Dealing with foreign state-sponsored persecution: fighting world-wide freezing injunctions and relocating to the UK
This article addresses how individuals can be targeted for state-sponsored persecution and considers how they can protect themselves, their assets and their reputation (including how to prepare and fight a world-wide freezing injunction). The article also outlines some immigration solutions as well as the tax consequences for relocating to the UK.
This article is part of the global guide to private client law. For a full list of private client Q&As visit www.practicallaw.com/privateclient-guide.
In an increasingly turbulent and "post-truth" world, state-sponsored persecution of citizens appears to be increasing and in certain jurisdictions it is no longer only the richest and most renowned oligarchs who are targeted. There has been a noticeable increase in smaller business people being targeted who are often individuals that do not play an obvious or active part in political life.
This article therefore addresses how individuals can be targeted for state-sponsored persecution and considers how they can protect themselves, their assets and their reputation (including how to prepare and fight a world-wide freezing injunction). The article also outlines some immigration solutions as well as the tax consequences for relocating to the UK.
Corporate raiding and prosecutions to order
One of the most insidious forms of state-sponsored persecution is corporate raiding, based on a prosecution to order. Frequently, the persecution starts as a civil dispute between businessmen who, for example, may have an ostensibly straightforward contractual dispute. However, instead of (or in addition to) litigating the dispute through the civil courts, the more politically-connected businessman uses their influence over the state to resolve the dispute to their advantage.
To kick things off, false (and usually salacious) articles are planted in the press by either the state authorities or the persecutor's contacts in the media (a tactic available in many jurisdictions around the world for a fee). The persecuted individual is made out to be a criminal, making it extremely difficult for them to continue to conduct business, causing issues with banks, and laying the groundwork for persecution within the justice system. So begins the application of both psychological and commercial pressure to the persecuted.
In addition to the media campaign, the persecutor will also seek to use their contacts within the state security apparatus (such as the police, prosecutors' office, or the intelligence services) to arrange for the politically weaker businessman to be arrested on false or exaggerated charges. The persecuted individual is then often arrested with little or no warning. Often the persecutor will simultaneously apply to freeze their assets by way of civil or criminal proceedings, usually with little or contrived evidence. Without-notice freezing orders are incredibly difficult to defend, rendering individuals helpless in the short term and often stifled in the medium term. Under these circumstances, it can often be difficult to find funds to instruct lawyers (if any will act for you, given the negative press). Freezing injunctions in the persecutory state regarding domestic assets are usually the first wave of several freezing injunctions. Many countries, such as Switzerland, will freeze assets first and ask questions later at the request of another country's authorities. The most damaging freezing injunction is the world-wide freezing injunction, which can be issued in the context of English civil litigation (see below, Asset protection and freezing injunctions).Having been detained by the police, with their domestic assets frozen, "telephone justice" may occur (for example, judges receive orders as to the decision to be made, or the "correct" judge is allocated to the case and "knows" what to do). Telephone justice can lead to:
Lengthy pre-trial detention.
Guilty decisions based on little or poor evidence (especially if no jury is involved).
Once detained, either pre or post-trial, prison conditions and circumstances apply further pressure. Conditions can be extremely poor and the other inmates are often dangerous or paid "stooges" sent to spy on the persecuted individual or increase the psychological pressure (such as by persuading them to cave in to extortion attempts). Prisoners are often kept in an extremely cramped and overcrowded environment, with little or no daylight and limited opportunity to leave their cells. In the worst case scenarios individuals are beaten, poisoned, or killed. The case of Sergey Magnitsky is the most famous example of such dire treatment and violence in prison. Following his death, the US introduced sanctions against each of the members of the Russian authorities involved in his case, including several judges who still serve today. Usually, however, detention of this form is used as a means of pressure to extort the individual. For example:
Company shares can be signed away with the promise of release.
"Damages" are paid with minimal bearing on reality or connection to the underlying civil dispute.
Individuals therefore have little option other than to co-operate, as there is little else that can be done once the individual is imprisoned.
Protecting physical security: relocating to the UK
The English legal system is widely recognised as one of the least corrupt and most sophisticated in the world. State-sponsored persecution usually targets the individual's personal security, their reputation, and their wealth (see above, Corporate raiding and prosecutions to order). Within English law, there are ways of defending all three.
A persecuted individual will have a far better chance of protecting their physical security if they are outside of the persecuting state. To bring the persecuted individual back to the persecuting jurisdiction, an extradition request must be made. This provides the English courts, and state, the opportunity to assess the extradition request for persecutory elements and analyse the requesting state's human rights record. The European Convention of Human Rights (ECHR) provides several lines of defence. The most common of these are:
The right of every person to his or her life (Article 2).
The prohibition of torture and inhumane or degrading treatment or punishment (Article 3).
The right to liberty and security of person (Article 5).
•The right to a fair trial (Article 6).
In addition to defending an extradition request, a persecuted individual can also claim political asylum. This provides a second line of defence. Asylum proceedings can be held in private and are confidential, whereas extradition proceedings are public. This means that it is usually easier to persuade witnesses to come forward by pursuing the asylum route. The UK asylum courts also have a sophisticated understanding of the concept of political persecution and appreciate that corporate raiding campaigns are to the persecutor's financial benefit, but that the persecution itself is only enabled through political corruption.
Once asylum is claimed, it is not possible to extradite the individual until the whole asylum process is complete (which must include the entire appeals process under section 39(3) of the Extradition Act 2003). Once asylum is granted, any extradition request will be automatically blocked and refused by the British authorities under Article 33 of the UN Convention Relating to the Status of Refugees 1951 (Refugee Convention). Once granted asylum, the persecuted individual will be granted a UN-mandated refugee travel document. This document:
Provides leave to remain in the granting state.
Enables international travel (though no return to the persecuting state).
Interpol red flag notices
State authorities can apply to Interpol to publish a "red flag notice" against an individual's name. This serves to intensify the defamation of the individual's character and makes it risky for them to travel internationally due to fear of arrest. Interpol's constitution prohibits it from facilitating political persecution and has become more aware of state-sponsored persecution, and it does refuse applications from some states, including Russia. If a red flag notice is published, Interpol can be responsive to representations from lawyers regarding political persecution and can withdraw a red flag notice following robust correspondence. However, without the benefit of an inter-partes court hearing, the best way to persuade Interpol to withdraw a red flag notice is to provide either/both:
Evidence that asylum has been granted.
An extradition request that was refused on the basis of political persecution.
Preparation as a first line of defence and immigration solutions
Most people know when they live in a state that has a security and judicial system that can be relied on to be fair and just. If an individual takes a dim view of their home nation's justice system, they should ensure that they have options available for themselves and their families to leave the jurisdiction. Ideally, this means that they should have both:
Extant visas to enable them to travel internationally. In terms of UK visas, there are several appropriate options for skilled business people, but the most straightforward and flexible visa for high-net-worth individuals and their families is the Tier 1 (Investor) visa. This visa has no UK residency requirements unless the objective is ultimately to apply for Indefinite Leave to Remain and UK citizenship (after a minimum of five years' residence).
A second citizenship (if dual nationality is legal in their country of origin). There are several economic citizenship programmes around the world which currently offer second citizenship without having to spend much, if any, time in the jurisdiction prior to obtaining a passport. These economic citizenship programmes fiercely protect their reputations and perform extensive due diligence on applicants. However, it is important for the persecuted individual to apply for these programmes prior to the commencement of any smear campaigns against their reputation, as it will be extremely difficult to obtain a second citizenship after the event.
It is important to note that individuals cannot enter the UK as a visitor with the intention of claiming political asylum. You must be a bona fide visitor in order to enter the UK in this manner. Second citizenships can also complicate asylum claims, as the Refugee Convention states that dual citizens must seek the protection of their second home state prior to claiming protection from a third party state. However, once extradition proceedings have begun, it is (practically speaking) impossible to access the second home state. The UK police will have arrested the persecuted individual and will usually have placed them under bail conditions restricting travel outside of the UK for the entirety of the extradition proceedings.
The tax implications of relocating to the UK
Relocating to the UK will almost certainly trigger UK tax consequences for the persecuted individual. Although the relocation may happen very quickly, it is important to seek UK tax advice to ensure the move is carried out in the most tax-efficient way possible.
The individual's exposure to UK income tax, capital gains tax (CGT), and inheritance tax (IHT) will be determined by both their:
Relocating to the UK will most likely mean the individual goes from being "non-UK resident and domiciled" to "UK resident non-UK domiciled". This has UK tax implications that should be taken into account.
The UK's statutory residence test (SRT) determines an individual's residence status for UK tax purposes. The SRT is broken down into various stages and generally looks at how many days an individual spends in the UK in a tax year and their links to the UK during that tax year. The UK tax year runs from 6 April to 5 April. The SRT will provide a conclusive answer on whether they are UK tax resident or not for that tax year. In some cases, an individual can be treated as UK tax resident for only part of the tax year (split year treatment). Claiming split year treatment can be particularly useful when an individual has relocated to the UK in a rush, without having the time to carry out the "pre-arrival" UK tax planning (see below, Pre-arrival tax planning).
Becoming UK resident does not automatically mean that the individual will be non-resident in the country they have departed from. Where relevant, a double tax treaty between the UK and the departing country should be considered.
Domicile means an individual's country of origin or country where they have settled permanently or indefinitely. Assuming the persecuted individual has a non-UK domicile of origin (for example, Russia), they will only acquire a domicile of choice in the UK if, at any time after they come to the UK, it can be shown that they have formed the intention of settling there permanently. The standard of proof is high and it is difficult for someone with a non-UK domicile of origin to acquire a domicile of choice in the UK.
Being non-UK domiciled can offer significant UK tax advantages. If an individual becomes UK resident, it is important that the person takes steps to protect their "non-domicile" status.
The remittance basis
In most cases, the relocating individual will become UK resident non-UK domiciled. The person will then be eligible to be taxed on the favourable remittance basis of taxation for income tax and CGT. This means they are not liable to UK income tax or CGT on any income or capital gains they receive outside the UK unless they remit the income or capital gains to the UK. The definition of "remit" is very wide. Generally, the individual will be viewed as "remitting" the offshore income or capital gains if they (or certain people/entities connected to them) bring them to, or benefit from them in, the UK.
The individual will be able to bring "clean capital" to the UK tax-free. Clean capital includes:
Any money they made before they became UK resident.
Certain gifts or inheritance they receive while being UK resident.
While being UK resident, they will be liable to income tax and CGT on any UK-sourced income and capital gains they receive.
Claiming the remittance basis is free until the seventh year of UK residence. Thereafter, the annual cost is GB£30,000 for years eight to 12, and GB£60,000 for years 13 to 15. From the sixteenth year of residence the remittance basis of taxation will no longer be available, as the individual becomes deemed domiciled.
Pre-arrival tax planning
Preferably, the individual should set up the following three offshore bank accounts before becoming UK resident:
A clean capital account.
An income account.
A capital gains account.
Setting up these three accounts will enable the individual to be taxed in the most UK tax-efficient manner under the remittance basis. If these accounts are not set up and used correctly, the individual will be unlikely to take full advantage of the remittance basis regime.
The intention would be that the clean capital account would be used for general expenditure in the UK. Pre-arrival offshore income and gains and any other pure capital such as an inheritance should be paid into the ring-fenced clean capital account and all income and gains accruing on those funds should be mandated to the separate income and capital gains accounts, to ensure that the clean capital remains untainted.
The funds in the income account and the capital gains account should not be remitted to the UK but can be used outside the UK.
Non-UK domiciled individuals, on their death, are not subject to IHT on any non-UK assets they own. The value of any UK assets held personally in excess of the "nil rate band" (currently GB£325,000) will potentially be subject to IHT at 40% on death. Transfers between spouses are completely exempt from IHT where both spouses are non-UK domiciled. The surviving spouse will have the benefit of the available nil rate band. The survivor's nil rate band is doubled (currently to GB£650,000) if the first to die's nil rate band was not used on their earlier death.
If an individual is UK domiciled or deemed domiciled on death, the value of their worldwide estate will be subject to IHT at 40%. An individual will be deemed domiciled for tax purposes once they have been UK resident for 15 of the last 20 tax years.
One way of dealing with the potential IHT exposure is to take out a life insurance policy that will pay out a substantial cash sum on the relevant death. This cash can then be used to pay some or all of the tax due.
Additionally, or alternatively, the individual can transfer his non-UK assets into a trust while he is non-UK domiciled. Those assets will then always be excluded from the individual's taxable estate on death. The trust may form part of a larger estate planning or asset protection structure. Where trusts will be used, it is essential that tax advice is taken to ensure the trust does not trigger unexpected tax liabilities.
Asset protection and freezing injunctions
The word-wide freezing injunction (WFO) is the nuclear missile of civil litigation in England and Wales. It effectively restrains the party subject to the injunction from disposing of or dealing with their assets and is designed to preserve the assets until a judgment can be enforced. Any non-compliance with the terms of a WFO can lead to committal proceedings for contempt of court. A WFO can be an extremely powerful and disruptive tool to have to defend but there are safeguards to protect an individual from a vexatious claim. A WFO can always be discharged by providing alternative security to the applicant.
As the most powerful legal tool available to an applicant, the English courts will not grant an injunction unless certain strict conditions are met. These conditions are as follows:
The applicant must have a cause of action (that is, an underlying legal or equitable right).
The applicant must have a good arguable case.
There must be the existence of assets within the jurisdiction.
There must be a real risk of the respondent's assets being dissipated.
How to prepare for them
By their very nature, WFOs are almost always made without notice, meaning the persecuted individual may only learn of such an injunction when they are served with one.
Speed is a crucial element in dealing with freezing injunctions. On receipt of such an injunction, the individual will need to produce a statement of assets in a very short timeframe (48 hours is standard). Clients are often frustrated by the prospect of having to devote substantial resources to this process rather than getting "on the front foot" and engaging with the substance of the claim. For an oligarch, mini-garch and everyone in-between, providing a statement of any assets valued at GB£1,000 or above can be a daunting prospect. An immediate consequence of the WFO will be agreeing variations to the order with the applicant for living expenses, often set by the judge granting the WFO at a very low figure. If the client has a large family or multiple business interests, living expenses will come thick and fast and will need to be dealt with through correspondence and/or applications to the court.
Applicants intent on maximising disruption to the client may also launch simultaneous proceedings in other jurisdictions. This will require consideration of the WFO very carefully before considering any further options (for example, taking derivative action to protect a business asset subject to a corporate raiding attack could lead to a legal adviser being considered to be "dealing" with the asset and thereby breaching the terms of the WFO). Applying for a variation of the WFO in order to defend foreign proceedings should be managed carefully. A sophisticated claimant will use the disruptive nature of a freezing injunction to their advantage.
Anyone who believes that they are a potential "target" for a WFO should get a clear understanding of their asset position in advance. A family office will often be able to assist in this regard. If a WFO is expected imminently, it is advisable that the targeted person:
Sets aside a sizeable legal fighting fund of liquid assets.
Procures a statement of assets and a list of living expenses.
How to fight them
If the legal adviser is well informed and well prepared, they should be able to deal with the asset statements and living expenses in a relatively short procedure, releasing the legal team to engage with the claim itself and consider the application to discharge the WFO.
The grounds for discharging a freezing order are as follows:
The applicant has not complied with its undertakings.
The order is oppressive.
There has been inordinate delay by the applicant.
There has been a material non-disclosure on the part of the applicant.
There is no good arguable case or risk of dissipation of assets.
Persecuted individuals can also consider going on the offensive, by issuing their own civil litigation proceedings against those persecuting them. However, civil litigation in the context of state-sponsored persecution must be approached carefully and strategically. Usually, it is beneficial to engage in civil litigation, especially if the crux of the dispute is, in reality, civil in nature. Useful evidence such as civil court orders can be deployed in the context of extradition and asylum proceedings, to demonstrate that the criminal charges have been trumped up and that the criminal courts are not the proper forum for resolving the dispute. Clearly, the persecuting individual should be very careful as to the court system in which they litigate. There is usually little use in litigating in the civil system of the persecuting state if the judiciary cannot be trusted to take an objective approach. On this basis, when conducting business in potentially corrupt jurisdictions, one should be careful to include English law and jurisdiction, or international arbitration clauses in their contracts.
Protecting reputation and dealing with banks
Unfortunately false press articles have a habit of multiplying and travelling across jurisdictions. Most banks use specialist compliance search engines which monitor press globally and will pick up on criminal allegations in another country. Such allegations are then usually incorporated into the persecuted individual's online compliance profile and can make it extremely difficult to access financial services, even in foreign jurisdictions. In addition, these search engines do not usually have the resources to conduct sufficiently thorough due diligence to identify sophisticated political persecution. However, once proof of political persecution has been presented, this will usually be sufficient to persuade the compliance search engines to:
Amend the persecuted individual's profile.
Remove the false information.
If the matter is too complex, or where the persecution is too subtle or sophisticated to resolve in correspondence, it may be necessary to issue defamation proceedings to resolve the issue.
State-sponsored persecution can be multi-faceted and severe in its consequences. There are methods to combat and remedy each type of assault but those who suspect they may be in the firing line must be prepared and must act fast. The persecuted individual's physical security and that of their family are key, along with the protection of their assets and reputation. A well-prepared legal team, with an understanding of state-sponsored persecution, will be able to combat all fronts simultaneously.
Victoria Pigott, Partner
Mishcon de Reya
Professional qualifications. England and Wales, 2006
Areas of practice. Commercial litigation; private client; extradition; dispute resolution.
Acts for a wide variety of clients including high profile and high net worth individuals, corporations, families and family offices.
Experienced in defending extradition requests.
Advises on complex multi-jurisdictional commercial cases, including director and shareholder disputes as well as partnership issues and general contractual matters.
Experienced in the issuing and defending of freezing injunctions.
Represents clients under investigation by criminal or regulatory bodies.
Professional associations/memberships. Member of the London Solicitors Litigation Association.
Matt Ingham, Associate
Mishcon de Reya
Professional qualifications. England and Wales, 2015
Areas of practice. Real Estate; private tax; corporate; commercial litigation; asylum claims involving political persecution and corporate raiding; making asylum claims whilst simultaneously defending extradition claims; making and defending civil proceedings based on allegations of fraud; reputation management all linked to the underlying corporate raiding attempt.
Recent transactions. Experience of human rights-based judicial review applications and non-contentious advisory reputation work.
Katie Doyle, Associate
Mishcon de Reya
Professional qualifications. England and Wales, 2013
Areas of practice. Tax; private client; family; high net worth individuals.
Clients include high net worth individuals and families, both domestic and international, whom she advises on a range of taxation and trust issues.
Regularly advises on residence and domicile issues with a focus on UK property investment by internationals.
Advises on and implements lifetime tax-planning strategies including the preparation of tax-efficient wills, often with an international aspect and is experienced in providing domestic tax advice to UK residents, administering estates and preparing Lasting Powers of Attorney.
Tyrone Rees-Davies, Associate
Mishcon de Reya
Professional qualifications. England and Wales, 2015
Areas of practice. Commercial litigation; private client; corporate; commercial; dispute resolution; high net worth individuals.
Acts for a range of clients, including high profile and high net worth individuals, companies, and family offices.
Acting for the Claimants in an upcoming 40-day Chancery Division fraud trial of Group Seven Limited & Anr v Ali Nasir & Ors, concerning the recovery of sums lost in a EUR100 million fraud from those who are alleged to have helped facilitate the fraud.
Assisted in the defence of a US$800 million fraud claim and freezing injunction brought against a Russian high net worth individual. The complex, multi-jurisdictional claim involves elements of English, Russian and Cypriot law.
Acted for the chairman of a Russian bank in a dispute with a former shareholder and business partner: Commercial Court trial October 2014.