Tag Archives: wales

The Court’s discretion under s22 PoCA 2002

Crown Court judgeThe revisiting of old confiscation orders by prosecutors under section 22 Proceeds of Crime Act 2002 is becoming more frequent but as yet few variations made under s22 have been appealed.

In stark contrast to the position when a confiscation order is first made, on a s22 revision the court – in other words the judge – has discretion concerning what variation to make to the original confiscation order and even whether to refuse to make any variation at all.

Section 22 is headed “Order made: reconsideration of available amount”.

 

Reconsideration of available amount

Section 22 PoCA 2002 empowers the Crown Court to vary an existing confiscation order made under s6 of the Act. In effect it allows the prosecution to apply to the court for a further payment to be required from the defendant under an existing confiscation order where his available amount has increased since the original order was made.

We are considering the position of a defendant who was made subject to a confiscation order, perhaps some years ago, and the court ruled then that he had a figure of benefit which was higher than his available amount. At that time the court would not have ordered him to pay the full amount of his benefit. Instead the amount he was then ordered to pay would have been restricted to his available amount at that time. The figures of the defendant’s benefit, available amount and the amount he was ordered to pay should all be spelled out in the original confiscation order.

Under s22 the prosecutor returns to court and asks it to consider the available amount which the defendant has now and to order him to pay a further amount now towards his total benefit.

But the court is required under s22(4) to do what “it believes is just”.  In the case of Padda v R [2013] EWCA 2330 the Court of Appeal noted, at para [45] that it is entirely appropriate on a s22 application for the court to bear in mind any “consideration which might properly be thought to affect the justice of the case”.

At the same time the court must have regard to the underlying policy behind confiscation – that offenders should be stripped of the benefit of their offending.

So could there ever be a case where the court would simply refuse the prosecution’s application to order the defendant to pay a further amount?

 

Mr Mundy’s case

Ian Mundy had been convicted in Cardiff Crown Court in 2008 of drugs offences (involving cocaine and cannabis) and money laundering.  He had been subject to confiscation with a benefit of £172,365 and an available amount of £9,275.  He was ordered to pay £9,275 and did so by 19 March 2009.

There was therefore an excess benefit of £163,090 which Mr Mundy had never been ordered to pay.

In 2016 or 2017 it came to the attention of prosecutors that the property owned by Mr Mundy (which had a negative equity in 2008) now had a positive value.  In addition Mr Mundy now had a car, a van and two motorcycles and had over £8,000 in bank accounts.  He seemed an ideal candidate for a s22 application.

A restraint order was obtained on 21 February 2017 and a s22 application was lodged on 26 May 2017.  The Crown sought a further payment of £29,791.  Mr Mundy disputed the Crown’s valuation of his assets and, following exchanges of documents, the Crown reduced its figure to £22,061.  Mr Mundy put the figure at only £2,561 arguing, amongst other things, that the monies in the bank accounts were to pay for various items and to support his family. He said the motorcycles had little value and were his hobby; the van was used for work; the car was jointly owned with a third party and the value placed on the property was excessive.

The application was heard on 13 September 2017.  The Crown Court judge refused to order that Mr Mundy pay any further amount.  The judge said, “I have read the application and the information in support of the application to make the order. I have also read the detailed response to the section 22 application in which the explanation is provided on behalf of the defendant, firstly, to the circumstances in which he acquired the various vehicles and also the circumstances and the use to which the savings which were gathered were to be put. I have absolutely no doubt that it would not be just in these circumstances to make the order under section 22 and I decline to do so.”

The Crown appealed.

 

The appeal

The Court of Appeal heard the case in January 2018, R v Mundy [2018] EWCA Crim 105.

On appeal the court noted that what was “just” required a consideration of what was “just” for the prosecution as well as for the defendant.  The court noted that the judge in the Crown Court had expressly referred to the public interest in confiscating the proceeds of crime.

The court considered that the judge’s reasoning had been rather too “abbreviated”.  At para [33] it remarked “If the judge had gone through the list and given brief reasons for rejecting each element in it, and if he had added that there must be an element of proportionality in the disposition of court resources, then we doubt there could have been any proper basis for challenging the order.  Judges are entitled summarily to dismiss applications that they regard as being substantially without merit, but the Crown had spent considerable time and effort preparing for the application and both it and the public were entitled to know why the judge rejected the application.”

But the Court of Appeal went on to conclude that the Crown Court judge had a discretion to refuse to vary the order and that on the facts it was properly open to him to do so in Mr Mundy’s case.  The court dismissed the prosecution’s appeal.

It follows that – at least for now – Mr Mundy is not required to pay anything further under the 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.)

Default sentence reduction for part payment

Supreme Court logoOn 24 January 2018 the UK Supreme Court handed down its judgment in R (Gibson) v Secretary of State for Justice [2018] UKSC 2. As a result of this judgment there will be slightly more generous reductions in default sentences to be served where part of the amount due under a confiscation order has been paid. It may be that in its determination of what the statute law actually says the Supreme Court has found that the law in this area is more generous to convicted defendants than parliament had intended it to be.

 

Mr Gibson’s case

Mr Gibson had been made subject to a confiscation order of over £5.4m in March 2000.  He was ordered to pay this within 12 months, with a six year prison term in default.  Perhaps not surprisingly Mr Gibson did not pay the amount in full on time and from March 2001 interest started to be added, at the rate of 8% per annum, on the amount outstanding.

In fact only relatively small amounts were paid under the confiscation order.  By the time the Magistrates’ Court committed Mr Gibson to prison under the default sentence only £90,370 in total had been paid – but the interest added to the amount originally ordered to be paid had resulted in the total amount outstanding rising to over £8.1m.

The original default term had been six years, or 2,190 days.  There was no doubt that Mr Gibson was due some reduction in this because he had paid £90,370 off the order.  But should the reduction be calculated as a proportion of the original amount ordered of £5.4m or as a proportion of the amount now outstanding of £8.1m?

Originally the calculation was made based on the £8.1m.  That resulted in a reduction of 24 days in the default term.  But Mr Gibson wanted the calculation to be based only on the original £5.4m – which instead would result in a reduction of 35 days.  Mr Gibson commenced legal proceedings to get the extra reduction in his default sentence.

The law on the point is not particularly clear.  Mr Gibson originally lost the argument in the Administrative Court.  He appealed to the Court of Appeal – and lost again.  But in January 2018 the Supreme Court decided in Mr Gibson’s favour.  As a result he is entitled to the extra 11 days reduction in his default sentence.

 

The effect of the Supreme Court decision

This decision applies in every case (in England and Wales) in which a default sentence has been activated by the Magistrates’ Court, interest has been added to the amount outstanding, and there needs to be some reduction in the default sentence as a result of part of the confiscation order having been paid.

The effect of the decision is that the reduction for the part payment is to be calculated based on the original amount ordered to be paid when the confiscation order was made – not on the amount (including interest) which is outstanding when the Magistrates’ Court activates the default sentence.

Let’s take a simpler example. John is subject to a confiscation order in the sum of £150,000 with a default sentence of 30 months. He has paid £15,000 under the order, but interest of £5,000 has been added. When John is being committed to prison under the default sentence the balance outstanding is £140,000 (including the interest).

John’s default term will be reduced by 3 months (which is 10% of the original default term) because he has paid £15,000 (which is 10% of the original confiscation order amount of £150,000).  So he will be committed to prison for 27 months (3 months less than the original default term of 30 months).  In practice the default sentence would be calculated in days rather than months.

When calculating the reduction in the default sentence the interest is ignored.

 

Is this what parliament intended?

It seems doubtful that this is what parliament intended.  One effect of this decision appears to be that a default sentence cannot be activated where the remaining balance outstanding is less than the total interest which has been added.

Consider the example of Peter who was originally the subject of a confiscation order for £60,000 with a default sentence of 18 months.  Peter does not pay on time and interest of £5,000 has been added.  The amount outstanding is now £65,000 – but if Peter pays just the original £60,000 off then he cannot be committed to prison under the default sentence, even though the £5,000 interest is still outstanding.  This is because there is a 100% reduction in the default sentence because he has paid 100% of the original amount of the confiscation order.

Of course parliament can change the law by passing new legislation if it wishes.

 

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.)

The meaning of “dishonesty” in English criminal law

Legal wig copyright David Winch 2014
What is meant by “dishonesty” in English criminal law? When considering the meaning of dishonesty the criminal courts of England and Wales until now often referred to a case decided last century. Recently in the case of Ivey v Genting Casinos (UK) Ltd (t/a Crockfords) [2017] UKSC 67 (25 October 2017) the UK Supreme Court reconsidered the meaning of dishonesty – and came to some new conclusions.

 

The two-stage ‘Ghosh’ test

Until October 2017 the leading case on the meaning of dishonesty in English criminal law was R v Ghosh [1982] EWCA Crim 2. In that case, decided in 1982, the Court of Appeal determined that there was a two-stage test for dishonesty. The first stage was based on an objective criterion and the second stage was based on a subjective criterion. The two stage test was put in the following terms:-

“In determining whether the prosecution has proved that the defendant was acting dishonestly, a jury must first of all decide whether according to the ordinary standards of reasonable and honest people what was done was dishonest. If it was not dishonest by those standards, that is the end of the matter and the prosecution fails.

If it was dishonest by those standards, then the jury must consider whether the defendant himself must have realised that what he was doing was by those standards dishonest. In most cases, where the actions are obviously dishonest by ordinary standards, there will be no doubt about it. It will be obvious that the defendant himself knew that he was acting dishonestly. It is dishonest for a defendant to act in a way which he knows ordinary people consider to be dishonest, even if he asserts or genuinely believes that he is morally justified in acting as he did.”

So until October 2017 criminal courts operated on the basis that not only must the conduct of the defendant be dishonest by the ordinary standards of reasonable and honest people (the objective test) but the defendant himself must have realised that he was acting dishonestly by that standard (the subjective test).

 

The subjective test

What was implied in Ghosh, was that a defendant was entitled to say, “I did not know that anybody would regard what I was doing as dishonest” and if he was believed he should be acquitted of dishonesty (as the subjective test was not satisfied).

But the Supreme Court has now criticised that approach, saying that “It has the unintended effect that the more warped the defendant’s standards of honesty are, the less likely it is that he will be convicted of dishonest behaviour”.

The new judgment means that it is still necessary for the jury in the Crown Court or the magistrates in the Magistrates’ Court to reach conclusions about the actual state of mind of the defendant – but only insofar as this relates to the defendant’s state of knowledge or belief as to the facts.  The Supreme Court has now said that criminal courts should no longer ask themselves whether the defendant himself realised that he was acting in a way which ordinary people would consider to be dishonest.

 

The new legal position

So instead of the Ghosh test, when dishonesty is in question the court must first ascertain (subjectively) the actual state of the individual’s knowledge or belief as to the facts. The question is not whether that belief is reasonable – the question is whether it is genuinely held.  Once his actual state of mind as to knowledge or belief as to the facts is established, the question whether his conduct was honest or dishonest is to be determined by the jury or magistrates by applying the (objective) standards of ordinary decent people.

There is no longer any requirement that the defendant must appreciate that what he has done is, by those standards, dishonest.

One consequence of this is that the definition of “dishonesty” is now consistent between criminal and civil law in England and Wales.

 

An example

Suppose a person is newly arrived in England and he has come from a country in which all public transport is free.  He gets on a bus in London and on arriving at his destination gets off without paying.  He is charged under s3 Theft Act 1978 with dishonestly making off without payment.  But was he dishonest?

The issue is ‘Did he genuinely believe that no payment was required?’.  If he did then he has not been dishonest and should be acquitted.  If, on the other hand, he did know that payment was required then he was dishonest by not paying.

But this issue concerns the defendant’s belief about the relevant facts – the issue is not about his understanding of what constitutes “dishonesty”.  That is the change in the law as a result of the Supreme Court’s ruling in October 2017.

 

Contacting us

Our contact details are here.

David

(Note: This article applies to matters arising under the provisions of the criminal law in England and Wales.  Appropriate professional advice should be sought in each individual case.)

Bank account frozen

BanksFrom time to time I am contacted by people who have found their bank account frozen by the bank without warning or explanation.  Perhaps the account holder discovers this when he attempts to use a debit card, draw cash from an ATM, use online banking, or visit his bank to pay money in or take it out.

What should the customer do and what can he expect to happen?

 

Contact the bank

The first thing to do is to contact the bank and ask for an explanation.  The bank might be rather evasive in response – perhaps referring to ‘technical difficulties’ – or the bank may refer the customer to a specialist department (such as the fraud department) – or the bank may hand over a pre-printed leaflet about money laundering.  But the bank are unlikely to provide a full explanation about what is happening or when the account will be unfrozen.

If the bank won’t tell the account holder what is going on the likelihood is that someone at the bank has flagged up the account for possible ‘money laundering’.  In other words someone at the bank (or the bank’s computer system) has noted what appears to be unusual activity on the account which might be connected to proceeds of some sort of crime.

If that is the case then it may be helpful if the customer very swiftly supplies to the bank further information, explanations and, if possible, documentary evidence in support of an innocent explanation for any unusual recent transactions.

Also, if there is a particularly urgent need to have the account unfrozen – for example where the account is a business account and it is necessary to pay employees’ wages or a supplier almost immediately – tell the bank about the urgency.

The bank will not disclose which transactions have triggered their action or what suspicions they have, so the customer will be left guessing how he can best put the bank’s mind at rest.

But that further information needs to be supplied as quickly as possible, preferably the same day – delaying for a couple of days will probably be too long.

 

Inside the bank

What is happening inside the bank is probably that the customer’s account (or accounts) will have been referred to the bank’s anti-money laundering or anti-fraud department for consideration of whether a Suspicious Activity Report (SAR) should be made to the National Crime Agency (NCA) by the bank’s Money Laundering Reporting Officer (MLRO).

If the MLRO decides that there is a valid basis for a suspicion of money laundering (which is very widely defined) then an SAR will promptly be submitted to the NCA.  The SAR will ask the NCA to give consent for the bank to unfreeze the account.  Once that SAR is submitted matters will be largely out of the bank’s control – which means that nothing is likely to be achieved after that time by the customer supplying further information, or making a complaint, to the bank.

But the bank will not normally tell the customer whether it has made an SAR or when the SAR was submitted.

Once the bank has submitted an SAR to the NCA the account will remain frozen until either the NCA have replied to the bank authorising the bank to unfreeze the account, or the ‘notice period’ has elapsed without the bank receiving any response at all from the NCA.

The ‘notice period’ is seven working days starting from the day after the bank submits the SAR to the NCA.  So, for example, if the bank submitted an SAR on Thursday 9 June 2016 the ‘notice period’ would end on Monday 20 June.

In practice however the NCA aim to respond to these consent requests before the end of the ‘notice period’.  If the NCA are told by the bank that there is a particular urgency they will attempt to respond particularly swiftly (which is one of the reasons the customer should tell the bank if there is a particularly urgent need to have the account unfrozen).

If the NCA require further time to consider the matter they will respond to the bank by refusing consent.  Once that happens the account will remain frozen until the ‘moratorium period’ expires.  The ‘moratorium period’ is 31 days starting with the day on which the bank receives refusal of consent from the NCA.

So, for example, if the bank receives refusal of consent on Thursday 16 June 2016 the last day of the ‘moratorium period’ will be Saturday 16 July.  The account should then be unfrozen on the next working day.

[UPDATE: The Criminal Finances Act 2017 included legislation which allows a court to extend the ‘moratorium period’ by up to a further six months (an additional 186 days).  This is now in force.]

During the ‘moratorium period’ the NCA will continue to consider the position and may at any time give the bank consent to unfreeze the account.

If the NCA do not give consent then the bank should unfreeze the account once the ‘moratorium period’ has expired unless in the meantime the authorities have obtained a ‘restraint order’ from a Crown Court judge.

If a ‘restraint order’ has been obtained from a Crown Court judge then copies of that order are served promptly on the bank and on the customer (and perhaps also on others, such as the Land Registry).  A ‘restraint order’ will normally freeze all the assets of the customer indefinitely.  There is more information about ‘restraint orders’ HERE.

A customer who is served with a copy of a Crown Court ‘restraint order’ should seek advice from a solicitor experienced in such matters immediately.

 

What can the customer do?

The bank ‘s customer will not know whether the bank has submitted an SAR to the NCA, when the SAR was submitted, or what response has been received from the NCA, if any.

Because of this the customer will not know when the ‘notice period’ or the ‘moratorium period’ are due to expire.

Aside from very swiftly providing additional information and documents and telling the bank about any particularly urgent need to have the account unfrozen, as already mentioned, the customer will be able to do little more than check with the bank every day whether his account has been unfrozen.

 

What about the Banking Ombudsman?

In my experience the Banking Ombudsman does not intervene where the bank has a suspicion of money laundering and is acting in accordance with its Terms and Conditions.

 

How often are bank accounts frozen?

Figures published by the NCA indicate that they receive approximately 8,000 consent requests each year from banks, building societies and similar institutions.

The NCA on average respond to these consent requests in five working days – and give consent in about 90% of cases.  In about a further 5% of cases they give consent during the moratorium period.

However even where consent is granted the bank’s customer may become the subject of an investigation by the authorities (such as the police, HM Revenue and Customs or the Single Fraud Investigation Service).

 

What is the legal basis for this?

Most of the relevant law is to be found in Part 7, Proceeds of Crime Act 2002 – particularly in s335 and s340.

A case concerning the freezing of a bank account when a suspicious activity report had been filed with the NCA by the bank was considered by the Court of Appeal in London in the case of The National Crime Agency v N & Royal Bank of Scotland plc [2017] EWCA Civ 253 (07 April 2017).  The court concluded that it would only very rarely be appropriate for the court to interfere with the temporary freezing of a bank account where a report had been made to the NCA.

 

How long will the account be frozen?

In the majority of cases the account should be unfrozen within about two weeks.  In a minority of cases the account will be frozen for up to about six weeks, perhaps slightly longer.

[UPDATE: The Criminal Finances Act 2017 included legislation which allows a court to extend the ‘moratorium period’ by up to a further six months (an additional 186 days) which means that an account can be frozen for up to about 32 weeks without a ‘restraint order’. This is now in force.]

Where a ‘restraint order’ is obtained the account will remain frozen after that.

 

What happens after the account is unfrozen?

After the account is unfrozen the bank’s relationship with the customer may return to normal or the bank may write to the customer asking him to close his account (or accounts) within 60 days and move to another bank.

The bank may not give any reason for requiring the customer to close his account.

 

Can the customer claim damages against the bank?

I am not aware of any cases in which bank customers have successfully claimed damages against their bank in relation to an account which has been frozen because of a reasonable suspicion of money laundering (even where, on investigation, no ‘money laundering’ was discovered).

 

Contacting us

Our contact details are here.

David

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

Money Laundering Regulations 2017

Big Ben imageThe final wording of the new Money Laundering Regulations 2017 was published on 22 June 2017. To give them their full title The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 came into force on 26 June 2017.  The reality is however that the new Regulations will take a year or two to be fully effective.

The Regulations run to over 100 pages.  I cannot describe them fully in a blog such as this, but I will mention a few points of interest.  These regulations replace the Money Laundering Regulations 2007 (as amended) and The Transfer of Funds (Information on the Payer) Regulations 2007.  Many of the provisions of the 2017 Regulations simply continue requirements of the 2007 ones.  But there are some changes of emphasis and important new requirements too.  The new Regulations also implement in UK law the requirements of the EU Fourth Money Laundering Directive.

  1. The hierarchy of risk assessments
  2. Written policies, controls and procedures
  3. Changes for High Value Dealers
  4. Changes for Estate Agents
  5. Politically exposed persons
  6. Banning persons with criminal convictions
  7. Conclusion
  8. Contacting us

 

The hierarchy of risk assessments

The new Regulations set out a hierarchy of risk assessments.  The UK government, in particular HM Treasury and Home Office, are required by regulation 16 to make arrangements before 26 June 2018 for a risk assessment to be undertaken to identify, assess, understand and mitigate the risks of money laundering and terrorist financing affecting the United Kingdom.

Then under regulation 17 each of the various supervisory bodies must identify and assess the international and domestic risks of money laundering and terrorist financing to which those relevant persons for which it is the supervisory authority (“its own sector”) are subject.  The supervisory body must take into account the risk assessment from HM Treasury and Home Office.

Finally under regulation 18 each ‘relevant person’ (businesses in the regulated sector) must take appropriate steps to identify and assess the risks of money laundering and terrorist financing to which its own business is subject.

In carrying out that risk assessment a relevant person must take into account information made available to it by its supervisory authority and its own risk factors. Those will include risk factors relating to its customers, the countries or geographic areas in which it operates, its products or services, its transactions and its delivery channels.

 

Written policies, controls and procedures

The new Regulations are much more prescriptive about the written policies, controls and procedures required.  Regulation 19 in particular spells out these requirements.

    • (1) A relevant person must
      • (a) establish and maintain policies, controls and procedures to mitigate and manage effectively the risks of money laundering and terrorist financing identified in any risk assessment undertaken by the relevant person under regulation 18(1);
      • (b) regularly review and update the policies, controls and procedures established under sub-paragraph (a);
      • (c) maintain a record in writing of —
        • (i) the policies, controls and procedures established under sub-paragraph (a);
        • (ii) any changes to those policies, controls and procedures made as a result of the review and update required by sub-paragraph (b); and
        • (iii) the steps taken to communicate those policies, controls and procedures, or any changes to them, within the relevant person’s business.
    • (2) The policies, controls and procedures adopted by a relevant person under paragraph (1) must be —
      • (a) proportionate with regard to the size and nature of the relevant person’s business, and
      • (b) approved by its senior management.
    • (3) The policies, controls and procedures referred to in paragraph (1) must include —
      • (a) risk management practices;
      • (b) internal controls (see regulations 21 to 24);
      • (c) customer due diligence (see regulations 27 to 38);
      • (d) reliance and record keeping (see regulations 39 to 40);
      • (e) the monitoring and management of compliance with, and the internal communication of, such policies, controls and procedures.
    • (4) The policies, controls and procedures referred to in paragraph (1) must include policies, controls and procedures —
      • (a) which provide for the identification and scrutiny of –
        • (i) any case where —
          • (aa) a transaction is complex and unusually large, or there is an unusual pattern of transactions, and
          • (bb) the transaction or transactions have no apparent economic or legal purpose, and
        • (ii) any other activity or situation which the relevant person regards as particularly likely by its nature to be related to money laundering or terrorist financing;
      • (b) which specify the taking of additional measures, where appropriate, to prevent the use for money laundering or terrorist financing of products and transactions which might favour anonymity;
      • (c) which ensure that when new technology is adopted by the relevant person, appropriate measures are taken in preparation for, and during, the adoption of such technology to assess and if necessary mitigate any money laundering or terrorist financing risks this new technology may cause;
      • (d) under which anyone in the relevant person’s organisation who knows or suspects (or has reasonable grounds for knowing or suspecting) that a person is engaged in money laundering or terrorist financing as a result of information received in the course of the business or otherwise through carrying on that business is required to comply with —
        • (i) Part 3 of the Terrorism Act 2000; or
        • (ii) Part 7 of the Proceeds of Crime Act 2002;
      • (e) which, in the case of a money service business that uses agents for the purpose of its business, ensure that appropriate measures are taken by the business to assess —
        • (i) whether an agent used by the business would satisfy the fit and proper test provided for in regulation 58; and
        • (ii) the extent of the risk that the agent may be used for money laundering or terrorist financing.
    • (5) In determining what is appropriate or proportionate with regard to the size and nature of its business, a relevant person may take into account any guidance which has been —
      • (a) issued by the FCA; or
      • (b) issued by any other supervisory authority or appropriate body and approved by the Treasury.

This regulation effectively requires each business in the regulated sector to draw up new written statements of policies, controls and procedures.

 

Changes for High Value Dealers

It was expected that the monetary lower limit for cash transactions would be reduced from €15,000.  That has indeed happened and the new limit is €10,000.  This means that when a firm or sole trader who by way of business trades in goods (including an auctioneer dealing in goods) receives, in respect of any transaction, a payment or payments in cash of at least 10,000 euros (or equivalent) in total he is acting as a ‘high value dealer’ and is subject to the Regulations.  As previously, this applies whether the transaction is executed in a single operation or in several operations which appear to be linked.

But Regulation 14 makes two other changes for High Valuer Dealers.  Now these Regulations apply where such a trader makes such a payment as well as when he receives one.

Also the regulation specifies that a payment does not cease to be a “payment in cash” for these purposes if cash is paid by or on behalf of the person making the payment to a person other than the other party to the transaction for the benefit of the other party, or into a bank account for the benefit of the other party to the transaction.

 

Changes for Estate Agents

An important change for estate agents is that by Regulation 4 an estate agent is to be treated as entering into a business relationship with a purchaser (as well as with a seller) at the point when the purchaser’s offer is accepted by the seller.

This means that at that stage the estate agent will have to complete customer due diligence on the purchaser of a property.  That was not previously required where the estate agent had been instructed by the seller.

This provision may help to address concerns about overseas buyers using tainted funds to purchase properties in the UK.

 

Politically exposed persons

A new definition of ‘politically exposed persons’ in Regulation 35 means that a UK senior politician entrusted with prominent public functions would also now be regarded as a PEP.  As a result additional anti-money laundering precautions are necessary when dealing with him or with a family member or close associate of his.

 

Banning persons with criminal convictions

The Regulations effectively will prevent a person who has been convicted of a ‘relevant offence’ from being a beneficial owner, officer or manager of a firm or a sole practitioner in specified types of business within the regulated sector.  This is achieved by Regulation 26 using a rather circuitous mechanism.

The regulation requires beneficial owners, officers and managers of a firm and sole practitioners to be approved by their supervisory body (before 26 June 2018) if the firm is an accountant, tax adviser, auditor, insolvency practitioner, legal professional, estate agent or high value dealer.  But the supervisory body is required to approve anyone who applies to it unless the applicant has been convicted of a ‘relevant offence’.  If a person is inadvertently approved who has a conviction for a ‘relevant offence’ their approval is invalid (and a valid approval becomes invalid when an approved person is newly convicted).

There is a list of ‘relevant offences’ in Schedule 3 to the Regulations.  These include “any offence which has deception or dishonesty as one of its components” as well as a long list of specified offences, including offences under the Data Protection Act 1998 and Perjury Act 1911, for example.  Unsurprisingly, tax and money laundering offences are included in the list.

One ramification of this will be that for an accountant, for example, being convicted of a ‘relevant offence’ could effectively end his career.

It is not clear, to me at least, whether this will affect persons who have old offences which would be regarded for most purposes as ‘spent’ under the Rehabilitation of Offenders Act 1974.

 

Conclusion

The Money Laundering Regulations 2017 make significant changes to the law which will affect every business in the regulated sector.

 

Contacting us

Our contact details are here.

David

(Note: This article deals with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 so far as they apply in England and Wales. Appropriate professional advice should be sought in each individual case.)

Alleged possession of criminal property

Police lamp copyright David Winch 2014Pete and Tony both worked for Snodsby Council as care workers at the Flower Dew Home.  This was supported accommodation for four adults with learning difficulties, who would not be capable of living independently or managing their personal finances.  Pete and Tony had worked there for years and had become friends.

Part of their role was to take residents on trips out to local shops and attractions where the residents could spend their own funds, withdrawn for the purpose from safe custody at the home. It was permissible for the residents to purchase items for themselves and even spend small amounts on gifts for the staff – an ice cream for example.  After each trip the care workers were obliged to account for the expenditures of the residents’ monies.

But one day an allegation was made that Pete had been stealing cash from the residents. After a local authority investigation a report was prepared which alleged that, as well as stealing their cash, Pete had been spending excessive amounts on trips out.  In effect Pete was alleged to have been treating himself and Tony on these trips, taking improper advantage of the residents’ vulnerability by using their money inappropriately.

 

Investigations

Pete and Tony were interviewed by council staff, including a manager Mr Justin Thyme.  Pete immediately admitted that he had taken some money.  Following those interviews the matter was referred to the police and both Pete and Tony were arrested and interviewed under caution by Detective Constable Arthur Crabtree.

DC Crabtree drew up a schedule of amounts drawn by Pete from residents’ monies between August 2013 and October 2014.  DC Crabtree called these “unaccounted withdrawals”.

Then DC Crabtree obtained copies of bank account statements for both Pete and Tony from their banks.  He looked for cash deposits into Pete’s and Tony’s bank accounts over the same period.  He put these deposits onto his schedule, which he called ABC/1.

The schedule showed total “unaccounted withdrawals” of £12,621 from residents’ monies between August 2013 and October 2014.  Over the same period there were cash deposits, which DC Crabtree called “unsourced deposits”, of £12,249 in Pete’s bank accounts.  In that same period there were also bank transfers of £7,960 from Pete’s bank accounts to Tony’s.

 

Charges

In due course Pete was charged with theft of a total of £10,221 from the four residents of Flower Dew Home, contrary to s1 Theft Act 1968.  Pete was also charged with possession of criminal property of £12,249 in money (which was the total amount of cash he had banked) contrary to s329 Proceeds of Crime Act 2002 and concealing criminal property of £7,960 in money (which was the total amount of the bank transfers to Tony) contrary to s327 of the same Act.

Tony was charged with possessing criminal property of £7,960 in money (which was the amount transferred from Pete’s bank accounts to his) contrary to s329 Proceeds of Crime Act 2002.

Pete pleaded guilty to all the charges he faced and was sentenced.

Tony pleaded not guilty to the single charge he faced.  The matter was referred to the Crown Court and a trial date was fixed.

 

An ‘open and shut’ case?

One might think that Tony was certain to be convicted because Pete had already pleaded guilty to concealing criminal property of the £7,960 which he had transferred to Tony.  But matters are not that straightforward.  Pete might have been advised to plead guilty to all the charges he faced rather than risk further investigations by the council or the police and to get the maximum reduction in sentence from an early guilty plea.  Because Pete had pleaded guilty the prosecution evidence had not been challenged in court by Pete’s legal team.

The court was not entitled to assume that because Pete had pleaded guilty, Tony must also be guilty.  Added to that, even if Pete was guilty of concealing criminal property of £7,960 by transferring it to Tony, it should not automatically follow that Tony would be guilty of possessing criminal property by receiving that money – that would depend, amongst other things, on whether Tony suspected or knew the money was proceeds of crime.

 

Possible defences

Tony’s legal team were aware of four alternative possible reasons why he might be found not guilty of the offence of which he had been charged.

These were

  1. the £7,960 was not proceeds of crime, or
  2. the £7,960 was proceeds of crime, but Tony neither knew nor suspected that, or
  3. the £7,960 was repayment of monies Tony had previously lent to Pete, or
  4. the £7,960 transferred into Tony’s bank account was not money which was in Tony’s “possession”.

 

Our instructions

Tony’s solicitors instructed us to consider the prosecution evidence, including exhibit ABC/1 – DC Crabtree’s schedule of “unaccounted withdrawals”, “unsourced deposits” and bank transfers from Pete to Tony – in relation to possible reasons 1 and 3 and to prepare an expert witness report suitable to be served in evidence.  If necessary we would attend Tony’s trial and give oral evidence.

 

Our work

We prepared a fee estimate which was approved by the Legal Aid Agency.  Then we set to work.

The first thing we did was to attempt to verify all the entries on exhibit ABC/1 to supporting bank statements or other documentary evidence supplied by the prosecution.

The documents presented to us by our instructing solicitors were the prosecution bundle which included witness statements from DC Crabtree and the council manager Mr Thyme and the bank statements of Pete’s and Tony’s which DC Crabtree had obtained – but did not include any accounting records of Flower Dew Home relating to residents’ monies (which had been referred to by Mr Thyme in his witness statement) nor the transcripts of the interviews DC Crabtree had held with Pete and Tony.  Also there was no prosecution case summary in the bundle nor any documents from the plea and trial preparation hearing.

 

The prosecution case

Our understanding was that the prosecution case was that the “unaccounted withdrawals” were monies stolen from residents (although Mr Thyme’s witness statement said that there had been inappropriate spending on trips out – but not that the entirety of the monies drawn were stolen), that the “unsourced deposits” were stolen cash banked by Pete into his account, and that the bank transfers to Tony were funded from the “unsourced deposits” (and hence were monies stolen by Pete).

 

Our findings

We were not able to confirm that the “unaccounted withdrawals” were stolen monies (although they might be) because we had not seen the records of Flower Dew Home and because Mr Thyme’s witness statement suggested that only part of the monies withdrawn were stolen or used inappropriately on gifts or treats for Pete and Tony.

We were able to identify on exhibit ABC/1 the particular withdrawals making up the £10,221 which Pete had admitted to stealing, but we could find no reason why Pete had not been charged with the theft of the whole of the unaccounted withdrawals of £12,621 listed on exhibit ABC/1.  It seemed that some withdrawals on the list may simply have been omitted from the theft charges on the indictment in error.

We were able to identify the deposits totalling £12,249 on Pete’s bank account statements and the bank transfers of £7,960 from Pete’s bank accounts to Tony’s on both Pete’s and Tony’s bank statements.

Chart of withdrawals v deposits

But when we looked at the detail of the dates and amounts of the “unaccounted withdrawals” and “unsourced deposits” on exhibit ABC/1 we found that although the total of the withdrawals (the alleged cash stolen) of £12,621 and Pete’s bank deposits of £12,249 were very similar, the timing and pattern of the alleged thefts and the bank deposits did not tie up.

We prepared a graph of the “unaccounted withdrawals” and “unsourced deposits”, day by day, which illustrated the mismatch between the two.  This showed that at least some of the bank deposits occurred before the cash thefts admitted by Pete, which meant that those deposits cannot have related to the thefts in question.

It also became clear that Pete had at least one account with another bank – and those other bank statements had not been obtained by DC Crabtree.  So the picture we had of Pete’s financial affairs was incomplete and, in our opinion at least, some of the inferences drawn by DC Crabtree were therefore not reliable.

 

Pete’s legitimate income

It seemed that until January 2014 Pete’s monthly salary had been paid by bank transfer from Snodsby Council into the bank account examined by DC Crabtree.  There was a pattern of Pete transferring most of his salary out of this account into his account with the other bank soon after he was paid each month.  Then there seemed to be a series of smaller transfers back to this account, presumably when Pete needed spending money.

After January 2014 there were no salary credits from Snodsby Council, but the transfers into the account from the other bank continued.  We inferred from this that from February 2014 onwards Pete’s monthly salary had been credited to his account with the other bank (although neither ourselves nor DC Crabtree had seen any bank statements for that account).

It had not been suggested that Pete’s monthly salary was proceeds of any crime.

 

The monies transferred to Tony

We then looked at the timing of the transfers from Pete’s bank account to Tony’s and the credits to Pete’s account immediately before those transfers, to see how far, on a practical level, the transfers to Tony seemed to be funded from the “unsourced deposits” into Pete’s account.

We found that more often than not the transfers to Tony seemed to be more closely related to Pete’s monthly salary credits or to monies Pete had transferred into his account from his account at the other bank.  Of the £7,960 transferred to Tony only £250 looked to be more closely related to “unsourced deposits” than other credits to Pete’s account.

 

Tony’s loans to Pete

Finally we looked to see if, outside the indictment period of August 2013 to October 2014, there were transfers of monies between Pete and Tony.  Tony had told his solicitors that he had often lent money to his friend Pete and been paid back over time, so there was nothing unusual in Pete transferring money into his bank account.  We did find evidence of such money transfers, in both directions, both before August 2013 and after October 2014.

That finding supported Tony’s evidence in that respect.  It also strengthened the possibility that the transfers from Pete to Tony were repayments of earlier informal loans from Tony to Pete.

 

Our report and its impact

We prepared a formal expert witness report and submitted it to Tony’s solicitors.  They in turn served copies on the prosecution and the Crown Court.

A little while later the prosecution indicated to Tony’s solicitors that they would not continue with the prosecution of Tony and in due course he was formally acquitted of the charge.

So a prosecution case which at first sight might have appeared to be overwhelming had proved on detailed examination to be full of holes.

 

Contacting us

Our contact details are here.

David

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

Criminal Finances Act 2017

Big Ben imageThe new Criminal Finances Bill was published on 13 October 2016. Consideration of the detailed provisions of the Bill by MPs and Lords has now been completed and limited amendments have been made to the original Bill.  When this blog post was last updated (16 April 2018) the final version of the Bill had received Royal Assent and had become the Criminal Finances Act 2017.  However most of the operative sections of the Act are being brought into force by regulations which are being made in stages (updates to the text below indicate provisions which are in force).

The new Act strengthens civil recovery of the proceeds of crime; creates ‘unexplained wealth orders’; creates new offences of failing to prevent the facilitation of tax evasion; and extends existing investigation powers in relation to money laundering and terrorist finances.

It appears that the provisions in the Bill were largely based on suggestions from investigators and prosecutors.  Insofar as the Bill was criticised in parliament those criticisms were to the effect that the Bill’s provisions did not go far enough.

WARNING – THIS IS A LENGTHY BLOG POST – OVER 2,000 WORDS

 

  1. Strengthening civil recovery powers
  2. Unexplained wealth orders
  3. Failing to prevent the facilitation of tax offences
  4. Suspicious Activity Reports and the moratorium period
  5. Tidying up investigation powers
  6. Conclusion
  7. Contacting us

 

Strengthening civil recovery powers

Originally Part 5 of the Proceeds of Crime Act 2002, which deals with civil recovery, contained 87 sections (numbered 240 to 326).  Previous amendments have deleted two of those sections but added 31 new ones.  The new Act adds a further 45 new sections to Part 5 in two entirely new chapters, chapter 3A ‘Recovery of listed assets in summary proceedings’ and chapter 3B ‘Forfeiture of money held in bank and building society accounts’.

The existing chapter 3 of PoCA 2002 (which continues in force) makes provision for officers to search for cash, for the detention of cash where (on ‘reasonable grounds’) that cash is suspected to be ‘recoverable property’ (which broadly means proceeds of crime) or is suspected to be intended for use in crime, and is more than the ‘minimum amount’ (which is £1,000), and for the forfeiture of seized cash where the court is satisfied (on a balance of probabilities) that the cash is ‘recoverable property’ or is intended for use in crime (or where no objection has been raised to forfeiture).

In essence the new chapter 3B, inserted by s16, extends similar provisions (except the search provisions) to monies in bank or building society accounts.  That will involve a bank or building society account initially being ‘frozen’ for a period of up to 2 years by an ‘account freezing order’ made in the Magistrates’ Court (which, like a Crown Court restraint order, may initially be made on an ex parte basis).  Application could then be made, by way of an ‘account forfeiture notice’, for monies in the ‘frozen’ account to be forfeit to the Crown without the necessity of a further appearance in the Magistrates’ Court.  Alternatively, or if an objection were made (in writing and normally within 30 days) to the ‘account forfeiture notice’ (for example by the account holder or another interested party), a hearing in the Magistrates’ Court would be required before the monies could be forfeit.

There is provision for the account holder to be informed of the making of an ‘account freezing order’ and the issue of an ‘account forfeiture notice’ and for allowances to be made for monies to be drawn from a ‘frozen’ account – for example to meet living expenses or to allow the running of a business, as well as to meet appropriate legal costs.  There are also provisions to cater for setting aside or variation of an ‘account freezing order’ and for late objections and appeals.

The new chapter 3A, inserted by s15, extends similar provisions (including search provisions) to ‘listed assets’ which  include precious metals, precious stones, watches, artistic works, face-value vouchers and postage stamps.  The chapter 3A provisions also cater for associated property and joint property (where only part of an asset is subject to forfeiture).  Again a ‘minimum value’ of £1,000 applies.

The Act also provides, s14, for the definition of “cash” in s289 PoCA 2002 to be extended.  The definition already included cheques (including travellers’ cheques), bankers’ drafts, postal orders, bearer bonds and bearer shares.  It will now include gaming vouchers, fixed-value casino tokens and betting receipts.  The idea is to cover what might be described as ‘cash substitutes’ which could be used by criminals as an alternative means of transferring value.  A similar amendment is made to the Anti-Terrorism, Crime and Security Act 2001 in respect of “terrorist cash”.

The scope of ‘unlawful conduct’ which may be the basis of civil recovery action under Part 5, PoCA 2002 is extended by s13 to include ‘gross human rights abuse or violation’ which is defined by a new section 241A PoCA 2002.

[UPDATE: The provisions of s16, inserting a new chapter 3B into PoCA 2002, came into force on 31 January 2018.  The provisions of s15, inserting a new chapter 3A into PoCA 2002, and s14, extending the definition of cash, came into force on 16 April 2018.]

 

Unexplained wealth orders

The Act creates ‘unexplained wealth orders’ by s1.  An ‘unexplained wealth order’ requires an individual to set out the nature and extent of his interest in the property specified in the order, and to explain how he obtained that property in cases where that person’s known income does not explain ownership of that property.

It therefore allows an enforcement authority to require an individual to explain the origin of assets that appear to be disproportionate to his income.  It is important to recognise that ‘unexplained wealth orders’ form part of chapter 8 of PoCA 2002 which deals with powers of investigation (new sections applicable to England and Wales are inserted after s362 of PoCA 2002) – rather than part 5 which deals with civil recovery.

Applications for ‘unexplained wealth orders’ are to be made to the High Court, who would need to be satisfied either that there are reasonable grounds for suspecting that the respondent is, or has been, involved in serious crime (or a person connected with the respondent is, or has been, so involved) or that the respondent is an overseas ‘politically exposed person’ (meaning an individual who has been entrusted with prominent public functions by an international organisation or a State outside of the UK or the European Economic Area, or a close relative or associate of such a person).

Serious crime refers to an offence set out in Schedule 1 to the Serious Crime Act 2007 (including some drug trafficking, arms trafficking, people trafficking and modern slavery offences, organised crime, money laundering, firearms offences, prostitution offences, fraud, tax evasion, bribery, counterfeiting and trade mark offences, poaching and environmental offences).

In the case of an overseas ‘politically exposed person’ there would be no requirement for a suspicion of serious criminality.

In the original Bill, an application for an ‘unexplained wealth order’ could only be made in connection with property having a value greater than £100,000.  During the Bill’s passage through parliament this figure was reduced to £50,000.

Where a person provides information in response to an ‘unexplained wealth order’ the authority may use that information as a basis for civil recovery proceedings under Part 5 or in connection with any confiscation proceedings under Part 2 PoCA 2002.

Where a person fails to provide information in response to an ‘unexplained wealth order’ (without reasonable excuse) there will be a rebuttable presumption that the property in question is ‘recoverable property’ for the purposes of any civil recovery proceedings taken subsequently.

Alongside the proposed new ‘unexplained wealth orders’ will be new ‘interim freezing orders’, introduced by s2, to ‘freeze’ assets subject to ‘unexplained wealth orders’ to prevent their dissipation.

[UPDATE: The provisions relating to unexplained wealth orders came into force on 31 January 2018.]

 

Failing to prevent the facilitation of tax offences

The Act creates, at sections 44 to 52, a new offence of failing to prevent the facilitation of tax offences.  This new offence may be committed by an organisation such as a limited company or a partnership (but not by an individual).  The essence of the offence is that where an individual has committed an offence which has facilitated a tax offence by another, then the organisation with which he is connected (typically his employer) may be prosecuted for its failure to prevent the individual committing his offence.

For example if an employee of a bank or a firm of accountants facilitates a tax offence by a customer or client then not only will that employee be liable to prosecution (as he is now) for his criminal conduct in facilitating the tax offence but the organisation will be liable to prosecution for this new offence.  In this way the government intends to hold organisations to account for the criminal misconduct of their employees and other persons acting on their behalf.

Under existing law the organisation would only be liable to prosecution if the ‘directing minds’ of the organisation were engaged in criminal conduct.  Because employees who commit tax evasion facilitation offences are typically not at the most senior level of the organisation which employs them the organisation itself is not currently at risk of prosecution.  The Act changes that.

The new offence is modelled on the s7 Bribery Act 2010 offence of failing to prevent bribery.

As with the Bribery Act offence, guidance will be issued to assist organisations to set up appropriate procedures to prevent tax evasion facilitation offences by their employees and agents.  Key principles are likely to include risk assessment, prevention procedures, due diligence, staff training, and monitoring and review.

[UPDATE: These provisions came into force on 30 September 2017.]

 

Suspicious Activity Reports and the moratorium period

Provisions in the Act aim to make more effective the Suspicious Activity Reports regime.  There is a new power, introduced by s12, allowing the National Crime Agency to require any person within the ‘regulated sector’ (that is businesses subject to the Money Laundering Regulations and obliged to make a Suspicious Activity Report in appropriate circumstances) to provide relevant information to the NCA where the NCA has received a SAR (whether from that person or another) or a request by an overseas authority.  If necessary an order may be made in the Magistrates’ Court compelling disclosure of the required information (with a penalty of up to £5,000 for non-compliance).

Previously the SARs regime operated on a ‘shop and stop’ basis.  Where a reporting entity, such as a bank or firm of accountants or lawyers, made a report it was relieved of any obligation of client confidentiality with regard to the content of the SAR.  But the reporter was not in a position to provide follow up information or further details to the NCA where ordinary client confidentiality prevented that.  So once the report had been submitted the reporter was effectively stopped from providing further details.  The provisions in the Act remove any obstacle to the supply of further information (except in respect of information covered by legal privilege).

Another change, introduced by s11 of the Act, facilitates the exchange of information about suspicious activities between different businesses within the ‘regulated sector’ so that, where appropriate, they can co-ordinate their reports and actions in relation to those suspicions.

Customers of banks in particular may be concerned by further provisions, inserted by s10 of the Act, allowing the ‘moratorium period’ (during which, for example, a bank account may be frozen) to be extended by up to six months longer than was previously permitted.

Under previous legislation a bank could freeze a customer’s account pending consent from the NCA initially for a period of seven working days and then for an additional period of no longer than 31 calendar days.  This 31 day period is known as the ‘moratorium period’.  Under the new provisions the NCA (or other appropriate investigator such as the police or HMRC) can apply to the Crown Court for the moratorium period in respect of a particular SAR to be extended.  Initially the Crown Court could grant an extension of (up to) 31 days and the court would have power, upon further applications by the investigator, to grant further (up to) 31 day extensions – up to a maximum extension of 186 days from the end of the original moratorium period.  Extensions could be granted where the Court is satisfied that it is necessary and reasonable, and where an investigation is being conducted diligently and expeditiously.  The Court may exclude from any part of its hearings concerning extending the ‘moratorium period’ the ‘interested person’ (the holder of a frozen bank account for example) and his legal representatives.

It follows that a customer’s bank account could be frozen for more than seven months without the customer having an opportunity to hear the evidence upon which the suspicion of money laundering was based and to effectively challenge that evidence or provide appropriate explanations.  Such a long period of account freezing could have very serious implications for the customer.

These provisions of the Act add new sections to Part 7 PoCA 2002.

[UPDATE: These provisions came into force on 31 October 2017.]

 

Tidying up investigation powers

The Act also contains various provisions to tidy up the PoCA 2002 provisions relating to powers of investigation.

In particular amendments made by s7 allow ‘disclosure orders’ under s357 PoCA 2002 to be obtained in connection with money laundering investigations and, by s33, the investigation powers of Part 8 PoCA 2002 become available for revisits under s22 PoCA 2002 to a defendant’s available amount in relation to an existing confiscation order.

Section 32 of the Act ensures that confiscation orders which are discharged under s24 or s25 PoCA 2002 may still be subject to reconsideration under s21 or s22 PoCA 2002.

The Act also extends PoCA 2002 enforcement and investigation powers more coherently to HMRC, the Serious Fraud Office, the Financial Conduct Authority and immigration officers.

[UPDATE: Some of these provisions have now come into force.]

 

Conclusion

The Criminal Finances Act 2017 makes significant changes to a variety of PoCA 2002 provisions with corresponding amendments to the law relating to terrorist property.

 

Contacting us

Our contact details are here.

David

(Note: This article deals with the Criminal Finances Act 2017 so far as it applies in England and Wales.  At the time of writing not all of the operative provisions of the Act had been brought into force.   Appropriate professional advice should be sought in each individual case.)

Challenging a s22 PoCA 2002 confiscation reconsideration

Crown Court judgeThe revisiting of old confiscation orders by prosecutors under section 22 Proceeds of Crime Act 2002 is becoming more frequent.

This blog post considers the provisions of s22 and ways in which prosecution applications under s22 may be challenged by the defendant.

Section 22 is headed “Order made: reconsideration of available amount”.

WARNING – THIS IS A LENGTHY BLOG POST – APPROXIMATELY 3,000 WORDS

  1. Reconsideration of available amount
  2. The legal ‘trigger’
  3. “Makes” v “varies”
  4. Inflation
  5. The burden of proof
  6. What is ‘just’?
  7. The prosecutor’s s22 application and witness statement
  8. Restraint orders and investigation powers
  9. Time limit
  10. Challenges
  11. Default sentence
  12. Due date for payment & interest
  13. Second revisit
  14. Appeals
  15. Conclusion
  16. Contacting us

 

Reconsideration of available amount

Section 22 PoCA 2002 empowers the Crown Court to vary an existing confiscation order made under s6 of the Act.  In effect it allows the prosecution to apply to the court for a further payment to be required from the defendant under an existing confiscation order where his available amount has increased since the original order was made.

This blog article does not consider variations to confiscation orders made under earlier legislation, such as the Criminal Justice Act 1988, Drug Trafficking Act 1994 or Drug Trafficking Offences Act 1986.  Different rules apply under those Acts.

Nor are we considering the position of a person who has a new conviction and a new confiscation order is being made as a result of that.

We are considering the situation of a defendant who was made subject to a confiscation order, perhaps some years ago, at which time the court ruled that he had a figure of benefit which was higher than his available amount.  At that time the court would not have ordered him to pay the full amount of his benefit.  Instead the amount he was then ordered to pay would have been restricted to his available amount at that time.  The figures of the defendant’s benefit, available amount and the amount he was ordered to pay should all be spelled out in the original confiscation order.

Under s22 the prosecutor asks the court to consider the available amount which the defendant has now and to order him to pay a further amount now towards his total benefit.

Let’s consider Jim’s case.  Jim was subject to a confiscation order in September 2008.  That order says that Jim’s benefit was £100,000 and his available amount was £500.  Jim was ordered to pay £500 which he has paid.  Today Jim owns a house with his wife.  The house is worth £200,000 but there is a mortgage of £180,000.  So Jim’s half share is worth £10,000.  Jim also has a car worth £6,000 but no other assets, so Jim’s total available amount today is £16,000.

The prosecution can ask the court under s22 to order Jim to pay a further £16,000 (or some other figure) by making a variation to the confiscation order made in September 2008, requiring a further payment now.

 

The legal ‘trigger’

The legal ‘trigger’ for a s22 variation is in subsection 22(4):-

If the amount found under the new calculation exceeds the relevant amount the court may vary the order by substituting for the amount required to be paid such amount as –

(a) it believes is just, but

(b) does not exceed the amount found as the defendant’s benefit from the conduct concerned“.

The ‘trigger’ is in the first phrase – “If the amount found under the new calculation exceeds the relevant amount“.  What that means is that a s22 variation can only be made where the defendant’s available amount now exceeds the available amount shown on the original confiscation order.

In Jim’s case it obviously does (£16,000 is more than £500) and so the court can consider making an order requiring a further payment from Jim now.

 

“Makes” v “varies”

Under s22 a court may “vary” an existing confiscation order – but it does not “make” a confiscation order.  The legislation does not regard a variation to amount to the ‘making’ of an order.  This can be seen most clearly in the differing provisions regarding default sentence when a court “makes” an order – see s35 – and when a court “varies” an order – see s39.

It follows that an order which has been varied under s22 is an order which was ‘made’ at the time of the original confiscation hearing, not at the time of the variation.

 

Inflation

In these cases we can be looking back at figures determined by the court some years ago.  Because of this s22 recognises the effect of inflation by subsection 22(7) which says:-

In deciding under this section whether one amount exceeds another the court must take account of any change in the value of money.

This is done by using the RPIJ index published by the Office for National Statistics.  [UPDATE: Since the article was written courts have moved on to using CPIH rather than RPIJ for ‘inflation’ uplifts.]

In Jim’s case the confiscation order was made in September 2008 when RPIJ stood at 209.8.  The latest figure (May 2016) is 240.1.

So uplifting Jim’s benefit of £100,000 it becomes equivalent to £114,442 and his original available amount of £500 becomes equivalent to £572 today.

So, strictly speaking, the trigger condition is whether £16,000 exceeds £572 – which of course it does.

The prosecutor will most likely ask the court to vary the original confiscation order so that Jim’s amount to pay is £16,500 – that is the £500 which he has already paid plus a further £16,000 payable now.

The prosecutor will point out that this amount (which when adjusted for changes in the value of money is equivalent to £16,572) is less than Jim’s total benefit (which when adjusted for changes in the value of money is £114,442).

 

The burden of proof

An application under s22 is made by the prosecutor (or an enforcement receiver appointed under s50).  It would appear that the burden of proof is on the applicant to provide information enabling the court to make a “new calculation” of the defendant’s available amount.

This contrasts with the position when the confiscation order was originally made (at which time the burden was on the defendant to show that his available amount was less than his benefit, by virtue of s7).

 

What is ‘just’?

Under s22(4) the court is to vary the amount to be paid to an amount which the court “believes is just.”  What does that mean?

I suggest that part of the process of deciding what is ‘just’ involves looking back at the figure of benefit previously decided by the court and considering whether that figure, in the light of subsequent legal developments, is either faulty because it was based on a misunderstanding of the law (as may have arisen, for example, in a case of mortgage fraud), or is an amount which it would now be considered disproportionate to order the defendant to pay in full (as may be the case, for example, where stolen property has been returned to its owner).

That will involve some detailed reconsideration of the basis on which the original confiscation order was made, which may involve re-examination of the basis of prosecution’s assertions regarding benefit which were set out in the original s16 statement insofar as the court accepted those assertions when making the confiscation order.

Where, in the light of the relevant law as it is understood today, the defendant would not now be ordered to pay an amount based on the whole of the benefit shown in the original confiscation order then, I suggest, it would not be ‘just’ to order a defendant to pay that amount now under s22.

So it is necessary, in my view, to consider the impact of case law such as R v Waya [2012] UKSC 51 (proportionality and confiscation, mortgage fraud), R v Ahmad [2014] UKSC 36  (recovery from co-defendants), R v Harvey [2015] UKSC 73 (VAT and confiscation) and Boyle Transport (Northern Ireland) Ltd v R [2016] EWCA Crim 19 (piercing the corporate veil) on the understanding of confiscation law, when considering an application under s22.

This does not mean that the defendant is appealing against the benefit figure in the original confiscation order.  He is asking the court to consider what it would be ‘just’ for him to be ordered to pay now under s22.

[UPDATE: The case of R v Cole [2018] EWCA Crim 888 (24 April 2018) in the Court of Appeal concerned a s22 application in a mortgage fraud case. The original confiscation order had been made before the Supreme Court decision in Waya and the benefit included the amount of the mortgage advance.  The Court of Appeal restricted the further amount ordered to be paid under s22 in line with what the original benefit figure would have been had a ‘Waya-compliant’ approach been followed when the confiscation order was first made.  In other words the Court of Appeal did take into account the decision in Waya when making the s22 variation.]

More broadly the court appears to have a discretion under s22 to consider what amount, in all the circumstances, it believes it would be ‘just’ for the defendant to be ordered to pay.

The Court of Appeal has held in the case of Padda v R [2013] EWCA Crim 2330, “In that context, it is entirely appropriate for a court to consider such matters as the amount outstanding, the additional amount which might now be available for a further payment, the length of time since the original confiscation order was made, the impact on the Defendant of any further payment contemplated and indeed any other consideration which might properly be thought to affect the justice of the case.

When the court is considering a variation to a confiscation order under s22 then – once the trigger condition has been satisfied – the court may order the defendant to pay a further amount of any size, large or small, so long as the total which the defendant is required to pay under the confiscation order (adjusted for changes in the value of money) does not exceed the total of his benefit (adjusted for changes in the value of money).

Strictly speaking, the only relevance of the defendant’s current available amount is in relation to determining whether the trigger condition is satisfied.  In practice however the prosecutor is likely to suggest that it would be just for the defendant to be ordered to pay an additional amount which is the lesser of (a) his current available amount, and (b) the maximum which the defendant could be ordered to pay in relation to his total benefit.

 

The prosecutor’s s22 application and witness statement

Section 22 does not make express provision for a prosecutor’s statement in support of an application for a variation of a confiscation order.  There are no express provisions akin to those found in s16.

Equally there are no express provisions akin to sections 17, 18 and 18A requiring statements or information from the defendant or third parties.

Nevertheless the prosecutor (or enforcement receiver) will need to make a written application to the court and the likelihood is that he will append to that a witness statement which will be in some respects similar to a s16 statement.  Rule 33.16 Criminal Procedure Rules 2015 applies to the service of the application and any supporting witness statement.  It is likely that the defendant will want to respond to the application by way of a statement of his own before the court hearing.

 

Restraint orders and investigation powers

The prosecutor is entitled to apply for a restraint order, under s40(6), when a s22 application is to be made or has been made.

Where the court makes a restraint order it may also require the subject of the restraint order to supply information under s41(7) for the purpose of ensuring that the restraint order is effective.

However it appears that the investigation powers under Part 8 of PoCA 2002 are not available to a prosecutor applying for a s22 variation, because a s22 application does not appear to involve a ‘confiscation investigation’ as defined by s341(1).

There could be some debate as to whether a s22 investigation is an investigation into “the extent or whereabouts of realisable property available for satisfying a confiscation order made” in respect of the defendant, referred to in s341(1)(c).  My own view is that “satisfying a confiscation order made” refers to full payment of the amount ordered to be paid under the original confiscation order which has been made, rather than referring to satisfying a variation of that confiscation order which is (perhaps) to be made.  If that is the case, and if the original confiscation order has been paid in full, then the s22 investigation would, in my view at least, not fall within s341(1) with the result that the Part 8 investigation powers would not be available to a financial investigator acting for the prosecutor.

[UPDATE: The recent Criminal Finances Bill includes – at clause 27 – a proposed amendment to s341(1)(c) intended to make the investigation powers of Part 8 available to a prosecutor applying for a s22 variation.]

 

Time limit

There is no statutory time limit.  This means that a s22 application may be made many years after the original confiscation order was made.

 

Challenges

A s22 application may be subject to a variety of challenges by the defendant.

The defendant may assert that the trigger condition has not been satisfied.  Take the example of Bert who was subject to a confiscation order made in February 2012.  In that order his benefit was held to be £90,000 and his available amount was £40,000.  Bert was ordered to pay £40,000 which he has paid.  The prosecutor now finds that Bert has £25,000 in a bank account in his sole name.  Bert has no other assets, so his available amount now is £25,000.

The RPIJ in February 2012 was 225.8.  The latest figure (May 2016) is 240.1.

So uplifting Bert’s benefit of £90,000 it becomes equivalent to £95,699 and his original available amount of £40,000 becomes equivalent to £42,533 today.

So, strictly speaking the trigger condition is whether £25,000 exceeds £42,533 – which of course it does not.

It follows that the trigger condition is not satisfied and the court should not order Bert to pay a further amount now under s22.

A second area of challenge concerns the defendant’s available amount.  Consider Charles who, according to Land Registry records, is the sole legal owner of Rose Cottage.  The prosecutor values Rose Cottage at £250,000.  There is an outstanding mortgage of £150,000.  The prosecutor therefore asserts that Charles has an available amount of £100,000.

Charles may challenge this on the basis that he is not the sole beneficial owner of Rose Cottage and that the current value of Rose Cottage is less than £250,000.  That challenge may have a bearing on whether the trigger condition is satisfied and on the value of Charles’ current available amount – with obvious implications for any amount which Charles may be ordered to pay now as a result of the s22 application.

A third area of challenge concerns what might loosely be described as ‘change of law’.  In 2005 Peter was convicted of mortgage fraud in that he had purchased a house with a mortgage of £100,000 which he had obtained by giving false information on his mortgage application.  Peter was subject to confiscation with a benefit of £100,000 (the amount of the mortgage advance) and an available amount of £20,000.  He was ordered to pay £20,000 which he has paid.  Peter now has £50,000 in a bank account in his sole name but no other assets (so his available amount is £50,000).  He is subject to a s22 application.

Peter may challenge the application on the basis that it would not be ‘just’ to order him to pay £50,000 under s22 as, on a proper and just interpretation of the legal position, he did not ‘obtain’ the mortgage advance and, in any event, the mortgage advance has since been fully repaid to the lender.

The court would then have to consider what further sum, if any, it would be ‘just’ to order Peter to pay under the confiscation order.  That may involve consideration of the price for which Peter ultimately sold the mortgaged property.

A fourth possible area of challenge concerns prosecution delay and Article 6(1) of the European Convention on Human Rights.  Consider the case of Derek who was subject to a confiscation order in 2006.  The court then found he had a benefit of £175,000 and an available amount of £25,000.  He was ordered to pay £25,000 which he has paid.  In 2011 the prosecution discovered that Derek was the sole owner of a property worth £200,000 which he had inherited from his father who died in 2009.  No action was taken by the prosecution at the time.  The file was reviewed in 2016 and an application was then made under s22.

Derek may challenge the application on the basis that it infringes his Article 6(1) rights in that the prosecutor has not brought the s22 application to court “within a reasonable time”.

Fifthly, a s22 application may be challenged on the basis that, taking everything into consideration, it would be simply unjust to order the defendant to make any further payment now – or that it would be unjust to require him to pay the full amount requested by the prosecution.  It might be argued, for example, that it would be just for the defendant to be ordered an amount based on his bank balance but not any part of the value of the equity in his home or the value of assets he uses in his legitimate business.  However such an argument would have to overcome the clear legislative policy in favour of maximising the recovery of the proceeds of crime, even from legitimately acquired assets.

There may be other bases on which a s22 application may be challenged.

 

Default sentence

The provisions of s22 permit the court to vary the amount to be paid under the confiscation order, but do not expressly authorise the court to vary the original default sentence (which will have been based on the original amount payable).

Section 35 authorises the court to set a default sentence when it “makes a confiscation order”, not when it varies one.  However s39 authorises the court to vary the default sentences in the circumstances detailed in that section.

One of the trigger conditions in s39 is that a confiscation order has been varied under s22 and the effect of the variation is to vary the maximum period of a default sentence applicable in relation to the order under s139(4) Powers of Criminal Courts (Sentencing) Act 2000.

Unfortunately when s35 was amended by s10 Serious Crime Act 2015 corresponding amendments to s39 were not made.  The effect appears to be that the court can vary the default term in accordance with the table of default terms in certain circumstances, but only in accordance with the default terms set out in s139(4) Powers of Criminal Courts (Sentencing) Act 2000.  These are the default terms which applied to confiscation orders made before 1 June 2015.

In other words, when considering a default term in the context of a s22 variation it is as if the changes to default sentences made by the Serious Crime Act 2015 had never happened.

 

Due date for payment & interest

Strictly speaking, s22 does not authorise the court to vary the due date for payment.  Under s11 this is closely tied to the date on which the confiscation order is “made” (not the date on which it is varied under s22).  Under s12 the defendant must pay interest on any amount which is not paid when it is required to be paid.

However it would appear to be a nonsense to charge interest, backdated to the date on which the confiscation order was originally made, on an additional amount.  Such an interest charge might be considered to infringe the defendant’s rights under Article 1 of the First Protocol of the European Convention on Human Rights.

 

Second revisit

After a confiscation order has been varied under s22 is it possible to revisit it again at a later date?  The short answer is ‘Yes’.

However on a subsequent revisit the ‘trigger’ condition will be interpreted as comparing the defendant’s current available amount with his available amount as determined on the most recent occasion on which an application was made under s22.

 

Appeals

It seems clear that a defendant can appeal against a s22 variation where he considers the variation to have been wrong in principle or manifestly excessive (see Padda referred to above).

On the other hand, it does not appear that a prosecutor is able to appeal against the amount by which the court decides to vary a confiscation order on a s22 application, or a decision not to make any variation – but he is able to make a fresh application under s22 at a later date.

 

Conclusion

There are a number of matters which will need to be carefully considered by prosecution and defence in connection with a prosecutor’s application under s22 for reconsideration of a defendant’s available amount.

 

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.)

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.)

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

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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.)