Account Freezing Orders (AFrOs) and Account Forfeiture Orders (AFOs)
August 27, 2020
By Damian Nolan
Introduction and Background
What Are They?
Introduced under the Criminal Finances Act 2017 (CFA)
Came into force 31st January 2018
In large part modelled on Part 5 POCA 2002 (Civil Procedures) though some critical differences exist
Why Required?
NCA estimate £190bn of money from various criminal conduct is held in accounts with connection to the UK jurisdiction
Authorities have realised that there are very significant sums potentially available and a large part may be seen as low-hanging fruit and easily available using the new statutory scheme.
Purpose of The Legislation
The objective of the CFA was, according to the Government:
“To significantly improve our ability to tackle money laundering, corruption, tax evasion and terrorist financing [and to] make the UK a hostile environment for those seeking to move, hide and use the proceeds of crime and corruption.”
Its crowning jewel was the UNEXPLAINED WEALTH ORDER (UWO). The first UWO case grabbed headlines with details of a £16 million Harrods shopping spree.
While no doubt invasive, the applicability of the UWO is limited by design: its focus is on individuals whose known sources of legitimate income do not correlate with their extravagant lifestyles.
Although much attention was given surrounding the introduction of the UWO, more draconian powers of wider application slipped through the parliamentary net and the court of public opinion in the form of AFrOs and AFOs.
However, it is clear that AFrOs and AFOs are stepping out of the shadows and being used in more financial crime investigations. They are being used as a preliminary part of any investigation and/or prosecution.
The Figures
In 2018/19 there were 60 AFrOs
In 2019/20 already up to 166
By 27th June 2019 £110m in over 670 bank and building society accounts had been frozen under AFrOs.
By August 2019 that figure had increased to £210m
Current and Future Relevance
HMRC has already indicated that they are going to use them in connection with investigations into the abuse of funds made available under Covid19.
In addition, with the explosion of cases arising from the decryption of “Encrochat” many potential defendants may well find that the first they know they have come to the attention of the authorities through such investigations will be when they receive notification that an AFrO has been made against them.
Some Recent Orders Include: –
May 2018 Vlad Luca Filat, son of Moldovan PM, £0.5m frozen, father got 9 years in prison for £800m bank fraud (12.5% GDP), son a student in UK living in £1000 per day penthouse, £200k Bentley Bentayga, £98k into HSBC over 3 days. Feb 2019 £466k forfeited.
March 2019. £1.5m forfeited – UK property purchases from proceeds of Pakistan frauds – seized in absence of account holder
February 2019 – 95 accounts £3.6m frozen, mainly Chinese students suspected money laundering of foreign fraud, sending luxury goods to back to China.
August 2019 – freezing orders covering 8 bank accounts “in excess of £100m” suspected to be “derived from bribery and corruption overseas”. Following a related order in Dec 2018 for £20m.
Earlier Approach
Previously the approach to asset recovery required criminal proceedings (higher standard of proof required in cases that may be difficult for juries to follow) or a complex civil procedure in the High Court with a minimum requirement of £10,000.
By way of contrast the new legislation provides for a non-conviction based, relatively simple procedure to freeze assets (bank accounts, personal property, jewels etc) based on a “reasonable suspicion” only.
The Application
“Enforcement Officers” (POs, HMRC and SFO) and “accredited financial investigators” can apply to a MC to freeze a bank, building society or and “authorised deposit taker” (under Pt 4 of the FSMA 2000) account containing more than the minimum amount – currently £1,000 where:–
a) The officer has reasonable grounds for suspecting that money held in an account maintained with a bank of building society –
(i) is recoverable property, or
(ii) is intended by any person for use in unlawful conduct
Applications are governed by The Magistrates’ Courts (Freezing and Forfeiture of Money in Bank and Building Society Accounts) Rules 2017 (“the Rules”)
No need for the actual account holder to be involved in suspected unlawful conduct
The Rules envisage “on notice“ applications since there is a service requirement regarding the application and notification of the hearing on any person by or for whom the account is operated (Rule 3[3])
Oddly, whereas the Rules make NO provision for “without notice” (WN) applications the Act does is there is a risk that efforts to forfeit the money will otherwise be prejudiced.
Will the bulk of applications by WN? Too tempting perhaps?
No clear CoA/Divisional Court guidance yet on the Court’s approach to this but this is likely to change as more of these applications are made.
What is clear is that in WN applications there will be a duty for the applicant to provide “full, fair and accurate disclosure of material facts to the Court” (but see later as that information may be unintentionally incomplete if other information is not obtained by the time of the application).
Provisions of The Application
Applicants can apply for an AFrO for up to 2 years’ duration.
Where the initial application is for a lesser period it can be extended up to the maximum of 2 years’,
The Court’s expectation will be that the length of the Order sought should be proportional to the case. However, so far experience has shown that how proportionality is applied is inconsistent.
In some applications the period requested has been explained; in others the 2 year maximum seems to be “standard” request so it may be necessary to challenge the application as to the length of Order sought. Tactically, it can be helpful as it may well have the net effect of eliciting the scope of the enquiries/investigation if justification of the length sought is required.
Making the Order
To make an AFrO the Court must be satisfied there are reasonable grounds to suspect the account contains recoverable property or is intended by any person for use in unlawful conduct.
If it does it has a power NOT a duty to make the Order.
Court should consider proportionality bearing in mind
a) the length of the Order sought;
b) the complexity of the investigation;
c) whether it will involve overseas enquiries; and
d) what proportion of the target’s assets are to be seized.
The Court’s should expect expedition with the investigation given the invasive nature of the Order but that may be difficult to ensure especially if the enquiries to be undertaken involve extra-jurisdictional issues.
During the investigation, the applicant can issue an Asset Forfeiture Notice.
If no objection is received within 30 days’ notice then AFO is made.
If objection is received Notice lapses – and application for AFO is made.
As such these deadlines have to be observed and acted upon accordingly.
“Recoverable Property”
Defined as property obtained through unlawful conduct UNLESS it has been acquired by an innocent 3rd party in good faith, for value and without notice (the “Section 308 exception”)
“Unlawful conduct” – encompasses conduct which is unlawful both in the UK and overseas including conduct which constitutes or is connected with a gross human rights abuse or violation, which if it had occurred in the UK, would be an offence.
“A person obtains property through unlawful conduct (whether by his own or another’s conduct) if he obtains property by or in return for the conduct.”
NOTE – it is not necessary to show that the conduct was of a particular kind IF it is shown that the property was obtained through conduct of one of a number of kinds, each of which would have been unlawful conduct (POCA s242(2)(b)).
This is likely to allow general assertions of Money Laundering (the background for many of the applications) to be made without the need to specify the predicate offence.
Again, probably need to await CoA/ Divisional Court guidance on the extent to which applications will have to justify the assertions that lie behind the application.
“Reasonable Suspicion”
“Reasonable grounds to suspect” – likely to be the most problematic area within the context of such applications.
To a significant extent this concept mirrors the cash forfeiture provisions.
BUT there are some notable differences:-
Lower test than in High Court for “Property Freezing Orders” where you need a “good arguable case.”
Lower than a Restraint Order application (Crown Court only) – here, a Judge needs to be satisfied that a criminal investigation has commenced AND that there are reasonable grounds to suspect that the alleged offender has benefitted from their criminal conduct (POCA s245A(5))
In contrast, an AFrO can be made BEFORE any investigation of any description has started – means the applicant can move extraordinarily quickly and accounts can be frozen before any formal investigation has commenced.
This is a really significant change as the applicant may have very limited information founding the suspicion yet may not have other information that could be easily available but isn’t as no investigation has commenced. For instance, a Production Order against a bank could not be obtained and yet this may reveal further information that places the assertions relied upon for the AFrO in a fuller context. So you may have a situation not of non-disclosure but one where the information was not obtained in the first place
Another significant difference is that with a Restraint Order there must be a requirement to provide a progress report to the Court regarding the investigation and it will be discharged if proceedings are not started within a reasonable period of time.
Here, there is NO SUCH REQUIREMENT for AFrOs and as outlined already it could possibly be of two years’ duration
Counter Measures
Initially, it may be worth considering what measures can be put in place to either minimise the risk of coming within the legislation or maximising the chance of defeating any application under the CFA 2017. These could include:-
a) Reconsider banking operations, particularly foreign/UK transactions;
b) Due Diligence/AML/Compliance measures – include an understanding of corporate “failure to prevent” offending;
c) Pro-active engagement with banks; and
d) Early engagement of advice/strategy before and after AFrO application
Excluding Funds for Living, Business and Legal Expenses
This is likely to be the first application made.
Venue is the Magistrates’ Court.
No provision for a Crown Court to make an exclusion order pending an appeal of an AFO.
Principles are largely common to other similar orders.
Important consideration will be the availability of other assets to meet the expenses in question
Will require:-
a) clear instructions on the extent and nature of their assets;
b) gathering the evidence necessary to support the instructions; and
c) draft schedules of anticipated expenses using the categories above
Legal Expenses
These applications are covered by the POCA 2002 (Legal Expenses in Civil Recovery Proceedings) Regulations 2005 (Expenses Regulations). Contrary to the position relating to restrained assets in criminal restraint and confiscation proceedings, a court deciding whether to grant an exclusion for the purpose of enabling a person to pay legal expenses in respect of the civil recovery proceedings under Pt.5 of POCA must:-
(i) have regard to the desirability of those involved in such proceedings having legal representation; and
(ii) disregard the possibility of legal aid funding being available to the person.
In (NCA v Azam [2013] 1 WLR 3800 at 3815) three relevant points were identified when considering an analogous application under a POCA Pt.5 property freezing order. In summary they are:-
- It is for the applicant to show that, in all the circumstances, it is just to permit the use of frozen funds to pay their legal fees;
- If on the evidence, the court is satisfied there are other available assets which may be used, it will not grant the application; and
- If the court is not so satisfied but is in doubt and has specific grounds for suspecting the applicant has not disclosed the full extent of their assets, it may resolve that doubt against the applicant. Absent those specific grounds for suspicion, even if the court rejects the applicant’s evidence as unreliable, it may not have any adequate basis for concluding there are other available assets. Accordingly, it is not the case that if the applicant cannot prove they have no other available assets which could be used, the application must fail.
[NB Rates are capped by regulation 17.]
Reasonable Living Expenses and Costs of Carrying on a Business
Courts will expect the parties to have attempted to reach an agreement on the sums to be released. While a suspect account holder is generally entitled to enjoy the standard of life he or she previously experienced, this does not extend to “Rolls Royce” type expenditure. The statute requires a court to exercise its exclusion powers “with a view to ensuring, so far as practicable, that there is not undue prejudice” to the eventual forfeiture of recoverable property or money intended for use in unlawful conduct.
As with legal expenses, an application will be refused where other assets are available to meet the expenses and any doubt as to whether the applicant has undisclosed assets may be resolved against them.
It is important to consider what other steps can be taken by the legal adviser?
Seeking Further Information After the Process has Commenced
“The Rules” require only that the subject of an AFrO be provided with two documents:
(a) the Court Order; and
(b) notice to the person affected which provides brief details about the nature of the order and the subject’s right to challenge it.
These documents will contain almost no detail as to why the account(s) has/have been frozen. The Rules contain no express provision requiring the underlying material or application notice be provided to the respondent following a without notice application.
An imperative will be to request a copy of the application notice and the material underpinning it, in order to advise on challenging the order.
There is a body of case-law (NCA v Simkus [2016] EWHC 255) supporting the contention that those subject to orders granted;
“must ordinarily be provided with a copy of the supporting information”
This gives rise to the question whether AFrOs should follow the criminal law PII regime used in search warrant cases or the principle applied in High Court asset freezing cases – that there is an irreducible minimum of disclosure that must be given to the subject of the asset freezing applications.
The question of which approach should be adopted in AFrOs and AFOs remains open.
It is also worth considering at this stage whether there are other ways in which to obtain information to support a challenge to an AFrO. For example, if it appears that the order was made following the issue of a suspicious activity report (SAR), a subject access request could be made to the relevant institution. In (Lonsdale v National Westminster Bank PLC [2018] EWHC 1843 QB); it was held that SARs fall within the definition of “personal data” and in that case, where funds have already been frozen, the bald assertion by the defendant bank that disclosing the SAR in response to a subject access request risks prejudicing an investigation (which is an offence) did not bar disclosure.
Should the Order be Challenged?
The decision whether to challenge an AFrO or AFO and how to do so will likely be the most significant decision for clients. There may be a number of available options in each case.
One option is simply to let the frozen funds investigation take its course and wait to challenge an AFO application if one is made.
Another is to apply to vary or set aside the AFrO. This can be done by any person affected by the order.
Potential grounds for such an application include:-
a) the lack of any reasonable grounds for suspicion;
b) the funds are not recoverable property;
c) the bona fide purchaser for value exception in s.308 applies; or that
d) the order itself is disproportionate in all the circumstances.
The “estoppel defence” elsewhere in Pt.5 civil recovery proceedings, namely that property which has been obtained in good faith and in respect of which the recipient has then taken steps to their detriment ceases to be recoverable, does not appear in Chapter 3B of POCA.
However, the grant of an AFrO or AFO is discretionary and the bona fide recipient’s reliance on the funds in question would be relevant to the question of the proportionality of any order.
Alternatively, there may be instances where for strategic reasons it is in the account holder’s best interests not to challenge an AFrO, such as where the account holder is a company and only one of its accounts has been frozen and this does not unduly affect its operating capacity.
In this type of case, the legal adviser would be well advised to make plain to the relevant enforcement agency that the allegations underlying the AFrO are disputed but that a commercial decision has been taken to allow it to run its course. This strategic approach could be adopted with a view to challenging any future forfeiture application when the higher burden of proof will rest on the applicant enforcement agency.
However, those advising should be aware that when funds are not ultimately forfeited the subject is entitled to compensation ONLY where they have suffered a loss and the circumstances are “exceptional.” As such, acquiescing on the AFrO on a without prejudice basis may only result in the Order being set aside without any recompense so this has to be borne in mind before this avenue was pursued as opposed to challenging the AFrO itself.
Another potential route by which to reach a resolution is by way of a civil settlement with the authority bringing the proceedings. The NCA acknowledges the importance of settlements in civil proceedings and has entered into at least one significant settlement in December 2019 following the freezing of bank accounts under the AFrO scheme. There may be potential benefits to both parties and obviously advice as to whether to pursue this line is case sensitive.
It is worth bearing in mind that an AFO can only be made in respect of that proportion of the monies in an account which are recoverable property or intended to be used in unlawful conduct. If the subject’s bank or building society account contains a mixture of funds and the evidence of underlying or intended criminality is strong in relation to some of the funds but weak in respect of others, the pursuit of a settlement agreement carving out the former may constitute a swift means by which to reach a resolution. This route may also be a strategic option where, for example, challenging the order in court would be hopeless or attract unwanted publicity and attention.
Appeal Issues
The AFrO and AFO appellate framework replicates that of cash seizure and forfeiture. The legislation does not provide a route to appeal an AFrO. Therefore, a challenge to the making of an AFrO or in respect of an application for its discharge or variation would be by way of case stated or judicial review proceedings in the High Court. The lack of a direct appeal is akin to the position in relation to cash seizure and forfeiture.
Under the statute, a right of appeal to the Crown Court exists only in respect of an AFO. It is by way of rehearing and on an appeal the Crown Court may make any order it thinks appropriate. When hearing the appeal, the Crown Court is exercising its limited civil jurisdiction. The practical effect of this distinction is that the Crown Court cannot, for example, exclude evidence under s.78 of the Police and Criminal Evidence Act 1984 (PACE).
The appellate procedure is governed by the Crown Court Rules 1982/1109. A decision of the Crown Court can be challenged in the High Court by way of case stated or judicial review.
Issues Regarding International Co-Operation
Article 31 of the Proceeds of Crime Act 2002 (External Investigations and External Orders and Requests) (Amendment) Order 2018/1078 (the 2018 Order) inserts a number of provisions into the Proceeds of Crime Act 2002 (External Investigations and External Orders) Order 2005/3181 (the 2005 Order) the effect of which is to permit the Secretary of State to refer an external request to freeze monies held in a bank account in this country to one of the principal domestic law enforcement authorities. If the enforcement officer dealing with the case agrees there are reasonable grounds for suspecting that the funds constitute recoverable property the officer may apply to a Magistrates’ Court to give effect to the external request.
The low threshold of “reasonable suspicion” remains the same and there is no need for proceedings to have been brought in the requesting country in connection with the property in question.
I expect that one issue the courts will need to resolve in due course is the extent to which the applicant enforcement officer may rely on the suspicions of the foreign law enforcement agency that is seeking the UK’s legal assistance, rather than having direct access to the evidence that gives rise to its suspicions.
The Role of The Magistrates’ Court
It seems enforcement authorities are choosing to make AFrO applications in the magistrates’ courts in complex cases in which property freezing applications could have been made in the High Court. It appears that:-
(a) some applications have been decided by lay magistrates rather than District Judges;
(b) on occasions courts have not been given prior reading time despite pre-hearing requests that it was needed;
(b) “over-listing” in any given court has resulted in insufficient time being available for the parties’ agreed time estimates causing unnecessary adjournments; and
(c) previously, a hearing has been curtailed expressly because these are “summary proceedings” in the magistrates’ court, not the High Court.
All this is notwithstanding that for a long time various appellate courts have recognised as axiomatic that complex asset Restraint Order applications should be listed before (ideally specialist) judges with sufficient time to read and absorb the papers and conduct proper hearings.
Put shortly, it seems that for legal and practical reasons, applications for Restraint or Property Freezing Orders before the Crown Court or the High Court respectively are subject to far more rigorous scrutiny than similarly complex cases being dealt with under the AFrO regime in the Magistrates’ courts. It could be argued that given the greater draconian powers (up to 2 years’ and without a formal investigation being instigated) that are part of the AFrO/AFO regime then this is not the correct venue to determine such applications. However, for the applicants one can see the obvious advantages.
Conclusions
I anticipate that reliance on these potentially draconian orders will increase, including in response to requests from overseas authorities to freeze funds in the UK.
The AFrO/AFO scheme has yet to be subject to detailed scrutiny by the High Court. The use of these potentially draconian orders continues to grow rapidly. There is every reason to assume that that trend will only continue.
Why? The National Economic Crime Centre was established in October 2018. In their Annual Plan 2019/20 it stated:-
“(We) seek to maximise new powers, for example Unexplained Wealth Orders and Account Freezing Orders, across all agencies to tackle illicit finance across all threat types.”
Damian Nolan
Exchange Chambers
