The UK government has issued Circular 3/2018, titled 'Unexplained Wealth Orders' [UWO}. This circular is essentially a part of the implementation/extension of the process of 'Proceed of Crimes Act, 2002 (POCA) of the UK. It is important to note, as has been described by the author in his earlier articles, that 'Anti-Money Laundering' provisions in the UK form part of POCA under UK legislations. UWO has dealt with a very pertinent and an out of box regulation having very far reaching effects on the subject of proceeds of crime.
The UK's POCA is a comprehensive law to deal with the proceeds of crimes. Actions treated as crime for POCA have been duly identified. Within that law, proceeds of crime and money laundering are taken as two different but related subjects. All proceeds of crime do not fall within the ambit of money laundering. Money laundering is rightly taken as second and next stage of accumulation of proceeds of crime. Any action or transaction that places the proceeds of crime into regular financial system is an action and is so treated as money laundering. It is unfortunate that this matter has not been correctly addressed in Pakistan's anti money laundering legislation being Pakistan's Anti Money Laundering Act, 2010 and it is expected that over the time a correction will be made. This subject has been dealt with in one of the articles published in this paper in the past. In this particular article, our subject is the description and effect of the Unexplained Wealth Orders of the UK and its effect on Pakistan's financial and economic affairs, if any.
Circular 3/2018 provides steps that may be undertaken under the POCA with respect to 'Unexplained Wealth' in the UK of UK- and non-UK nationals. That questioning will be limited to the identification of the sources income for acquiring such assets. Freezing of such assets is a second stage that is essentially not covered in this circular. The circular inter alia provides: "A UWO is a civil power and investigation tool. It requires the respondent to provide information on certain matters (their lawful ownership of a property and the means by which it was obtained). It is important to note that, as an investigation power, a UWO is not (by itself) a power to recover assets. It is an addition to a number of powers already available under POCA to investigate and recover the proceeds of crime and should therefore not be viewed in isolation."
The aforementioned paragraph of UWO is enough to explain what the regulation is and what it desires to achieve.
UK and Pakistanis assets
Pakistan has very deep cultural, educational and economic relations with the UK. We were their subjects for over 100 years. London is still the financial capital of the world. The UK is the center for higher education for almost all Pakistanis in every professional field. Stability of society, rule of law and many other factors contribute to the movement of capital to the West and in particular to the UK by Pakistani nationals. London is the second home for rich Pakistanis. The stable, civilized, educated environment provided in that society has actually attracted all well-to-do Indians and Pakistan to keep all on part of assets in that safe environment. This is a natural process. Patriotism cannot override this natural tendency.
After the Second World War, the UK economy relied directly or indirectly on capital inflows from other countries. They established institutions, including property developments, with high class facilities that suited investment by foreigners. Resultantly, economically established classes of the developing countries, mostly being ex-colonial people, decided to maintain assets especially residential properties in the UK. There cannot be exact estimate of assets held in the UK by Pakistani citizens; however, there is no doubt that investment is substantial. This writer's rough estimate ranges between 15 to 25 billion USD. It is further stated that unlike a general perception a substantial part of such investment has been from clean sources within the country of source. It is movement of capital. Nevertheless, our system of recording and manner of movement of fund are so complicated that unnecessary problems are expected to arise whilst identifying the trail. This is the subject of this article.
The change in the West
Movement of capital to the UK and other western jurisdictions was duly supported by the policies of the West. This includes tacit protection and promotion of tax havens like the Cayman, the Bahamas, etc. A system was, and still is, in operation that promotes movement and accumulation of wealth from the east to the west.
The post-9/11 world is quite different. This difference was intensified by the Financial Crises of 2008 and gradual economic upsurge and relevance of China in the economic scenario. All these factors required a revised plan for economic survival of western world's financial system. With the growing age in the West and heavy burden of social welfare costs there is a huge inherent demand in the West for availability of employment, broadening the tax base to cater to taxes not being received which are otherwise receivable in the western societies on account of various reasons such as base erosion, etc. The Luxembourg and Ireland fiscal legislations that promoted base erosion led to a revised thinking on the matter. In other words, the time for relaxed tax environment for individuals and corporations, throughout the world is over. What President Trump is doing? He is asking to pay tax at a lower rate but payment of the same in the US to create employment in the US and other such objectives. The policy is obvious and clear. The resultant effect of such actions is leading to the revision of taxation environment in the western world.
In addition to the same laws relating to proceeds of crime started emphasizing on anti-money laundering provisions as counter terrorism became an integral part of such regulations. Geo-political developments in the Middle East, Africa and South East Asian and many other parts of the world revealed that financing of terrorism is not limited to societies, other than West. There are a quite a number of young people in the West who have a completely different mindset, duly supported, by financial systems around the world, that is highly undesirable for the world. The recruits for ISIS, and their financial networks, opened many eyes. Resultantly there is a need to monitor the sources of funds ending in the UK and other economies. All the actions, starting from the Panama Leaks, the Paradise Papers, activation of the 'Financial Action Task Force' (FATF) and now this UWO are the constituents of an overall objective and plan to identify the 'sources' of money which are landing in western economies. Tainted sources are to be segregated from others for obvious reasons.
Theme of the regulations
Throughout the world, 'income' is taxed. Utilization of such income, be it acquisition of assets or consumption is a personal act that can and should not be monitored except in extraordinary situations. Accordingly, there are very few jurisdictions that require filing of asset records and identification of sources of such income under the income tax regulations. The regulation being discussed in this article, is accordingly not a derivative of income tax law. It is a derivative of POCA being a different provisions that deals with the subject of crimes and proceeds of crime. In this connection, it is highly important to note that under the UK legislation, list of crimes under POCA does not include evasion of income tax as the same is handled separately in income tax legislations. This means that this regulation is over and above what is stated in UK taxation laws. This is a new phase in financial regulations.
For a person, where the source of money for the acquisition of property in the UK is outside the UK, the problem is multi-dimensional. In that case, the enquiry will be comparatively difficult as the source will emanate from outside the UK. It is expected to be severe in the sense that there is a perception that a substantial part of such amount has been acquired from undesired means in the source country.
From a purely tax viewpoint the process identified in the circular, as briefly identified in the aforesaid quoted paragraph, is different from regular course of enquiry. It appears that all properties having a value exceeding the prescribed value, in the name of non-UK persons will be identified and the owners may be required to inform the authorities the sources from which such properties have been acquired to locate whether it falls under POCA. The concept as underlined appears to be simple in theory however in practical sense it will be a difficult exercise, especially in relation to those who have sources outside UK. The original crime, if any, was undertaken outside the jurisdiction of the UK. It however appears that under this regulation that 'nexus' within UK is being overridden. This is very important subject of territorial jurisdiction of law. We expect litigation and court rulings on this matter.
Blessing for Pakistan
Notwithstanding the developments in the western societies especially the UK, Pakistan is passing through a transition on the matter of documentation of asset and tax compliance. We have messed up our taxation system, in a designed manner to divorce the information relating to income from asset accumulation. This is only part of the problem. The other part is accumulation of assets, in Pakistan and outside Pakistan, out of proceeds of crime. UWO in very simplistic sense is saying that, in post UWO period, the UK has laid down the rules for identifying and then freezing such assets acquired through illegal means even outside the UK. This may be a blessing for Pakistan and other under-developing countries as in many such cases 'proceeds of crime' mainly being proceed of corruption, are landing in properties and assets in the UK. It is important to note that in Pakistan in the post-2015 amendment in anti-money laundering regulations tax evasion is also treated as proceeds of crime.
This regulation, which is purely a UK legislation, is in effect a blessing for Pakistan as this may now be seen as a handicap for our people if they park their ill-gotten wealth in the UK. We know that such assets are there, and even one or two investigations and confiscations will be enough to send a signal in respect of forthcoming environment.
Trail of transaction and burden of proof
On the practical side especially in relation to non-UK persons whilst explaining the source the difficult proposition will be identifying and unearthing the 'trail' through which proceeds have landed in UK. In simple words, in many cases there could have been a laundering / camouflage process whereby there can be break/ missing link in the trail. This complication will be multiplied on account of routing the sums through Middle Eastern countries which are generally used as a conduit to place assets in the West including the UK. Furthermore, as a second layer of defense, tax havens like Cayman, Panama, Bermuda and others jurisdictions, offering trust companies and other mechanisms, are used to separate the ostensible and beneficial ownerships. These are practical problems. Nevertheless, the process and manner now prescribed in UWO is clear that ultimately the KYC (Know Your Customer) mechanisms are going to be changed which will be enough to unveil the layers placed between a property and its real ownership.
For delinquent persons the most dangerous aspect of UWO is shifting of the burden of proof. It appears from the bare reading, which is in line with the underlying concept of POCA, that the burden of proof lies with the owner of the property, not the UK government. This is a departure from the general principles of taxation however as stated earlier these regulations are governed by POCA laws not being the taxation laws.
Conclusion and summary
The aforesaid regulations reveal that the process which started with the Panama Leaks and other such revelations is now entering its second phase. This phase represents streamlining the legislations, outside Pakistan, such as the UK, to provide apparatus for the governing agencies to enquire and confiscate the assets held in the UK which were acquired from proceeds of crime in the source country. This is an exceptional situation which represents an out of box process unlike those undertaken in the past. This represent a clear reflection of the international movement to curb money laundering processes anywhere in the world, essentially in relation to terrorist activities.
In relation to Pakistan, this represents a blessing in the sense that it will assist in eliminating and removing one of the major parking lots for proceeds of crime emanating from crimes, including tax evasion. The message is loud and clear that tainted money is not welcome anywhere in world. It is better to pay taxes and keep investment in Pakistan.