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A confiscation case study – the career fraudster

Books - copyright David Winch 2014On 16 June 2014 the Court of Appeal in London heard the appeal of Mr Sam Ernest against a confiscation order in the sum of £308,380 made against him at Kingston-upon-Thames Crown Court.  The Appeal Court judgment R v Ernest [2014] EWCA Crim 1312 makes interesting reading.

Mr Ernest purported to run a business as an events organiser.  He would claim to have contacts from whom he could obtain sought-after tickets to popular high profile events, such as Wimbledon, the London Olympics, rock concerts or film festivals, in return for money.

Mr Ernest sometimes provided the tickets for which he had been paid, but often he would not.  When tickets were not provided he would usually promise refunds – on some occasions refunds were given, but on others they were not.

 

The victims

His victims were in the main either wealthy people or organisations who could afford to pay substantial sums of money for prestige events, or men whom he had befriended or women with whom he entered into relationships.

One woman with whom he was having a relationship got a party of 18 people together, some from the USA, to attend events at the London Olympics.  She paid almost £4,000 to Mr Ernest.  He continued to promise that the tickets would arrive right up until after her friends had arrived in the UK.

In total Mr Ernest defrauded his victims of over £48,000.

 

The police investigation

Mr Ernest’s activities had first been reported to the police in 2009, but they took no action at that stage.  It was not until 2012, when a special team of police officers were investigating fraud associated with tickets for the London Olympics, that attention was focused on his activities.

On discovering that the police wished to speak to him, Mr Ernest prevaricated and would not agree to attend for interview.  No doubt this was in part because he was a United States citizen who had entered the UK on a six month tourist visa in 2005 and was an illegal over-stayer. His passport had expired in 2010.

However in December 2012 Mr Ernest pleaded guilty to 17 counts of fraud and was sentenced to 4 years imprisonment.  Confiscation proceedings followed.

 

The confiscation proceedings

Mr Ernest was subject to confiscation proceedings on the basis that he had a ‘criminal lifestyle‘ having been convicted in the same proceedings of more than 3 offences from which he had obtained a benefit and had, in aggregate, obtained a benefit of at least £5,000, s75 Proceeds of Crime Act 2002.

The Appeal Court judgment does not, of course, give a full history of the confiscation proceedings.  We do not know what was in the prosecution’s s16 statement or in Mr Ernest’s response.  We do know, however, that the confiscation went to a full hearing in the Crown Court which heard evidence from a Detective Constable Knowles and from Mr Ernest.

 

The prosecution assertions

DC Knowles referred to bank accounts held by a Ms Barbara Howell which had apparently been used by Mr Ernest (and by Ms Howell for legitimate purposes).  There was also a bank account in the name of J Bailey Morgan which apparently Mr Ernest controlled.  DC Knowles considered the movements on these bank accounts since the ‘relevant day’, which it was agreed was 29 August 2006 (six years prior to the date on which Mr Ernest had been charged).

DC Knowles calculated the amount of money in these accounts paid in by known victims together with all of the unexplained credits to the accounts, that is all the monies deposited during the relevant period other than those which represented Ms Howell’s legitimate earnings and funds. This figure came to £209,980. This figure included sums specifically identified as being monies paid into that account by persons identified as victims of Mr Ernest’s activities.

The prosecution invited the court to assume all these sums credited to the various bank accounts to be benefit of Mr Ernest’s general criminal conduct pursuant to s10(2).  Presumably to avoid risk of double counting the prosecution did not seek to assert, as benefit of particular criminal conduct, any additional benefit of the 17 offences of which Mr Ernest had been convicted.

However the prosecution did assert that a further assumed benefit arose, under s10(4), in respect of Mr Ernest’s day to day living expenses over the period since the ‘relevant day’.  These were estimated at £16,400 per year for 6 years, so £98,400 in total.  The prosecution accepted that to some extent Mr Ernest had been financially supported over this period by a succession of girlfriends but contended that, even so, he would have incurred this £98,400 expenditure himself.

In consequence, the prosecution’s total benefit figure was £308,380.  The prosecution apparently did not accept that Mr Ernest’s ‘available amount’ would be less than his benefit.

 

The defence evidence

Mr Ernest asserted that on at least some occasions he had supplied tickets for which he had been paid and on other occasions he had made refunds to customers.  So it would not be correct, in his view, to treat the entirety of the sums banked as benefit.  He also asserted that he had no assets available and no hidden assets.

However the defence produced no books and records of the business and no report of a forensic accountant, nor did the defence produce documentary evidence of Mr Ernest’s current ‘available amount’.  The defence relied upon the oral evidence of Mr Ernest.

 

The judgment in the Crown Court

The Crown Court judge entirely rejected the oral evidence of Mr Ernest.  He was, the judge concluded, a “career fraudster” who had used the bank accounts of others and had produced no documents in support of his oral evidence.  The judge concluded that he was a dishonest man who had lied repeatedly under oath.

The judge accepted the benefit figure of £308,380 asserted by the prosecution and found that the defendant had not discharged the burden upon him to show that his ‘available amount’ was less than his benefit.

Accordingly he ordered Mr Ernest to pay £308,380 within 6 months, with a default sentence of 3 years consecutive to the prison term he was already serving.

 

The Court of Appeal judgment

On appeal it was argued that the judge should have reduced the benefit figure to reflect legitimate business activities conducted by Mr Ernest where he had provided tickets or had made refunds.  Furthermore Mr Ernest had incurred expenditures in obtaining the tickets which he had supplied.

The Court of Appeal would have none of this.  It noted the absence of evidence in support of the asserted legitimate activities and commented that “the fact that some unidentified proportion of that money might conceivably be referable to some specific (but unidentified) business transaction does not render the making of the assumption incorrect”.

The Court was not prepared to make any reduction in the benefit figure in respect of expenses which Mr Ernest might have incurred.  It regarded the occasional provision of tickets by Mr Ernest as a means of furthering his fraudulent purpose by luring customers to do more business with him.

The £209,980 assumed benefit arising from credits to the bank accounts was therefore upheld.

But the Court of Appeal did accept that the bank statements showed expenditures by Mr Ernest on his living costs.  These expenditures had therefore been met from monies already included in assumed benefit.  This undermined the prosecution’s assertion that Mr Ernest would have incurred £98,400 of living expenditure funded entirely by additional assumed criminal conduct.  There was no other suitable figure before the court, so this head of benefit was omitted on appeal.

In consequence the benefit figure was reduced to £209,980.  The court ordered Mr Ernest to pay this lower figure and reduced the default sentence to 2 years 6 months.

 

Commentary

One doesn’t know whether in this case the defence had instructed a forensic accountant or not.  It is possible that a forensic accountant’s report had been obtained but had not been disclosed as part of the defence evidence (perhaps for good reason!).

However it should come as no surprise to find a Crown Court judge entirely rejecting the unsupported oral evidence of a convicted defendant.  Possibly if a forensic accountant had given evidence in the Crown Court confiscation hearing the judge might have accepted that the defendant, having incurred the expenses shown on the bank accounts, would not have had an ‘available amount’ equal to the total of his assumed benefit.  Such a conclusion would have been consistent with the Court of Appeal decision in McIntosh & Marsden v R [2011] EWCA Crim 1501.

In the event this defendant seems destined to serve his default sentence in due course.

David

(Note: This article applies to confiscation proceedings 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 proceedings 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.)

Confiscation – challenging the prosecutor’s s16 statement

Legal wig copyright David Winch 2014How should the defence challenge the prosecutor’s assertions concerning the defendant’s benefit and available amount?

The prosecutor’s s16 Proceeds of Crime Act 2002 statement is a key document in confiscation proceedings.  In preparing the s16 statement the prosecution will have considered the offence(s) of which the defendant has been convicted; the evidence at trial (or readied for trial where there has been a guilty plea) and other information collected during investigation of the offence; information provided by the defendant in any statement under s18 or in response to any requirement in a restraint order under s41(7); information obtained from banks and others (perhaps by way of a production order under s345); and the results of the prosecution’s own investigations – probably undertaken by an accredited financial investigator.

 

Variety

Prosecution s16 statements are prepared in a wide variety of circumstances.  No two s16 statements will be the same – though they all have some similarities.  In any event the s16 statement will need careful study.  Typically the body of the s16 statement will run to between 10 and 30 pages with supporting appendices which could run to several hundred pages, and may include spreadsheets.

The s16 statement is likely to include some background narrative which sets the confiscation proceedings into context, including a description of the court proceedings resulting in the conviction and any restraint order which has been obtained.   There may also be information about the defendant (date of birth, previous convictions, etc) and information about his known legitimate income.

The defence legal team will wish to challenge any incorrect factual assertions in that narrative – but this narrative background is not at the heart of the s16 statement.

 

Financial investigations and ‘benefit’

The s16 statement will then move on, probably providing some details about the financial investigations undertaken by the prosecution and their findings about the defendant’s financial affairs.  That leads to the prosecution assertions about the defendant’s ‘benefit’ for confiscation purposes.

In this context ‘benefit’ has a special meaning based on the statutory provisions – it does not refer to what might be the defendant’s benefit in the everyday sense of the word.

 

‘Benefit’ of the offences

The first element of the defendant’s ‘benefit’ which the s16 statement will deal with is the ‘benefit’ of the offences of which the defendant has been convicted, sometimes referred to as the ‘direct benefit’ or the ‘benefit of particular criminal conduct’.  Here the prosecution are considering what the defendant ‘obtained’ as a result of the offences of which he has been convicted in the proceedings which triggered the confiscation.

This may be very easy to establish.  If the defendant has been convicted of, say, stealing a cheque for £10,000 payable to someone else and paying it into his own bank account then the ‘benefit’ of that offence is £10,000 (possibly uplifted for changes in the Retail Prices Index since the date of the theft).

But in many cases the ‘benefit’ of the offence will be less clear cut.  For example there may be theft of cash where there are inadequate records to quantity the amount of cash stolen, or supply of controlled drugs where there are no records of the monies received for the drugs, or the defendant may have been a member of a conspiracy (meaning it will be necessary to ascertain the amount ‘obtained’ by this particular defendant in his role in that conspiracy).

In rare cases the ‘benefit’ may be based on the profit deriving from fundamentally legitimate business operations which have been tainted by criminality, as in the case of R v Sale.

The ‘benefit’ asserted by the prosecution may also include assets which need to be valued, such as controlled drugs seized at the time of the defendant’s arrest.

In other cases the ‘benefit’ may be based on a ‘pecuniary advantage’ arising from the evasion of a liability – for example evasion of income tax, VAT or duties on goods.

In a minority of cases the prosecution may not be asserting that the defendant has obtained any benefit at all from the offences of which he has been convicted.

 

Assumed ‘benefit’

If the prosecution assert that the defendant has a ‘criminal lifestyle’ then the s16 statement will also deal with additional assumed ‘benefit’ which arises under the statutory assumptions of s10 PoCA 2002.  The statutory assumptions apply to the defendant’s receipts and expenditures since the ‘relevant day’ (which is usually 6 years prior to the date on which the defendant was charged with the offences of which he has been convicted) and to any assets held by the defendant since the date of his conviction.

Typically the prosecution will have obtained bank and credit card statements for all known bank and credit card accounts held by the defendant and will have reviewed all deposits to those accounts since the ‘relevant day’.  They may also have information about the defendant’s expenditures since the ‘relevant day’ – for example as a result of examining documents seized from searches of the defendant’s premises or considering information provided by the defendant in recorded interviews or in his s18 statement.  In addition the prosecution may have obtained Land Registry records or solicitors’ conveyancing files regarding property purchases, and mortgage account statements.

These same sources of information may be the basis for assertions of assumed ‘benefit’ in respect of any assets held by the defendant after the date of his conviction.

 

‘Available amount’

Finally the prosecutor’s s16 statement will deal with the defendant’s ‘available amount’.  Again this is a term defined by statute which does not mean simply the amount which the defendant has available to meet the confiscation order.  It refers to the current market value of the defendant’s assets, less any mortgage or other liability which is secured on those assets, plus the current value of any ‘tainted gift’ which the defendant has made.

However many of the defendant’s liabilities, such as unsecured borrowings and unpaid bills, will be ignored when computing the defendant’s ‘available amount’.

 

Default sentence

The s16 statement may conclude with an indication of the range of default sentences applicable where a confiscation order remains unpaid.

 

Challenging the s16 statement

The defence will wish to scrutinise in detail the prosecution assertions in relation to both the defendant’s ‘benefit’ and his ‘available amount’.  The focus of the defence challenge to the prosecutor’s figures will depend very much on the details within the s16 statement.

In relation to the ‘benefit’ of the offences of which the defendant has been convicted the defence will wish to consider the existence of the asserted ‘benefit’; whether it has been ‘obtained’ by the defendant himself, solely or jointly; and whether it is correctly valued.

Regarding the assumed ‘benefit’ the defence will wish to consider whether the criteria for a ‘criminal lifestyle’ have been met; whether the ‘relevant day’ has been correctly identified; the existence of the asserted receipts, expenditures and assets of the defendant himself (which may involve careful consideration of bank accounts and assets held in joint names and consideration of ‘lifting the corporate veil’); any evidence of the legitimate nature of those receipts and legitimate funds used to finance those expenditures and the purchase of those assets; any overlap or double counting between the various heads of asserted ‘benefit’ including, for example, where monies have been withdrawn from one of the defendant’s bank accounts and paid in to another; and the valuation of the various items reflected in the assumed ‘benefit’.

In relation to the asserted ‘available amount’ the defence will again consider the existence of those assets; the ownership of them by the defendant himself so as to exclude any interest of third parties; the current market value of those assets; and the amount of any liabilities secured on those assets.

Particular difficulties may arise where the ‘available amount’ is said to include any ‘tainted gifts’ or ‘hidden assets’.

Ultimately the defence will also wish to consider whether the use of the statutory assumptions involves a ‘serious risk of injustice’ or the confiscation order sought by the prosecution would be disproportionate and so infringe the defendant’s human rights.

All of these matters will feed in to the drafting of a s17 statement to be signed by the defendant and filed in response to the prosecution’s s16 statement, and the defence preparation for the confiscation hearing in the Crown Court.

 

Use of a forensic accountant

A forensic accountant may be able to assist the defence in challenging a number of aspects of the s16 statement.  This is likely to be particularly important in cases involving ‘assumed benefit’ under the ‘criminal lifestyle’ assumptions.  A forensic accountant may be better placed than the solicitor to undertake detailed examination of the figures and financial documents underlying the prosecution’s s16 assertions.

The cost of a forensic accountant’s report will normally be met by criminal legal aid under prior authority arrangements.

As a first step it is advisable to ask the forensic accountant to provide a fee quotation (to be forwarded to the Legal Aid Agency with an application for prior authority).  In order to prepare his quotation the forensic accountant should ideally be provided with a copy of the body of the prosecutor’s s16 statement, an approximate page count of the appendices to that statement, a copy of the defendant’s s18 statement, any advice which may have been obtained from counsel in relation to the s16 statement, and a note of the court timetable for the submission of the defendant’s response in the form of a s17 statement.

Where the appendices to the s16 statement include spreadsheets it is usual to ask the prosecution to supply electronic copies of the Excel spreadsheets (not the PDFs) either on disc or as email attachments.

Once the prior authority has been obtained the forensic accountant’s work can get underway!

David

(Note: This article applies to confiscation proceedings 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 proceedings 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.)

Accountant sentenced to 7 years for cheat & fraud

Legal wig copyright David Winch 2014An accountant has been sentenced to 7 years’ imprisonment for cheating HMRC and defrauding his clients.

Simon Terry Pearce, 48, who held no recognised accountancy qualifications, ran S T Pearce Accountants from offices in St Austell, Cornwall.  He was convicted on 26 charges after a ten week trial at Truro Crown Court.  The prosecution evidence assembled by HM Revenue & Customs ran to approaching 40,000 pages and, in total, 51 prosecution witnesses were called to give evidence.

 

The allegations

It was alleged that over a period of several years Mr Pearce had operated his practice dishonestly by preparing tax returns for his clients which overstated their business expenses and the tax which they had suffered under the Construction Industry Scheme (CIS tax), overclaimed capital allowances particularly in relation to cars and – in relation to Capital Gains Tax – understated the sales proceeds of properties.  In many cases Mr Pearce had revised previous years’ tax returns for new clients.  The result of all this was that his clients’ tax liabilities were dishonestly understated and tax refunds were generated falsely.

It was further alleged that Mr Pearce had forged clients’ signatures and dishonestly abused HMRC’s Structured Action Request online system for taxpayers and their authorised agents with the result that clients’ tax refunds were paid by HMRC into his bank account rather than to the clients.  Whilst in some cases these refunds were forwarded to clients fully and reasonably promptly, in many cases refund payments were delayed (sometimes by a period of years), or paid on only in part, or not paid on at all.

Finally it was alleged that in relation to Mr Pearce’s own tax returns he had dishonestly understated his fee income and that he had failed to register his business for VAT at the appropriate time.

 

Mr Pearce’s defence

Mr Pearce said that he had not been dishonest. The tax returns which he had prepared for clients reflected the information which clients had provided to himself and his staff at interviews with them.  He had included fair estimates of expenditures for which the clients had no documentary evidence, particularly in relation to travelling and subsistence.  He had misunderstood tax law in relation to motor cars, believing that 100% first year allowances or annual investment allowances were available, and the abolition of CGT taper relief in 2008 had not come to his attention.

He had arranged for clients’ tax refunds to be paid to his bank account when fees were due to him.  His failure to pass the balance of refunds on to clients was as a result of inadequate and misleading information received from HMRC, poor record keeping in his office and pressure of work resulting from having taken on too many clients.  He had fobbed off clients who had enquired about their refunds and had given them excuses and explanations for delays which were untrue.  He accepted that he had used HMRC’s online Structured Action Request facility to arrange refunds to be paid to him but believed he was entitled to do so.

He asserted that clients’ income tax returns were only submitted to HMRC after clients knew what was on them, albeit that the clients may have received and signed paper copies of the returns only after they had been filed online with HMRC.

 

My role

I was instructed by Mr Pearce’s solicitors and counsel to advise them on generally accepted conduct by accountants in relation to the preparation of accounts and tax returns for clients, relevant tax law and practice, the proper treatment of clients’ tax refunds, and to examine Mr Pearce’s own business records and those of certain of his clients, together with the associated accounts and tax computations, to advise whether tax liabilities had been understated.

I attended court and advised the defence team throughout the presentation of the prosecution case but I was not myself called to give evidence.  The only witness called by the defence was Mr Pearce himself.

 

The clients’ evidence

The clients typically gave evidence to the effect that they relied upon and trusted Mr Pearce as their accountant to deal properly with their accounts and tax affairs.  In many cases they denied providing Mr Pearce with information which he claimed to have received from them.

They did not themselves understand accounts or tax and believed that their tax returns were being correctly prepared and that they were entitled to any refunds which they had received.  They were devastated when they learned that they were required to repay substantial sums to HMRC.

 

The outcome

The jury found Mr Pearce guilty on 26 of the 30 counts which he faced.  Clearly the jury considered him to have been thoroughly dishonest over a period of years.

 

The lessons to be learned

Mr Pearce frequently received tax refunds on behalf of clients but did not operate a client bank account.  In practice refunds received were swallowed up by business and private expenses leaving Mr Pearce unable to pass on to clients the monies which were due to them.

The firm’s working papers and interview notes in support of figures in the accounts and tax returns were inadequate to demonstrate persuasively which figures were based on information that had been provided by clients and which were based on estimates made by Mr Pearce apparently based on his general knowledge of his clients’ activities – or to refute the allegations that some increases in claimed expenses arose purely from fabrications by Mr Pearce.

In many cases business expenses in accounts and returns had apparently been compiled based only on an examination of paid bills and discussions with clients – and without examination of clients’ bank statements.  In the majority of cases which I examined Balance Sheets had not been prepared.  Had the accountancy work been more thorough then many mis-statements which were made on tax returns, for example from duplication of genuine expenditures, could have been avoided.

Either Mr Pearce’s knowledge of tax law and practice was faulty and out of date in important respects or he was claiming allowances and reliefs for his clients which he knew were not available to them.

 

Overview

This was a very significant prosecution by HMRC, the biggest case ever prosecuted by them in Cornwall, and a major case by any standards.  Few Crown Court trials run to ten weeks or involve over 50 witnesses and few criminal investigations generate approaching 40,000 pages of exhibits.  The prosecution asserted that Mr Pearce had ultimately retained £170,000 in refunds due to his clients and that overall HMRC had lost between £1 million and £2 million as a result of his activities.

I have no doubt that my advice was valuable to the defence in professionally examining the prosecution evidence and ensuring that it was appropriately challenged.  Ultimately the weight of evidence against Mr Pearce was overwhelming and the jury were sure that he had been dishonest.

David

(Note: This article refers to a criminal prosecution in England and Wales. There are a number of additional issues which could be relevant to criminal proceedings in particular cases which it is not possible to deal with in an article such as this. Appropriate professional advice should be sought in each individual case.)

Benefit in confiscation: gross receipts or profit?

Antique coin copyright David Winch 2014For many years lawyers acting in confiscation cases on behalf of convicted defendants have sought to limit ‘benefit’ for confiscation purposes to the ‘true benefit’ or ‘profit’ arising from the criminal activity – and for just as many years lawyers acting for the prosecution have sought to argue that the ‘benefit’ is the gross amount received. This article traces the development of this argument through the history of the various different Acts of Parliament which have provided for confiscation and right up to the present.

 

Drug Trafficking Offences Act 1986

One of the earliest cases to focus on the issue of gross receipts or profits in confiscation was R v Smith (Ian) [1989] 1 WLR 765. This was a drug related confiscation under the provisions of the Drug Trafficking Offences Act 1986. The defendant’s counsel argued that the benefit should reflect only the profit derived from drug trafficking. The Court of Appeal countered, “it seems to us that the section is deliberately worded so as to avoid the necessity, which the appellant’s construction of the section would involve, of having to carry out an accountancy exercise, which would be quite impossible in the circumstances of this case”.

It is true that the wording of the relevant Act referred to “any payments or other rewards received by a person . . . in connection with drug trafficking carried on by him or another”. It is difficult to see how these words could be considered to refer to the profit from drug trafficking rather than the gross amounts received.

 

Drug Trafficking Act 1994

But the Smith case set the tone for many subsequent confiscation cases. So, for example, in the case of R v Banks [1996] EWCA Crim 1799, a drugs case based on the confiscation provisions of the Drug Trafficking Act 1994, the Court of Appeal reaffirmed the decision in Smith. Again it may be relevant that the 1994 Act had repeated the wording of the 1986 Act with regard to “payments or other rewards received”.

 

Criminal Justice Act 1988

Away from drug offences, confiscation had been introduced more generally by the Criminal Justice Act 1988. The provisions of that Act were consider by the House of Lords in R v (David Cadman) Smith [2001] UKHL 68. This case concerned evasion of duty on the import of cigarettes. In that respect issues of what had actually been received were sidelined, since the benefit for confiscation purposes was held to be the duty which had not been paid – rather than any monies which had actually been received.

But the House of Lords took the opportunity to refer with approval to the 1989 judgment in Smith – indicating that legislators had “adopted a similar approach” in relation to drug related and non-drug related confiscations, notwithstanding the different form of words used in the 1988 Act.

 

Proceeds of Crime Act 2002

Some years later, in the case of CPS Nottinghamshire v Rose [2008] EWCA Crim 239, the Court of Appeal gave detailed consideration to the separate strands of confiscation legislation in respect of drug offences and non-drug offences, and the newer legislation in the Proceeds of Crime Act 2002 dealing with confiscation in relation to all types of offences.

Whilst the Court of Appeal did not consider that when drafting PoCA 2002 the legislators had chosen to adopt the confiscation provisions from one branch of earlier statute law rather than another, it did consider that “it can safely be assumed that Parliament did not intend to weaken the application of the confiscation regime (or regimes) when bringing the existing provisions within a single framework”.

 

Confiscation and business activities

The Court of Appeal decision in the case of R v Scragg [2006] EWCA Crim 2916 had dealt with confiscation in relation to a (relatively) legitimate business. Mr Scragg bought and sold motor cars. But Mr Scragg was dishonest and he was convicted of ‘fraudulent trading’ contrary to s458 Companies Act 1985. In the confiscation proceedings which followed under the Proceeds of Crime Act 2002 the question arose, “where a defendant obtains by deception a vehicle valued at £10,000 and sells it for £8,000, how is his benefit to be quantified?”.

It was not suggested that only Mr Scragg’s profit was his benefit – rather the issue was whether his benefit in relation to that purchase and sale would be £10,000 or £18,000. The Court of Appeal found his benefit to be limited to the greater of the purchase price and the sale price in respect of each vehicle (so the benefit would be £10,000 in respect of the car in this example).

 

Gross receipts

But one needs no imagination to see that the implications of confiscation for a business could be harsh indeed. This is graphically illustrated by the decision in Del Basso & Goodwin v R [2010] EWCA Crim 1119 which concerned a business offering long term car parking on land not far from Stansted Airport. The business was a legitimate one except that it was carried on in contravention of an enforcement notice stemming from an absence of any planning permission for the land in question to be put to that use.

The confiscation order in that case was based on the gross receipts of the business – not on the profits arising. In arriving at that conclusion the Court of Appeal referred to the House of Lords decision in R v May [2008] UKHL 28 in which, when summarising the key features of confiscation their Lordships had said, “the benefit gained is the total value of the property or advantage obtained, not the defendant’s net profit after deduction of expenses”.

In the case of R v Waya [2012] UKSC 51 the Supreme Court, consistent with May, had noted that, “a legitimate, and proportionate, confiscation order may . . . require a defendant to pay the whole of a sum which he has obtained by crime without enabling him to set off expenses of the crime”.

 

Accounting exercises unwelcome

More recently in the case of R v Harvey [2013] EWCA Crim 1104 the Court of Appeal upheld a confiscation order based on a percentage of all gross receipts of a business notwithstanding the fact that those gross receipts included some demonstrably legitimate sums and Value Added Tax on invoiced sales, which had been properly accounted for to HM Revenue & Customs. The court commented that, “it is repugnant and contrary to the principles stated in May paragraph 48 and Waya paragraph 26 to carry out an accounting exercise in respect of those monies” obtained as a result of criminal conduct.

From this history it might appear that courts in England & Wales have taken a consistent, and harsh, line that confiscation orders are to be made on the basis of the gross amounts obtained as a result of, or in connection with, crime.

 

A softer line?

But there is an alternative and more nuanced interpretation.

In the case of Waya the Supreme Court acknowledged that there may in some circumstances be a danger of a disproportionate outcome which, “will have to be resolved case by case as the need arises. Such a case might include, for example, the defendant who, by deception, induces someone else to trade with him in a manner otherwise lawful, and who gives full value for goods or services obtained. He ought no doubt to be punished and, depending on the harm done and the culpability demonstrated, maybe severely, but whether a confiscation order is proportionate for any sum beyond profit made may need careful consideration”.

 

Confiscation and profits

Perhaps illustrating that approach, the Court of Appeal in R v Sale [2013] EWCA Crim 1306 allowed an appeal against a confiscation order based on the total receipts generated from contracts obtained illegally and substituted an order based on the gross profits arising from those contracts, noting that, “it would have seemed to us proportionate to limit the confiscation order to the profit made”.

In that case the court would also have wished to reflect in the confiscation order, “the pecuniary advantage gained by obtaining market share, excluding competitors, and saving on the costs of preparing proper tenders” but it had no information enabling it to uplift the confiscation order to reflect this aspect of the “true benefit” obtained by the defendant.

 

True benefit

But, arguably at least, the cases of Waya and Sale have opened the door for defendants in future confiscation proceedings in some cases to ask Crown Courts to restrict the confiscation order to be made against them to the ‘true benefit’ obtained from their criminal conduct rather than the gross amounts obtained, in order to arrive at a confiscation order which is proportionate and compliant with Article 1 of the First Protocol to the European Convention on Human Rights.

 

A fuzzy line

It might be said however that the effect of recent decisions has been to create some uncertainty. On first sight it seems difficult to reconcile the full-bloodied and harsh outcome in Harvey with the more generous approach adopted in Sale in circumstances where both cases related to essentially legitimate business activities tainted by an illegitimate ingredient. It will be interesting to see how these types of cases are dealt with in future.

David

 

UPDATE:  Since this article was written the Court of Appeal has dealt with the case of R v King [2014] EWCA Crim 621.  It was argued on behalf of the defendant, on appeal, that following the logic in Sale the defendant’s benefit should have been based on his profit from trading in used cars rather than his gross receipts.  The selling of used cars was not of itself criminal activity, it was argued.  Mr King’s offence was in purporting to act as a private individual rather than as a motor trader when selling 58 cars (and thereby attempting to sidestep consumer protection legislation).  However, with one exception, the purchasers had apparently been satisfied with the cars they had purchased from him.  His appeal was dismissed.  The Court of Appeal found that Mr King’s benefit was the gross amount received and that “this business was founded on illegality”.

It may be considered however that in Sale, since the contracts in question were obtained by illegal bribes, it might equally have been said that the gross receipts were “founded on illegality”.  To the writer it remains far from clear in which circumstances the court will consider it appropriate to restrict the amount of the confiscation order to the profit arising.  There appears to be no hard and fast line nor a single determinative factor and, as the Court of Appeal noted at paragraph [32] of King, “cases differ to a great extent”.

 

FURTHER UPDATE:  See my later article Confiscation & legitimate businesses for further discussion of this topic.

(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.)

Criminal lifestyle confiscation and output VAT

The Court of Appeal have recently handed down a judgment in the ‘criminal lifestyle’ confiscation case of R v Harvey [2013] EWCA Crim 1104.

This was a case in which I had been instructed by the defendant’s solicitors in the confiscation proceedings in the Crown Court.

 

Background

The defendant was a director and majority shareholder in a limited company engaged in hire of plant and equipment (sometimes with drivers, sometimes just the plant itself).

A number of items of plant used by the company were found to be stolen property and the defendant pleaded guilty to 9 counts of ‘handling’ contrary to s22 Theft Act 1968.  A further 30 counts were left to lie on the file.

The defendant was subject to confiscation under PoCA 2002 on the basis that he had a ‘criminal lifestyle’ and that the veil of incorporation of the company should be pierced.

 

Benefit for confiscation purposes

The prosecution contention initially in a statement under s16 PoCA 2002 was that the entirety of the gross receipts of the company (inclusive of VAT) since the ‘relevant day’ constituted assumed ‘benefit’ of the defendant for the purposes of confiscation.

By the time of the hearing in the Crown Court the prosecution had changed its position.  Whilst it was unable to put a figure on the proportion of company receipts which were derived from criminal conduct, it was significant that the police had inspected 91 items of plant (both large and small) and considered 39 of those items to be stolen property (that is approximately 42.8% on an ‘item count’ basis).

 

The decision in the Crown Court

At Crown Court the judge held that 38% of the company’s gross receipts (inclusive of VAT) since the ‘relevant day’ were to be regarded as ‘benefit’.  Those gross receipts included not just trading income but also receipts from the sale of plant.

This 38% figure was based on the 42.8% on an ‘item count’ basis, reduced to recognise the greater earning power of the (legitimate) larger and more expensive items of plant.  The judge concluded that the defendant had known that all 39 items of plant (not just the 9 items in relation to which he had pleaded guilty to ‘handling’) were stolen property.

The Crown Court judge did not accept that he should be guided by a detailed analysis of a representative sample of company sales invoices over the period since the ‘relevant day’ which appeared to show a much smaller proportion of the company’s income was derived from the stolen plant.  He concluded that the defendant was dishonest and his company records did not reflect the entirety of the transactions of the business and so figures based on company records were not persuasive.

The benefit found by the judge was calculated accordingly at approximately £2.2m (based on the value of the 39 stolen items plus 38% of gross receipts of the company since the ‘relevant day’) and he set a default term of 10 years.

 

The appeal to the Court of Appeal

The defendant appealed on the grounds that:

  1. VAT charged to customers and accounted for to HMRC should be excluded from the gross receipts figure.
  2. Stolen plant had been recovered by the police and returned (sometimes after many years of use) to its rightful owners, but no reduction had been made in the benefit figure to reflect this.
  3. The 38% figure was too high on the facts and, in particular, had been applied to all receipts including demonstrably legitimate income from the sale of legitimately acquired plant.
  4. The default sentence of 10 years was excessive.

The Court of Appeal reduced the default term to 8 years but otherwise upheld the confiscation order in full, dismissing the appeal on each of the first three grounds.

The Court of Appeal took the opportunity to review and comment upon various confiscation cases – some very recent, some older – in the light of the decision of the Supreme Court in R v Waya.  In particular the Court of Appeal opined that the decision in R v Del Basso and Goodwin [2010] EWCA Crim 1119 now “does seem excessively harsh and may arguably be characterised as disproportionate”.

Defendants and accountants may be disappointed to note the Appeal Court’s decision (even after the Waya case) that output VAT charged on the (assumed) illegitimate receipts of a legitimate business is to be regarded as a component of benefit in a ‘criminal lifestyle’ confiscation – even where that output VAT has been properly accounted for and paid over to HMRC.  The Court of Appeal considered that there was nothing in Waya which called into question the manner in which the Court of Appeal in Del Basso dealt with VAT and that therefore Del Basso was binding authority on that point.

But the Court of Appeal in any event approved this approach, commenting, “It would be wrong in principle to carry out an accounting exercise in respect of VAT which [the business] collected through the use of stolen property”.  The total monies paid by customers, including the VAT charged, constituted property obtained by criminal conduct.

[UPDATE:  On 16 December 2015 the UK Supreme Court upheld Mr Harvey’s appeal against this element in the calculation of his benefit for confiscation purposes.  The UKSC held that where VAT has been accounted for to HMRC it would be disproportionate under A1P1 to make a confiscation order calculated on the basis that the VAT, or a sum equivalent, was “obtained” by the defendant for the purposes of PoCA 2002.]

The Court of Appeal’s view must, by implication, be taken to be that they did not consider the confiscation order of £2.2m to be disproportionate in all the circumstances.

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.)

A book-keeper accused of stealing

Beatrix was Mr McGregor’s book-keeper – or more correctly she was a self-employed book-keeper and Company Secretary working for Mr McGregor’s company, which was an agency supplying circus acts and finding ‘C’ list celebrities to open supermarkets and the like.  But times were tough and it seemed like, however hard Mr McGregor worked, he was just scraping by.

Fortunately Mr McGregor could rely on the faithful Beatrix to look after the paperwork and pay the bills and the part-time staff.  One Sunday Mr McGregor was wondering how much there was in the company’s accounts with the District Bank and the Provincial.  So, unusually for him, he had a look at the bank statements.

He was shocked by what he saw.  Not only was there next to nothing in either of the company bank accounts but a quick check of the bank statements showed numerous transfers in the past month or two to Beatrix and to her daughter, and payments to Rentaphone and CloudsTV (neither of which Mr McGregor knew anything about) as well as several cash machine withdrawals and petrol purchases.

 

The police

Mr McGregor phoned the police and arranged an interview with Detective Constable Carrott.  He made a formal statement alleging that Beatrix had stolen money from the company.

DC Carrott interviewed Beatrix who said that all the expenditures were legitimate and had been authorised by Mr McGregor who had agreed that the company should pay Beatrix’s phone and TV subscriptions and her petrol bills.  The cash had been drawn on Mr McGregor’s instructions.  Some had been used to pay company bills in cash and the rest had been handed over to him.  There was nothing in writing because Beatrix and Mr McGregor had a relationship based on trust.  Beatrix denied any wrongdoing.

DC Carrott met with Mr McGregor again.  He denied authorising payment of any of Beatrix’s bills and he denied receiving any of the cash.

Mr McGregor now produced to DC Carrott bank statements and voluminous accounting records going back over more than two years revealing a stream of unauthorised payments and withdrawals made by Beatrix.  In total over £40,000 had been stolen, he alleged.

Meanwhile DC Carrott did a little digging and found that, while she was working for Mr McGregor’s company, Beatrix had been receiving Job Seeker’s Allowance and Council Tax Benefit on the basis that she was not working and had no earnings.

Beatrix was charged with theft of cash and fraud by abuse of position in relation to Mr McGregor’s company and making false representations to obtain Job Seeker’s Allowance and Council Tax Benefit.

 

The solicitor

After consulting her solicitor Beatrix decided to plead guilty to making false representations to obtain benefits but continued to deny any wrongdoing in relation to Mr McGregor’s company.  She told her solicitor that Mr McGregor was being untruthful and that it was inconceivable that Mr McGregor had (as he claimed) been unaware of the payments to her (which she sometimes had made direct to her daughter’s bank account to save time) and of her bills for phone, TV and petrol.  The business was a small one and the bank statements went direct to Mr McGregor who also had an accountant check everything and prepare annual accounts.

The solicitor contacted us and asked us to prepare a report based on an examination of the prosecution evidence (amounting to over 1,200 pages) and Beatrix’s responses.

 

Our involvement

We provided a fee quotation to enable the solicitor to obtain a prior authority from the Legal Aid Agency.  We also, at this initial stage, wrote to the solicitor outlining the sort of further documentary evidence which would assist us if it were available and indicating that, in our experience of other small businesses, allegations of theft by trusted members of staff were not a rarity and that this indicated that all too often in practice business owners failed to exercise sensible supervision over book-keepers and others with control over company monies.

When we examined the prosecution exhibits we found amongst them copies of emails which had apparently routinely been sent by Beatrix to Mr McGregor each week setting out the payments she was making out of the business accounts, and the monies received from customers.  The listed payments included staff wages and payments to Beatrix (in relation to which she had submitted sequentially numbered invoices as she was technically self-employed).

But whilst the emails showed one weekly payment to Beatrix, she was typically taking a dozen or more payments per month.  Often more than one payment to Beatrix referred to payment of the same invoice.  Sometimes the same invoice had been paid out of both of the two company bank accounts.  So although the amount of any one payment was not unreasonable the number of these payments and their total value was clearly inconsistent with the information which Beatrix was emailing to Mr McGregor.

We reported that we were simply unable to say what had happened to the cash withdrawn from the company bank accounts as there was no evidence beyond the contrasting assertions of Beatrix and Mr McGregor.

However the prosecution estimate of the amount of ‘wages’ legitimately due to Beatrix was, in our view, a significant underestimate.  The prosecution figure was based on £85 per week whereas the emails clearly showed payments of up to £175 per week to Beatrix (of which Mr McGregor must have been aware and which he had, by implication, approved).  Taking that into account the prosecution figure of the amount stolen was, in our view, overstated by £10,490.

Attached to our expert witness report were schedules detailing the amounts paid from the company bank accounts to Beatrix and members of her family, the amounts reported as paid to her on her emails to Mr McGregor, and the cash withdrawals from the bank accounts.

 

The outcome

The solicitor discussed our report with Beatrix.  After thinking it over for a few days Beatrix decided to plead guilty at Liverpool Crown Court to theft and fraud in relation to Mr McGregor’s company (as well as the benefit fraud offences).  She was given a suspended prison sentence, ordered to do 180 hours unpaid work and required to pay compensation of £1,200 to Mr McGregor’s company.

That is undoubtedly a better result than she would have obtained had she gone to trial and been convicted.

David

N.B. Names and certain other details have been changed to protect client confidentiality.

(Note: This article relates to a criminal prosecution in England and Wales. There are a large number of additional issues which could be relevant to criminal proceedings 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.)

Appealing out of time after a change of law

When the law changes can an appeal be made to the Court of Appeal outside the normal time limits?

Normally an appeal against a decision of the Crown Court in England and Wales has to be submitted within 28 days of the decision. But the Court of Appeal can give leave for an appeal to be heard where the deadline has been missed – and has done so in some cases where the deadline has been missed by months or even years.

Where a defendant has suffered a decision which, though it appeared to be well founded at the time it was made, now appears to be incorrect in the light of subsequent case law, what is the position regarding the submission of an appeal out of time?

This is an issue which arises from time to time – and may be particularly topical following the decision of the UK Supreme Court in the case of R v Waya [2012] UKSC 51.

 

The general rule

The general rule is that the Court of Appeal will not allow an appeal to be made out of time if the only reason for the appeal is that subsequent cases have shown the previous perception of the legal position was mistaken.

This was set out many years ago in the case of R v Mitchell [1977] 65 CAR 185 when it was said that, “It should be clearly understood, and this court wants to make it even more abundantly clear, that the fact there has been an apparent change in the law or, to put it more precisely, the previous misconceptions about the meaning of a statute have been put right, does not afford a proper ground for allowing an extension of time in which to appeal against conviction”.

That rule has been reiterated many times since.  See, for example, the comment, “alarming consequences would flow from permitting the general re-opening of old cases on the ground that a decision of a court of authority had removed a widely held misconception as to the prior state of the law” from the case of Ramsden [1972] Crim LR 547 and repeated, with approval, in the case of R v Ramzan & Others [2006] EWCA Crim 197 at paragraph [30].

In the case of R v Cottrell [2007] EWCA Crim 2016 it was said, at paragraph [42], “there is a continuing public imperative that so far as possible there should be finality and certainty in the administration of criminal justice.  In reality, society can only operate on the basis that the courts administering the criminal justice system apply the law as it is.  The law as it may later be declared or perceived to be is irrelevant”.

But there have been exceptions made to the general rule.

 

Substantial injustice

It does appear to be the case that where the Court of Appeal can be satisfied that a defendant has suffered a substantial injustice then it can be persuaded to hear an appeal out of time. In the case of Hawkins [1997] 1 Cr.App.R 234 the Court of Appeal commented that “the practice of the Court has in the past, in this and comparable situations, been to eschew undue technicality and ask whether any substantial injustice has been done”.
So, for example, where a defendant has been convicted of an offence of which, under a new understanding of the law, he could not now be found guilty – but the evidence shows that he must have been guilty of another similar offence (of which he had not been charged), then the Court of Appeal will generally not allow an appeal to be heard out of time. This was the position of a Mr Malik who had been convicted of conspiracy to launder money prior to the ruling in R v Saik [2006] UKHL 18 (which changed the law regarding the conspiracy offence where there was merely a suspicion that monies were proceeds of crime). The Court of Appeal considered that there was ample evidence of the substantive offence of money laundering in Mr Malik’s case and refused him leave to appeal his conviction out of time.

In R v Charles [2001] EWCA Crim 1755 the Court of Appeal said, at paragraph [41], “In practice judges and courts are probably not as reluctant to grant extensions of time as the authorities may suggest. It has been the experience of the members of this Court that consideration will usually be given to the merits before declining to grant an extension of time. Both in Jones (No. 2) and Asraf, the merits were considered notwithstanding the absence of any proper explanation for the delay. There are some cases, such as those where the applicant wishes to rely on fresh evidence unavailable at trial, where the extension of time will be readily granted. There are cases such as those envisaged in Hawkins where it will not be”.

 

Failure to address a key issue

Perhaps slightly different are cases where, because the law was not properly understood at the time, a key issue in the proceedings was not recognised and addressed in the Crown Court. This is illustrated by the case of Bell & Others v R [2011] EWCA Crim 6.

Mr Bell was subject to a confiscation order made in 2007 after he had been convicted of being knowingly concerned in the fraudulent evasion of the duty chargeable on cigarettes contrary to section 170(2)(a) Customs and Excise Management Act 1979. The confiscation order was based on the amount of duty evaded when the cigarettes in question had been smuggled into the UK. But in fact it does not follow that a person committing this offence is himself liable for the duty and thus has ‘obtained’ a pecuniary advantage which would form the basis for a confiscation order. That had not been appreciated by the Crown Court at the time the confiscation order was made. In consequence the Crown Court had not addressed the question of whether Mr Bell was himself liable for the evaded duty and evidence relevant to that issue had not been obtained.

Subsequently the Court of Appeal had decided the case of White & Others v The Crown [2010] EWCA Crim 978 which highlighted this issue. Mr Bell then lodged an appeal against the confiscation order made against him three years earlier.

Before the Court of Appeal it was accepted that, in fact, Mr Bell had not been personally liable for the evaded duty. The Court of Appeal granted leave to appeal the confiscation order out of time because “it would be a grave injustice not to grant leave”.

In place of a benefit of £157,775 based on the evaded duty, Mr Bell was made subject to a confiscation order of just £950 based on the payment he had received for his role in the smuggling offence.

 

The impact of R v Waya

We have yet to see whether the Court of Appeal will grant leave to appeal confiscation orders out of time following the decision of the UK Supreme Court in the case of R v Waya [2012] UKSC 51.

The Waya case decided two points of principle: (1) confiscation orders should not be ‘disproportionate’ because that would infringe Article 1 of the First Protocol to the European Convention on Human Rights and (2) a mortgage applicant does not ‘obtain’ a mortgage advance (for confiscation purposes) if that advance is simply paid to a solicitor, acting on behalf of both the applicant and the lender, and then remitted to the vendor of the property being purchased (or his solicitor) – because the mortgage applicant does not at any stage gain ‘control’ of the monies advanced.
It may be that defendants who have been subject to a confiscation order which they consider is more severe than the Crown Court would have made had the decision in Waya been available at the time will now seek to appeal their orders. It will be very interesting to see how such appeals are dealt with by the Court of Appeal.

David

EDIT: A further article on the subject updates the position: Appealing a confiscation order out of time.

(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.)

Restraint orders under PoCA 2002

Restraint orders can be obtained by the authorities acting under the Proceeds of Crime Act 2002 – but in what circumstances and what are the effects?  This blog article attempts to answer some of the most common questions about restraint orders.

 

What is a restraint order?

Essentially a restraint order under the Proceeds of Crime Act 2002 is an order made by a Crown Court judge, normally at the request of the police or other investigating or prosecuting authority, which effectively ‘freezes’ the assets (including bank accounts) of an individual or a company.  A single restraint order may apply to several connected individuals and / or companies.  A restraint order is typically designed to ‘freeze’ all the assets of the individual(s) and company(ies) to whom it is directed, including assets legitimately acquired and even including assets outside the UK.

The key legislation in relation to England & Wales is sections 40 – 47 PoCA 2002.

 

When can a restraint order be made?

A restraint order can be made at any time after a criminal investigation has commenced into suspected criminal conduct from which an individual or company is suspected to have benefited.  It is not necessary for the investigation to have progressed as far as the arrest of anybody, nor is it necessary that anybody has been charged with an offence.

But the applicant for the restraint order must show that he has reasonable grounds to suspect that a benefit has been obtained from criminal conduct, s40.  Ordinarily a restraint order should be made only if there is genuinely a risk that assets will be dissipated (for example being spent, hidden, given away or removed from the country) in the absence of such an order, see s69 and R v B [2008] EWCA Crim 1374.

 

How is a restraint order made?

A restraint order is normally made by a Crown Court judge on an application by the police / Crown Prosecution Office or other authority.  Before making the restraint order the judge will be provided with a witness statement (often supported by other documentary evidence) from the applicant for the order.  However the subject(s) of the order will NOT have an opportunity to challenge the making of the order at this stage and will NOT be informed of the application until after the restraint order has been made.

As a result the subject(s) of the restraint order will normally be unaware of the application until he / she / they are served with a copy of the restraint order – by which time it will already be in force.

 

Who can be the subject of a restraint order?

An individual or company may be the subject of a restraint order if he / she / it is an alleged offender who is suspected to have benefited from an offence or is a person who (though not an alleged offender) has received assets from an alleged offender (by way of what is known as a ‘tainted gift’).

It follows that a restraint order may be drawn up to name as its subjects not only the alleged offender but also, for example, his spouse.

 

What is the effect of the restraint order?

The restraint order will prevent the assets of the subject(s) being dissipated by preventing the sale or transfer of those assets and by ‘freezing’ the subject’s bank accounts.  Technically the restraint order prohibits each subject from “dealing with” his assets. The restraint order will typically list known bank accounts and assets of the subject and will contain clauses designed to ensure that the order relates to those assets and accounts and to any other assets and accounts which are not shown on the list.

There is normally a provision in the restraint order allowing the subject to draw and spend a sum of money, typically £250 per week, to meet day to day living expenses.

The applicant who obtained the restraint order will normally serve copies of it on the subject(s) of the order and send copies of it to banks, etc at which the subject(s) are believed to have accounts and to, for example, the Land Registry in relation to land and buildings owned by the subject(s).

 

Can a restraint order be challenged?

Yes.  The subject of a restraint order can apply to have the order discharged (cancelled) or amended.  The application will be heard by a Crown Court judge who will hear submissions both from the applicant for the original order and the subject(s) of that order.

Typically a subject of a restraint order will apply to have the terms of the order relaxed, for example to allow a higher level of living expenses or to allow monies to be used to pay specific expenses (such as mortgage payments) or to remove one or more of the subjects from the scope of the order.

In some circumstances it may be appropriate for a subject to apply to the court to have the order limited so as to cover only specified assets.

The decision of the Crown Court judge can be the subject of an appeal to the Court of Appeal and beyond.

Where the restraint order impacts upon a legitimate business it may be necessary to make careful arrangements in the order to allow the business to continue in operation – to pay employees’ wages and business expenditures, for example.  One option in such a situation is for the court to appoint a management receiver (such as an independent accountant or insolvency practitioner) to operate the business whilst protecting the business assets from dissipation. However this may prove expensive and the management receiver’s fees are normally met out of the assets which he is managing, so in effect the subject pays his fees.

 

What is the purpose of a restraint order?

Ultimately the purpose of a restraint order is to preserve the assets of the subject(s) so that they remain available to meet any confiscation order which the Crown Court may make after the alleged offender has been charged, tried and convicted of an offence, s69.

 

 

What else might a restraint order require?

Commonly a restraint order includes clauses requiring the subject(s) of the order to disclose further information to the authorities concerning their assets, s41(7).  This information may then be used to assist in ensuring the effectiveness of the restraint in preventing the dissipation of assets and to assist the prosecution in confiscation proceedings following the conviction of the alleged offender(s).  However the information cannot be used by the prosecution in the course of the alleged offender’s criminal trial.

A restraint order may also contain a requirement to return to the UK assets held overseas (such as monies in an overseas bank account).

 

What about paying the alleged offender’s legal fees?

Restrained assets cannot be used to meet any legal fees of the alleged offender in connection with his defence against any criminal charges arising from the investigation which formed the basis of the application for the restraint order, see s41(4) PoCA 2002.  This means that the alleged offender will have to rely on legal aid (or gifts from friends) to meet his defence costs.

 

What about payments made to lawyers before the restraint order was made?

Where a solicitor holds funds in his client account which he has received from a person who has since become subject to a restraint order then the balance standing to the credit of the client is an asset of the subject which (like his other assets) is ‘frozen’ by the restraint order.

It is permissible for the solicitor to bill work done by him up to the date of the restraint order and pay himself for that work by transfer from the client account.  But similar transfers cannot be made in respect of any subsequent legal work, see Irwin Mitchell v RCPO & Allad [2008] EWCA Crim 1741 at paragraph [40].

 

What is the effect of breaching the restraint order?

A person who breaches a restraint order may be held to be in contempt of court (this is a ‘civil’ contempt, see R v O’Brien [2014] UKSC 23, which can nevertheless result in imprisonment) or may be subject to prosecution for attempting to pervert the course of justice, see Kenny v R [2013] EWCA Crim 1 at paragraph [41].

 

When does the restraint come to an end?

A restraint order will continue in force until it is lifted by the Crown Court.  This could be on an application by the subject of the order, or where proceedings are not brought within a reasonable time as a consequence of a criminal investigation which has not resulted in anyone being charged, or on the acquittal of the alleged offender, or on the satisfaction of any confiscation order made by the Crown Court following the alleged offender’s conviction.

Even after a confiscation order has been satisfied or discharged a restraint order may continue in force & restrained assets may then be used to satisfy any outstanding legal aid contribution related to the criminal proceedings.

 

Conclusion

Anyone finding himself subject to a restraint order under PoCA 2002 should seek appropriate legal advice without delay.

David

 

[This article has been updated to reflect legal changes made with effect from 1 June 2015.]

(Note: This article applies to restraint 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 subject’s restraint 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.)

Confiscation: lifting the veil of incorporation

Too often prosecutors do not appear to understand the issues surrounding lifting or piercing the veil of incorporation in confiscation cases. Some will treat a limited company as entirely separate from the defendant and therefore untouchable and of no relevance to the confiscation proceedings. Whilst others will ignore the fact of incorporation and treat all income and assets of a limited company as automatically those of the defendant, whatever the circumstances. Neither approach is correct.

[UPDATE: There is a more up to date article on piercing the corporate veil in confiscation HERE.]

 

When can the veil of incorporation be pierced?

There is a relatively long history of piercing or lifting the corporate veil in confiscation case law, certainly back as far as R v Dimsey & Allen [1999] EWCA Crim 2261. A useful summary was set out more recently in R v Seager & Blatch [2009] EWCA Crim 1303 at paragraph [76] in which it was said:

“It is “hornbook” law that a duly formed and registered company is a separate legal entity from those who are its shareholders and it has rights and liabilities that are separate from its shareholders . . . A court can “pierce” the carapace of the corporate entity and look at what lies behind it only in certain circumstances. It cannot do so simply because it considers it might be just to do so. Each of these circumstances involves impropriety and dishonesty. The court will then be entitled to look for the legal substance, not the just the form. In the context of criminal cases the courts have identified at least three situations when the corporate veil can be pierced. First if an offender attempts to shelter behind a corporate façade, or veil to hide his crime and his benefits from it . . . Secondly, where an offender does acts in the name of a company which (with the necessary mens rea) constitute a criminal offence which leads to the offender’s conviction . . . Thirdly, where the transaction or business structures constitute a “device”, “cloak” or “sham”, i.e. an attempt to disguise the true nature of the transaction or structure so as to deceive third parties or the courts.”

It follows that where, for example, a defendant has been convicted of a crime carried out through a company with which he is connected (perhaps as a shareholder, or director) then the benefit of that crime, which in the first instance has been obtained by the company, may properly be regarded as having been obtained by the defendant for confiscation purposes.

But equally where a convicted defendant is connected with a company but there is no allegation of dishonesty or illegality in relation to that company, then the veil of incorporation cannot be pierced. Take the example of a defendant convicted of a drug trafficking offence who earns his living by a legitimate manufacturing business which he owns and which is incorporated as a limited company. In the absence of anything untoward relating to the company the income of the company is not income of the defendant and so, for example, the criminal lifestyle assumptions cannot be applied to the deposits into the company bank account.

 

Effect on defendant’s benefit

Where the corporate veil can properly be pierced or lifted the effect is that, for the purposes of calculating the defendant’s benefit, the receipts, expenditures and assets of the company are treated as if they were receipts, expenditures and assets of the defendant personally. A benefit of criminal conduct which has been obtained by a company can then be regarded as a benefit which has been obtained by the defendant personally.

An obvious example of this was the leading case of R v May [2008] UKHL 28 in which companies with which the defendant was connected obtained the benefit of VAT fraud and this was treated as the benefit of the defendant himself in confiscation.

This can be particularly important in cases in which the ‘criminal lifestyle’ assumptions of s10 Proceeds of Crime Act 2002 (and corresponding provisions in earlier legislation) apply. In relation to benefit, once the corporate veil is pierced, the whole of the value of the company’s receipts, expenditures and assets can be ascribed to the defendant personally (irrespective of his actual shareholding in the company). So it is not the case that, for example, if Jim holds 60% of the shares of XYZ Ltd his deemed receipts will be limited to only 60% of the receipts obtained by that company – his receipts will be regarded as 100% of the receipts obtained by the company. It follows that Jim’s assumed benefit under the criminal lifestyle assumptions can also be 100% of those receipts.

In practice the prosecutor will often decide to apply the criminal lifestyle assumption to the receipts of the company, but not go so far as to apply the s10 assumptions to the company’s expenditure or assets.

 

Effect on the defendant’s available amount

The effect on the defendant’s available amount is less clear cut. It could be argued that, where the veil of incorporation can properly be pierced, the assets held in the company’s name should be treated as if they were held personally by the defendant. The effect of that could be to disregard the implications of any shares in the company being held by anyone other than the defendant and to disregard any unsecured and non-preferential liabilities of the company, following the logic of s9(1)(a) PoCA 2002.

The decision of the Court of Appeal some years ago in R v Omar [2004] EWCA Crim 2320 appears to suggest such an approach might be open to the courts. However in that case the Crown Court judge had, in the event, calculated the defendant’s available amount in accordance with the legal ownership of the properties in the company’s Balance Sheet (which were registered either in the sole name of the defendant or in the joint names of the defendant and his wife). The Crown Court judge did not accept a defence argument that, notwithstanding the apparent legal ownership, the properties should be treated as company assets. The Court of Appeal upheld that decision of the Crown Court. So, in the author’s view, Omar does not demonstrate that assets which are held by a company can be treated as if they were held by the defendant personally for the purpose of calculating the defendant’s available amount.

There have been cases in which restraint orders have been applied to assets held by a company with which the defendant is connected. A leading case in this area is HM Customs & Excise v Hare & Others [1996] EWCA Civ 1351, [1996] 2 All ER 391. However, in the author’s view, there is an important difference between concluding that such assets ought properly to be subject to a restraint order, and might even be sold, and concluding that such assets ought properly to be treated as wholly belonging to the defendant for the purpose of valuing his available amount without reference to the company’s liabilities and the interests of other shareholders.

Where the corporate veil is not lifted the defendant’s available amount will include the value of the shares which he holds in the company. That value will reflect the company’s assets and its liabilities (both secured and unsecured and both preferential and non-preferential) and will also reflect the proportion of the total issued share capital of the company which is held by the defendant. That approach to the valuation of the defendant’s assets is consistent with s79(3) PoCA 2002. In the author’s view this is the better approach when calculating a defendant’s available amount even where the corporate veil has been pierced for the purpose of calculating the defendant’s benefit.

However each case needs to be examined closely based on its own particular facts.

 

 

The importance of the facts

In relation to benefit it is conceivable that a situation might arise in which money (or other assets) might be obtained by the defendant and then introduced by him into his (legitimate) company. In that case the money (or asset) would, in truth, initially have belonged to the defendant and the introduction into the company would, in reality, be a loan or gift to the company by the defendant. (The money or asset would not truly be ‘income’ of the company.)  In that situation the initial obtaining by the defendant himself would be the crucial factor and would result in the money (or asset) being capable of being treated as, or being assumed to be, a benefit of his for confiscation purposes.

Similarly, in relation to the defendant’s available amount, money (or an asset) initially held and owned by the defendant which is then transferred by him to his (legitimate) company would not reduce his available amount. Either the transfer to the company would create a loan balance due to the defendant (which would form part of his available amount) or the transfer would be a gift which again could form part of his available amount, under s9(1)(b) PoCA 2002.

A grey area remains where a defendant asserts that a company which he controls is a legitimate business but the prosecutor asserts that, on the contrary, the company is, or has been, engaged in some criminality (separate from the criminality of which the defendant has been convicted) – but that criminality has not been the subject of any prosecution. In such a case it is the author’s view that the prosecutor who seeks to rely on unprosecuted criminal conduct as a basis for piercing or lifting the veil of incorporation would be under an obligation to prove that unprosecuted criminal conduct to the court dealing with the confiscation – and prove it to the criminal standard. This is because, in the author’s view, the position would be akin to that considered by the House of Lords in R v Briggs-Price [2009] UKHL 19. The prosecutor would not simply be relying on the application of the statutory assumptions – he would be seeking to extend the ambit of the statutory assumptions in reliance upon the unprosecuted criminal conduct. No such case appears yet to have come before the appeal courts.

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 and corresponding earlier legislation. 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.)

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.)