Bad News for Bad People: Decision in U.K.’s First Unexplained Wealth Order Case

Reports of a $21 million shopping spree at the posh London department store Harrods (examples here, here, and here) dominated accounts of the first court decision to test the new U.K. law requiring those owning a high-end property to show how they could afford it. The court cited the Harrod’s binge in its October 3 decision denying Zamira Hajiyeva’s application to quash an order compelling her to explain how she could afford her $15 million London home in Knightsbridge (walking distance to Harrods) when her only visible means of support is Mr. Hajiyeva, a deposed Azerbaijan oligarch now serving 15 years in an Azeri prison for bank fraud. Tabloid fascination with Mrs. Hajiyeva’s spending binge is understandable, but the decision’s import stretches far beyond the disclosure of the crass excesses typical of a gangland moll.

Even before the law took effect, concerns were heard it would not advance its objective of making the United Kingdom “a more hostile place for those seeking to move, hide or use the proceeds of crime or corruption or to evade sanctions.”  Would the British judiciary’s traditional respect for property rights and qualms about forcing individuals to reveal their personal finances produce such narrow readings of the law as to eviscerate it? Would law enforcement authorities reach too broadly when seeking an order, giving well-financed targets multiple grounds on which to mount a challenge?  The Hajiyeva decision is the first to answer these questions, and for kleptocrats, crime bosses, drug kingpins, and other malefactors hoping the law would go awry, the answers are all bad.

The Criminal Finances Act 2017 authorizes the High Court to issue an Unexplained Wealth Order (UWO) when, upon the request of a designated law enforcement agency, it is “satisfied that there are reasonable grounds for suspecting” that the target of the order could not afford the property given the person’s “known sources” of “lawfully obtained income” (§362B). The target must produce a statement showing his or her interest in the property, how the property was obtained “including, in particular, how any costs incurred in obtaining it were met,” and other property-related information the order requests (§362A). If the target fails to fully comply with the order, the agency which sought it can bring a civil action under part 5 of the Proceeds of Crime Act to seize the property.

A February 27 UWO issued at the request of the National Crime Agency (NCA) directed Hajiyeva to show how she could afford the Knightsbridge home.  In a petition to quash it, she argued:

  1. The law does not apply to her. Hajiyeva claimed she is not subject to the UWO law because her husband was not, as required for the law to reach her, a “Politically Exposed Person” under European Union rules.
  2. It is unreasonable to think she couldn’t afford the property. The evidence the NCA presented did not provide the court “reasonable grounds” to suspect her lawful income was insufficient to pay for the property.
  3. The UWO was erroneously drafted. The UWO warned she could be held in contempt of court for failure to comply, a punishment not listed in the statute.
  4. The UWO violates her human rights. The UWO infringes the “peaceful enjoyment” of her property, a right protected by the European Convention on Human Rights.
  5. The UWO would require the violation of U.K. legal privileges law. The UWO requires Hajiyeva to violate her privileges against incriminating herself and incriminating her spouse.
  6. The court misused its discretion. Taking account of the arguments above and the context of the proceedings, the court should have exercised its discretion to refuse to issue the order.

The High Court, per Mr. Justice Supperstone, considered and rejected each in turn.  Its reasoning:

Jurisdiction. For a UWO to issue against Hajiyeva, she must be a “politically exposed person” as defined by the 2015 EU’s Antimoney Laundering Directive. The NCA contended Hajiyeva’s husband, as chair of “state-owned enterprise,” a bank majority-owned by the Azerbaijan government, qualified as a politically exposed person under EU rules and thus, as the rules also provide, she too was a politically exposed person. Although Hajiyeva claimed majority ownership by itself was not enough to make an enterprise state-owned, she offered only rhetoric to support the argument. The NCA pointed not only to sources suggesting majority ownership sufficed but, more damningly, as the court noted, statements by the bank and her spouse calling the bank “state-owned.”

Hajiyeva also sought exclusion from the statute’s reach by seizing on language in section 262B(7) of the act.  On one reading, it limits politically exposed persons to individuals outside Europe who are or were once “entrusted with prominent public functions,” a test she argued that, as an officer of a bank, he did not meet. The argument failed. A careful parsing of the statute showed such a limitation was not meant, an interpretation consistent with the explanation proffered by the legislation’s principal sponsor during debate in the House of Commons.

Income test. Hajiyeva offered no evidence she had access to any funds other than her husband’s. Hence, whether the court had “reasonable grounds” to suspect she did not earn sufficient “lawful income” to pay for the house boiled down to whether it was reasonable to believe the monies her husband used to acquire it came from legitimate sources.  Hajiyeva cited three reasons suggesting the funds were legitimate.   First, contrary to the NCA’s claim that he had been nothing but a government employee from 1993 until his arrest in 2015, she argued that he had in fact been a major commercial banker.  Second, she offered what the court termed “a short document” from a U.K. wealth management firm saying he was worth $72 million in 2011, and third, she testified that he was “very well-off” when they married in 1997.

The court found none of the three arguments persuasive. Its earlier finding that the bank her husband chaired was state-owned belied the claim he had been a commercial banker. It dismissed out-of-hand the document from the wealth management firm and her testimony.

In seeking an UWO, the NCA cited the husband’s bank fraud conviction in Azerbaijan to suggest he bought the Knightsbridge home using funds obtained illegally.  Hajiyeva argued the court erred in giving the conviction any weight as there are, as the court acknowledged, “serious deficiencies” in the Azerbaijan criminal justice system. The court ruled that the fairness of the husband’s trial, if it were to be become an issue, was for consideration at a later stage in the proceeding.

Furthermore, and it was here, that Hajiyeva’s shopping habits became part of the case, the court observed that it was hardly farfetched to conclude that her husband had indeed defrauded the bank. Harrods’ records showed her shopping binge had been charged to 35 different American Express, Visa, and Master Cards issued in her name by the husband’s bank. One of the charges at his fraud trial had been that he issued credit cards to his family and stuck the bank with the bills.

Erroneous warning.  That Hajiyeva was willing to throw everything, including the kitchen sink, at the case in hopes of overturning the order is evidenced by her claim the order should be quashed because of language it contained warning her she could be found in contempt if she violated it. Her lawyers argued that the warning exceeded the penalties for noncompliance imposed by the statute and the order was thus invalid.    Their argument was met with what, on this side of the Atlantic, is called “short shrift.”

Human rights violation. The court gave more shrift to the claim the UWO violated Hajiyeva’s right to the “peaceful enjoyment” of her London flat guaranteed by Article 1 of Protocol 1 (A1P1) to the European Convention on Human Rights. Hajiyeva claimed ownership of the flat as the beneficial owner of a BVI corporation which held legal title to the flat.  It would thus “appear,” the court said, that this makes her the beneficiary of a discretionary trust, and it “is not clear” the rights of discretionary beneficiaries are protected by A1P1. In any event, to invoke the protection of A1P1 the challenged action must have some effect on the property’s value. Simply requiring her to show how she paid for the flat “would not give rise to a loss of value.”

Finally, even if the UWO did interfere with rights protected by A1P1, “[t]here are grounds to believe the property has been obtained through unlawful conduct.” Hajiyeva is being asked only for information on a single, residential property she has lived in for many years. The information requested is thus for a legitimate end, and as the court observed, it constitutes “no more than a modest interference with the peaceful enjoyment of the property.” It thus passes muster under a proportionate or fair balance test.

Privilege offenses.  Hajiyeva argued that to comply with the UWO “would offend” her privilege against self-incrimination and her privilege against incriminating her husband in criminal conduct.  In the U.K. both privileges are statutory, granted by the Civil Evidence Act 1968, and apply “only as regards criminal offenses under the law of any part of the United Kingdom. . . .” The court ruled that Hajiyeva therefore had no right to invoke either privilege on the ground she or husband might face prosecution in Azerbaijan if she answered the UWO.  As for prosecution in the U.K., it concluded there was little risk they would face prosecution and that even if there were, by statute neither privilege was applicable in civil proceedings involving the seizure of property.

Discretion. Hajiyeva offered a final, catchall argument to avoid telling authorities how she could afford the flat. Taking account of all the other arguments she had advanced, “plus the broader context of these proceedings,” she contended the court should have exercised its discretion and declined to issue the UWO.  One of the broader considerations Hajiyeva urged was the risk that whatever she said in replying to the UWO could be used to prosecute her or her husband in Azerbaijan.  The court found there was “no real or appreciable risk” that disclosure of information about how the property was obtained would give rise to prosecution in Azerbaijan. Furthermore, whatever information she did provide about the property’s acquisition would be held by the NCA, and under current U.K. rules the NCA could not share any incriminating information with Azerbaijan without first assessing the fairness of its justice system.

The second “broader consideration” Hajiyeva advanced was that since her husband bought the property in 2007, she would need his assistance to answer the UWO, but that thanks to his imprisonment in Azerbaijan, he “will be unable to meaningfully engage with this process. . . for many years.”  The court answered by noting that the UWO was directed at Hajiyeva, not her husband, and that the NCA had shown there were many others “well placed to explain [Hajiyeva’s] sources of wealth” and how the property was paid for.

Accordingly, on October 3 in National Crime Agency v Mrs A [2018] EWHC 2534 (the decision’s formal citation), the court dismissed Hajiyeva’s application to quash the UWO.

One Azeri activist expressed (necessarily anonymously) disappointment that the U.K. had chosen Hajiyeva as the first target of an UWO:

“Out of all the Az officials currently in power and who own as much if not more assets in the UK, they went after an ‘easy target’ – the wife of someone who has fallen out of grace with the ruling regime and serves prison term.”

Rather than a criticism of the NCA, however, the Hajiyeva prosecution shows how savvy the NCA was in picking her as a test case.  As the wife of someone on “the outs” with the Azeri government, Hajiyeva’ plight was unlikely to complicate matters by injecting any diplomatic or foreign policy concerns into the case.  Even better, her grotesque, vulgar displays of wealth made it an even more attractive test case as she was hardly likely to generate public sympathy or political support — in either Azerbaijan or the U.K.

Whether the NCA could choose which High Court judge would hear the challenge to the order I don’t know.  So, it was either a further example of NCA’s shrewd, strategic thinking when it picked the judge.  Or plain luck.  For as the discussion above shows, Mr. Justice Supperstone, while carefully assaying Hajiyeva’s arguments, never failed to heed the statute’s aim or its rationale. More than once he weighed the slight burden it put on an order’s target — to show how the property was acquired — against a compelling interest in closing a major avenue that mobsters, drug kingpins, and corrupt officials use to hide their money.   And every time, he came out on the side of demanding that Hajiyeva comply with the UWO.

For the honest, an UWO request is trivial. For those like Hajiyeva, where serious questions about how the property was obtained have been raised, it may well be a far different matter.  The harder those like Hajiyeva fight having to explain how they obtained their property, the more obvious it is they are hiding wrongdoing, a point that comes through subtly but unmistakably in the court’s ruling. And one that will hang over future challenges to UWOs. The more a target fights to keep the lid on how property was obtained, the more certain the court can be that much crime lies underneath.

Is the court’s ruling bad news for bad people? It certainly seems so from this side of the Atlantic.  More importantly, it also seems so from those whose opinions count for more, learned U.K. defense counsel.  Lawyers from the London firm Stewarts say the decision “has set the bar high in several areas for any respondent wishing to set aside UWOs. . . .” Anita Clifford, co-author of a forthcoming volume on the Criminal Finances Act, concludes that in the first important test of a UWO, the court signaled “the legislation is fair and reasonable. . . [and thus that] UWOs sought by confident enforcement authorities are inevitable.”

Properties in Knightsbridge now run between $500,000 and $14.5 million. If, as many NGOs believe, Hajiyeva is not the only one in the neighborhood whose funding provenance could be subject to an UWO, might there suddenly be a flood of “For Sale” signs popping up around her?

16 thoughts on “Bad News for Bad People: Decision in U.K.’s First Unexplained Wealth Order Case

  1. Rick, thank you for your comprehensive summary of the October 3 decision and the broader takeaways for UWOs going forward. It was especially helpful how you walked through the proposed grounds to quash the order and the court’s responses. Diving into the details, were you concerned at all how quickly the court dismissed (or, rather, ignored) the testimony of Mrs. Hajiyeva and the exhibits she submitted from the wealth management firm purporting to estimate her husband’s net worth and past income? The order reads as if the question over how much weight to give the fraud conviction in Azerbaijan sucked all the air out of the room on the Source of Income requirement. I think it would have been helpful — if not just for this case but for future ones — if the court explained why it dismissed this evidence or why it was merely insufficient. As the burden shifts back-and-forth in these UWO orders and challenges, it would been helpful to have more color on how tough the burden is to question/explain the source of income.

    Overall, I agree it certainly seems as if the court’s ruling is bad for bad people, which is good. But as the NCA moves beyond low-hanging fruit as such as Mrs. Hajiyeva, I suppose we will find out if it is also bad for good people, in some circumstances.

    • Glad you found the post useful. I wouldn’t read too much into the court’s failure to consider the wealth management firm’s statement or Hajiyeva’s claim her husband was “very well off” when they married. For an UWO to issue, the court need only be “satisfied that there are reasonable grounds for suspecting” that the target of the order could not afford the property given the person’s “known sources” of “lawfully obtained income.” The “reasonable grounds” standard along with the statutory provision allowing an order to issue without notice to the target together strongly suggest that a lengthy evidentiary hearing is not proper when a target challenges the issuance of an order. In the Hajiyeva matter, for the court to have considered the wealth management firm’s statement or her testimony, it would have had to afford the NCA time to investigate each. The kind of drawn-out proceeding this would have required would be inconsistent with other provisions of the statute seeking to hold down the time required for resolving an UWO.

      Where evidence is to be heard is when the target comes forward to explain that, contrary to reasonable appearances, the funds used to purchase the property did in fact come from “lawfully obtained income.” It is here that Hajiyeva can produce the wealth management firm’s statement, offer her testimony, and provide whatever additional evidence she has that her lawful income was sufficient. The Criminal Finances Act 2017 requires the court to set a “response period” for her submission. In determining its length, the court will be apprised of what she intends to offer in rebuttal. It will also have the time NCA estimates it will require to examine the records of the wealth management firm, cross-examine Hajiyeva on her reasons for believing she was marring a wealthy individual, and conduct discovery on whatever else Hajiyeva offers to show the property was bought with legal income.

      That the place for any significant evidentiary hearing is when the target comes forward with evidence to show the property was lawfully acquired is further suggested by the penalty scheme set out in the Criminal Finances Act 2017. While the statute imposes no penalty for false or perjured testimony in an application to quash an order, section 362A, labelled “Offense,” makes knowingly or recklessly providing false material information a crime punishable by a fine and up to two years in prison.

      If ,and how ,this section may affect further proceedings in the Hajiyeva matter, and indeed in any UWO action, will surely bear watching.

      • Ah, thanks for clarifying. I suppose the standard is analogous in some ways to a motion to dismiss on this side of the Atlantic; this is far from the last word that Mrs. Hajiyeva (or her lawyers) will have.

  2. Rick, thank you for this interesting post! I think you bring up something interesting when you say that the harder you fight having to explain how you gained your property, the more obvious it is that you’re hiding a wrongdoing. While I generally agree that if you don’t have anything to hide you should probably cooperate, I hesitate to operate under the assumption that the harder you try to legally fight against providing sensitive personal information the more you probably have to hide. I think there are other reasons that you might not want your financial information to be shared with the government, even if it could prove you’re not involved in anything nefarious. For one, I think most people view their finances as a private matter, and don’t want to have the government interfering in their personal financial choices. While it may be more convenient for someone to prove that their property was lawfully gained, on principle it feels as though it is the government’s duty, not the respondent’s, to prove their point.

    • You raise two concerns about the law which I suspect are widespread.

      The first is requiring individuals to share sensitive information about their finances with the government. It is indeed correct that the UWO target will have to provide some personal financial information to the government to rebut the claim a property was acquired with illegal money. While one can imagine cases where the rebuttal would require nothing especially sensitive – documents evidencing a bank loan or a winning lottery ticket – one can also imagine the opposite extreme. A married person could have a secret friend who purchased a flat for the person that his or her spouse does not know about. The source of funding would surely be exposed if the flat owner were served with an UWO.

      There is no question that in such cases the statute does harm. Set against such harm are the benefits from the granting government the power to seize properties acquired with money from criminal wrongdoing: the immediate deterrent effect on the wrongdoer, the longer-term deterrent effect on others, the financial gain to the state, even a reduction in high-end real estate prices. When I think of the damage the corruption and crime that financed the purchase of expensive real estate, costly jewelry, and the like does, I conclude the law’s benefits outweigh its harms. I realize you may disagree. The only answer I have is that a democratically-elected legislature agrees with my utilitarian calculus.

      Your second concern is the burden the law puts on the UWO target. You say that while it is likely “more convenient” for the target to prove the property was lawfully obtained, it feels like “on principle” that it should be the government’s duty to prove it was unlawfully obtained. The same concern has been raised about statutes that require public servants to show how they can afford a living standard inconsistent with their government salary. These “illicit wealth” laws have been challenged on human rights grounds for reversing the burden of proof in a criminal case.
      National courts and the European Court of Human Rights have offered various rationales in turning back these challenges. They are summarized in the Stolen Asset Recovery Initiative’s 2012 volume On the Take: Criminalizing Illicit Enrichment to Fight Corruption.

      The one I find most persuasive is the one which explains that the burden of proof never really shifts in such cases. The government presents evidence that an individual is living beyond his or her means. The burden than shifts to the defendant to produce rebuttal evidence, and the fact finder weighs the government’s evidence and the rebuttal evidence and decides whether the government has proved its case.

      This is how the UWO law is structured. The government presents a prima facie case (“reasonable grounds” to suspect) that the property was acquired with criminal money. The UWO target then presents his or her evidence. If the court finds the target’s evidence unpersuasive, the government can bring a civil action to seize the property. But it was the government that began the action by presenting evidence suggesting the property was not lawfully obtained and it is the government’s evidence that must remain convincing after the target has presented his or her explanation.

      While I appreciate that on a first read the UWO law, like the illicit wealth statutes, feels wrong on principle, remember that in a murder prosecution the defendant has the burden of producing evidence to show he killed the victim in self-defense, and at common law, tort defendants had the burden of showing consent or assumption of risk. Such “affirmative defenses” are grounded on another important principle: that the burden of producing evidence should be put on to the party best placed to provide it. And who better to show how a property was acquired than its owner?

      • Illicit enrichment is criminalized in the United Nations Convention against Corruption, Art. 20. I have always felt that the beginning of that article is very telling: “Subject to its constitution and the fundamental principles of its legal system, each State Party shall consider “. To me, it always meant that the drafters of the text were fully aware that illicit enrichment as a crime might be argued to be unconstitutional in some countries, since it transfers the burden of proof on the shoulders of the accused. Some member states have actually gone so far as to criminalize this in their national codes, thus in fact raising the constitutionality debate (especially if the the crime was extend to non-PEPs as well).

        However, I think that the path the UK chose is actually hard to argue in terms of constitutionality. In this case, after all, the law enforcement can only bring a civil action to seize the property and not a criminal case (if I understand correctly, that is). Therefore, I agree with Rick here completely. Furthermore, this is nothing revolutionary, when you think about it. The banks have long had the AML obligation to make sure that their clients do not make transactions outside their financial capabilities (and, in fact, they were obliged to ask for documents proving the source of assets in such cases, or deny the transactions), it’s just that for banks it was always hard to keep track of that, since they don’t have the tools the law enforcement agencies have.

      • Thank you for your response! I hadn’t considered this law in the sense of an affirmative defense, and I think your explanation, and really seeing this in the context of the aftermath of criminal wrongdoing reduces a lot of my concern about the law!

  3. Thanks for your post. It certainly seems like the Serious Fraud Office found the case they needed to create powerful UWO precedent. I’m intrigued by the Court’s reasoning regarding Article 1 of the European Convention of Human Rights and the Court’s intimations that beneficial owners of corporations are not necessarily protected by it. After all, the European Convention clearly protects property rights in leases, welfare benefits, among other things seemingly less permanent in duration.

    • Glad you liked the post. On corporate beneficial ownership and Article 1 of Protocol 1 to the European Convention, the court reasoned that a beneficial owner of a corporation “appears to be” a beneficiary of a discretionary trust:

      “A discretionary beneficiary, who is merely a member of a class to whom the trustees have a discretion to apply trust capital or income, has no interest in the narrow sense [citing ¶1-008 of Lewin on Trusts]; and an object of a discretionary trust has no proprietary interest in the trust assets or capital [Lewin ¶1-061].”

      The way the sentence is written it is not clear whether the court is saying that every beneficial owner of a corporation is a discretionary beneficiary, or whether it is simply saying, on facts not stated, that in the case at bar Hajiyeva is a discretionary beneficiary. The problem for me is with the phrase “who is merely a member of a class.” I don’t know enough trust law to parse it. Do trustees enjoy discretion to provide trust benefits to all beneficial owners? Or is there something else besides their status as a beneficial owner that kicks them into the class of discretionary beneficiaries? And who, by the way, is the trustee or more likely imputed trustee in an arrangement such as that here?

      The status of beneficiary owners of corporations is likely to be raised in future UWO cases. Sounds like a good topic for a GAB post. Hint, hint.

  4. Rick, thanks for this great post. In your last paragraph you comment that the UWO law and the Hajiyeva case could result in “for sale” signs appearing in Knightsbridge. That raises the question: if money is being chased out of the U.K., where will it go? New York has traditionally been seen as an alternative to London for places where oligarchs like to park their cash (Vancouver as well comes to mind), which makes me wonder whether we’d ever have an equivalent UWO law here in the U.S. I suspect not, but I wonder if you have a different view. It seems to me that something about this law runs deeply contrary to American intuitions about wealth, property, and privacy, and passage of an American UWO law would be politically untenable. Additionally, were a state to pass its own version of such a law, I’d expect there to be legal challenges. A UWO law doesn’t seem to me to be problematic under the fourth amendment, because financial information is virtually always shared with some third party, and thus a defendant would have no reasonable expectation of privacy in that information. However, I can imagine some sort of due process claim being effective in challenging a UWO law, though I confess I’m not familiar enough with doctrine in this area to identify the exact form a challenge would take. Regardless, I’m curious if you have any thoughts on this, and also more generally where else you think dirty money will go if it leaves London. Thanks!

  5. Thank you for the post and the continuing discussion in the comments section, most interesting. You question in the fourth from last paragraph whether the NCA had any influence over the judge who heard the matter. They would not have. The High Court administrative office would have selected the judge at the time the initial without notice application was made by the NCA. The High Court decision that you analyse above was merely the result of the respondent to the UWO challenging the making of the UWO on the without notice basis; the matter therefore went back before the judge who made the UWO in the first instance. While this decision is certainly interesting, what will be of greater interest will be how it is handled by the Court of Appeal (and Supreme Court most likely) and, indeed, the European Court of Human Rights when it is submitted there (as surely it will be).

    • Many thanks for the clarification on both the selection of the judge to hear the application to quash and the likely appeals. I don”t read many High Court opinions so I don’t know how lucky the NCAA was in drawing Supperstone as the judge. But it is hard to imagine a first instance judge doing any better a job of analyzing the case.

      Question: can Hajiyeva appeal the denial of the application to quash now? Or must she wait until a decision on whether her response to the order is compliant or not?

      • Yes, Mrs Hajiyeva can appeal this High Court decision without necessarily having to comply with the order. I would imagine that the High Court and the Court of Appeal will allow her some latitude with regard to any appeal, and consequent delay to her complying with the order, because of the novel and contentious nature of the UWO and the fact that having a Court of Appeal decision will at least provide an initial binding precedent; the High Court only being persuasive as a first instance tribunal in this matter.

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