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Piercing the corporate veil in confiscation

impostorPiercing the corporate veil in confiscation has a long history, but there is nothing expressly on the subject in Part 2 of the Proceeds of Crime Act 2002 (which deals with confiscation in England and Wales).  Instead the approach to piercing the corporate veil in confiscation is based on long established English legal principles and caselaw of more general application.

It is perhaps not unreasonable to suppose that if a criminal attempts to sidestep his responsibility for his criminal actions by interposing a company through which to commit his crimes then the courts should be able to ‘look through’ the company to the underlying reality of the situation.

On the other hand there is a long established legal principle that a company is a legal entity which is distinct from its directors and shareholders.

This article attempts to trace recent developments in piercing the corporate veil in caselaw in respect of confiscation and to suggest some practical implications of the present-day legal position in England and Wales.

WARNING – THIS IS A LENGTHY BLOG POST – IN EXCESS OF 6,000 WORDS

  1. Salomon v A Salomon and Co Ltd 1896
  2. Gilford Motor Co Ltd v Horne 1933
  3. Lazarus Estates Ltd v Beasley 1956
  4. HMRC v Hare 1996
  5. R v Dimsey and Allen 1999
  6. CPS v Jennings 2008
  7. R v Seager and Blatch 2009
  8. Prest v Petrodel Resources Ltd 2013
  9. R v Sale 2013
  10. McDowell and Singh v R 2015
  11. Boyle Transport (NI) Ltd v R 2016
  12. A clear and coherent picture?
  13. Practical implications

 

Salomon v A Salomon and Co Ltd 1896

Consideration of the corporate veil in the law of England and Wales has to start with the 1896 decision of the House of Lords (as the UK Supreme Court was known until relatively recently) in the case of Salomon v A Salomon and Co Ltd [1896] UKHL 1, [1897] AC 22.

This was not a criminal case, it was a case involving the insolvency of a limited company.  At that time company law (based on the Companies Act of 1862) required that a limited company must have at least seven shareholders in order to be legally constituted.  A Salomon and Co Ltd was duly incorporated with seven shareholders, one of whom was Mr Aron Salomon.  The remaining shareholders were Mr Salomon’s wife and five of his grown up children.

Mr Salomon had operated a successful sole trader business as leather merchant and boot and shoe manufacturer for many years.  He transferred this business to the newly formed company and in exchange received the vast majority of the shares in the company in part payment and obtained a debenture creating a charge over the assets of the company in respect of other monies due to him.

The result was that Mr Salomon become both the majority shareholder and a secured creditor of the company which carried on the business which he had formerly carried on in his own name.

Shortly after the business had been transferred to the company there appears to have been a downturn in the boot and shoe trade.  The company lost contracts and found itself with unsaleable stock.

When the business failed the company’s liquidator took legal action claiming that the arrangement had been, in general terms, a fraud designed to allow Mr Salomon to carry on his own business and reap the profits for himself but with protection from his creditors.  The liquidator claimed monies off Mr Salomon for the benefit of those creditors.  In court the business was described as a ‘one man’ company and it was suggested that the company was simply an agent of Mr Salomon, or alternatively that the relationship between Mr Salomon and the company was one of trustee and beneficiary.

The Court of Appeal considered that the objective of companies’ legislation was to facilitate the coming together of a group of people in business.  That was not what had happened here.  Indeed the Court of Appeal went as far as to say that “Mr Aron Salomon’s scheme is a device to defraud creditors”.

Whilst the Court of Appeal had found in favour of the liquidator the House of Lords reversed that decision, holding that A Salomon and Co Ltd was a properly constituted company and a distinct legal entity.  On the incorporation of the limited company proper procedures had been followed in accordance with the letter of the law.  There had been no fraud.

In consequence, the House of Lords held, Mr Salomon was entitled to the protection of limited liability and was not liable to meet the claims of the company’s creditors.

 

Gilford Motor Co Ltd v Horne 1933

Perhaps the first well known case in which the court pierced the corporate veil is Gilford Motor Co Ltd v Horne [1933] Ch 935.

Mr EB Horne had been the managing director of the Gilford Motor Co.  His contract of employment precluded him being engaged in any competing business in a specified geographical area for five years after the end of his employment “either solely or jointly with or as agent for any other person, firm or company”.

He left Gilford and carried on a competing business in the specified area, initially in his own name.  He then formed a company, JM Horne & Co Ltd, named after his wife, in which she and a business associate were shareholders.  The trial judge found that the company had been set up in this way to enable the business to be carried on under his own control but without incurring liability for breach of the covenant not to compete with his former employer.

However the reality, in the judge’s view, was that the company was being used as “the channel through which the defendant Mr Horne was carrying on his business.”

The company was restrained by the court in order to ensure that Mr Horne was deprived of the benefit which he might otherwise have derived from the separate legal personality of the company.

It does not follow that JM Horne & Co Ltd was to be identified with Mr Horne for any other purpose.  Mr Horne’s personal creditors would not, for example, have been entitled simply by virtue of the facts found by the court to enforce their claims against the assets of the company.

In short, Mr Horne was found to have created the company in order to evade his own pre-existing legal obligation not to compete with his former employer.  In those circumstances the court pierced the corporate veil to prevent Mr Horne from benefiting by abusing the separate legal personality of the new company.

 

Lazarus Estates Ltd v Beasley 1956

The case of Lazarus Estates Ltd v Beasley [1956] 1 QB 702 was not a case focussing on the corporate veil.

But it is an important and relevant case because of the famous dictum of Lord Denning in that case:-

“No court in this land will allow a person to keep an advantage which he has obtained by fraud.  No judgment of a court, no order of a Minister, can be allowed to stand if it has been obtained by fraud.  Fraud unravels everything.  The court is careful not to find fraud unless it is distinctly pleaded and proved; but once it is proved, it vitiates judgments, contracts and all transactions whatsoever…”

This illustrates a broader principle governing cases in which the benefit of some apparently absolute legal principle has been obtained by dishonesty.  The authorities show that there are limited circumstances in which the law treats the use of a company as a means of evading the law as dishonest for this purpose.

 

HMRC v Hare 1996

The modern law of confiscation in England and Wales began with the Drug Trafficking Offences Act of 1986 and the Criminal Justice Act of 1988.

The case of HM Customs & Excise v Hare and Others [1996] EWCA Civ 1351 was concerned with a restraint order made under Criminal Justice Act 1988 powers against a number of individual defendants and certain companies under their control.

The basis of the application to the judge and the restraint order which he made was that the individual defendants, through the companies and otherwise, had carried out excise duty fraud in relation to alcoholic liquor in a sum then estimated as being in excess of £100m.  No charges had been brought against the companies themselves however.

It appears not to have been disputed that some of the companies’ trading had been legitimate although perhaps only a small part.  The accounting records of the companies were wholly inadequate.

The Court of Appeal held that the evidence provided a prima facie case that the defendants had control of the companies; that the companies had been used for fraud, in particular the evasion of excise duty on a large scale; that the defendants regarded the companies as carrying on a family business, and that company cash had benefitted the defendants in substantial amounts.

The Court of Appeal considered that Customs and Excise ought not to be criticised for not charging the companies.  The more complex commercial activities become, the more vital it is for prosecuting authorities to be selective in whom and what they charge, so that issues can be presented in as clear and short a form as possible.

It seemed to the Court of Appeal that no useful purpose would have been served by introducing into criminal proceedings the additional complexities as to the corporate mind and will, which charging the companies would have involved.  Conversely, there could have been justified criticism had the companies been charged merely as a device for obtaining orders under the Act in relation to their assets.

In all the circumstances, it was appropriate to lift the corporate veil in this case and to treat the stock in the companies’ warehouses and the motor vehicles as property held by the individual defendants.

 

R v Dimsey and Allen 1999

The case of R v Dimsey and Allen [1999] EWCA Crim 2261 was concerned with a confiscation order made under Criminal Justice Act 1988 powers against Mr Allen.

A large part of Mr Allen’s benefit for confiscation purposes was said to consist of the corporation tax liabilities of certain offshore companies, which had been evaded.  Mr Allen contended on appeal that these were not liabilities of his (they were liabilities of the companies concerned) and hence not benefit of his.

It was the prosecution case that his income and assets were held by offshore companies.  The properties in which he and his family lived were bought and sold in the name of offshore companies.  Offshore companies were used to pay for personal expenditure, including holidays, school fees and ordinary household expenses.  It was the prosecution case that Mr Allen himself managed and controlled the companies in the United Kingdom.  That aspect of the prosecution case was not challenged for the purposes of his appeal.

The Court of Appeal gave short shrift to the argument that the relevant benefit was not Mr Allen’s, holding that “it is plain from authorities cited by the Crown that the corporate veil may fall to be lifted where companies are used as a vehicle for fraud.  Here the companies in question were the appellant’s alter ego.  On this part of the case it seems to us that the Crown’s position is simply incontestable.  In those circumstances the appeal against the making of the confiscation order will be dismissed”.

 

CPS v Jennings 2008

On 14 May 2008 the House of Lords handed down important judgments in three confiscation cases, R v May [2008] UKHL 28, CPS v Jennings [2008] UKHL 29 and R v Green [2008] UKHL 30.

On the face of it Mr Jennings’ appeal concerned a restraint order made under Criminal Justice Act 1988 powers in relation to his assets, pending his trial on a charge of conspiracy to defraud.  But the issues raised in the appeal also concerned the amount of the benefit “obtained” by Mr Jennings from his offence.

The conspiracy was described by the prosecution as ‘an advance fee fraud’.  It was carried on through a company, UK Finance (Europe) Ltd, which had originally been in legitimate business selling second hand cars and arranging finance for the purchasers.  The company advertised itself as a lender, targeting people with poor credit ratings.  Applications for loans were made over the telephone.  An administration fee of £70 was required in return for arranging a loan.  But in fact the company had no money to lend, and no arrangements with any other source of finance to make loans, and no loans were ever made.

Mr Jennings was an employee of company.  He was neither a director nor a shareholder.

The prosecution alleged that each of the conspirators had benefited to the tune of the total amount of monies obtained from the fraud, calculated by the financial analyst employed by the police at £584,637.  This sum was made up of £460,809, which had gone through the company’s books, and £123,828, which was the value of postal orders cashed at a local post office.  Mr Jennings’ argument was that, over the period of the conspiracy, he and his wife could not have received more than, say, £50,000, made up of salary, a payment from the company’s loan account, and the postal orders which he had cashed “on several occasions” when the sole director, Mr Phillips, was away.

In relation to the amount of benefit Mr Jennings had “obtained” the judgment reached no conclusion, leaving that to be determined on the making of any confiscation order against him.  The court noted however that “obtained” must mean “obtained by him”.

In its judgment in the case of May the House of Lords said:-

“D ordinarily obtains property if in law he owns it, whether alone or jointly, which will ordinarily connote a power of disposition or control, as where a person directs a payment or conveyance of property to someone else. He ordinarily obtains a pecuniary advantage if (among other things) he evades a liability to which he is personally subject”.

Matters relating to Mr Jennings had moved on since the restraint order had been made in that, by the time of the House of Lords’ judgment, both Mr Phillips and Mr Jennings had been found guilty of the fraud.

In relation to piercing the corporate veil the House of Lords said, “In the ordinary way acts done in the name of and on behalf of a limited company are treated in law as the acts of the company, not of the individuals who do them.  That is the veil which incorporation confers.  But here the acts done by Mr Jennings and his associate Mr Phillips in the name of the company have led to the conviction of one and a plea of guilty by the other.  Thus the veil of incorporation has been not so much pierced as rudely torn away”.

That judgment might be regarded as the high water mark in piercing the corporate veil in confiscation proceedings.

 

R v Seager and Blatch 2009

The significance of the Court of Appeal decision in R v Seager and Blatch [2009] EWCA Crim 1303 is not the actual outcome for Mr Seager and Mr Blatch.  Each of them had been convicted of acting as a company director whilst disqualified from doing so.  The court held in each case that the corporate veil should not be pierced as the relevant company in each case was operating a legitimate business (albeit that the defendants should not have been acting as directors of those companies).

The significance of the judgment is in the summary of the law on the subject of piercing the corporate veil which is included in the judgment of the Court of Appeal, which held:-

“There was no major disagreement between counsel on the legal principles by reference to which a court is entitled to ‘pierce’ or ‘rend’ or ‘remove’ the ‘corporate veil’.  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.”

 

Prest v Petrodel Resources Ltd 2013

The judgment of the UK Supreme Court in the case of Prest v Petrodel Resources Ltd and Others [2013] UKSC 34 is undoubtedly significant in relation to the doctrine of piercing the corporate veil.  In view of all that had gone before it may also be regarded as surprising.

The case arose from the divorce of Michael and Yasmin Prest.  In essence Yasmin Prest made a claim, following her divorce from Michael Prest, on seven properties the legal ownership of which was held in the names of various companies.

One of the issues which arose, or appeared to arise, was whether the court was entitled to pierce the corporate veil to enable the court to ensure the satisfaction of a financial order made in the matrimonial court in favour of Yasmin Prest.

Ultimately the Supreme Court held that it was unnecessary to pierce the corporate veil as in reality the seven properties, though legally held in the names of the companies, were beneficially owned by Michael Prest.

However the Supreme Court considered in depth the doctrine of piercing the corporate veil and found little to commend the concept.  Lord Sumption said:-

“In my view, the principle that the court may be justified in piercing the corporate veil if a company’s separate legal personality is being abused for the purpose of some relevant wrongdoing is well established in the authorities.

It is true that most of the statements of principle in the authorities are obiter, because the corporate veil was not pierced.  It is also true that most cases in which the corporate veil was pierced could have been decided on other grounds.  But the consensus that there are circumstances in which the court may pierce the corporate veil is impressive.

I would not for my part be willing to explain that consensus out of existence.  This is because I think that the recognition of a limited power to pierce the corporate veil in carefully defined circumstances is necessary if the law is not to be disarmed in the face of abuse.

I also think that provided the limits are recognised and respected, it is consistent with the general approach of English law to the problems raised by the use of legal concepts to defeat mandatory rules of law.

The difficulty is to identify what is a relevant wrongdoing.  References to a ‘facade’ or ‘sham’ beg too many questions to provide a satisfactory answer.

It seems to me that two distinct principles lie behind these protean terms, and that much confusion has been caused by failing to distinguish between them.  They can conveniently be called the concealment principle and the evasion principle.

The concealment principle is legally banal and does not involve piercing the corporate veil at all.  It is that the interposition of a company or perhaps several companies so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming that their identity is legally relevant.  In these cases the court is not disregarding the ‘facade’, but only looking behind it to discover the facts which the corporate structure is concealing.

The evasion principle is different.  It is that the court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company’s involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement”.

He went on:-
“I conclude that there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control.

The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s separate legal personality.  The principle is properly described as a limited one, because in almost every case where the test is satisfied, the facts will in practice disclose a legal relationship between the company and its controller which will make it unnecessary to pierce the corporate veil.

I consider that if it is not necessary to pierce the corporate veil, it is not appropriate to do so, because on that footing there is no public policy imperative which justifies that course.

For all of these reasons, the principle has been recognised far more often than it has been applied.  But the recognition of a small residual category of cases where the abuse of the corporate veil to evade or frustrate the law can be addressed only by disregarding the legal personality of the company is, I believe, consistent with authority and with long-standing principles of legal policy”.

Lady Hale in a brief supporting judgment referred to “examples of the principle that the individuals who operate limited companies should not be allowed to take unconscionable advantage of the people with whom they do business”.

Lord Mance added:-
“It is however often dangerous to seek to foreclose all possible future situations which may arise and I would not wish to do so.  What can be said with confidence is that the strength of the principle in Salomon’s case and the number of other tools which the law has available mean that, if there are other situations in which piercing the veil may be relevant as a final fall-back, they are likely to be novel and very rare”.

In short the Supreme Court held that, in part because of other remedies available (which should then be used in preference), it will almost never be necessary to rely on the doctrine of piercing the corporate veil.

However it has to be said that the Supreme Court was not considering criminal misconduct and was not referred to cases such as Hare and Jennings.

It also should be remembered that the Supreme Court appears to have endorsed the dictum of Lord Denning in Lazarus Estates Ltd that “fraud unravels everything” (which applies not only to situations involving limited companies).

 

R v Sale 2013

The Court of Appeal decision in R v Sale [2013] EWCA Crim 1306 appears to be the first confiscation appeal after the Supreme Court decision in Prest in which issues of piercing the corporate veil were considered.

Mr Sale had been convicted of corruption and fraud by false representation in connection with gifts given to an employee of Network Rail.  Mr Sale was managing director of Sale Service and Maintenance Ltd which became a supplier to Network Rail.  The company obtained contracts for approximately £2m worth of work in consequence of the corruption.

In relation to the confiscation order Mr Sale argued that his benefit should be limited to the financial advantages he had himself received, rather than the sums received by the company under the contracts.

The Court of Appeal held that, following the Supreme Court decision in Prest, the earlier Court of Appeal decision in Seager and Blatch was still good law but was to be understood in the light of Prest.

In particular in relation to the three circumstances in which it had previously been said that “the corporate veil can be pierced” Seager and Blatch should now to be understood to mean instead that “a benefit obtained by a company is also treated in law by PoCA as a benefit obtained by the individual criminal”.

Mr Sale was the sole controller of the company and there was a very close inter-relationship between the corrupt actions of Mr Sale and steps taken by the company in advancing those corrupt acts and intentions, the reality was that the activities of both Mr Sale and the company were so interlinked as to be indivisible.  Insofar as the company was involved, what it did served to hide what Mr Sale was doing.

Accordingly in Mr Sale’s confiscation proceedings it was appropriate for the court to have regard to the transactions between Network Rail and the limited company and not to confine itself to the amounts which Mr Sale had personally received.

It may be noted that in Sale Mr Sale’s available amount was in excess of his benefit in any event and so was not a matter for consideration by the court.

 

McDowell and Singh v R 2015

In McDowell and Singh v R [2015] EWCA Crim 173 the Court of Appeal adopted the approach employed in Sale.

In particular it found that the defendant was the sole controller and beneficial owner of the company, which was his alter ego.  Accordingly the Crown Court was entitled to examine the receipts and profits of the company for the purpose of ascertaining the benefit obtained from the criminal conduct of the defendant personally.

 

Boyle Transport (NI) Ltd v R 2016

The case of Boyle Transport (Northern Ireland) Ltd v R [2016] EWCA Crim 19 was more factually complex.

Patrick Boyle and Mark Boyle had been at the relevant time the only directors of a haulage company, Boyle Transport Ltd, and had between them owned just over 50% of the shares in the company.  The remaining shares were held by other members of the Boyle family.

Patrick Boyle and Mark Boyle and a number of drivers employed by the company were convicted of conspiring to make false instruments in relation to tachograph records relating to the use of the company’s haulage vehicles.

Confiscation proceedings against Patrick Boyle and Mark Boyle followed.  In those confiscation proceedings the court held that each of the defendants had a criminal lifestyle and that in excess of 50% of the turnover of the company over a period of six years was to be regarded as benefit jointly obtained by them.  That resulted in a finding that each of Patrick Boyle and Mark Boyle had obtained a benefit of just over £10m.

The available amount of each defendant was significantly less than the benefit.  The court found the available amount of Patrick Boyle to be £1,097,622 and that of Mark Boyle to be £738,171.  In each case the available amount of the defendant included assets held by the company.

An added complication was that a new company, Boyle Transport (Northern Ireland) Ltd, had been incorporated and the entire fleet of vehicles and trailers of the old company and other assets were transferred to the new company of which Patrick Boyle and Mark Boyle were not directors.

The Crown Court found that the transfer of assets to the new company was not genuine but a mere device and made an order for the appointment of an enforcement receiver.  The new company appealed against that order.  At the same time Patrick Boyle and Mark Boyle appealed against the original confiscation orders.

On behalf of the new company it was contended that the old company was established as a legitimate company, carrying on a legitimate business: road haulage.  It had substantial assets and many employees, all deployed for that legitimate purpose.  True it was that business had been carried on, in a very significant way, in breach of the relevant regulations.  But that did not justify disregarding or piercing the corporate veil.  The old company was not an alter ego company on any view: it was not within the concealment principle.  Nor had the old company been established or operated in a way coming within the evasion principle.  In the circumstances of this case it was a negation of well settled company law principles, as confirmed in Prest, and indeed a negation of realities to equate the turnover obtained by the old company with benefit obtained by Patrick Boyle and Mark Boyle and to designate assets held by the old company as assets held by them.  That they were the ‘operating minds’ did not mean that they were the owners.  The judge had placed too much emphasis on the wrongdoing and not enough emphasis on the actual benefit they as individuals had obtained.

In essence the Court of Appeal agreed with these contentions and held that it would not be justified to treat the turnover of the old company, or the major part of it, as benefit obtained by Patrick Boyle and Mark Boyle individually; nor would it be justified to treat the assets of the old company (and hence of the new company) as realisable property of Patrick Boyle and Mark Boyle individually.

The Court of Appeal in its judgment in Boyle went on to comment upon earlier decisions in Hare, Prest, Sale and McDowell.  It considered that Sale and McDowell were decisions on their particular facts and implied that the caution expressed in the decision in Hare, many years ago, concerning the undesirability of charging the company itself with a criminal offence, may now be misplaced following the decision of the Supreme Court in Prest.

With regard to the decision in Jennings, the Court of Appeal noted that in that case the activities of the company were wholly fraudulent and it regarded Jennings as an example of the concealment principle identified in Prest.

The Court added:-

“The reality is that in the Crown Courts – as in many other courts – the phrase ‘piercing’ the corporate veil had been used broadly without focusing precisely on the two concepts of concealment and evasion as have now been identified by Lord Sumption in Prest.  One must not forget the obvious point that the context of confiscation proceedings under the 2002 Act is always criminal.  That, in factual terms, is a context very different from Salomon and is very different also from many of the reported decisions on lifting or piercing the corporate veil.

It is that criminal context which is capable of explaining why, in an appropriate case in confiscation proceedings, the involvement of a limited company quite frequently can, on the facts, be described as a mere facade or sham.   The companies in such cases are properly treated as alter egos, or agents, of their criminal controllers.

Many of the cases of this kind thus are clear examples of Lord Sumption’s concealment principle and do not involve, in the sense explained by Lord Sumption, ‘piercing’ the corporate veil at all: and it is that latter doctrine which is the one of “limited” and “rare” application”.

The Court however also cautioned against too great a readiness to reach a finding of alter ego in relation to any company, noting that “the fact that the incorporator is sole shareholder and director of a company does not mean that the company is thereby and for that reason alone to be treated as his alter ego”.

In relation to the much quoted passage from Seager and Blatch the Court suggested that the opening sentence be further modified to read, “In the context of criminal cases the courts have identified at least three situations when a benefit obtained by a company may, depending on the facts, also be treated in law by POCA as a benefit obtained by the individual criminal….”.

The Court of Appeal referred to six overlapping general propositions which Crown Courts may wish to take into account when considering piercing the corporate veil in confiscation proceedings:-

  1. The test is not simply a test of “justice”, which would be too vague and unprincipled.
  2. The Crown Court needs to assess the reality of the matter, but without departing from established principles relating to the separate legal status of a limited company.
  3. Confiscation is not aimed at punishment.
  4. The principles pertaining to piercing the corporate veil in confiscation are the same as those which apply in the civil courts.
  5. Regard should be had to the nature and extent of the criminality involved.
  6. Where a company is solely owned and controlled by a convicted defendant it will not necessarily follow that the company is his alter ego.

 

A clear and coherent picture?

So do we, as a result of all this caselaw, have a clear and coherent picture of when in confiscation proceedings it will be justified to treat the turnover of a limited company as benefit obtained by a defendant personally and when it will be justified to treat the assets of the company as realisable property of a defendant individually?

I suggest that we do not.

Following the decision of the Supreme Court in Prest the Court of Appeal could have abandoned the obiter dicta in Seager and Blatch and proposed an entirely new formulation in relation to piercing the veil of incorporation in confiscation proceedings.  It did not.

Or the Court of Appeal could have concluded that the dictum of Lord Denning that “fraud unravels everything” applies in confiscation proceedings and that the Supreme Court in Prest was not addressing such proceedings, which arise in a criminal context – reaffirming Seager and Blatch.  It did not.

Instead since Prest the Court of Appeal has progressively watered down Seager and Blatch and found itself facing different ways in Sale, McDowell and Boyle, whilst controverting Hare for good measure.

Prosecutors, lawyers and courts may well find themselves in many cases unclear as to the principles to be followed in quantifying a convicted defendant’s benefit and available amount for confiscation purposes where a limited company is involved.

 

Practical implications

In Boyle the Court of Appeal found that the convicted defendants were the only two directors of the company, that they between them owned more that 50% of the shares in the company and that more than 50% of the turnover of the company was derived from criminal conduct.  Yet they held that it would not be appropriate to ascribe to the convicted defendants for confiscation purposes any part of the turnover or assets of the company.

Defendants and their legal advisers will thereby be encouraged to contest in confiscation proceedings the piercing of the corporate veil in every case in which there is a sliver of legitimate trading in the operations of a company – and perhaps even in cases where there is not.

Prosecutors will be encouraged to charge not only company directors but also the companies themselves with criminal offences, with a view to avoiding in confiscation proceedings the difficulties which the Crown have encountered in Boyle.

As the outcome in Boyle demonstrates, individuals whose criminal conduct is undertaken through a limited company may fare very much better in confiscation than those whose criminality is undertaken individually or in an unincorporated partnership, unless the company itself is also charged, convicted and made subject to confiscation.  That may be particularly relevant in cases of money laundering, people or arms trafficking, bribery, intellectual property or modern slavery offences, and in relation to regulatory offences.

Even where an individual and a company are both subject to confiscation it is easy to imagine circumstances in which the bulk of the benefit would be regarded as obtained by the company (rather than the individual) with the result that the individual defendant would be less likely to be obliged to realise his legitimately acquired assets to satisfy a confiscation order.

I would suggest that in preparation for a confiscation hearing both prosecution and defence will now in many cases wish to prepare two computations of benefit and available amount based on the alternative outcomes that the court does, or does not, pierce the corporate veil.

Financial investigators preparing s16 statements for the prosecution will need to be alive to the possibility that assets apparently held by a company may be beneficially owned by an individual or vice versa, as will the lawyers and forensic accountants instructed by the defendants.

Where both the company and its directors are convicted of an offence and are subject to confiscation proceedings there will be an additional difficulty in valuing the director’s shares in the company for the purpose of determining his available amount, because the value of his shares may depend upon the outcome of the confiscation proceedings against the company.

All of these factors are likely to create extra work for prosecutors, lawyers, forensic accountants and the courts in years to come.

 

Contacting us

Our contact details are here.

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. Appropriate professional advice should be sought in each individual case.)

Balance of probabilities in confiscation

balance-scalesIn confiscation law ‘the balance of probabilities’ plays a key role.  Under s6(7) Proceeds of Crime Act 2002 the court must decide any question relevant to the determination of the amount which the defendant is to be ordered to pay on the balance of probabilities.

But what does that mean?

 

The balance of probabilities

Some years ago the House of Lords (as the UK Supreme Court was known at the time) considered the meaning of the phrase ‘the balance of probabilities’ in the case of Re H & Others (minors) [1995] UKHL 16.  The case actually concerned an application by a local authority for a care order under the Children Act 1989 in respect of certain children who may or may not have become subject to significant harm if they remained in the care of their mother and step-father.

Nevertheless I suggest that the House of Lords’ comments in that case on the meaning of the expression ‘the balance of probabilities’ are of wider application.  Indeed when s6(7) of the then Proceeds of Crime Bill was being considered by a committee of MPs they were referred by the government minister to this judgment.

The House of Lords’ judgment includes the following:-

“The balance of probability standard means that a court is satisfied an event occurred if the court considers that, on the evidence, the occurrence of the event was more likely than not. When assessing the probabilities the court will have in mind as a factor, to whatever extent is appropriate in the particular case, that the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability. Fraud is usually less likely than negligence. Deliberate physical injury is usually less likely than accidental physical injury.  . . .  Built into the preponderance of probability standard is a generous degree of flexibility in respect of the seriousness of the allegation.”

“Although the result is much the same, this does not mean that where a serious allegation is in issue the standard of proof required is higher. It means only that the inherent probability or improbability of an event is itself a matter to be taken into account when weighing the probabilities and deciding whether, on balance, the event occurred. The more improbable the event, the stronger must be the evidence that it did occur before, on the balance of probability, its occurrence will be established.”

In the later case of Re B (Children) [2008] UKHL 35, the House of Lords commented on this passage, stressing the importance of the words “to whatever extent is appropriate in the particular case“.  The judgment went on:-

“There is only one rule of law, namely that the occurrence of the fact in issue must be proved to have been more probable than not. Common sense, not law, requires that in deciding this question, regard should be had, to whatever extent appropriate, to inherent probabilities.”

In another House of Lords case in 2008, Re CD (Northern Ireland) [2008] UKHL 33 Lord Carswell said, at para [28]:-

“A possible source of confusion is the failure to bear in mind with sufficient clarity the fact that in some contexts a court or tribunal has to look at the facts more critically or more anxiously than in others before it can be satisfied to the requisite standard.  The standard itself is, however, finite and unvarying.  Situations which make such heightened examination necessary may be the inherent unlikelihood of the occurrence taking place (Lord Hoffmann’s example of the animal seen in Regent’s Park [which may have been a lioness or an Alsatian]), the seriousness of the allegation to be proved or, in some cases, the consequences which could follow from acceptance of proof of the relevant fact.  The seriousness of the allegation requires no elaboration: a tribunal of fact will look closely into the facts grounding an allegation of fraud before accepting that it has been established.  The seriousness of consequences is another facet of the same proposition: if it is alleged that a bank manager has committed a minor peculation, that could entail very serious consequences for his career, so making it the less likely that he would risk doing such a thing.  These are all matters of ordinary experience, requiring the application of good sense on the part of those who have to decide such issues.  They do not require a different standard of proof or a specially cogent standard of evidence, merely appropriately careful consideration by the tribunal before it is satisfied of the matter which has to be established.”

In a further case, Re S-B Children [2009] UKSC 17, Lady Hale in the Supreme Court said:-

“There is no necessary connection between the seriousness of an allegation and the improbability that it has taken place. The test is the balance of probabilities, nothing more and nothing less.”

So it is the inherent improbability of an event, not its seriousness, which as a matter of common sense will be in the mind of the court when deciding an issue on the balance of probabilities.

 

Confiscation proceedings

In confiscation proceedings the court will be dealing with a defendant who has been convicted of an offence.  The existence of that conviction, and the evidence already accepted by the court in relation to it, cannot be ignored by the court when drawing conclusions relevant to the confiscation order.

However I suggest the court should not lose sight of the significance of ‘the balance of probabilities’ when determining matters which are in dispute in the consequent confiscation proceedings.

 

Contacting us

Our contact details are here.

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.)

S10A PoCA 2002 determinations – appeals & reconsideration

Scales of justiceOnce the Crown Court has made a ‘determination’ for the purposes of confiscation of the extent of a convicted defendant’s interest in an asset can that ‘determination’ be altered on an appeal or reconsideration?

The short answer is ‘Yes’.  A previous article ‘Crown Court section 10A determinations in confiscation‘ considered the new power to make a ‘determination’ introduced by s1 Serious Crime Act 2015 which inserted new s10A into the Proceeds of Crime Act 2002.

This article goes on to consider appeal & reconsideration of s10A determinations.

 

Appeal

A s10A determination may be appealed either by the prosecutor or by a person whom the Court of Appeal thinks is or may be a person holding an interest in the asset in question, but different eligibility rules apply, see s3 SCA 2015.

Whoever wishes to appeal to the Court of Appeal will not be permitted to do so where a receiver has already been appointed under s50 PoCA 2002, or where the Court of Appeal believes that an application is to be made by the prosecutor for the appointment of a receiver, or where such an application has been made but has not yet been determined.

In addition where the intended appeal is to be made by a person who claims to hold an interest in the asset the appeal must be on the basis that either the person was not given a reasonable opportunity to make representations when the determination was made, or that giving effect to the determination would result in a serious risk of injustice to that person, or both.

But what is meant by “a serious risk of injustice”?  I would suggest that this is not restricted to a risk of serious injustice – what is serious is the risk, not the injustice.  When considering the meaning of the same phrase in earlier confiscation legislation the Court of Appeal in the case of R v Benjafield [2000] EWCA Crim 86 held, at paragraph [41.4]: “any real as opposed to a fanciful risk of injustice can be appropriately described as serious”.

It is doubtful whether an error which had an insignificant impact on the outcome would be regarded as creating an “injustice”.  However it may prove to be the case that the need to show “a serious risk of injustice” will not be an especially difficult hurdle for a potential appellant.

On hearing an appeal against a determination the Court of Appeal may confirm the determination, or make such order as it believes is appropriate.  The decision of the Court of Appeal may be further appealed to the Supreme Court.

 

Reconsideration in the Crown Court

When the Crown Court is appointing a receiver under s50 it may confer various powers upon the receiver including (but not limited to) power to manage or realise any realisable assets, and the court may may order a person holding an interest in a realisable asset to make payment to the receiver in respect of a beneficial interest in that asset held by the convicted defendant or the recipient of a tainted gift, see s51(2) & (6).

Where a s10A determination in respect of an asset has not previously been made the Crown Court must not exercise those powers without giving any person holding an interest in the asset a reasonable opportunity to make representations to it, s51(8).

Where a s10A determination in respect of an asset has previously been made that will bind the Crown Court when appointing the receiver, unless the Crown Court finds on an application by a person holding an interest in the asset that either the person was not given a reasonable opportunity to make representations when the determination was made and has not appealed against the determination, or that giving effect to the determination would result in a serious risk of injustice to that person, or both – see s51(8B) inserted by s4 SCA 2015.

The effect therefore is that the s10A determination can be undone by the Crown Court when it is appointing a receiver (unless that determination has already been subject to an appeal to the Court of Appeal).

 

The combined effect

The combined effect of these provisions is that a person with an interest in the asset will have an opportunity either to appeal to the Court of Appeal against the determination or an opportunity to ask the Crown Court to reconsider the determination (but cannot do both).

In either case the person with the interest will have to satisfy the court that either he was not given a reasonable opportunity to make representations when the determination was made, or that giving effect to the determination would result in a serious risk of injustice to him, or both.

He will need to do that on or before the appointment of a receiver under s50.

It remains the case that the powers of the receiver must be exercised with a view to allowing a person other than the defendant or a recipient of a tainted gift to retain or recover the value of any interest held by him, see s69(3)(a).

A s10A determination is a determination of the defendant’s interest in the asset rather than a determination of the interests of others but clearly has a relevance to issues arising under s69(3)(a).

 

Conclusion

The existence of these opportunities to challenge the previous ‘conclusive’ s10A determination may be thought to go a long way to nullify the perceived attractions of inviting the Crown Court to make a s10A PoCA 2002 determination when making a confiscation order.

 

Contacting us

Our contact details are here.

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 & legitimate businesses

Business officeDo recent English Court of Appeal decisions map out a new approach to confiscation when applied to legitimate businesses which have become tainted with criminality?

Has there been an evolution in the assessment of ‘benefit’ following the Supreme Court judgment in Waya?

Are the courts in certain circumstances now looking to confiscate only the profit from trading?

 

Payments received

Whilst one could describe drug trafficking as a ‘business’ as it involves trading in goods, it has long been the case – since the Drug Trafficking Offences Act 1986 in fact – that the gross receipts of such a ‘business’ are treated as ‘benefit’ for confiscation purposes.

Drug trafficking is of course a wholly criminal enterprise.  Prior to the Proceeds of Crime Act 2002 confiscation in respect of drug trafficking was dealt with under a separate legislative regime which specified that the offender’s benefit was “any payments or other rewards received”.  That can only mean the gross receipts.

 

Property obtained

But the wording of the confiscation provisions in s71 Criminal Justice Act 1988, relating to non-drug crime, referred to property “obtained” as a result of or in connection with the offence.  Similar wording was adopted when the two different legislative regimes for confiscation were merged in PoCA 2002.  Is the notion of what an offender has “obtained” a more flexible one than what he has “received”?

Initially the PoCA 2002 formulation was considered, identically to the old drug crime wording, to refer to gross receipts.  For example the Court of Appeal in CPS Nottinghamshire v Rose [2008] EWCA Crim 239 at paragraph [67] said “it can safely be assumed that Parliament, in enacting the legislation, did not intend to weaken the application of the existing confiscation regime”.

The House of Lords in the case of CPS v Jennings [2008] UKHL 29 confirmed that “obtained” meant obtained, solely or jointly, by the offender himself & that a person may “obtain” property without it actually passing through his hands.  In R v May [2008] UKHL 28 it was said that a defendant “ordinarily obtains property if in law he owns it”.  In that sense the notion of what has been “obtained” may be wider than that which has been “received”.

But the House of Lords also recognised that a person may “receive” property without “obtaining” it – as in the case of a courier.

 

High water mark

Perhaps the case of Del Basso & Goodwin v R [2010] EWCA Crim 1119 might be regarded as a high water mark in the application of confiscation to legitimate business.  In that case the offenders operated a ‘park & ride’ business in contravention of an enforcement order.  There was no local authority planning permission allowing the use of the land in question for that purpose.  A confiscation order based on the gross receipts of the business was upheld by the Court of Appeal notwithstanding the acknowledged fact that in other respects the business was operated in a proper & lawful manner.

 

Scottish High Court case

But in a case involving the Weir Group PLC, a quoted company, the Scottish High Court took a very different line.  The Weir Group PLC paid an agreed figure of £13,945,962 in confiscation and a fine of £3m after pleading guilty to two charges of breaching UN sanctions in connection with a number of ‘Oil for Food’ programme contracts awarded between 2000 and 2002.  The company admitted breaching UN sanctions applicable at the time on doing business with Iraq which was then ruled by Saddam Hussein’s regime.

Under the relevant statute, s1(1) Proceeds of Crime Scotland Act 1995, the Scottish Court had discretion to make a confiscation order in “such sum as the court thinks fit”.  The Weir Group companies had secured 16 contracts, for which they were paid £34,340,204, by paying ‘kickbacks’ of £3,104,527. The confiscation order was for only £13,945,962. This included Weir’s gross profit of £9,414,283 from the contracts – plus the kickbacks of £3,104,527 and the fee of £1,427,152 paid to Weir’s agent in Iraq.

The confiscation order could have been for £20m more had the Scottish Court settled on the gross receipts as the appropriate figure for confiscation.

 

Three contrasting situations

Recent Court of Appeal decisions in England & Wales appear to differentiate between three contrasting situations.

The first is where a licence or other form of authorisation is mandatory when carrying on a particular trade or business activity but the absence of that licence does not render the trading itself illegal.  So, for example, in Sumal & Sons (Properties) Ltd v London Borough of Newham [2012] EWCA Crim 1840 the company was convicted of being the owner of a rented property without a licence contrary to s95(1) Housing Act 2004.

However the Court of Appeal found that the Housing Act did not prohibit the renting out of an unlicensed property & that the rent was legally recoverable from tenants even where the required licence had not been obtained.

That being the case, the rent was not received or obtained as a result of or in connection with the offence & so was not ‘benefit’ for confiscation purposes.

A similar result occurred in the case of Mr Singh who failed to obtain a licence under s1(1) Scrap Metal Dealer’s Act 1964, before he carried on business as a scrap metal dealer – see McDowell & Singh v The Queen [2015] EWCA Crim 173.  Again his trading activity was not itself prohibited due to the absence of a licence & therefore no ‘benefit’ for confiscation purposes arose from it.

The underlying trading was not itself an illegal activity, nor could it be said to have resulted from the criminal conduct.

Confiscation orders which had been made in these cases were quashed on appeal.

 

Illegitimate trading

At the other end of the scale we have trading activity which is itself illegal, being prohibited by law.  Obviously drug trafficking falls into this category but so too was the trading of a company controlled by Mr McDowell who was convicted of being knowingly concerned in the supply, delivery, transfer, acquisition or disposal of controlled goods with intent to evade the prohibition thereon, contrary to Article 9(2) Trade in Goods (Control) Order 2003.

The trading in question involved the delivery of aircraft and other military equipment from China to Ghana.  The Court of Appeal found the underlying transactions to be prohibited and unlawful.  Mr McDowell’s criminal offence was being concerned in the trading activity.  His ‘benefit’ for confiscation purposes was the gross amount received from that trading.

Intriguingly however the Court of Appeal added, “We were informed only that the company’s accounts revealed the gross profit made by the company in consequence of all its trading. In these circumstances, even if, in principle, the court had been prepared to entertain a submission that the appellant’s benefit was for a lesser sum than his receipts, he had manifestly failed to discharge the burden of proof.”

 

Legitimate trading resulting from criminality

But the Court of Appeal in McDowell suggests at paragraph [51] there is a middle ground – “In a case in which the underlying transactions producing the appellant’s receipts are lawful and not criminal, the cost of those transactions to the defendant may, on the grounds of proportionality, properly be treated as consideration given by the appellant for the benefit ‘obtained’. There may be no “loser” as contemplated by the Supreme Court in Waya and by the Vice President in Jawad, but the underlying principle is the same – the defendant has not gained by his conduct to the extent that he has given value for his receipts. Each case must be decided according to its particular facts.”

We are dealing here with the situation in which the defendant has committed an offence and that offence has resulted in trading activity which would not otherwise have occurred – but the underlying trading activity is not itself criminal conduct.

An earlier decision of the Court of Appeal had concerned a Mr Sale who had obtained contracts for his engineering company from Network Rail by bribing one of their employees, R v Sale [2013] EWCA Crim 1306.  The engineering work was properly performed and was, of itself, an entirely legal trading activity.

The Court of Appeal concluded that the amount to be confiscated was not the gross receipts of the company under the contracts but was the company profit plus the the pecuniary advantage gained by obtaining market share, excluding competitors, and saving on the costs of preparing proper tenders for the work.  The Court of Appeal held that, on grounds of proportionality & in the light of the Supreme Court decision in Waya, the amount ordered to be paid under the confiscation order ought to have been calculated on that basis.

In another case, R v Boughton Fox [2014] EWCA Crim 2940, the court had found that customers had been induced by dishonest misrepresentations to enter into legitimate leasing agreements upon terms which were, in the event, more onerous than had been represented to them.  The defendant’s company had received commission from the lessors on the signing of the lease agreements.  The defendant was convicted of conspiracy to defraud and was subject to a confiscation order.

The Court of Appeal, following Sale, concluded “that the benefit to the appellant might arguably be reflected as (1) the gross profit from the dishonest trading activity, (2) the increase in market value of the company, if any, represented by the dishonest trading activity with (3) an adjustment to represent the appellant’s 50% interest in the company”.

In the event however there was no information before the Court enabling it to assess the benefit in that way & it instead took Mr Boughton Fox’s benefit to be a proportion of the salary & dividends received by him over the period of the offending.

 

Conclusion

It appears that in the three contrasting situations the amount to be paid under a confiscation order may be based on (a) no benefit, (b) benefit equal to gross receipts, or (c) a figure based, on grounds of proportionality, on the gross profit from the resulting trading plus the value of any other advantages obtained (such as benefit from increased market share and cost savings).

An accountant might consider that the appropriate figure, instead of gross profit plus cost savings, should be the contribution which the trading in question makes to net profit, that is to say the relevant turnover net of associated variable costs.  That would be a better measure of what the business has gained by the additional sales.

Certainly in such cases a forensic accountant, such as myself, should be instructed to assist in quantifying the appropriate figure.

The key to differentiating the three situations is a careful analysis of the nature of the offence and the extent, if at all, to which it involves trading, or results in underlying trading, which is itself illegal.  Where the offence involves illegal trading, or results in trading which is itself illegal, then the benefit will be the gross amount received from that trading.

Where the offence does not involve trading but results in trading which itself is not illegal, then the expenses incurred in that trading are not expenses of the crime and may be treated, on grounds of proportionality, as consideration which may reduce the amount to be paid under the confiscation order.

Where the offence does not itself involve trading and the trading does not result from the offence, then that trading does not give rise to any benefit for confiscation purposes.

However there are undoubtedly some legal complexities inherent in this new approach particularly with regard to distinguishing, on the one hand, trading receipts from criminal activity and, on the other, trading receipts from legitimate activity resulting from criminal conduct.

It remains to be seen whether the Supreme Court will endorse this new approach when an appropriate case comes before it.

 

Contacting us

Our contact details are here.

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.)

Drug valuations in confiscation proceedings

Legal wig copyright David Winch 2014The way in which illegal drugs are valued in confiscation proceedings has changed over the years.  A Court of Appeal decision in March 2014 is only the most recent development.

It is useful to consider separately valuation of drugs in relation to the defendant’s ‘available amount’ and in relation to his ‘benefit’.

 

Available amount

It has long been the case that illegal drugs (sometimes referred to as controlled drugs) have been regarded as having zero value when calculating a defendant’s ‘available amount’ for confiscation purposes, because the drugs cannot legally be sold and any drugs seized will have been forfeit and destroyed by the authorities.

 

Benefit

The valuation of illegal drugs in relation to the defendant’s ‘benefit’ is not so straightforward.  There have been a number of twists and turns in the interpretation of the law.

In 2008 the Court of Appeal concluded that illegal drugs had no value for the purposes of calculating a defendant’s ‘benefit’ but, where the ‘criminal lifestyle’ assumptions operated (as they would under PoCA 2002 in a drug trafficking case by virtue of s75 and Schedule 2), then the expenditure on acquiring those drugs would in many cases form a component of the defendant’s ‘benefit’ figure.

The following year the House of Lords (by a 3-2 majority) overturned that Court of Appeal decision, in the leading case of R v Islam [2009] UKHL 30.

The statute law provides that s79 applies “for the purpose of deciding the value at any time of property then held by a person” and that “its value is the market value of the property at that time”.

The issue in Islam revolved around the meaning of “market value”.  Was that expression limited to a ‘legal market value’?  Could illegal drugs be simultaneously regarded as having a zero value in relation to the defendant’s ‘available amount’ and a significant value in relation to the defendant’s ‘benefit’?

The majority view was that when determining the “market value” for the purposes of ‘benefit’ “we look at the market in which [the defendant] expected to dispose of the property in question. That is what it was worth to him”.  So, for the purposes of evaluation of the defendant’s ‘benefit’ the value of seized drugs could be based on their value on the illegal drugs market.

The House of Lords noted that it was a commonplace of everyday life that the same goods might have a different value depending upon the market on which they were sold.  So there was no illogicality in valuing drugs differently for the purposes of ‘available amount’ (based on the impossibility of sale in a legal market) and ‘benefit’ (based their value on the illegal drugs market).

 

The latest development

On 4 March 2014 the Court of Appeal issued its judgment in the case of Elsayed v The Crown [2014] EWCA Crim 333.

The issue was relatively straightforward.  The defendant worked as a hospital porter.  He was arrested and his locker at the hospital was searched.  In it were found £56,510 in cash, 169 grams of cocaine of 80% purity and a small wrap of 3 grams of cocaine at 5% purity.  No cutting agents or other wraps or bags were found.

The defendant in due course pleaded guilty to possession of Class A drugs with intent to supply and possession of criminal property.  Confiscation proceedings followed.

The defendant’s explanation was that he had started to use cocaine and had agreed to store the 169 grams of cocaine and cash for his supplier.  The small wrap was for his own use.

The prosecution asserted, on the contrary, that this defendant intended to cut the 169 grams of cocaine to a 5% purity for ‘retail’ sale at street level.

In the confiscation proceedings the Crown Court judge found, as a fact, that the defendant himself would cut the cocaine and sell it ‘retail’ at street level.

The importance of this was that, if cut and sold ‘retail’, that cocaine would have a market value of £108,160.  In its uncut state and if sold ‘wholesale’ that cocaine had a market value of only £6,857.  The judge made a confiscation order based upon the ‘retail’ value of that cocaine.  The defendant appealed.

 

The legal arguments

The defence argued that “benefit figure for the purposes of confiscation is derived from historic transactions and the value of actual property held in the defendant’s possession connected with the relevant offence, not what it ‘might’ be worth ‘if’ it was to be altered in some way.”

In support of that one might refer to the wording of s79 which applies “for the purpose of deciding the value at any time of property then held by a person” and that “its value is the market value of the property at that time”.  Similarly the focus of s80(2)(a) was on “the value of the property (at the time the person obtained it)”.

The prosecution argued that the cocaine should be valued by reference to the market on which the defendant intended to sell it – which the judge had found to be the ‘retail’ street market.  In consequence, argued the prosecution, the Crown Court judge had been correct to adopt the ‘retail’ street value because that was the market in which the defendant intended to sell the drugs.

 

The Court of Appeal’s decision

The Court of Appeal upheld the confiscation order based on the ‘retail’ street value of the cocaine.  They considered it would be arbitrary to value the cocaine on the basis of it not having been cut at the time it was seized if (as found by the judge) the defendant’s intention was to cut the cocaine and sell it at street level.

The court held that the value of those drugs to the defendant was the value he expected to obtain from their (‘retail’) sale by him.  It was not determinative, the court held, that the drugs had not been prepared for ‘retail’ sale when they were seized.

Of course that conclusion may yet be subject to further appeal.

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.)

Confiscation and multiple defendants

Police lamp copyright David Winch 2014The Court of Appeal in London recently considered a couple of questions which arise where more than one defendant is convicted and then subject to confiscation.  Where benefit is obtained jointly by co-defendants should each of them be regarded as obtaining the whole of the benefit which they obtained jointly?  Secondly, is it proper for confiscation orders to be made against the various co-defendants which require them to pay in total more than the amount obtained from the offence?

 

These questions arose in the case of Fields and Others v R [2013] EWCA Crim 2042.  Essentially the position was that the co-defendants, Mr Fields, Mr Sanghani and Mr Sagoo had been engaged in a fraud between January and June 2005 which generated £1,410,762.  Each of them was convicted of having been at the heart of the fraud and so each of them had jointly obtained the benefit of it.

In the Crown Court the judge made confiscation orders against each of them recording a benefit of the entire amount obtained in the fraud (uplifted for inflation between 2005 and the date of the confiscation order under s80(2)(a)).

When it came to considering the ‘available amount‘ of each defendant, the Crown Court judge concluded that none of the defendants had satisfied him that he had an ‘available amount‘ less than his benefit.  Accordingly he made confiscation orders against each of the defendants in the full amount of the benefit generated by the fraud.

Each of the defendants appealed against the confiscation orders.

 

Benefit jointly obtained

In relation to the benefit jointly obtained it was argued on appeal that – whilst each of them had obtained an interest in the entire £1,410,762 obtained from the fraud – the value of each defendant’s interest was only a one-third share (because of the impact of the interests held by the other defendants).  It was contended that, in consequence, s79(3) applied and resulted in the value of each defendant’s benefit being equal to one-third of the value of the total amount obtained by the fraud.

The Court of Appeal rejected that contention.  They considered the argument to be “altogether too artificial”.  They remarked that, “Section 79(3) of the 2002 Act is to be taken as, generally speaking, extending to making allowance for lawfully subsisting prior interests of other persons: not to the asserted ‘beneficial interests’ of co-conspirators whose very criminality has caused the relevant property to be obtained jointly in the first place”.

Furthermore they pointed out that there was precedent case law, binding upon them, particularly from the House of Lords decisions in R v May [2008] UKHL 28 and R v Green [2008] UKHL 30, which was wholly against the defendants’ argument on this point.  The Court of Appeal did not consider that more recent decisions, such as that of the Supreme Court in R v Waya [2012] UKSC 51, had undermined the authority of the House of Lords’ earlier decisions in this connection.

In truth it seems that there was little prospect of the defendants succeeding on this argument in the Court of Appeal and it may be expected that the decision will now be further appealed to the Supreme Court (which would not necessarily be bound by the earlier case law).  It may be noted that the possible implications of s79(3) were not discussed in the House of Lords’ judgments in those earlier cases.

 

Available amount and multiple recovery

The Court of Appeal considered whether it was open to the Crown Court judge to hold that none of the defendants had satisfied him that his ‘available amount‘ was less than his benefit.  The Appeal Court upheld the Crown Court judge’s findings on that point.

The defendants then argued that, as a result of the three confiscation orders, the Crown would (if the orders were satisfied) recover three times the amount obtained from the fraud.  They submitted that this multiple recovery operated like a fine upon the defendants and was disproportionate and a breach of the defendants’ rights under Article 1 of the First Protocol to the European Convention on Human Rights (‘A1P1’).

The argument based on disproportionality relies heavily upon the Supreme Court decision in Waya.  But Waya was not a case involving more than one defendant and the particular issue of multiple recovery was not a relevant consideration in that case.

The Court of Appeal rejected the defendants’ arguments on this point also.  They considered that the House of Lords cases again were authority, binding upon them, which were against the defendants’ submissions – and that the decision in Waya had no impact on this issue.

The confiscation orders made against each defendant by the Crown Court judge had reflected the amount of the benefit obtained by him.  The confiscation legislation, said the Court of Appeal, “requires the focus of attention to be on depriving each defendant of the proceeds of his crime”.  But the defendants’ argument would require each confiscation order to take into account the confiscation orders made against co-defendants – and that was not appropriate.

However this again is a point which the Supreme Court may be asked to consider if the case is further appealed.

Of course if the defendants had been successful in reducing their benefit to one-third of the amount obtained by the fraud then the issue of multiple recovery would have evaporated.

 

Delays in making the confiscation orders

Finally, it is interesting to note that in this case the police action against these defendants commenced in mid-2005.  The defendants were convicted of the fraud in November 2008.  The confiscation orders were made in the Crown Court in February 2010 (against Mr Fields) and November 2012 (against Mr Sanghani and Mr Sagoo).  The Court of Appeal decision was handed down in November 2013 (more than 8 years after the offence was committed) and the matter may yet go to a further hearing before the Supreme Court!

David

UPDATE: On 18 June 2014 the Supreme Court confirmed that the benefit should NOT be apportioned amongst the conspirators (see new blog article “UK Supreme Court rules on benefit obtained jointly“) but that the enforcement of each defendant’s confiscation order should be subject to a proviso that the State shall not recover more than 100% of the benefit jointly obtained, effectively creating a joint and several liability of the conspirators to ‘repay’ the benefit obtained jointly (see new blog article “Supreme Court caps confiscation enforcement“).

(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.)

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.)

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.)

Confiscation: a serious risk of injustice

In confiscation proceedings the court must not make a criminal lifestyle assumption in relation to particular property or expenditure if that creates a serious risk of injustice, see s10(6)(b) PoCA 2002.  Similar provisions apply to earlier confiscation legislation in England and Wales employing statutory assumptions for the purpose of determining a defendant’s benefit.  But what does this mean in practice?

 

A serious risk of injustice

The legislation expressly refers to a “serious risk of injustice”.  Does that mean the risk of a serious injustice?

The court, at the end of the confiscation process, has therefore a responsibility not to make a confiscation which could create injustice

In the Court of Appeal judgment in the case of R v Benjafield [2000] EWCA Crim 86 it was held, at paragraph [41.4]: “In particular, while a defendant is required to show that an assumption in his case in incorrect, if he fails to do this, the court must still not apply an assumption where there would be a “serious risk of injustice in the defendant’s case if the assumption were to be made”.  As to the weight that has to be given to the word “serious”, any real as opposed to a fanciful risk of injustice can be appropriately described as serious.  The court, at the end of the confiscation process, has therefore a responsibility not to make a confiscation which could create injustice”.

So it appears almost as if the word “serious” could be omitted.

But in my experience convicted defendants who have been made subject to confiscation orders under the ‘criminal lifestyle’ provisions often leave court feeling that they have suffered a serious injustice.

it may well be perfectly proper for a confiscation order to be massively greater than the gain from the offences

Indeed more recently the Court of Appeal in the case of Shabir v R [2008] EWCA Crim 1809 said at paragraph [27]: “If it is a case in which the criminal lifestyle provisions of the Act can legitimately be applied, and with them the several section 10 assumptions as to the source of assets, it may well be perfectly proper for a confiscation order to be massively greater than the gain from the offences of which the defendant has been convicted”.

Many defendants might regard that as a description of precisely the serious injustice which they have suffered.

 

A general discretion to avoid unfairness?

One might think that s10(6)(b) Proceeds of Crime Act 2002 offers Crown Court judges a general discretion to avoid excessive harshness or unfairness towards defendants in confiscation proceedings, but courts have held that it does not operate in that way.

a judge is permitted to stand back and determine whether there is or might be a risk of serious or real injustice

It appears that a judge is permitted to ‘stand back and determine whether there is or might be a risk of serious or real injustice’ (as it was put in Lunnon v R [2004] EWCA Crim 1125 at paragraph [11]) but in this context the courts have had in mind possibilities such as “a defendant suffering from some mental infirmity” (alluded to in R v Briggs-Price [2009] UKHL 19 at paragraph [104]) or the position of an unrepresented defendant putting his case in person (see WB v R [2006] EWCA Crim 3062 at paragraph [135]).  The position in relation to that rather restricted application of s10(6)(b) may have been changed somewhat by the Supreme Court decision in R v Waya [2012] UKSC 51, which is discussed below.

But the courts have expressly said that the fact that a confiscation order will cause hardship to the defendant is not to be regarded as a factor giving rise to a serious risk of injustice.  Consideration of a possible serious risk of injustice is not a discretionary exercise by the judge to determine whether or not it is fair to make an order against a particular defendant, see R v Jones [2006] EWCA Crim 2061 at paragraph [14].

The courts have considered the serious risk of injustice in the context, as the statute suggests, of whether or not the assumption should be made in relation to particular items of property or expenditure.

 

Rebutting the criminal lifestyle assumptions

But, once the courts have concluded there would be no serious risk of injustice in making the assumption, the courts have not considered that the placing of the burden of rebutting the assumption (on the balance of probabilities) on the defendant – rather than placing the burden on the prosecution to provide evidence of further criminal conduct – gives rise to a serious risk of injustice.  In effect the Crown Courts are not permitted to consider whether that may, of itself, give rise to a serious risk of injustice because the placing of that burden on the defendant is an integral feature of the legislation and because courts (both at national and European level) have consistently held that placing that burden on the defendant is proper and does not breach the defendant’s human rights.

a defendant who has not kept records of his financial affairs will not be saved from a substantial confiscation order

So, for example, a defendant who has not kept records of his financial affairs, and in consequence cannot produce the clear and cogent evidence which the court requires in order to rebut the statutory assumptions, will not be saved from a substantial confiscation order on the basis that there would be a serious risk of injustice if the assumptions were applied in his case, see R v Jones [2006] EWCA Crim 933 at paragraph [20].

However where there is sufficient evidence to rebut the statutory assumption in relation to property or expenditure, but the extent to which the assumption is rebutted by that evidence is uncertain, the court may make a broad brush reduction in the amount of the assumed benefit to eliminate any perceived risk of injustice – as was done in the case of R v Deprince [2004] EWCA Crim 524 at paragraph [21].

 

Double counting of benefit

an item of property should not be counted twice

More straightforwardly, the provision also allows the court to avoid the injustice which could otherwise occur where the same property falls to be considered as assumed benefit more than once as a consequence of the operation of the statutory assumptions.  So, for example, where an item of property is both transferred to the defendant after the relevant day and held by him after the date of his conviction that property should not be counted twice for benefit purposes.

But even in relation to alleged double counting, sometimes called double accounting, it is necessary for there to be adequate evidence before the court to rebut the statutory assumptions or show that there is a serious risk of injustice.  In the case of Priestley v R [2004] EWCA Crim 2237 the defendant had been convicted of offences concerning the sale of counterfeit perfume, champagne and clothing.  In the confiscation hearing Mr Priestley had not given any evidence himself nor called any witnesses.  The judge found his benefit by calculating the estimated proceeds from the sale of the perfume (based on the number of perfume bottles that had apparently been used and an estimated average sale price per bottle), and adding to that figure the amount of monies deposited in the defendant’s bank account and the estimated expenditure on production of the perfume since the relevant day, together with the amount of cash in the defendant’s possession on the day of his arrest.  On appeal it was submitted that this involved double accounting since the bank deposits, the expenditure and the cash in hand would all have represented monies generated from the sale proceeds of the perfume (which had already been taken into account).  The Court of Appeal dismissed the appeal holding that the judge had “no secure evidential basis” to conclude that there was a serious risk of injustice in applying the statutory assumptions in full.

 

The decision in R v Waya

courts should not make confiscation orders which are disproportionate to the objective of the confiscation legislation

The Supreme Court in the case of R v Waya [2012] UKSC 51 has made it clear that the courts should not make confiscation orders which are disproportionate to the objective of the confiscation legislation.  Where an order calculated in accordance with the provisions of PoCA 2002 would be disproportionate the judge should reduce the amount of the order so that it will not infringe the defendant’s human rights, in particular with respect to Article 1 of the First Protocol of the European Convention on Human Rights (A1P1).

But the Supreme Court indicated that ordinarily the operation of s10(6)(b) should avoid the making of an order in a ‘criminal lifestyle’ case which would infringe the defendant’s A1P1 rights.  It remains to be seen whether these comments in Waya will breathe new life into the s10(6)(b) provision, although clearly the Supreme Court did not intend by its judgment in Waya to create a wide-ranging general discretion for Crown Court judges in ‘criminal lifestyle’ confiscation cases.

At the end of the day criminal lifestyle confiscation remains a potentially Draconian deterrent penalty employed by the courts as a part of the sentencing process.

David

Note: This article has been updated to reflect the decision of the Supreme Court in R v Waya.

17 year sentence for VAT carousel fraud

Recently Dilawar Ravjani was sentenced to 17 years imprisonment following conviction for conspiracy to cheat the public revenue.  He was said to be the ring-leader in a complex missing trader intra community (MTIC) VAT fraud – sometimes known as carousel fraud.  But was that sentence – reportedly the longest ever given to an individual in the UK for this type of fraud – too harsh?

 

The offending

It is said that Mr Ravjani was at the head of a conspiracy involving purported trading in mobile phones of a total value of £1.7 billion.  But some of the phones did not even exist and a total of 5,700 fake transactions had been created to give the appearance of legitimate trading.  HM Revenue & Customs started their investigation in 2006.  It culminated in five trials and the conviction of 15 conspirators.  Only recently has the final trial been concluded.  The total VAT loss to HMRC was £107 million.

Undoubtedly the offending was serious.

 

The criminal charges

Mr Ravjani was charged and convicted of a single offence of ‘Conspiracy to Cheat the Public Revenue’.  He was sentenced to 17 years imprisonment and banned from acting in the management of a company for 15 years.  He is also to be subject to confiscation proceedings.

The offence of ‘Conspiracy to Cheat the Public Revenue’ is a common law offence in England & Wales with a history going back hundreds of years

The offence of ‘Conspiracy to Cheat the Public Revenue’ is a common law offence in England & Wales with a history going back hundreds of years.  The common law offence of ‘Cheat’ had applied more widely but was abolished by s32(1)(a) Theft Act 1968 except in relation to the public revenue.  The logic of that abolition was that the statutory offences set out in the Theft Act 1968 replaced the old common law.

One of the consequences of this was that, except in relation to offending concerning the public revenue, the statute introduced maximum sentences for offending formerly prosecuted as ‘Cheat’.  The maximum sentence for theft was originally set at 10 years imprisonment.  For some offences a lower maximum was set, for example ‘false accounting’ carried a maximum sentence of 7 years.

In relation to VAT a criminal offence was enacted by s72(1) Value Added Tax Act 1994 where “any person is knowingly concerned in, or in the taking of steps with a view to, the fraudulent evasion of VAT by him or any other person”.  Subsection (2) provides that “the evasion of VAT includes a reference to the obtaining of . . . the payment of a VAT credit”.  A ‘VAT credit’ is defined in s25(3) to include a VAT refund paid following the submission of a trader’s VAT return.

So it seems that Mr Ravjani could have been prosecuted under s72 VAT Act 1994.  But the maximum sentence for an offence under that section is 7 years imprisonment.

It appears to be the case that the offending occurred prior to the coming into effect of the Fraud Act 2006, which provides a maximum sentence of 10 years for fraud by false representation and similar offences.

However had the victim of this fraud been a wealthy individual, rather than the public purse, the maximum penalty (for the common law offence of conspiracy to defraud) would have been 10 years.

Mr Ravjani was not charged with any money laundering offence under Part VII, Proceeds of Crime Act 2002.  Such offences carry a maximum sentence of 14 years imprisonment.

the prosecutors may have had an option to charge Mr Ravjani either under the specific statutory offence or with the common law offence

So it seems that the prosecutors may have had an option to charge Mr Ravjani either under the specific statutory offence of s72 VAT Act 1994 (with a maximum sentence of 7 years) or with the common law offence of ‘Cheating the Public Revenue’ (which has no statutory maximum sentence).

It is perhaps not surprising that they chose to charge Mr Ravjani with the common law offence.  But were they entitled to do so?

 

Common law v statutory offences

It might be argued that Mr Ravjani ought to have been charged with the statutory offence under s72 VAT Act 1994 because his alleged criminal conduct fell within the scope of that statutory offence.

good practice and respect for the primacy of statute do in my judgment require that conduct falling within the terms of a specific statutory provision should be prosecuted under that provision unless there is good reason for doing otherwise

In the case of R v. Rimmington [2005] UKHL 63 Lord Bingham said this at paragraph [30]:
“Where Parliament has defined the ingredients of an offence, perhaps stipulating what shall and shall not be a defence, and has prescribed a mode of trial and a maximum penalty, it must ordinarily be proper that conduct falling within that definition should be prosecuted for the statutory offence and not for a common law offence which may or may not provide the same defences and for which the potential penalty is unlimited.  . . .    It cannot in the ordinary way be a reason for resorting to the common law offence that the prosecutor is freed from mandatory time limits or restrictions on penalty.  It must rather be assumed that Parliament imposed the restrictions which it did having considered and weighed up what the protection of the public reasonably demanded.  I would not go to the length of holding that conduct may never be lawfully prosecuted as a generally-expressed common law crime where it falls within the terms of a specific statutory provision, but good practice and respect for the primacy of statute do in my judgment require that conduct falling within the terms of a specific statutory provision should be prosecuted under that provision unless there is good reason for doing otherwise”.

It is clear that Mr Ravjani was regarded as the organiser and ring-leader in this conspiracy.  It is also clear that other members of the conspiracy were convicted of money laundering and sentenced to prison terms in excess of 7 years.  It follows that, had Mr Ravjani been prosecuted only under s72 VAT Act 1994, he would have received a lighter sentence than other conspirators who were considered less culpable.

But is that, in the words of Lord Bingham, “good reason for doing otherwise”?

It has to be said that appropriate sentencing in this area remains open to debate.  In the Court of Appeal judgment R v Meehan [2006] All ER (D) 105 it was indicated that organisers of such frauds should expect sentences well into double figures – clearly in excess of those envisaged in VAT Act 1994.  That appears to leave a tension between the views of the Court of Appeal and those of Lord Bingham in the House of Lords.

Perhaps that should be resolved by Parliament looking again at the 7 year maximum sentence under s72 VAT Act 1994?

But can it be right that a person who defrauds the public purse faces a higher sentence on conviction than a person who defrauds wealthy individuals or businesses?

David

P.S.  Mr Ravjani might, on the other hand, consider himself fortunate to have been prosecuted in England rather than in another jurisdiction.  At least he did not have to face a very, very long sentence such as that meted out in the US courts in the case of Bernie Madoff – 150 years!

UPDATE
On 29 November 2012 the Court of Appeal refused Mr Ravjani’s application for leave to appeal against his 17 year sentence R v Ravjani [2012] EWCA Crim 2519.

SECOND UPDATE
The Court of Appeal on 17 December 2013 in the case of Dosanjh & Others v R. [2013] EWCA Crim 2366 commented upon the use of common law charges in circumstances where the offending could be covered by a statutory offence. They said, at paragraph [33], “we are entirely confident that as far as Parliament is concerned, the offence of conspiracy to cheat the public revenue retains its established and clearly understood role in the prosecution of revenue cases. It is used to supplement the statutory framework and is recognised as the appropriate charge for the small number of the most serious revenue frauds, where the statutory offences will not adequately reflect the criminality involved and where a sentence at large is more appropriate than one subject to statutory restrictions”.
In practice however I see the common law offence being charged apparently routinely in cases which could not be described as “the most serious revenue frauds”. Will that no longer be the case in future?