Unprosecuted mortgage fraud in criminal lifestyle confiscations

After the UKSC decision in R v Waya, what is the position of a defendant subject to ‘criminal lifestyle’ confiscation who has obtained a mortgage advance by fraud but has not been prosecuted for that?

The November 2012 decision of the UK Supreme Court in R v Waya [2012] UKSC 51 dealt with confiscation under the Proceeds of Crime Act 2002 where the defendant had been convicted of mortgage fraud but did not have a ‘criminal lifestyle’ within the meaning of s75 PoCA 2002. But the implications of the judgment go far wider.

This article considers the relatively common situation in which a convicted defendant is subject to confiscation on the basis that he does have a ‘criminal lifestyle’ and it appears that he may have previously obtained a mortgage advance by fraud although he has not been prosecuted for that.

 

A worked example

Let’s take the example of William who is a self-employed engineer. Five years ago he purchased Rose Cottage, a four bedroomed house in an idyllic country location, for £775,000. He put up a 40% deposit from his own legitimate money, that’s £310,000. The remaining 60%, or £465,000, he obtained fraudulently by giving false details of his income to the mortgage lender. Two years ago William got involved in dealing in controlled drugs. He was arrested, charged and convicted of possession of a controlled drug with intent to supply. He is now subject to confiscation proceedings under PoCA 2002 on the basis that he has a ‘criminal lifestyle’.

William still owns Rose Cottage. The outstanding mortgage is still £465,000 – it is an ‘interest only’ mortgage and William has kept up the payments to the lender. The open market value of Rose Cottage is now £1,200,000.

We need to consider the impact of the statutory ‘criminal lifestyle’ assumptions on the calculation of William’s ‘benefit’ (if any) in connection with his ownership of Rose Cottage and the mortgage fraud.

 

The first assumption

The first assumption is found in s10(2) PoCA 2002 which says:
“The first assumption is that any property transferred to the defendant at any time after the relevant day was obtained by him (a) as a result of his general criminal conduct, and (b) at the earliest time he appears to have held it.”

Prior to the UKSC decision in Waya the likelihood is that the court would have treated the £465,000 mortgage advance as “property transferred to the defendant” and therefore an assumed benefit of £465,000 would have arisen from it in William’s confiscation.

However in the light of paragraph [53] of the Supreme Court judgment it now appears to be the case that the £465,000 was not “property transferred to the defendant” and so no benefit can arise under the first assumption in relation to the mortgage fraud.

Similarly any suggestion that Rose Cottage itself should be regarded as property transferred to the defendant “as a result of his general criminal conduct” would run counter to paragraphs [46] and [47] of the Supreme Court judgment in Waya.

But that is not the end of the story, as we need to consider the other assumptions of s10.

 

The fourth assumption

Let’s look at the fourth assumption next – because we need to get that out of the way.  The fourth assumption is found in s10(5) PoCA 2002 which says:

“The fourth assumption is that, for the purpose of valuing any property obtained (or assumed to have been obtained) by the defendant, he obtained it free of any other interests in it.”

But all the assumptions of s10 are subject to s10(6) which says:

“But the court must not make a required assumption in relation to particular property or expenditure if (a) the assumption is shown to be incorrect, or (b) there would be a serious risk of injustice if the assumption were made.”

It seems irrefutable that the mortgage lender has an interest in Rose Cottage and so, to that extent, the fourth assumption is negated because it has been “shown to be incorrect”.  That will be important when we consider the implications of the second assumption.

 

The second assumption

The second assumption is found in s10(3) PoCA 2002 which says:

“The second assumption is that any property held by the defendant at any time after the date of conviction was obtained by him (a) as a result of his general criminal conduct, and (b) at the earliest time he appears to have held it.”

William does hold Rose Cottage, subject to the mortgage lender’s interest in it, after the date of his conviction.  Rose Cottage is now worth £1,200,000 and the outstanding mortgage is £465,000 – so William’s interest in the property is now £735,000 (his ‘equity’ in the property).  That includes an increase in value, or “appreciation”, of £425,000 (the difference between the £775,000 purchase price and the current value of £1,200,000) .

Following the logic applied by (the majority judgment of) the Supreme Court in Waya in paragraphs [70] and [71] of the judgment we can say that, because 40% of the original purchase price was funded by William’s own legitimate funds and 60% was funded by the fraudulently obtained mortgage, only 60% of the “appreciation” is a ‘benefit’ for confiscation purposes.

In relation to the other 40% of the “appreciation” and William’s initial deposit (which was legitimate monies) the second assumption is “shown to be incorrect” on the facts.

So the benefit arising, under the statutory assumptions, in relation to William’s ownership of Rose Cottage and the mortgage fraud is 60% of the “appreciation” of £425,000, which amounts to £255,000.

Note that this conclusion does not depend upon whether the mortgage advance was obtained after the ‘relevant day’ (defined in s10(8) and normally six years prior to the date on which the defendant was charged with the offence of which he has been convicted).

 

Proportionality and serious risk of injustice

The final issue is whether such an outcome would be disproportionate and hence an infringement of William’s human rights under Article 1 of the First Protocol to the European Convention on Human Rights (‘A1P1’).  Since the outcome under the statutory assumptions is the same as that which would have arisen had William been charged with, and convicted of, the mortgage fraud and in the case of Waya the Supreme Court held that this outcome was not disproportionate, then it seems clear that William’s rights under A1P1 have not been infringed.

For similar reasons it appears that this calculation of assumed benefit does not involve a “serious risk of injustice” which would be relevant to s10(6)(b).

Happily this analysis leads to an outcome which is entirely consistent with the outcome in the rather different circumstances of Mr Waya’s case as I have described in an earlier blog article.

As an aside, I am bound to say that any conclusion that a defendant who had NOT been convicted of mortgage fraud should suffer a more severe outcome in confiscation, as a result of the operation of the statutory assumptions, in relation to that mortgage fraud than another defendant who had been convicted of mortgage fraud would be open to attack as involving an unacceptable “serious risk of injustice”.

 

But . . .

But what if the situation had been slightly different?  Suppose William had purchased Rose Cottage with his domestic partner Mary – and Mary had not been convicted of any offence and was not subject to confiscation?

Would Mary’s interest in the equity in Rose Cottage have the effect of halving William’s benefit under the statutory assumptions?  Would it make a difference whether William and Mary owned Rose Cottage as joint tenants or tenants in common?

These issues did not arise in the Waya case.  We may however see these issues aired in future confiscation hearings.

David

(Note: This article applies to confiscation orders under the provisions of Part 2 of the Proceeds of Crime Act 2002 in England and Wales. There are a number of additional issues which could be relevant to a defendant’s confiscation order in particular cases which it is not possible to deal with in a relatively short article such as this.  Appropriate professional advice should be sought in each individual case.)

6 thoughts on “Unprosecuted mortgage fraud in criminal lifestyle confiscations”

  1. As brilliant and easily digestible as ever, David!
    Please get AE onto Twitter soon so we can get daily updates…

  2. In relation to the above case would it be different if William purchased Rose Cottage 7 years ago and before the relevant date?

    Many thanks

    1. No. The point is that William held Rose Cottage after the date of his conviction and so the s10(3) assumption applies. The ‘relevant day’ is not relevant to the s10(3) assumption.

      David

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