Do 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?
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.
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  EWCA Crim 239 at paragraph  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  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  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  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  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  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.
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  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  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  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.
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.
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(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.)