Source: http://www.accountingevidence.com/blog/category/forensic-accountant/
Timestamp: 2019-04-26 02:18:25+00:00

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Do recent English Court of Appeal decisions map out a new approach to confiscation when applied to legitimate businesses which have become tainted with criminality?
Has there been an evolution in the assessment of ‘benefit’ following the Supreme Court judgment in Waya?
Are the courts in certain circumstances now looking to confiscate only the profit from trading?
Whilst one could describe drug trafficking as a ‘business’ as it involves trading in goods, it has long been the case – since the Drug Trafficking Offences Act 1986 in fact – that the gross receipts of such a ‘business’ are treated as ‘benefit’ for confiscation purposes.
Drug trafficking is of course a wholly criminal enterprise. Prior to the Proceeds of Crime Act 2002 confiscation in respect of drug trafficking was dealt with under a separate legislative regime which specified that the offender’s benefit was “any payments or other rewards received”. That can only mean the gross receipts.
But the wording of the confiscation provisions in s71 Criminal Justice Act 1988, relating to non-drug crime, referred to property “obtained” as a result of or in connection with the offence. Similar wording was adopted when the two different legislative regimes for confiscation were merged in PoCA 2002. Is the notion of what an offender has “obtained” a more flexible one than what he has “received”?
Initially the PoCA 2002 formulation was considered, identically to the old drug crime wording, to refer to gross receipts. For example the Court of Appeal in CPS Nottinghamshire v Rose  EWCA Crim 239 at paragraph  said “it can safely be assumed that Parliament, in enacting the legislation, did not intend to weaken the application of the existing confiscation regime”.
The House of Lords in the case of CPS v Jennings  UKHL 29 confirmed that “obtained” meant obtained, solely or jointly, by the offender himself & that a person may “obtain” property without it actually passing through his hands. In R v May  UKHL 28 it was said that a defendant “ordinarily obtains property if in law he owns it”. In that sense the notion of what has been “obtained” may be wider than that which has been “received”.
But the House of Lords also recognised that a person may “receive” property without “obtaining” it – as in the case of a courier.
Perhaps the case of Del Basso & Goodwin v R  EWCA Crim 1119 might be regarded as a high water mark in the application of confiscation to legitimate business. In that case the offenders operated a ‘park & ride’ business in contravention of an enforcement order. There was no local authority planning permission allowing the use of the land in question for that purpose. A confiscation order based on the gross receipts of the business was upheld by the Court of Appeal notwithstanding the acknowledged fact that in other respects the business was operated in a proper & lawful manner.
But in a case involving the Weir Group PLC, a quoted company, the Scottish High Court took a very different line. The Weir Group PLC paid an agreed figure of £13,945,962 in confiscation and a fine of £3m after pleading guilty to two charges of breaching UN sanctions in connection with a number of ‘Oil for Food’ programme contracts awarded between 2000 and 2002. The company admitted breaching UN sanctions applicable at the time on doing business with Iraq which was then ruled by Saddam Hussein’s regime.
Under the relevant statute, s1(1) Proceeds of Crime Scotland Act 1995, the Scottish Court had discretion to make a confiscation order in “such sum as the court thinks fit”. The Weir Group companies had secured 16 contracts, for which they were paid £34,340,204, by paying ‘kickbacks’ of £3,104,527. The confiscation order was for only £13,945,962. This included Weir’s gross profit of £9,414,283 from the contracts – plus the kickbacks of £3,104,527 and the fee of £1,427,152 paid to Weir’s agent in Iraq.
The confiscation order could have been for £20m more had the Scottish Court settled on the gross receipts as the appropriate figure for confiscation.
Recent Court of Appeal decisions in England & Wales appear to differentiate between three contrasting situations.
The first is where a licence or other form of authorisation is mandatory when carrying on a particular trade or business activity but the absence of that licence does not render the trading itself illegal. So, for example, in Sumal & Sons (Properties) Ltd v London Borough of Newham  EWCA Crim 1840 the company was convicted of being the owner of a rented property without a licence contrary to s95(1) Housing Act 2004.
However the Court of Appeal found that the Housing Act did not prohibit the renting out of an unlicensed property & that the rent was legally recoverable from tenants even where the required licence had not been obtained.
That being the case, the rent was not received or obtained as a result of or in connection with the offence & so was not ‘benefit’ for confiscation purposes.
A similar result occurred in the case of Mr Singh who failed to obtain a licence under s1(1) Scrap Metal Dealer’s Act 1964, before he carried on business as a scrap metal dealer – see McDowell & Singh v The Queen  EWCA Crim 173. Again his trading activity was not itself prohibited due to the absence of a licence & therefore no ‘benefit’ for confiscation purposes arose from it.
The underlying trading was not itself an illegal activity, nor could it be said to have resulted from the criminal conduct.
Confiscation orders which had been made in these cases were quashed on appeal.
At the other end of the scale we have trading activity which is itself illegal, being prohibited by law. Obviously drug trafficking falls into this category but so too was the trading of a company controlled by Mr McDowell who was convicted of being knowingly concerned in the supply, delivery, transfer, acquisition or disposal of controlled goods with intent to evade the prohibition thereon, contrary to Article 9(2) Trade in Goods (Control) Order 2003.
The trading in question involved the delivery of aircraft and other military equipment from China to Ghana. The Court of Appeal found the underlying transactions to be prohibited and unlawful. Mr McDowell’s criminal offence was being concerned in the trading activity. His ‘benefit’ for confiscation purposes was the gross amount received from that trading.
We are dealing here with the situation in which the defendant has committed an offence and that offence has resulted in trading activity which would not otherwise have occurred – but the underlying trading activity is not itself criminal conduct.
An earlier decision of the Court of Appeal had concerned a Mr Sale who had obtained contracts for his engineering company from Network Rail by bribing one of their employees, R v Sale  EWCA Crim 1306. The engineering work was properly performed and was, of itself, an entirely legal trading activity.
The Court of Appeal concluded that the amount to be confiscated was not the gross receipts of the company under the contracts but was the company profit plus the the pecuniary advantage gained by obtaining market share, excluding competitors, and saving on the costs of preparing proper tenders for the work. The Court of Appeal held that, on grounds of proportionality & in the light of the Supreme Court decision in Waya, the amount ordered to be paid under the confiscation order ought to have been calculated on that basis.
In another case, R v Boughton Fox  EWCA Crim 2940, the court had found that customers had been induced by dishonest misrepresentations to enter into legitimate leasing agreements upon terms which were, in the event, more onerous than had been represented to them. The defendant’s company had received commission from the lessors on the signing of the lease agreements. The defendant was convicted of conspiracy to defraud and was subject to a confiscation order.
The Court of Appeal, following Sale, concluded “that the benefit to the appellant might arguably be reflected as (1) the gross profit from the dishonest trading activity, (2) the increase in market value of the company, if any, represented by the dishonest trading activity with (3) an adjustment to represent the appellant’s 50% interest in the company”.
In the event however there was no information before the Court enabling it to assess the benefit in that way & it instead took Mr Boughton Fox’s benefit to be a proportion of the salary & dividends received by him over the period of the offending.
It appears that in the three contrasting situations the amount to be paid under a confiscation order may be based on (a) no benefit, (b) benefit equal to gross receipts, or (c) a figure based, on grounds of proportionality, on the gross profit from the resulting trading plus the value of any other advantages obtained (such as benefit from increased market share and cost savings).
An accountant might consider that the appropriate figure, instead of gross profit plus cost savings, should be the contribution which the trading in question makes to net profit, that is to say the relevant turnover net of associated variable costs. That would be a better measure of what the business has gained by the additional sales.
Certainly in such cases a forensic accountant, such as myself, should be instructed to assist in quantifying the appropriate figure.
The key to differentiating the three situations is a careful analysis of the nature of the offence and the extent, if at all, to which it involves trading, or results in underlying trading, which is itself illegal. Where the offence involves illegal trading, or results in trading which is itself illegal, then the benefit will be the gross amount received from that trading.
Where the offence does not involve trading but results in trading which itself is not illegal, then the expenses incurred in that trading are not expenses of the crime and may be treated, on grounds of proportionality, as consideration which may reduce the amount to be paid under the confiscation order.
Where the offence does not itself involve trading and the trading does not result from the offence, then that trading does not give rise to any benefit for confiscation purposes.
However there are undoubtedly some legal complexities inherent in this new approach particularly with regard to distinguishing, on the one hand, trading receipts from criminal activity and, on the other, trading receipts from legitimate activity resulting from criminal conduct.
It remains to be seen whether the Supreme Court will endorse this new approach when an appropriate case comes before it.
In many respects confiscation proceedings exist in a different world from criminal trials. It is almost as if, like Lewis Carroll’s Alice, we have stepped through a looking glass into a parallel universe.
It is important that lawyers recognise this and adjust their approach to the work accordingly. This article points up, briefly and in the most general terms, seven key differences between Crown Court trials and confiscation proceedings.
In a Crown Court trial the key issue is whether the defendant is ‘Guilty‘ or ‘Not Guilty‘ of the offence or offences of which he is charged.
In confiscation proceedings the question is ‘How much?‘. The proceedings are concerned primarily with the quantification, in money terms, of the convicted defendant’s ‘benefit‘ and ‘available amount‘ (as defined in Part 2 of the Proceeds of Crime Act 2002).
In the trial the burden of proof rests upon the prosecution to the ‘criminal standard’. They have to make the jury ‘sure’ of the guilt of the defendant.
In confiscation proceedings the standard of proof is the ‘civil standard’ – the balance of probabilities – and, in many respects, the burden of proof is on the convicted defendant; particularly in rebutting the statutory s10 assumptions in a ‘criminal lifestyle‘ case and in satisfying the court that the convicted defendant’s ‘available amount‘ is less than his ‘benefit‘.
In the trial the focus is on the offence or offences of which the defendant is charged. In confiscation proceedings the focus is on the convicted defendant under consideration.
Where, as is often the case, in confiscation proceedings the convicted defendant is alleged to have a ‘criminal lifestyle‘ the scope of the proceedings can range far beyond matters relevant to the offence or offences of which he has been convicted. The entire financial affairs of the convicted defendant over a period of many years may be subject to scrutiny.
Consideration of the convicted defendant’s ‘available amount‘ involves matters unconnected with any offence.
The indictment in a criminal trial may cover a number of co-defendants, but the s16 statement in confiscation proceedings deals only with a single convicted defendant. A confiscation order reflects the ‘benefit‘ obtained, solely or jointly, and the ‘available amount‘ of only that particular convicted defendant.
In a criminal trial the prosecution may call a number of witnesses who may have, quite literally, witnessed the alleged crime being committed. The defence may call evidence from the defendant himself.
In confiscation proceedings the prosecution are unlikely to call evidence from anyone other than the financial investigator who is the author of the s16 statement (which sets out the prosecution assertions regarding the convicted defendant’s ‘benefit‘ and ‘available amount‘). The likelihood is that little or no weight will be given by the court to unsupported oral evidence from the convicted defendant since, by that stage, he has been found guilty and his credibility thereby undermined.
The defence will therefore seek to present other witnesses, perhaps including a forensic accountant expert witness, and documentary evidence in support of the defence assertions.
Evidence which would be inadmissible in the criminal trial may be admissible in confiscation proceedings.
In a Crown Court trial the key decision of ‘Guilty’ or ‘Not Guilty’ is made by the jury, then in the case of a ‘Guilty’ verdict the sentencing is carried out by the judge.
But in confiscation proceedings there is no jury. All the decisions are made by the Crown Court judge. Having said that, in many cases the figures of ‘benefit‘ and ‘available amount‘ are in practice settled by negotiation resulting in an agreement between counsel for prosecution and defence which has been reached outside the courtroom. The judge will then be invited to make an order in the agreed figures and fix a default sentence.
In relation to sentencing following trial key factors will often include the nature and gravity of the conduct of the defendant in committing the offence, whether he pleaded guilty, his previous convictions, and his conduct since the offence in terms of showing remorse or making reparation.
In contrast a confiscation order is not strictly speaking regarded as punishment for the offence at all. So those factors (other than reparation) will have no impact on the confiscation. A relatively minor offence (in terms of sentencing) might be followed by a very substantial confiscation order, whilst conviction for a relatively serious offence might be followed by a minimal confiscation order.
By way of example, in the case of Waya  UKSC 51 the mortgage fraud offence attracted 80 hours community punishment but the eventual confiscation order was in the very substantial sum of £392,400.
It has been said that confiscation is intended, not to punish the convicted defendant for the crime, but to deprive him of the benefit he has obtained from relevant criminal conduct, up to the limit of his available means.
The prosecution have, with very limited exceptions, no opportunity to appeal the verdict or sentence in a criminal trial.
However prosecution and defence are each permitted to appeal a confiscation order (or a decision to make no confiscation order).
Confiscation proceedings are very different from the criminal trial which precedes them. They demand a different approach from instructed lawyers and an extensive examination of financial evidence. That examination may be assisted by the work of a forensic accountant, particularly where it is alleged that the convicted defendant has a ‘criminal lifestyle‘.

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