Tag Archives: unlawful conduct

Criminal Finances Bill proposed

bigbenA new Criminal Finances Bill was proposed in the Queen’s Speech at the opening of the new parliamentary year on 18 May 2016.  The new Bill is intended to assist in tackling corruption, money laundering and tax evasion.

The Bill itself has not yet been published, but the Home Office have said that the Bill will allow the government to recoup more criminal assets by reforming the law on proceeds of crime, including provisions to strengthen enforcement powers and protect the public. It will also implement a more effective regime to support reporting of suspicious financial activity, make it easier to seize illicit funds and improve coordination between the public and private sectors to tackle criminal financial behaviour.

[UPDATE: The Criminal Finances Bill has now been published and an article on it appears HERE]

The bill will:

  • introduce a criminal offence for corporations who fail to stop their staff facilitating tax evasion;
  • improve the operation of the suspicious activity reports regime to encourage better use of public and private sector resources against the highest threats, to target entities that carry out money laundering instead of individual transactions, and to provide the National Crime Agency with new powers; and
  • improve the ability of law enforcement agencies and courts to recover criminal assets more effectively, particularly in cases such as those linked to grand corruption.

 

New offence

The new offence for corporations who fail to stop their staff facilitating tax evasion may have similarities to the offence committed by a commercial organisation which fails to prevent bribery.  That was a new offence introduced by s7 Bribery Act 2010.

The essence of the Bribery Act offence is that it occurs when a person associated with a relevant commercial organisation bribes another person with the intention of getting or keeping business, or an advantage in the conduct of business, for the organisation.

So it could be that the new offence will be committed by a corporation where a person working for the corporation facilitates the evasion of tax by the corporation itself or by another person.

My expectation would be that in this context (as in the case of the Bribery Act offence) the offender could be an incorporated company or a partnership and that a person working for the corporation could be widely defined and not limited to employees of the corporation (so as to include partners and self-employed ‘staff’ and agents instructed by the corporation).

So, for example, a firm of accountants, lawyers or tax advisers would commit the offence if it failed to prevent a person working for it facilitating tax evasion by a client of the firm.

Under existing legislation a person who is knowingly concerned in tax evasion commits an offence, but an incorporated body would not be subject to such prosecution unless the ‘controlling mind’ of the company were ‘knowingly concerned’ in the evasion and acting dishonestly.  The new offence will therefore place an incorporated body at risk of prosecution in a significantly wider range of circumstances.

Again it may be the case (as with the Bribery Act offence) that it would be a defence for the firm to show that it had in place adequate procedures designed to prevent persons working for it from undertaking such conduct.

The maximum penalty for the Bribery Act offence is an unlimited fine and a similar penalty may be prescribed for the proposed new offence.

 

Suspicious Activity Reports

A new focus for the Suspicious Activity Reports (SAR) regime would be welcome.  Over 300,000 such reports are received by the National Crime Agency (NCA) each year.  The vast majority of these reports are from the High Street banks.  Some of these reports must be based on very limited information about the bank’s customer and his financial affairs.

A proportion of these reports will incorporate consent requests, meaning that the NCA need to urgently address the report as they have a statutory time limit requiring a response within 7 working days.  Yet these urgent cases may not be the most important matters to which the attention of the NCA should be directed.

We shall have to see what detailed proposals are in the Bill to shift the focus of SARs to encourage better use of public and private sector resources against the highest threats and to target entities that carry out money laundering instead of individual transactions.

 

Recovering criminal assets

The authorities recover criminal assets by confiscation under Part 2, Proceeds of Crime Act 2002, and by civil recovery under Part 5 of the Act.  Broadly speaking, confiscation applies where a defendant has been convicted of an offence from which he has obtained a benefit and obliges him to pay a sum of money to the court (so the focus of confiscation is on the defendant); whereas civil recovery does not necessarily involve any criminal conviction but requires specified property to be forfeit to the state where that property is, or represents, proceeds of criminal conduct (so the focus of civil recovery is on the asset).

Confiscation law was subject to significant amendment relatively recently by the Serious Crime Act 2015.  It may be that the Criminal Finances Bill will concentrate on amendments to civil recovery law.

 

Conclusion

No doubt the Criminal Finances Bill is a topic to which we shall be repeatedly returning in this blog as matters develop over the coming months.

[UPDATE: The Criminal Finances Bill has now been published and an article on it appears HERE]

 

Contacting us

Our contact details are here.

David

(Note: This article applies to the provisions of the Proceeds of Crime Act 2002 applicable in England and Wales. Appropriate professional advice should be sought in each individual case.)

UK Supreme Court rules on money laundering arrangements

Supreme Court logoThe UK Supreme Court recently ruled on the law relating to prosecutions for entering into, or becoming concerned in, an arrangement which facilitates the acquisition, retention, use or control of criminal property for, or on behalf of, another person – contrary to s328 Proceeds of Crime Act 2002.

The case arose as a result of the actions of a fraudster, referred to as ‘B’.

Shortly before commencing his fraud the defendant, referred to as ‘H’, opened two bank accounts and handed control of them to ‘B’ who then used them in connection with his frauds.  ‘B’ conned unsuspecting members of the public into making payments into these bank accounts (for services which in truth were non-existent).

The prosecution case was that ‘H’ must have known or at least suspected that ‘B’ had some criminal purpose even if he was not aware of the details of the con.  ‘B’ was convicted of fraud.  ‘H’ was charged with becoming concerned in an arrangement contrary to s328 PoCA 2002.

The Supreme Court was required to consider whether, in the circumstances alleged, ‘H’ could be guilty of a s328 offence – R v GH [2015] UKSC 24 (22 April 2015).

The Supreme Court broke the issue down into four key questions.  In addressing those questions it overturned some decisions of the courts below.

 

1  Must the property be ‘criminal property’ before the arrangement operates on it?

Counsel for the prosecution submitted to the Supreme Court that the same conduct could both cause property to become criminal and simultaneously constitute the offence charged under s328.  He made the same submission in relation to sections 327 and 329, correctly recognising that the three sections have to be construed coherently.

So, he submitted, a thief who steals “legitimate” property is necessarily at the same time guilty of “acquiring criminal property” contrary to s329.

The Supreme Court rejected that view, holding that it failed to recognise the necessary distinction between a person who acquires criminal property and one who acquires legitimate property by a criminal act or for a criminal purpose.

Sections 327, 328 and 329 are aptly described as “parasitic” offences because they are predicated on the commission of another offence which has yielded proceeds which then become the subject of a money laundering offence.

The Supreme Court therefore approved the decision of the Court of Appeal in an earlier case R v Geary [2010] EWCA Crim 1925 that to say that s328 extends to property which was originally legitimate but became criminal only as a result of carrying out the arrangement is to stretch the language of the section beyond its proper limits.  I have discussed the Geary case more fully in an earlier article on this blog.

However, for example, a thief who steals legitimate property might then commit a s329 money laundering offence by his possession or use of that property after his acquisition of it.

In practice such a thief should normally face a charge of theft rather than one of money laundering.  But the legal point that he may also be guilty of a money laundering offence is an important one because of the obligation on banks & others in the ‘regulated sector’ to report suspicions of money laundering under s330.

 

2  Must the ‘criminal property’ exist before the defendant joins the arrangement?

The Supreme Court agreed with the decision of the Court of Appeal in holding that it does not matter whether criminal property existed when the arrangement was first hatched.  What matters is that the property should be criminal property at a time when the arrangement operates on it.

It should be noted that the Supreme Court did not hold it to be necessary that the property should be criminal property at the time when the arrangement commences to operate on it.

The offence is complete when the arrangement becomes one which facilitates the acquisition, retention, use or control of criminal property for, or on behalf of, another person and the defendant knows or suspects this to be the case.

 

3  Were the monies ‘criminal property’ before being paid into the defendant’s bank account?

Counsel for the prosecution made a somewhat technical submission to the Supreme Court that the monies banked were criminal property at the time of payment because they represented a chose in action, namely the obligation of the purchasers of the supposed services to pay for them.

The Supreme Court were unimpressed by this submission, holding that there was a stark absence of material before the court to substantiate a case of this nature.

However the court did not close the door on such an argument being successfully presented in a future case.

 

4  Was the actus reus of the offence committed on the facts of the case?

Looking at the substance of the matter, the money paid by the victims into the accounts was lawful money at the moment at which it was paid into those accounts.  It was therefore not a case of the account holder acquiring criminal property from the victims.

But by the arrangement the respondent also facilitated the retention, use and control of the money by or on behalf of ‘B’.  Did the arrangement regarding the facilitation of the retention, use and control of the money fall foul of s328 on the basis that it was criminal property at that stage, since it was the proceeds of a fraud perpetrated on the victims?

In this case the character of the money did change on being paid into the defendant’s accounts.  It was lawful property in the hands of the victims at the moment when they paid it into the defendant’s accounts.  But it then became criminal property in the hands of ‘B’, not by reason of the arrangement made between ‘B’ and the defendant, but by reason of the fact that it was obtained through fraud perpetrated by ‘B’ on the victims.

There was a crucial difference therefore between this case and the situation in Geary (in which the arrangement itself had been the reason that the property in question became criminal property).

The Supreme Court (overturning the decision of the Court of Appeal) held that there was no artificiality in recognising that change in character of the money, and that it would be appropriate to regard the defendant as entering into or becoming concerned in an arrangement to retain criminal property for the benefit of another.

It was the retention, use & control of the monies after they had been paid into the bank accounts as the result of a fraud, under the bank account arrangement made earlier between ‘B’ & ‘H’, which could properly form the basis of a conviction of ‘H’ under s328.

 

Contacting us

Our contact details are here.

David

(Note: This article applies to prosecutions under the provisions of Part 7 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 trial 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.)

Supreme Court caps confiscation enforcement

Supreme Court logoThe UK Supreme Court has capped confiscation enforcement in cases where more than one confiscation order covers the same joint benefit.  The result is that the State will be unable to recover in excess of 100% of the benefit jointly obtained.  It is as if the confiscation order created a joint and several liability of the defendant to ‘repay’ the benefit jointly obtained.

The principle is simple – but the practical implications may on occasion be complex.

In fact the Supreme Court judgment on 18 June 2014 in the cases of R v Ahmad & Ahmed and R v Fields & Others [2014] UKSC 36 dealt with another point too – confirming that under the law of confiscation if two or more persons obtain a benefit jointly they each obtain the whole of it.  That point is considered in a separate blog article.

 

The problem

The problem may best be understood by a simple example.  Suppose John and Jim get a couple of guns, walk into a bank together and rob it of £10,000.  Subsequently they are caught and convicted and are made subject to confiscation orders.  In those confiscation orders each of John and Jim will have a benefit of £10,000.  Assuming each of them has sufficient assets it seems that in total they will be required to ‘repay’ £20,000 into court.  So, it appears, the court will recover twice the amount stolen.

The Supreme Court concluded that that could not be right.  Recovering double the amount stolen would be disproportionate.  It would not serve the real aims of the Proceeds of Crime Act 2002 and it would be a violation of the defendants’ rights under Article 1 of the First Protocol to the European Convention on Human Rights.

 

The simple answer

The simple answer is to require each of the confiscation orders against John and Jim to provide that it is not to be enforced to the extent that a sum has been recovered by way of satisfaction of another confiscation order made in relation to the same joint benefit.

This is what the Supreme Court held in its judgment at para [74].

So if the court recovers £5,000 from John it will only recover a further £5,000 from Jim.  Of course that means if the court recovers £10,000 from John then it will recover nothing from Jim, but the Supreme Court said that criminals have to accept that risk of unfairness.

 

Potential complications

Although the principle is clear and the reason for it is straightforward, its application in practice may be more complicated.

Suppose that as well as John and Jim robbing the bank there was a getaway driver, Jack.  Let’s suppose Jack was not caught at the time, but a good while later he is caught and convicted.  If he is subject to confiscation then presumably he cannot be liable to pay anything if the court has already received £10,000 from John and Jim.  So that is a bit of luck for Jack!

Let’s consider some other defendants.  Peter and Phil are fraudsters operating a fake business in which they order goods on credit, sell them and disappear – pocketing the money and never paying their suppliers.  Peter and Phil had a joint bank account for the fake business which received £50,000 from customers over a period of just under one year.

Peter and Phil are caught, convicted of fraudulent trading contrary to s9 Fraud Act 2006 and subject to confiscation.  In the confiscation proceedings each of them has a ‘criminal lifestyle‘ having been convicted of an offence carried on for at least 6 months from which a benefit of at least £5,000 has been obtained, s75 PoCA 2002.

Peter and Phil each have a benefit of £50,000 from the offence of which they have been convicted.  But that is not the end of the story.

The separate personal bank accounts which Peter and Phil have are examined and the statutory criminal lifestyle assumptions are applied.  There are £70,000 unexplained credits in Peter’s bank account and £25,000 unexplained credits in Phil’s bank account.  In consequence the court finds Peter’s total benefit for confiscation purposes to be £120,000 and Phil’s total benefit to be £75,000.

Peter’s available amount is £80,000 and Phil’s is £45,000.  So the court makes confiscation orders against Peter for £80,000 and against Phil for £45,000.

If Peter pays the £80,000 and Phil pays nothing, can enforcement proceedings still be taken against Phil?  If they can, how much can be enforced against Phil?  I do not think the Supreme Court judgment helps me answer these questions because I need to know how much of the £80,000 recovered from Peter relates to the £50,000 benefit jointly obtained and how much of it relates to the other £70,000 assumed benefit of Peter’s.

For example if the £80,000 recovered from Peter includes all the £50,000 jointly obtained benefit of the fraud then the most that can be enforced against Phil is his additional assumed benefit of £25,000.

But, at the other extreme, if the £80,000 recovered from Peter comprises £70,000 re his additional assumed benefit and only £10,000 re the jointly obtained benefit then it would appear that the whole £45,000 can be enforced against Phil (because he still has unrecovered amounts of £40,000 joint benefit and £25,000 additional assumed benefit).

Looking at this another way, if we make a presumption that in each case the first £50,000 of the amounts ordered to be paid by Peter and Phil related specifically to the jointly obtained benefit then the £80,000 paid by Peter has repaid all of the jointly obtained benefit and so (arguably) there can be no enforcement action against Phil.  But that would seem to be a nonsensical outcome.

 

Default sentences

We also need to consider the implications for default sentences.

Going back to John and Jim.  They each had a benefit of £10,000 from the bank robbery.  Let’s assume the confiscation orders against each of them specified a default sentence of 6 months.  If the court recovers £5,000 from John – so it can then only enforce a maximum of £5,000 against Jim – does that result in a corresponding reduction in Jim’s default sentence if he fails to pay?

My guess is that Jim will indeed have his default sentence effectively reduced.  But the Supreme Court judgment does not provide the answer.

Presumably Jack, the getaway driver, cannot be made to serve any default sentence if the court has already recovered the £10,000 from John and Jim.  And what about Phil the fraudster – what is the position regarding his default sentence?

 

In conclusion

It seems to me that in solving one problem the Supreme Court have risked creating further problems in relation to the enforcement of confiscation orders.

If it were decided that any ambiguity should be resolved in favour of the defendants then (i) all recoveries from any defendant should be applied against his benefit jointly obtained in priority to his other benefit, and (ii) each defendant’s default sentence ought to be reduced pro-rata when the amount enforceable against him reduces (whether this arises as a result of a recovery from him or as a result of a recovery from another person relating to benefit obtained jointly with him).

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.)

UK Supreme Court rules on benefit obtained jointly

Supreme Court logoThe UK Supreme Court has finally and firmly ruled out apportionment of benefit obtained jointly in its judgment on 18 June 2014 in the cases of R v Ahmad & Ahmed and R v Fields & Others [2014] UKSC 36.

The Supreme Court confirmed that where benefit is jointly obtained by more than one defendant then each defendant obtains the whole of the benefit obtained jointly, for the purpose of confiscation proceedings.

 

Benefit “obtained”

Benefit arises where a person “obtains” an asset or evades a liability as a result of or in connection with criminal conduct, see s76 Proceeds of Crime Act 2002.  But the Supreme Court points out, in para [42] of Ahmad, whilst a criminal may sometimes become the owner of property obtained through crime, in many cases he does not do so.  When a person “obtains” a chattel, money, a credit balance or land through criminal dishonesty, he does not acquire title to, or ownership of, the item in question, although he does acquire control over it.

As was pointed out by Lord Walker and Hughes LJ in Waya [2012] UKSC 51, para [68], a person who dishonestly obtains property has “at most a possessory interest good against third parties, and thus of no significant value”.

 

Contrasting “obtaining” and “ownership”

The Supreme Court considered that cases under the 2002 Act involve “obtaining” not “ownership”, and, even if they did involve ownership, the Court were doubtful whether that ownership would be technically joint, para [55].

In paras [60] to [62] of Ahmad the Supreme Court set out their thinking in rejecting arguments for apportionment of benefit.  The argument for apportioned valuation is that s79(3) requires the valuation of the property obtained to take into account the interests of accomplices.  This argument misunderstands the purpose and effect of s79(3) said the Supreme Court.  A defendant who steals property or obtains it by deception does not acquire ownership of that property.  Likewise if two defendants jointly misappropriate property, neither of them obtains a legal interest in it and neither has an “interest” for the purpose of s79(3).  In relation to each of them, the value obtained is the value of what they have taken, which is the market value of the misappropriated property.  Thus, once a defendant has obtained the property, whether solely or jointly, that market value is the value of what he has obtained.

The “interests” of a defendant’s co-conspirators are not to be taken into account when valuing the property for the purpose of assessing the value of the property which the defendant “obtained”.  Furthermore when one is valuing the property which a conspirator, including a defendant, has “obtained”, one is not normally valuing an “interest” at all.

 

Whether benefit was obtained jointly

However the Supreme Court also confirmed, by references at paras [41] and [46] to [51], that Crown Courts should not be too quick to conclude that benefit has been jointly obtained when there is evidence which suggests that it may not have been.  Judges in confiscation proceedings, said the Supreme Court, should be ready to investigate and make findings as to whether there were separate obtainings.

David

P. S.  A separate blog article “Supreme Court caps confiscation enforcement” deals with the cap on enforcement of confiscation orders which was also dealt with in the UK Supreme Court judgment in R v Ahmad & Ahmed and R v Fields & Others [2014] UKSC 36.

(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.)

Criminal lifestyle confiscation and output VAT

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

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

 

Background

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

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

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

 

Benefit for confiscation purposes

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

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

 

The decision in the Crown Court

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

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

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

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

 

The appeal to the Court of Appeal

The defendant appealed on the grounds that:

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

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

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

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

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

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

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

David

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

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?

Mortgage fraud – but by whom?

Police lamp copyright David Winch 2014Ted Kelly was no stranger to the inside of a police station or the Crown Court dock. He had had many brushes with the law, but being charged with financial crime was a new experience.

Ted’s home had been searched by the police more than once in the course of an investigation into serious crimes and the police had found documents concerning a buy-to-let property in Liverpool which Ted owned. A search at the English Land Registry turned up a mortgage from Borset Building Society and enquiries there revealed the mortgage application had been submitted online by a mortgage broker, Adrian Broke.

Attached to the application were two years accounts for the business prepared by Peter Addit & Co

The mortgage application indicated that Ted was a self-employed joiner, trading as Kelly’s Joinery Services. Attached to the application were two years accounts for the business, prepared by Peter Addit & Co – members of a leading professional body of accountants, and signed both by Mr Addit and by Ted.

Ted’s self-employment came as a surprise to the police (who understood him to make his living from less legitimate activities) and, sure enough, a check with HM Revenue & Customs revealed that they had no knowledge of Ted’s self employment either.

 

Gotcha!

“Gotcha!” said DC Lund to himself. To assemble his case DC Lund interviewed Adrian Broke and Peter Addit concerning their dealings with Ted

“Gotcha!” said DC Lund to himself. To assemble his case DC Lund interviewed Adrian Broke and Peter Addit concerning their dealings with Ted. They confirmed that Ted had approached Mr Addit in June 2008 to have accounts prepared – just a simple Profit & Loss Account. Mr Addit had not been instructed to do any tax work for Ted. He assumed Ted wanted the accounts for his bank or was dealing with his tax himself. Ted produced his passport and driving licence (which Mr Addit photocopied) and had handed Mr Addit a list of work done and expenses from which Mr Addit had prepared the P & L account. The fee was less than £200.

The following year Ted had returned with a similar schedule and Mr Addit had produced the 2009 accounts for him then and there, for a similar fee. The net profit each year shown on the accounts was in the region of £40,000. At the June 2009 meeting there had been some discussion of a property purchase and Mr Addit had recommended the services of Mr Broke the mortgage broker (who was also a client of his).

Mr Broke confirmed that in July 2009 Ted had contacted him about obtaining a mortgage to buy a home for himself. He had produced his passport and driving licence (which Mr Broke photocopied) and two years accounts prepared by Mr Addit. Mr Broke had carried out a fact find and then recommended a mortgage from Borset Building Society and some life and critical illness policies as well as property and contents insurance. Ted had accepted these recommendations and Mr Broke had completed the mortgage application online based on the information and accounts Ted had provided.

Armed with these facts DC Lund arrested Ted, interviewed him, and then charged him with fraud by false representation in that he had dishonestly made a false representation to Adrian Broke that the accounts were true, with the intention of obtaining the mortgage advance, contrary to s2 Fraud Act 2006.

 

Ted’s version of events

But Ted’s version of events was very different. He said he had never met Mr Addit, had never instructed him to prepare any accounts, and had never been self employed as a joiner

But Ted’s version of events was very different. He said he had never met Mr Addit, had never instructed him to prepare any accounts, and had never been self employed as a joiner. He had been wanting to buy a property in Liverpool to let out and his cousin had recommended the mortgage broker Mr Broke. Ted went to see Mr Broke. Although Ted had no regular employment Mr Broke had assured him this would be no problem. All that would be needed would be his passport and driving licence. Ted took these to a second meeting with Mr Broke who asked him to sign numerous documents – all of which he signed, without reading, where Mr Broke pointed. Mr Broke also took photocopies of his passport and driving licence.

Shortly afterwards the mortgage came through and Ted was able to purchase the property and let it out to tenants. The rental income more than covered the mortgage payments (which he always paid on time). Ted also found he was paying for some insurances by direct debit, and he cancelled those.

When the matter came to court DC Lund, Mr Broke and Mr Addit were called by the prosecution and gave evidence.

 

Cross-examination

Under cross-examination Mr Broke confirmed that Mr Addit was his accountant, that he and Mr Addit referred clients to each other from time to time (but without any referral fee) and that he knew Ted’s cousin. He also confirmed that as a result of Ted’s property purchase he would receive payments from Borset Building Society, from the conveyancing solicitor whom he had recommended to Ted, and from the insurance companies. Had the mortgage not gone ahead he would have received none of these payments, which he estimated at less than £2,000 in total. But he confirmed the statement he had given to DC Lund.

Mr Addit also confirmed the evidence in the statement he had given DC Lund. But under cross-examination he accepted that he had at first given the police a statement saying Ted had approached him initially for two years accounts to be prepared. That had been based on a mistaken recollection which he had corrected in his second statement. Mr Addit had not asked for, nor seen, any bills or receipts in relation to Ted’s self employment. He had relied on the schedule presented to him by Ted. He had returned the schedule to Ted and not kept a copy. Mr Addit had believed the accounts to be true based on the information supplied to him by Ted.

Mr Addit had recently moved to a new computerised system and had not retained his diaries for 2008 and 2009

Indeed since Ted was no longer a client his files had been destroyed. Mr Addit had not sent Ted an engagement letter. Mr Addit had recently moved to a new computerised system and had not retained his diaries for 2008 and 2009. He had not contacted HM Revenue & Customs in relation to Ted’s self employment as he was not instructed to deal with Ted’s tax affairs.

It transpired that Ted had not paid Mr Addit for the preparation of either the 2008 or the 2009 accounts. In fact Mr Addit had not invoiced Ted for these accounts as he expected Ted to pay without an invoice. The only documentary evidence which Mr Addit held in relation to his dealings with Ted was the photocopies he had of Ted’s passport and driving licence (the same documents which Mr Broke had copied in July 2009).

He accepted that the date on which the 2008 accounts were shown as having been signed in June 2008 was a Sunday. He said the actual date of signing would be within a day or two of that.

The accounts were not prepared for tax purposes. The word “Allowable” which appeared against certain expense headings was on his standard word processing template for such accounts.

He denied however that he had backdated the accounts, or that he had prepared them on the instructions of Mr Broke rather than Ted, or that Mr Broke had paid him anything in connection with Ted’s accounts.

 

The computer files

Immediately after Mr Addit had completed his evidence DC Lund asked him if he would still have on his computer system the Microsoft Word files for the 2008 and 2009 accounts. Mr Addit thought he could have and that he would be able to access them there and then using a Wi-Fi link from the court building.

The Word files for both the 2008 and 2009 accounts showed a ‘creation date’ on the evening before the day on which Mr Broke had filed Ted’s online mortgage application in July 2009

When he did so it was discovered that the Word files for both the 2008 and 2009 accounts showed a ‘creation date’ on the evening before the day on which Mr Broke had filed Ted’s online mortgage application in July 2009. The creation dates were approximately two minutes apart.  These files also each had a later ‘modified date’.  In one case the modified date was approximately two hours later the same evening.

DC Lund passed this information to prosecuting counsel, and then it was passed on to defence counsel and the judge.

Mr Addit was recalled to the witness box and questioned about this. He maintained that in fact the accounts had been prepared earlier and that perhaps what was now being seen were Word files for later copies of the accounts. He denied that the later ‘modified dates’ showed that these were in fact the original working copies of the accounts.

 

No case to answer

That brought the prosecution case to a close. Whilst the jury were excluded defence counsel asked the judge to dismiss the case on the basis that Ted had ‘no case to answer’.

The judge agreed that the trial should be halted and Ted should be acquitted

The judge agreed that the trial should be halted and Ted should be acquitted. The case against him had become so weak and tenuous that the jury could not possibly find that Ted had dishonestly represented to Mr Broke that the accounts prepared by Mr Addit were true – which was the basis on which Ted had been charged.  What’s more there was a danger that the jury might convict Ted because they did NOT believe the prosecution witnesses and that was a possibility the judge was unwilling to countenance.

So, as things turned out, it was not necessary to hear any evidence from the defence witnesses (including myself).  In any event the matters and issues which I had drawn to the attention of the defence team – and which had been set out in an expert witness forensic accountant’s report filed at court in advance of the trial – had largely been aired before the court already by defence counsel in his cross-examination of Mr Addit.

David

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

The Court of Appeal decision in Ahmad & Ahmed v R

Last month the Court of Appeal slashed the largest confiscation orders ever made in England & Wales.  The Crown Court had made orders of over £92 million each against Shakeel Ahmad and Syed Ahmed.  The Court of Appeal cut each order to just over £16 million, Ahmad & Ahmed v R [2012] EWCA Crim 391.  But in doing so did the Court of Appeal properly apply the wording of the legislation or did it allow itself to be excessively influenced by what it believed to be the underlying objective of confiscation?

The confiscation orders were made under the confiscation provisions of the Criminal Justice Act 1988, which are in many respects very similar to the confiscation provisions of the Proceeds of Crime Act 2002.  The statutory ‘criminal lifestyle’ assumptions did not apply to these defendants, who had each been convicted of a single count of ‘conspiracy to cheat the public revenue’ in relation to a massive VAT ‘carousel’ fraud (more correctly a Missing Trader Intra Community VAT fraud, or MTIC fraud).  The fraud had involved transactions, and movements of monies, between various companies under the control of the appellants.

The key to the fraud is that the exporting company, under normal VAT rules, is eligible to obtain a refund from HM Revenue & Customs of the VAT it has paid on its purchase of the goods which it exports

Essentially the fraud operated in this way.  High value goods were imported into the UK by one company, then sold to another, and another, and ultimately re-exported to the overseas company which had supplied them in the first place.  Sometimes the entire chain of transactions were completed in a single day.  The intermediate companies are known as ‘buffer companies’.  The key to the fraud is that the exporting company, under normal VAT rules, is eligible to obtain a refund from HM Revenue & Customs of the VAT it has paid on its purchase of the goods which it exports.  But if the company from which it has purchased those goods dishonestly fails to make payment to HMRC of the VAT it charged when selling the goods to the exporter, then HMRC will be out of pocket and the fraudsters will reap the benefit.

The appellants had been involved in 32 very large transactions in a period of less than 3 weeks.  These had resulted in VAT refunds of over £12 million.

In the confiscation proceedings it was accepted that the court was entitled to ‘pierce the veil’ of incorporation of a company used by the fraudsters.  It was held that they each had jointly obtained what the company had obtained.

 

The difficulty

Where the difficulty arises is that this company received monies which reflected the value of the goods plus the VAT on them.  The Crown Court judge made a finding that it was “a necessary part of the deception on HMRC that an amount representing the value of the goods and the VAT thereon should pass through the [bank] accounts of the buffer companies”.

The judge made a confiscation order reflecting not just the VAT lost to HMRC, but the £72 million value of the bank transactions

The Crown Court judge therefore made a confiscation order reflecting not just the £12 million VAT lost to HMRC, but reflecting the £72 million value of the bank transactions – in other words based on the value of the goods plus the VAT on them.  The issue on appeal was whether the Crown Court judge had been right to do that.

The relevant legislation, s71(4) Criminal Justice Act 1988 provides that “a person benefits from an offence if he obtains property as a result of or in connection with its commission and his benefit is the value of the property so obtained”.  The Crown Court judge held that the full amount passing through the bank account was ‘obtained as a result of or in connection with’ the offence.

The Court of Appeal disagreed and found that only the VAT was ‘obtained as a result of or in connection with’ the offence.  The remaining monies were the costs incurred in committing the offence rather than benefit obtained from the offence.

 

Which court was right?

I am bound to say that I think both courts came to an incorrect figure of benefit.

I would have looked at the issue from a different perspective

I would have looked at the issue from a different perspective.  It seems to me that the bank transactions were a necessary and integral ingredient of the fraud.  The bank transactions, in my view, were made as a result of or in connection with the offence.

I have considered what is meant by ‘as a result of or in connection with’ in an earlier article on this blog HERE.

But I do not believe the appellants can properly be said to have ‘obtained’ monies which they already had.  Neither the Crown Court nor the Court of Appeal appears to have found it necessary to consider where the monies needed to conduct the fraud came from.  Furthermore, there is a suggestion in the judgment of the Court of Appeal that monies were recycled and used repeatedly in the course of the 32 transactions.  So the monies actually ‘obtained’ by the appellants could be very considerably less than the £72 million figure used by the Crown Court judge.

The Court of Appeal did not find it necessary to consider those aspects further – which was unfortunate in my view.  The consequence is, I would suggest, that the aggregate amount ‘obtained’ by the appellants as a result of or in connection with the offence remains unknown.  It will not be less than the loss incurred by HMRC but may be greater than that figure depending upon the amounts and sources of the other monies employed in the fraud.

David

UPDATE : This case was the subject of an appeal to the UK Supreme Court.  Comments on the Supreme Court judgment can now be found in my newer blog articles “UK Supreme Court rules on benefit obtained jointly” and “Supreme Court caps confiscation enforcement“.

Just how is PoCA confiscation supposed to work?

The UK Supreme Court recently heard 3 days of complex legal submissions about a straightforward confiscation case.  Four eminent counsel suggested half a dozen wildly differing figures for the benefit arising from a single mortgage fraud.  Obviously the operation of confiscation under Part 2, Proceeds of Crime Act 2002 is neither simple nor straightforward.  There is a conspicuous lack of clarity and certainty in the confiscation regime.

The appellant, Mr Waya, contested the finding of the Court of Appeal that he pay £1.11 million – R v Waya [2010] EWCA Crim 412.  That was a reduction on the figure originally ordered in the Crown Court of £1.54 million.  His counsel suggested the correct figure was nil – or on an alternative basis it might be £0.255 million.  Counsel for the prosecution contended the Court of Appeal had the correct figure.  But counsel for the Home Department proposed a figure of £0.6 million and counsel for the Attorney General put the figure at £1.0 million.  Each of these figures was said to be based on applying the same statute law to the undisputed facts of the case.

Mr Waya dishonestly obtained a mortgage advance which he used to purchase a flat.  The flat went up in value . . .

The facts are these.  Mr Waya dishonestly obtained a mortgage advance which he used to purchase a flat.  The flat went up in value.  He legitimately obtained a new and larger mortgage, repaying the first mortgage in full.  The flat continued to increase in value.  Mr Waya was convicted of mortgage fraud (in relation to the original mortgage), or more accurately he was convicted of obtaining a money transfer by deception contrary to s15A Theft Act 1968, and was then subject to confiscation under PoCA 2002.  The sole question before the court was the amount of his benefit from the mortgage fraud (referred to as the benefit of his ‘particular criminal conduct’).

There were striking differences of principle in the approach of different counsel to the interpretation of PoCA 2002 as well as some different interpretations of the facts of the case.

 

The submissions of Mr Waya’s counsel

Mr Waya’s counsel put forward four alternative arguments.  Firstly he said that, on careful consideration of the facts, Mr Waya had not obtained anything when the mortgage was advanced since he had never been in control of the monies advanced.  He was never in a position to use the monies for whatever he might have wanted (they could only be used towards the purchase cost of the flat).

Secondly, Mr Waya (if he did obtain something) had obtained something of no market value.  He had not obtained a gift, he had obtained a loan.  The obligation to repay was integral to the money transfer – and the market value of the combination of the monies advanced to him and the repayment obligation was nil.  This result flowed from s79(3) PoCA 2002.

The courts should not take a ‘snapshot’ view but instead “the entirety of the transaction” had to be considered

Thirdly the courts should not, Mr Waya’s counsel contended, take a ‘snapshot’ view (considering only what happened when the mortgage was advanced) but instead “the entirety of the transaction” had to be considered.  The lender had been repaid in full and had lost nothing as a consequence of Mr Waya’s dishonesty.  So, looking at the entirety of the transaction, there was no benefit for the purposes of confiscation.

Fourthly, as a final alternative, the courts should look to the ‘pecuniary advantage’ derived by Mr Waya in accordance with s76(5).  He had been assisted in the purchase of the flat which had subsequently increased in value.  His counsel had calculated the value of his ‘pecuniary advantage’ to be £255,000.

The House of Lords had taken a wrong turning many years ago when it was said that “subsequent events are to be ignored”

Mr Waya’s counsel conceded that his proposal that the court should look to “the entirety of the transaction” rested on his view that the House of Lords had taken something of a wrong turning many years ago in the confiscation case of R v Smith [2001] UKHL 68 when it was said at para [23] that “subsequent events are to be ignored”.  That may be correct where, in the drug trafficking legislation, the benefit for confiscation purposes was to be based on the ‘payment or reward received’ – but it was not the correct approach to confiscation under the Criminal Justice Act 1988 or PoCA 2002 provisions where benefit was based on what had been ‘obtained as a result of or in connection with the criminal conduct’.

In consequence, it was contended, very many confiscation cases had been wrongly decided by courts at every level in England & Wales since that time.

 

The submissions of other counsel

Counsel for the prosecution, on the other hand, contended that the Court of Appeal had come to the correct conclusion in respect of Mr Waya’s confiscation.  Furthermore, with a very few exceptions, appeal courts had come to correct conclusions in confiscation cases over the years.  It was right to ignore subsequent events.  In particular the Court of Appeal had correctly decided in the case of CPS v Rose [2008] EWCA Crim 239 that s79(3) should not have the effect of causing the victim’s interest in any property to reduce the defendant’s benefit in confiscation in connection with his criminal conduct – although there are no words to that effect in the statute.

A defendant should not be entitled to rely on his own crime to limit the benefit of that crime for the purposes of confiscation

Counsel for the Home Department and for the Attorney General suggested a slightly different principle to be drawn from the Rose case.  This was that a defendant should not be entitled to rely on his own crime to limit the benefit of that crime for the purposes of confiscation.  In consequence, it was contended a thief or handler of stolen goods was to be treated as if he had obtained the value of good title to the stolen goods and where, as a result of criminal conduct, property had been obtained jointly by offenders then each of them was to be treated as obtaining the value of the whole of the property jointly obtained.  Again, of course, there are no words to that effect in the statute.

It will probably be 2 or 3 months before we will learn the Supreme Court’s decision in this case.  [UPDATE – Judgment in the Waya case was handed down on 14 November 2012, see below.]  But whatever that decision is I suggest that there will continue to be serious difficulties with the practical application of the confiscation regime – not least because this case did not touch at all on the consequences of the statutory ‘criminal lifestyle’ assumptions.

David

P.S. I have prepared a summary of the detailed legal submissions by counsel to the UK Supreme Court in R v Waya which is on Criminal Solicitor Dot Net HERE.

UPDATE:

The Supreme Court has handed down its judgment in the case, which is discussed in a new blog post R v Waya – the UK Supreme Court judgment.