A major problem in trying to tackle financial flows from kleptocracies is the opacity of the sources of the capital. Investigating complex schemes is time-consuming and it can be extremely difficult to link wealth to a definite, predicate crime, given the lack of rule of law in kleptocracies. To counteract this, the UK has introduced new laws in recent years, but these have faced resistance via professional enablers.
Evidence suggests that when laundering money, organized criminal groups will employ small high-street solicitors, accountants and estate agents, exploiting their lack of expertise or capability in the implementation of AML controls. But this is not true for PEPs. This sometimes may simply be for logistical reasons, as the vast majority of small to medium-sized estate agencies are only insured to handle transactions of up to £10 million. Even if a purchase is under this amount, many small estate agencies will simply refuse PEP clients from high-risk countries, not only because of the increased risk but also because the enhanced due diligence costs time and money, which reduces the profit to be made on the sale.
Large law firms will not only be able to outsource due diligence research, but also offer the client a range of future services – helping to obtain visas or citizenship, set up ‘tax-optimizing’ offshore structures, make charitable donations to bolster reputations and so on. Such companies will be aware when new AML legislation is introduced and what it means for their clients. Indeed, many legal firms will often advertise their services specifically in regard to new legislation. The introduction of Account Freezing Orders (AFOs) and Unexplained Wealth Orders (UWOs) as part of the Criminal Finances Act 2017 provoked a flurry of articles and adverts on legal websites about what the legislation meant, and how the law firms involved could assist a client issued with one.
Success and failure
The introduction of the AFO has been much more successful than the better-known UWO. AFOs are court orders allowing UK law enforcement bodies to freeze the contents of a bank account if they can show reasonable grounds to suspect that money in an account was obtained through unlawful conduct or is intended for unlawful use. Since their introduction, there have been successful forfeitures of money held by various PEPs, including the niece of Syrian president Bashar al-Assad and the son of a former Moldovan prime minister. Izzat Javadova, the first cousin of the president of Azerbaijan, reached a settlement with the NCA, agreeing to hand over £4 million of unlawfully acquired funds. Originally, the NCA froze via AFOs £6.4 million of a total £14 million linked to the ‘Azerbaijani Laundromat’ scandal and controlled by Javadova and her husband.
The introduction of the Account Freezing Order has been much more successful than the better-known Unexplained Wealth Order.
UWOs were introduced to complement civil recovery orders (CROs). CROs, in essence, lower the standard of proof from a criminal to a civil threshold, so that an asset can be frozen if an enforcement agency believes that on the balance of probabilities, rather than beyond reasonable doubt, it was purchased using criminally obtained capital. However, CROs were ineffective in cases where there was little or no evidence about the source of funds, preventing enforcement authorities from being able to show that the asset was ‘probably’ the result of illicit wealth. This is often the case when the owner comes from a country where assistance from national enforcement authorities will not be forthcoming because of the individual’s political connections.
A UWO attempts to circumvent this problem. It is an investigative tool that can be issued on an asset owned by a PEP, or someone suspected to be involved in serious crime, whose known sources of wealth are believed to be insufficient to purchase the asset in question. Once a UWO has been issued, the person who owns the asset (the ‘respondent’) then must explain the source of wealth that was used. If s/he fails to comply with the order, the asset is then assumed to have been purchased by the proceeds of crime and is thus recoverable under a separate CRO.
Although UWOs can be used to fight organized crime, a major part of the messaging surrounding this new investigative tool centred around the idea that they would be used to tackle kleptocracy or ‘grand corruption’. For example, the then home secretary Amber Rudd said in 2016 that: ‘[UWOs] send a powerful message that the UK is serious about rooting out the proceeds of overseas grand corruption’. Rudd also quoted from Transparency International, which said that UWOs may be ‘the most important anti-corruption legislation to be passed in the UK in the past 30 years’, legislation that will ‘make sure that the UK is no longer seen as a safe haven for corrupt wealth’.
In 2017, the UK government’s impact assessment on UWOs forecast around 20 being issued per year. Since then, multiple parliamentary reports have encouraged the use of both civil recovery procedures and sanctions against Russians linked to the Putin regime. However, despite hawkish comments on Russia from then security minister Ben Wallace, none of the four known UWO investigations features a Russian citizen. Moreover, no UWOs have been issued since July 2019 when the Boris Johnson government took office.
Two cases from Eurasia
Of the four UWO investigations that have been completed as of September 2021, two centred on UK citizens suspected of involvement in serious and organized crime. The other two concerned PEPs from Eurasia, but each resulted in a very different outcome. The first investigation featured UWOs issued in February 2018 on two separate properties, a townhouse in Knightsbridge and a golf club in Ascot. They belonged to an individual from Azerbaijan, Jahangir Hajiyev, and his wife, Zamira Hajiyeva. At the time the UWOs were issued, Hajiyev was in prison in Baku, having been convicted of misappropriating money and abusing his powers while chairman of the International Bank of Azerbaijan (IBA). The NCA argued that Hajiyev’s salary at IBA was not sufficient to purchase the property in question. His wife’s appeals against the UWOs were unsuccessful, meaning that she risked having the properties confiscated. As at November 2021, both properties remained under restriction, as the civil recovery case was ongoing.
In May 2019, another set of UWOs were issued by the NCA in relation to three properties in London valued at £80 million, including a ‘super apartment’ in Chelsea worth £40 million. In February 2020, the identities of the owners were revealed by UK media – Dariga Nazarbayeva and Nurali Aliyev, the daughter and grandson respectively of Nursultan Nazarbayev, Kazakhstan’s president between 1991 and 2019. The NCA argued that these properties were purchased using funds belonging to Dariga’s former husband and Nurali’s father, Rakhat Aliyev, who was suspected of being involved in serious crime. Rakhat Aliyev died in jail in 2015, while awaiting trial in Austria for two murders allegedly perpetrated in Kazakhstan.
In contesting the NCA’s argument on behalf of the respondents, Mishcon de Reya presented documentation to show that the funds used by Dariga Nazarbayeva and Nurali Aliyev were not linked to Rakhat Aliyev or his criminally obtained capital and, thus, that the UWOs had been issued in error. Ultimately, the UWOs were dismissed by the presiding judge, Ms Justice Lang, who held that the NCA had not demonstrated the link between the properties and Rakhat Aliyev, and that the NCA’s underlying assumptions and reasoning were ‘unreliable’ and ‘flawed’. An upcoming report by two of the authors of this paper examines this case, and uncovers evidence that the NCA did not submit to the court that would have strengthened its arguments.
This ruling has significant implications for the future of UWOs. In making her judgment, Lang accepted that as Nazarbayeva had gained one of her assets – the sugar company JSC Kant – in her divorce from Aliyev, the NCA could argue that it was a tainted gift and launch civil recovery proceedings. However, the judge stated that, in such an event, Nazarbayeva would be able to present several ‘powerful arguments’.
Two of these supposedly ‘powerful’ legal arguments seem weak from the perspective of political economy where the interconnections between wealth and power are laid bare. First, in a claim which betrayed an absence of expert witness testimony on the political economy of Kazakhstan, Lang stated that ‘notwithstanding his criminality, Rakhat Aliyev had been a successful businessman and JSC Kant is and was a legitimate business (it is a major sugar company)’. However, Aliyev’s ‘criminality’ included credible allegations that he had extorted, tortured and killed his rivals. He was one of a small number of ‘successful’ businesspeople with close links to the ruling family dominating the Kazakh economy at the time.
Second, Lang stated that the Kazakh prosecutor general’s department confirmed that Rakhat Aliyev ‘did not transfer any illegally acquired funds or assets’ to his wife. Given that in Kazakhstan, according to the US Department of State, ‘the executive branch controls the legislature and the judiciary’, it is problematic to rely on a ruling related to the eldest daughter of the man who ruled the country as an autocracy for nearly 30 years. UWOs were introduced to circumvent the problem of having to deal with individuals from nations with corrupt systems of governance, yet one of the very first UWO cases was dismissed partly due to evidence from such a country.
However, there may in fact also be an issue with the legislation itself. Section 326B 6(c) says that ‘income is lawfully obtained if it is obtained lawfully under the laws of the country from where the income arises’. As noted by Spotlight on Corruption, this ‘imposes potential hurdles for law enforcement to challenge assertions of lawfulness of income made by those who owing to their position of power in effect control how laws are implemented within their countries’.
Stepping back from this investigation and the provisions of UWO legislation in order to examine these property purchases purely on the evidence, similarities are noticeable in the two cases cited above. Nurali Aliyev received a $65 million loan from the bank he chaired – Nurbank – via a series of shell companies that he owned, money that was then used to buy a mansion on The Bishops Avenue in the Highgate district of London. There is no evidence to suggest the loan was repaid. During his time as chairman of IBA, Jahangir Hajiyev transferred loans from his own bank to fictitious companies that he himself controlled. The former was ruled as legitimate by Nurbank, whereas Hajiyev’s activities were ruled illegal by an Azerbaijani court and formed the basis of his conviction.
In response, Mishcon de Reya commented that the judgment in the UWO hearing stated that the loan Nurali Aliyev had received was legitimate, adding: ‘These [allegations] are based on reductive and derogatory stereotypes of central Asian countries and are categorically rejected.’
No focus on the enablers?
Although it is too early to draw a conclusion from only two UWOs, it is notable that the case related to an incumbent public official failed, while the case against the disgraced official was successful. An analysis of PEPs purchasing property in the UK suggests this pattern holds up – vanquished exiles fall foul of the rules, while expatriates who remain in favour back home avoid them. Indeed, of the 11 cases of properties recorded in the Annex as being frozen or sold following legal proceedings, all were against exiles or elites that had fallen out of favour with their home governments; 10 of the 11 were against exiles out of favour with regimes with which the UK is a partner. There is, therefore, a danger that, instead of counteracting corruption as intended, UWOs and other civil recovery proceedings reflect political power and the status quo in Eurasian countries and elsewhere.
However, there are exceptions to the apparent bias against exiles: cases like Maxim Bakiyev’s suggest that those with effective legal representation are able to defend themselves even if they have become a target of their home government. In perhaps a tacit acknowledgment of the problem of pursuing those with continued access to capital, it was reported that NCA financial investigators ‘believe targeting corrupt businessmen with access to “expensive QCs and claims of private wealth” is a “waste of time”’ and that future efforts would concentrate on mid- to high-level organized criminals.
The firm of solicitors for two of the Nazarbayeva/Aliyev UWO properties (Annex, numbers 29–30) was Herbert Smith LLP, which has, since a merger, become Herbert Smith Freehills, and boasts revenue in 2020/21 of more than £1 billion. Herbert Smith LLP also acted as conveyancer for Hajiyev’s golf course that was subject to a UWO (Annex, number 1). Mishcon de Reya advised Hajiyeva’s BVI company in the purchase of one of the properties that was later subject to a UWO (Annex, number 2). (Mishcon de Reya played no part in the UWO proceedings in this case.)
Given the confidentiality that surrounds the SAR system, it is impossible to determine whether legal professionals act appropriately on the red flags presented to them on any proposed transaction. However, it is likely that, along with a system overloaded with SARs, a lack of enforcement regarding failure to report a suspicion or knowledge of money laundering contributes to the sense of impunity within certain regulated sectors. According to one legal expert, there have only been three known convictions under this provision of POCA 2002 since it entered into force. In the case regarding Leyla and Arzu Aliyeva, although the solicitor was later sanctioned at a tribunal, the NCA did not launch criminal proceedings. This was despite the tribunal ascertaining that the transactions posed ‘a significant risk of money-laundering’.
Given the confidentiality that surrounds the SAR system, it is impossible to determine whether legal professionals act appropriately on the red flags presented to them on any proposed transaction.
The fact that many top tier law firms and agencies have been involved in cases featuring noted kleptocrats undermines the risk-based approach, as it suggests they are not merely responding to a legitimate demand for legal services but generating that demand through their participation in a vibrant commercial market servicing the proceeds of kleptocracy. In the next chapter we explore how this conflict of interest between regulatory compliance and commercial imperatives is also found among those enablers who facilitate reputation laundering by post-Soviet elites, including via philanthropy and attempts at political influencing.