The impact of Brexit
While it was hoped that a year after the United Kingdom’s surprise June 2016 referendum decision to leave the European Union there would be some clarity regarding the impact of Brexit, the lack of a clear plan before the vote and the unexpected result of a snap spring election have led to continuing uncertainty over the future of the relationship between the UK and the world’s largest trading bloc. Despite formal notice of the UK’s intention to leave the European Union having been given on 29 March 2017, it remains unclear how the UK will uncouple itself from myriad laws and institutions in which it has been interwoven for more than 40 years. For asset recovery practitioners, Brexit gives rise to a number of important implications.
Civil jurisdiction, recognition and enforcement of judgments
Council Regulation (EC) No. 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters has provided a clear framework to determine the proper jurisdiction for disputes and the automatic recognition and enforcement of judgments within member states. The benefits of the regime are clear and uncontroversial, and few (if any) would argue that the Regulation has had a negative impact on the English legal system. If the regime is scrapped in its entirety, it may result in parties having to face expensive early-stage satellite disputes on the question of forum conveniens and defendants seeking to reopen the merits of English judgments when successful claimants seek to enforce their awards in a member state (or vice versa). These outcomes would only serve to obstruct the course of justice. As such, it is likely that negotiators will seek continuity of these regimes after Brexit.
That said, the principle of judicial comity predates the EU. Whatever the outcome of Brexit negotiations, courts in the UK and Europe will not turn on each other overnight. Moreover, the English courts are committed to combating international fraud and corruption, wherever it arises. As Field J made clear in United States v Abacha  EWHC 993 (Comm):
it is unquestionably expedient for [the English] court to render the assistance sought [ . . . ] Corruption, like other types of fraud, is a global problem and it and its consequences are only going to be dealt with effectively if there is cooperation [ . . . ] between the courts of different national jurisdictions.
On 29 June 2017, the European Commission published its Position Paper on Judicial Cooperation in Civil and Commercial Matters, which recommends that EU law on jurisdiction applicable as of the withdrawal date continues to govern legal proceedings instituted before that date, choices of forum made prior to the withdrawal date should continue to be assessed against EU law applicable on that date, and that the relevant provisions of EU law on recognition and enforcement of judicial decisions should continue to govern judicial decisions given before the withdrawal date. The Position Paper does not make recommendations as to how matters should be dealt with after the UK leaves the EU.
On 22 August 2017, the UK government published its response to the EU Position Paper, entitled ‘Providing a cross-border civil judicial cooperation framework’. The paper expresses broad agreement with the EU Commission’s proposals should no agreement on a future relationship be reached. However, the paper goes further, setting out the UK’s position on what the future relationship should look like. It says that Rome I and II Regulations on choice of law and applicable law will be incorporated into UK law, meaning that courts in the UK and the EU will be applying the same choice of law rules post-Brexit. It also says that the UK will seek to remain party to the Lugano Convention on jurisdiction and enforcement of judgments, which currently governs the relationship between the EU and Iceland, Norway and Switzerland, and is modelled on an earlier version of the Brussels Regulation. The UK government intends to remain a party to the Hague Convention on Choice of Court Agreements (which it currently is through its EU membership). The one area where the paper does not set out a definitive position is with regard to the regime that will be put in place to deal with jurisdiction and enforcement of judgments.
The EU Confiscation Directive
The EU legislated for a Pan-European confiscation regime in 2014, in the form of the Directive on Freezing and Confiscation of Instrumentalities and Proceeds of Crime in the European Union (the Confiscation Directive). Prior to that, the UK had signed up to the 2005 Warsaw Convention, which replaced a 1990 convention covering similar ground. The Warsaw Convention is a Council of Europe treaty, and is not EU legislation. There is some suggestion that the UK will remain a member of the Council of Europe as the current Prime Minister, Theresa May, has signalled that she will not seek to scrap the Human Rights Act 1998, as previously indicated, and there was no mention of leaving the Council of Europe in the article 50 letter that notified the EU of the UK’s intention to leave. The Warsaw Convention obliges the UK and other signatories to cooperate in the enforcement of confiscation orders (subject to establishing double criminality). Moreover, the UK’s own Proceeds of Crime Act 2002 contains one of the world’s most robust criminal confiscation regimes, going beyond the provisions of the Confiscation Directive. Also, the Confiscation Directive does not provide for mutual recognition and enforcement of criminal confiscation orders among member states, which is governed instead by various EU framework decisions that provide for much discretion and require minimal harmonisation of confiscation regimes in any event.
Anti-money laundering post Brexit
With the implementation of the EU’s Fourth Money Laundering Directive in the UK by the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, the UK is up-to-date with EU policy. Given that UK and EU anti-money laundering policy (including the Fourth Directive) is based on the recommendations of the Financial Action Task Force (FATF), of which the EU and UK are both members, it is likely that Brexit will not have a discernible effect on the content and equivalence of anti-money laundering legislation across the two jurisdictions as both are, and will continue to be, derived from the same source (ie, FATF’s recommendations).
EU’s Fourth Anti-Money Laundering Directive
Enacted on 25 June 2015, the Fourth Anti-Money Laundering Directive is the most sweeping such legislation in Europe to date. With a two-year window for implementation, all EU member states were required to bring their regimes into compliance by 26 June 2017. However, 14 member states had failed to implement the rules by this deadline and a further three had only implemented the measures partially, leading the EU to issue rebukes. Despite this, all the EU’s largest economies, including France, Germany, Italy, Spain and the UK, had implemented the measures in full by the deadline. The Directive bolsters the existing rules by introducing the following changes:
- reinforcing the risk assessment obligation for banks, lawyers and accountants;
- extending the scope of ‘criminal activity’ to include tax crimes and bringing providers of gambling services and persons trading in goods for cash payments of €10,000 or more under the ambit of the regime;
- setting clear transparency requirements about beneficial ownership for companies. The information that will be collected pursuant to the Directive will be stored in a central register, and will be available to national authorities and certain other entities;
- facilitating cooperation and exchange of information between Financial Intelligence Units from different member states to identify and follow suspicious transfers of money;
- establishing a coherent policy towards non-EU countries that have deficient anti-money laundering and counter-terrorist financing rules;
- enhancing rules on customer due diligence, including carrying out simplified due diligence, enhanced due diligence, the ability to rely on third parties to carry out due diligence and the extension of the rules relating to politically exposed persons to include domestics; and
- increasing the sanctioning powers of competent authorities to include a maximum fine of at least twice the amount of the benefit derived from the breach or at least €1 million. For breaches involving financial institutions, the maximum fine is at least €5 million or 10 per cent of the institution’s annual turnover (or €5 million in the case of a natural person).
In July 2016, following the release of the Panama Papers and terrorist attacks in Europe, the Commission presented further proposals aimed at ensuring a high level of safeguards for financial flows from high-risk third countries, enhancing the access of financial intelligence units to information, including centralised bank account registers, and tackling terrorist financing risks linked to virtual currencies and pre-paid cards. These proposals are expected to be adopted by the end of 2017.
The tripartite working group on money laundering with digital currencies
In September 2016, in recognition of the growing concern over the use of digital and cryptocurrencies to facilitate money laundering, Europol, Interpol, and the Basel Institute on Governance established a tripartite working group with the aim of:
- gathering, analysing, and exchanging information regarding the use of digital currencies as a means of money laundering, and the investigation and recovery of proceeds of crime stored in the same form;
- training and bringing together law enforcement agencies and institutions to increase the capacity to successfully investigate crimes in which virtual currencies are involved; and
- creating a network of practitioners and experts who can establish best practices and provide assistance and recommendations.
The first Global Conference on Money Laundering and Digital Currencies
In January 2017, law enforcement agencies from numerous countries, Interpol and Europol, government agencies, and industry representatives met in Doha for the first Global Conference on Money Laundering and Digital Currencies. The conference focused on the threat of exploiting digital currencies for money laundering and terrorism financing and various projects underway to combat it. While these initiatives have not yet led to new regulation on digital currencies, the increasing focus on their role in money laundering demonstrates the scale of concern among authorities.
Since Mossack Fonseca, the world’s fourth largest offshore law firm, found itself at the centre of the largest ever leak of a law firm’s files, the ‘Panama Papers’ have continued to shake the world. The documents exposed a network of shell companies and offshore accounts concealing wealth linked to politicians and other public figures and included information on 214,000 offshore companies and more than 500 banks, including individuals who sought advice from the firm.
The data revealed the offshore holdings of 140 politicians, public officials and their families and led to the resignation of Icelandic Prime Minsiter Sigmundur Davíð Gunnlaugsson and the disqualification by the Pakistani Supreme Court of Prime Minister Nawaz Sharif. US$2 billion in transactions connected to associates of Russian President Vladimir Putin, and offshore companies linked to the family of Chinese President Xi Jinping were also uncovered. The leak also led to charges of money laundering being brought by Panama against founding partners Jurgen Mossack and Ramon Fonseca Mora.
As of April 2017, more than 150 investigations, inquiries, audits and probes by police, customs, financial crime and Mafia prosecutors, judges and courts, tax authorities and parliaments from 79 countries have been launched as a result of the leaked documents. This has led to national authorities recovering tens of millions of dollars in taxes on previously undeclared funds, including Malta’s tax office, which recovered more than US$10 million, and Iceland’s Directorate of Internal Revenue, which issued demands for US$5 million. Denmark’s tax minister, Karsten Lauritzen, agreed to pay up to £1 million for data from the leak to aid investigations into possible tax evasion by Danes. The US Department of Justice (DOJ) has launched a criminal investigation into the widespread international tax avoidance schemes exposed by the Panama Papers, and it is expected that the Kleptocracy Asset Recovery Initiative will be heavily involved in related investigations.
Following the revelations, the European Parliament formed the Committee of Inquiry to investigate alleged contraventions and maladministration in the application of EU law in relation to money laundering, tax avoidance and tax evasion. Also known as the PANA committee, it investigated whether EU law had been infringed and what legislative changes are necessary to tackle the problem. The Inquiry Committee started its work in June 2016 and had a term of 12 months. On 28 June 2017, the Committee published a draft report that called for stronger sanctions at the EU level, better regulation of intermediaries including lawyers and ‘urgent action’ to protect whistle-blowers.
Anti-Corruption Summit update
On 12 May 2016, the leaders of more than 40 countries gathered in London for the first Anti-Corruption Summit. While some commitments made at the Summit have been fulfilled, others remain in progress or have yet to be commenced. The following steps have been taken to realise the commitments made at the Summit:
- On 4–6 December 2017, the inaugural Global Forum on Asset Recovery (GFAR) will be held in Washington. Supported by the UNODC Stolen Asset Recovery Initiative (StAR) and the World Bank, the Forum will prioritise the return of assets to Nigeria, Sri Lanka, Tunisia and Ukraine.
- Unexplained wealth orders that permit courts to freeze the assets of persons suspected of having been enriched by criminal activity will come into effect in the UK with the commencement of the Criminal Finances Act 2017.
- In July 2017, the International Anti-Corruption Coordination Centre (IACCC) was launched by specialist law enforcement agencies from Australia, Canada, New Zealand, Singapore, the UK and the US. Interpol is scheduled to join later this year. Germany and Switzerland, which were involved in the design and establishment of the IACCC, will be observers.
- Twenty-one countries, including Singapore, Switzerland, the UAE, the UK and the US, pledged to establish public-private partnerships to fight corruption and money laundering. These might be developed along the lines of the UK’s Joint Money-Laundering Intelligence Taskforce (JMLIT). The JMLIT has been extended beyond its initial one-year trial period and has established relationships with partners in government, industry representative bodies in UK finance, law enforcement and major UK and international banks. The taskforce is planning to develop partnerships between governments and financial intelligence units to prevent the movement of illicit funds. Since the anti-corruption summit, the work of the JMLIT has led to arrests, more than 1,000 bank-led investigations into customers suspected of money laundering, the closure of more than 450 bank accounts suspected of being used for the purposes of laundering criminal funds and the restraint of £7 million in suspected criminal funds.
- On 30 June 2016, the UK made information on the beneficial ownership of UK-registered companies public. On 5 April 2017, the UK government launched a consultation asking overseas investors, property experts and transparency campaigners for their opinions on how the world’s first public register of beneficial owners of overseas companies and other legal entities who own UK property could be delivered. The consultation closed on 15 May 2017 and proposals are expected to be forthcoming.
1Malaysia Development Berhad update
1Malaysia Development Berhad (1MDB) was established in 2009 by the Malaysian government to stimulate the economy through strategic investments. In early 2015, it missed payments on some of the US$11 billion it owed to banks and bondholders. Shortly thereafter, the Wall Street Journal reported that the subsequent investigation had traced nearly US$700 million from the fund to accounts belonging to Prime Minister Najib Razak.
Since the problems at 1MDB were first reported, there have been a number of domestic investigations including a special task force headed by the attorney general, which raided 1MDB’s offices in July 2015. After the attorney general stepped down for health reasons, his replacement cleared Mr Najib of wrongdoing. 1MDB has consistently denied having given any money to Mr Najib, who has himself denied taking money from 1MDB or any other public funds. The Malaysian government has cracked down on reporting of the scandal by using the Communications and Multimedia Act and the Sedition Act to arrest those criticising Mr Najib’s administration, commenting on the government’s handling of the scandal, or making comments on social media deemed ‘insulting’ to Mr Najib or Malaysia’s royalty. The government has also blocked access to some news portals. The Auditor General’s report on the scandal was hidden from the public using the Official Secrets Act and, in November 2016, the vice president of an opposition party was sentenced to 18 months in prison for allegedly disclosing information from the report.
A number of foreign authorities, including Australia, Hong Kong, Luxembourg, Singapore, Switzerland, the UAE and the US are investigating 1MDB. In May 2016, Swiss bank BSI was ordered to shut down its Singaporean operations for breaches of money-laundering laws in relation to 1MDB. Swiss authorities allege that up to US$4.8 billion was illegally drained from 1MDB’s accounts. The US DOJ alleges that those who took the money include Malaysian businessman Jho Low, who reportedly received $1 billion from 1MDB, laundering more than US$400 million through the US. The DOJ is reportedly preparing to charge Low and, in June 2017, filed a suit alleging that a US$2.2 billion deal to purchase a US energy company was financed with money stolen by Low from 1MDB. The deal reportedly earned Low some US$300 million. The profits were also used to purchase a London property, which the US has taken steps to seize. On 10 August 2017, the DOJ sought to have the civil forfeiture proceedings stayed because evidence required to be disclosed in those proceedings may jeopardise the criminal investigation by revealing potential targets and subjects of the investigation and the investigative techniques that are being used. Singaporean authorities froze around $120 million of Low and his family’s assets in 2016.
To date, US$1.3 billion of assets have been frozen in the US, including profits from the film Wolf of Wall Street, a Van Gogh painting, and luxury properties in New York, Los Angeles and London. Hollywood star Leonardo DiCaprio and model Miranda Kerr have relinquished assets thought to have been bought with funds from 1MDB.
In December 2016, Yeo Jiawei, the first person to be convicted in connection with the scandal, was sentenced to 30 months’ imprisonment in Singapore for witness tampering and obstruction of justice. He is also awaiting trial for fraud and money laundering, having reportedly bought US$8.2 million-worth of luxury property on Australia’s Gold Coast. He denies any wrongdoing.
The trial of Teodorin Obiang
In the first instance of a sitting kleptocrat being tried, Equatoguinean First Vice President Teodoro Nguema Obiang Mangue (known as Teodorin) faced charges of misappropriation of public funds, misuse of corporate assets and the complicity and concealment of these offences. The trial began on 19 June 2017 before the Tribunal Correctionnel in Paris. Teodorin did not appear in person.
The complaint was filed by French anti-corruption group Sherpa, and other NGOs, on behalf of the people of Equatorial Guinea. French law permits victims to commence a prosecution, participate in the investigation, offer evidence at trial and question witnesses. French law also allows the judge to award damages to victims as part of the decision in the criminal trial. Teodorin’s assets in France include a Parisian mansion valued at €107 million and a collection of luxury cars including Ferraris and Maseratis valued at over €5 million.
At the beginning of the trial, Teodorin’s lawyers argued that the French proceedings should be stayed until the International Court of Justice made its decision in a case Equatorial Guinea has brought against France seeking dismissal of the proceedings and on the basis of diplomatic immunity. Both arguments were rejected, with the Court of Cassation having previously ruled that Teodorin’s ‘functions are distinct from those of a head of state, a head of government or a minister for foreign affairs’ and that ‘all the offenses of which he was accused [ . . . ] were committed for personal purposes’. The defence has also argued that none of the acts were crimes under Equatoguinean law as theft of public funds is not a crime if the thief is a senior government official and that, even if crimes were committed in Equatorial Guinea, a French court is not competent to rule on them.
The state prosecutor is seeking a sentence of three years in prison, a fine of €30 million, and confiscation of all of Teodorin’s French assets. The ruling is expected at a later date.
The UK Criminal Finances Act 2017
The UK freezes an average of US$225.5 million in laundered money each year. This figure is set to rise with the enactment of the Criminal Finances Act 2017, which is expected to come into force later this year.
Part 1 of the Act will create a new mechanism known as an unexplained wealth order (UWO) and extend civil recovery powers to the Financial Conduct Authority and HMRC. Part 2 will extend money laundering and asset recovery powers so that they apply to investigations under the Terrorism Act 2000 and the Proceeds of Crime Act 2002.
To obtain a UWO, a specified enforcement agency must apply to the court showing reasonable cause to believe that property valued over £50,000, belonging to a non-UK/EEA politically exposed person or a person suspected of involvement in serious crime, is disproportionate to their known income. If granted, the UWO shifts the burden of proof, requiring the owner to show that the asset was lawfully obtained for the purposes of these civil (as opposed to criminal) proceedings. If the response is inadequate, this extra information may then be used in a civil recovery process. Making false or misleading statements in response to a UWO is a criminal offence. The relevant enforcement agency may also apply for an interim freezing order to prevent the asset’s dissipation, re-laundering or removal before the UWO is considered.
The process will allow enforcement agencies to freeze assets before an individual is convicted. Where the owner is not a UK national, the previous system relied on conviction in their country of origin, which was extremely unlikely where that county was in crisis or its government was corrupt. This had resulted in hundreds of millions of pounds' worth of corrupt assets being laundered through London each year.
It is important to note that, although the burden of proof is shifted to the respondent, the process is civil rather than criminal and is directed at the asset rather than the individual.
Asset recovery under the Trump administration
During the 2016 US presidential election campaign, Donald Trump called the Foreign Corrupt Practices Act a ‘horrible law’ that puts American businesses at a ‘huge disadvantage’, raising questions of how it will be enforced by his administration and whether he will push for legislative changes.
The first insight into how the new government will treat asset recovery and anti-corruption legislation came from the new Congress, which in February 2017 repealed a rule made by the Securities and Exchange Commission pursuant to the Dodd-Frank Act that required public extractive energy companies to report how much they pay to foreign governments.
As has been widely reported, President Trump has not divested himself of his personal business interests in the manner that his predecessors did, raising concerns that the ability and resolve of the government to police foreign leaders will be curtailed. As Harvard Law Professor Matthew C Stephenson said:
The election of Donald Trump might impede the commitment of the United States to fight kleptocracy. . . The political consequences are that it reduces US leverage because of the perceived hypocrisy. The moral case is drastically undermined.
However, administration officials, including Attorney General Jeff Sessions and Deputy Assistant Attorney General Trevor N McFadden, have insisted that FCPA enforcement will continue to be a priority for the DOJ.
Although early indications of the intent of the President were concerning, it appears that for the time being enforcement will continue and that there will be significant internal pressure against any attempts to shift away from the hard line taken by the US in recent years.