"The application for the AFO can be made without notice, in circumstances where this would prejudice the forfeiture of the funds. "
Since 31 January 2018, UK law enforcement has had a number of new powers at its disposal, introduced into the Proceeds of Crime Act 2002 by the Criminal Finances Act 2017.
These provide UK law enforcement with potentially ground-breaking new powers to freeze and recover the alleged proceeds of crime. Whilst there has been significant focus on Unexplained Wealth Orders (introduced by the same Act), it is likely that these lesser known provisions, which involve the freezing and forfeiture of money held in bank and building society accounts, will prove of most relevance and concern to financial institutions and bank account holders. This also signals a change in approach by UK law enforcement, with civil recovery set to become the new norm.
Financiers and their advisers will need to understand what these powers mean in practice.
What are Account Freezing Orders?
These new powers were introduced to counter a number of obstacles that UK law enforcement faced in recovering funds held in “suspicious” accounts, where the funds were either alleged to be derived from, or intended for use in, unlawful activity. Although financial institutions can administratively suspend and/or close suspicious or high-risk accounts, the subsequent freezing and forfeiture of these funds by law enforcement was not straightforward. In criminal cases, this required the prosecution to succeed in persuading a Crown Court to restrain the assets and, after a successful criminal prosecution, secure a confiscation order. In civil recovery, this was dependent on the enforcement authority commencing civil recovery proceedings in the High Court and the value in the accounts being above £10,000.
The new provisions allow an officer to apply for an Account Freezing Order from a Magistrates’ Court, if he has reasonable grounds to suspect that the funds in an account maintained by a bank or building society are recoverable property: either obtained through unlawful conduct or intended for use in unlawful conduct. The account must hold at least £1,000, but the new legislation is unclear as to whether the account to be frozen must in fact be maintained by a UK branch.
The application for the AFO can be made without notice, in circumstances where this would prejudice the forfeiture of the funds. This would appear to provide law enforcement with a wide discretion as to whether to inform the account holder in advance of the application being made. When the introduction of these new powers was under discussion, it was acknowledged that in the majority of cases the financial institution would already have made a Suspicious Activity Report and have ringfenced the funds (such as by suspending the account). In such circumstances, it is difficult to understand why an application for an AFO would need to be made without notice. This is likely to be the subject of future litigation, particularly given the limited disclosure requirements for an AFO to be obtained.
What should those affected by an AFO do?
Any person affected by the AFO can apply for the order to be varied or set aside and the Act has included certain exclusions, such as for the purposes of reasonable living expenses, to carry on a business or for reasonable legal expenses. The maximum period for an AFO is two years. Importantly, at any point during that period, a senior officer can issue an Account Forfeiture Notice, if satisfied that the money is recoverable property. This effectively allows UK law enforcement to forfeit the funds administratively, without any recourse to the courts. If no objection is made to the AFN within 30 days, the money can be forfeited.
Where there has been an objection, UK law enforcement must make an application for an Account Forfeiture Order or apply for an extension to the AFO, if the two-year period has not expired. Any party aggrieved by the order can appeal to the Crown Court. Interestingly, where an AFO is subsequently discharged, parliament has sought to impose a higher threshold, than in cash seizure cases at least, for parties seeking compensation. The provisions specifically limit any order for compensation to circumstances that are “exceptional” and where the court is satisfied that a party has suffered loss.
In light of the lower evidential threshold required by AFOs and the ease with which UK authorities will be able to secure these, financial institutions are likely to be served with these in increasing numbers. As a result, and with de-risking in the financial sector only set to get worse, more and more accounts will be flagged as suspicious or high risk, leading to further account closures or suspensions. Not only will account holders be required to find and secure alternative banking, but they may now also face the additional hurdle of persuading a Magistrates’ Court and/or UK law enforcement that the funds in their accounts are not recoverable property.
Account holders will need to carefully consider their banking operations, particularly foreign transactions, and the due diligence to which they will be subject. In addition, they will need to take a far more pro-active approach in engaging with financial institutions, before their accounts become the subject of law enforcement scrutiny.