In her opinion, Justice Lang pointed to these alternative explanations for many of the government’s theories; for example, that DN, a businesswomen who was once named in Forbes richest people of Kazakhstan (and the daughter of a former President of Kazakhstan), aquired wealth independently of her ex-husband. Another gap in the government’s proof was that DN acquired properties #1 and #3 after her separation and divorce from RA. There was no evidence to suggest that the two were in contact throughout the purchase of any of the properties. Again, the theory of the government was not that the properties were acquired through any illegal proceeds, but specifically through RA’s illegal proceeds.

As to property #2, Justice Lang found that NA purchased the estate independent of influence from his parents, using funds lawfully borrowed from a Nurbank loan, through a transaction vetted by third-party consultants. Although RA had faced charges for the kidnapping and murder of Nurbank employees, Justice Lang found that “there was no longer any connection between Nurbank and RA at the time of the loan in August 2008.”

Takeaways for Global Money Laundering Enforcement and Forfeiture: Corporate Complexity Does Not Equal Illegality

The careful parsing of the facts by Justice Lang was informed by a basic value judgment regarding the potential evidentiary meaning of complex corporate structures in money laundering and forfeiture cases. This is the fundmantal controversy presented by this case. The Court imposed a relatively rigorous standard of proof for the government. Here, the seemingly mundane decision regarding an evidentiary standard of proof actually represents a much larger debate over basic principles. On the one hand, corporate opacity and complexity are often cited as masks for illegality, particularly by global watchdog groups rightfully concerned about corruption, kleptocracy and the social inequalities they fuel. However, the rule of law also means that the deprivation of liberty and property should not occur until after due process: a rigorous investigation and the presentation of reliable and compelling proof of culpability, subject to being tested by the defense. Generalized social concerns regarding corruption and income inequality do not necessarily equate to actual proof of illegality in a specific case, although the social concerns always form a backdrop.

Specifically, Justice Lang stressed a “need for caution in treating complexity of property holding through corporate structures as grounds for suspicion,” and stated:

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.

Justice Lang’s opinion also set forth the standard for similar cases that may come up: “where the Crown seeks to prove that property derives from crime by evidence of the circumstances in which the property is handled, it must be ‘such as to give rise to the irresistible inference that it can only be derived from crime.’”

Of course, corporate complexity and its consequences has been a major issue in the AML realm across the globe for years, particularly the issue of beneficial ownership and the scourge of anonymous shell companies – highlighted by the Panama Papers scandal. Although this is just one case outcome – which the U.K. government has stated that it will appeal – it singularly illustrates the classic tension between generalized suspicion of illegality, which can drive both financial institutions’ AML systems and legislative efforts, and the need to prove illegality and effectively refute explanations of innocence in specific enforcement actions.