Protecting private wealth against political risk
Lawyers may not be able to predict the future. But they may predict the best ways to protect legal rights. From the wars in Ukraine and Iran (with regime change in Venezuela in between) to the arrests of the former presidents of the US and France (and the imprisonment of the latter), we live in an increasingly volatile world.
Having a metaphorical bag packed in case the jurisdiction in which you, your family or your assets are located turns hostile is invaluable. From knowledge of extradition policies to mutual recognition of asset freezing orders, it pays to be prepared.
This article considers some of the aspects of the English civil and criminal regimes relevant to those vulnerable to the adverse effects of volatile regimes.
Asset protection
Money (and other forms of currency) can be transferred through multiple accounts and jurisdictions at the touch of a screen. Access to it can also be blocked with alarming swiftness. Consequently, victims of politically-motivated asset freezing or confiscation need to be familiar with international asset recovery and asset preservation strategies.
London is an international city, and many high-net-worth individuals will own assets here: from real estate (owned for personal use or investment) through to bank accounts or trading companies. This can make individuals vulnerable to attempts by foreign authorities to freeze or seize assets located here.
However, it may also mean that defendants have grounds to argue that the English courts have jurisdiction to deal with their disputes. The English courts have a proven track record in helping foreign litigants fight to recover and protect their assets and London has long proven a popular venue for litigation, both in support of foreign disputes and as a primary seat of litigation.
Worldwide freezing orders (WFOs)
A key weapon in the civil asset seizure regime is a worldwide freezing order. WFOs are a well-established remedy available in many common law jurisdictions, and similar remedies operate elsewhere. In general terms, they freeze a defendant’s assets pending judgment.
WFOs (or their equivalent) are rarely enforceable directly outside the country in which they are granted. However, WFOs issued by foreign courts can take effect in England. For example, if a foreign bank in London is established as an English company, the bank may resist compliance until an order is issued by the English courts. However, if the English bank itself is a branch of a foreign bank (and not established as an English company), it may consider itself obliged to comply with an order made in the home jurisdiction. Banks run risks either way and their attitude may well be dictated by the consequences of non-compliance in the jurisdiction in which the WFO was granted.
Whether or not a bank complies directly with a foreign freezing order, the English courts have the power to grant WFOs in aid of litigation in a foreign country and also to aid enforcement in foreign proceedings. Since Broad Idea v Convoy Collateral, the English courts can even freeze assets where there are no relevant domestic proceedings in prospect.
However, challenging an order from an English court over an English company is much more straightforward than dealing with a branch of a foreign bank which has elected to comply with a foreign WFO. Before the order is granted by an English court, there is also an assessment by the English court of the grounds upon which the order is sought, and a requirement for full, frank and fair disclosure of the facts.
How to reduce risks
Individuals at risk of regime change must identify the status of the financial institutions in which their key assets are located. Freezing bank accounts has a dramatic effect, and can have seriously adverse consequences, not just in terms of access to funds, but also from a reputational and regulatory perspective.
On receipt of a WFO, defendants will usually have 72 hours to provide detailed disclosure of their assets globally, including those held indirectly in companies, trusts and nominee structures. Compliance with this aspect of English litigation is crucial. The consequences of non-compliance (even if the foreign judgment is not ultimately recognised by the English courts) can be serious, including imprisonment.
A key step, which can be taken in advance, is to instruct lawyers or other professionals to prepare (and keep updated) a list of assets. This can save crucial time and, if prepared in the right way, be deployed in compliance with inquiries from multiple jurisdictions. A simple asset schedule is often insufficient. Individuals should maintain an ownership map supported by documentation evidencing beneficial ownership, source of wealth, transaction history, links across entities and the rationale for structuring decisions. Relevant documentation will include trust deeds, letters of wishes, loan arrangements, and shareholder agreements, amongst others. A coherent, contemporaneous narrative explaining wealth accumulation and interactions with state authorities can be decisive when responding to allegations of impropriety or politically motivated claims. It is also prudent to ensure that documentation is held securely in jurisdictions unconnected to the risk profile and accessible remotely to ensure continuity.
While a WFO creates a serious restriction on access to assets, it should not have a paralysing effect. In England, defendants have a right to access their funds to meet legal expenses and living costs. Additionally, with the right approach, other steps minimising the adverse effects of the order may be agreed.
The key is preparing in advance the relevant documentation and approach. Time limits are tight and courts have committed defendants to prison for contempt of court for breaching these orders. The sentences imposed have been close to the maximum permissible term of two years.
Challenges to asset seizure
The key grounds for challenging asset seizure in the English courts are to first establish that only the defendant’s assets have been frozen, not those legitimately owned by others. WFOs are typically granted without notice to the defendant and the applicant therefore has a duty of full and frank disclosure. This means bringing all matters material to the judge’s decision before the court, not just those supportive of the applicant’s position. Any attempt to portray an incomplete (or overly positive picture) of the claimant’s case can lead to the WFO being overturned. Again, the key is to have a clear, evidenced history and chronology of any recent events (for example political disagreements or transactions with state entities) prepared in advance so that an application to set aside the order can be made promptly.
Fighting back
Where state-owned entities or companies linked to the foreign authority (its banks for example) have branches in this jurisdiction, it may be possible to seek disclosure of information held by those branches. Information orders against these kinds of parties are known as ‘Norwich Pharmacal’ orders and can be a key weapon in obtaining the information required to challenge asset misappropriation or politically motivated allegations.
Immigration/asylum
Individuals should ensure they are aware of the extradition treaties between their home country and other nations in which they have connections. If there is a significant risk of extradition, it may be necessary to consider seeking asylum in countries which do not have an extradition treaty. Understanding the immigration status of family members is also crucial for individuals at risk. Protection may be available and it is key to seek expert advice. Typically, collecting and preserving evidence in advance is crucial including recording threats of persecution, physical harm and other risks.
Criminal asset recovery
Restraint orders and account freezing orders (AFOs) are, essentially, the criminal equivalents of WFOs. They can be deployed by relevant agencies under the Proceeds of Crime Act 2002 and the ‘Listed Asset’ provisions can be used to seize tangible assets. These powers can be exercised at the request of an overseas authority, by way of a request for mutual legal assistance made to the UK government. If the foreign authority provides sufficient information, the legal and evidential thresholds to freeze or forfeit sums are low.
Allegations that a defendant is a politically exposed person (PEP) can be hard to shake, once the label is applied. Unlike official sanctions, the PEP designation is more subjective. Again, the key to disputing PEP status is to assemble sufficient evidence.
Financial services regulation is increasingly tough for PEPs. While it is important to ensure assets are located in appropriate jurisdictions, this has become more difficult to achieve. In England, pressure on financial institutions from the Financial Conduct Authority has heightened the challenges for individuals from ‘high risk jurisdictions’ to open bank accounts. It is also worth noting that the list of high risk jurisdictions fluctuates. This makes access to financial services (or any regulated business, including law and accountancy) harder for persons from, resident in, or connected to those jurisdictions.
People planning for international volatility
Asset protection is inseparable from people protection. Be aware that restrictions on, or enforced movement of family members can trigger changes in tax residence, the personal (including matrimonial property) regimes that apply in the event of relationship breakdown and succession law (for example, forced heirship exposure). In situations in which minor children are involved, there may be child arrangements orders and/or legal frameworks in place preventing their removal to another jurisdiction and a risk of falling foul of the Hague Convention (child abduction) if relocation is undertaken unilaterally, without the court’s or other parent’s consent.
Immigration asymmetry within a family whereby family members hold different citizenship/passports/visas can cause fragmentation risk, for example where a family member cannot relocate as quickly as anticipated.
Structuring assets for volatility
Diversification is key: not just jurisdictional spread, but control and governance. Concentration of control in a single individual, jurisdiction or financial institution significantly increases vulnerability to political or regulatory intervention. Taking the time to regularly review control to ensure engagement with professional trustees in stable jurisdictions, independent directors and family governance frameworks will ensure better protection in a volatile environment. Be aware that some jurisdictions disregard trusts and most, including the UK and EU, compel disclosure of beneficial owners. In any event, the effectiveness of trust and foundation structures depends heavily on their factual operation. Structures lacking genuine independence may be vulnerable to challenge from foreign authorities and in family law proceedings.
Particular care is required where restructuring is undertaken in anticipation of instability, given the English court’s willingness in matrimonial proceedings to scrutinise and, where appropriate, unwind transactions designed to defeat claims.
A further consideration is liquidity and ensuring access to liquid funds which are portable (accessible in stable jurisdictions). Otherwise, individuals and families may find wealth frozen in illiquid assets such as real estate and private company shares inside volatile states when restrictions are imposed.
Practical steps
Do not wait for the worst to happen. Prepare in advance the key documentation on which you would need to rely if you had to challenge allegations against you, your family or your business by a foreign authority. It is also crucial to think about the best way in which to protect your ability to remain outside of the hostile regime. Differences in residence rights between asylum and investor visas, for example, can be crucial and best researched and resolved in advance.
The key point is to remember that the English courts have a well-deserved reputation for dealing with disputes fairly, robustly and at speed. Knowing your way around the relevant legal system and understanding who to contact in an emergency will pay dividends.
For more information, speak to your usual Penningtons Manches Cooper contact.