Our previous article ‘Confiscation: the ultimate penalty?’ showed that the law on confiscation, as set out in the Proceeds of Crime Act (POCA) 2002 can have severe financial consequences for both corporates and individuals.
The case law and practice that have evolved since the introduction of POCA 2002 is complex and constantly evolving to deal with the difficult practical consequences that arise from the application of the law.
The courts have frequently described POCA 2002 as draconian, but there are indications that judicial discretion is being used in some, if not all, cases to soften the impact of the legislation.
This article sets out some recent examples of difficulties that have arisen in the practical application of the law and explains the implications of those decisions. Consideration is also given to the parallel, civil confiscation regime, which is equally serious for those subject to it.
Confiscation or Compensation?
One of the thorny issues that arises following criminal proceedings is how the various financial orders that can be made by the court should be dealt with. In addition to any fine imposed, the criminal courts have the power to make an order against a convicted person or entity to pay compensation to the victim, subject to their ability to pay and proof of the loss.
The confiscation regime overlaps with the court’s power to make such orders because any amount that could otherwise be used to pay compensation will also be classified as an ‘available asset’ to be paid in satisfaction of a confiscation order. Any amounts paid over in satisfaction of a confiscation order go not to a victim, but to the state, with a proportion being passed to the enforcing authorities.
The following example illustrates the complexities that can arise in such circumstances.
Case Study A
A defendant, X, was convicted of stealing large amounts of money, over several years, from their employers, Y. With the stolen money, X purchased several properties.
When the crime was discovered, Y brought civil proceedings and obtained a charge against those properties to the value of the stolen funds, as well as a freezing order preventing their sale without its consent.
Following conviction, the criminal case proceeded to a confiscation hearing. The value of Y’s charge against the properties exceeded the value of X’s equity in them. The court should have ruled that, absent any other assets, of which there were none, X had no realisable assets with which to pay any confiscation order as the charge against the properties took precedence.
However, an understanding was reached between those acting for X and Y that Y would agree to release equity from one of the properties to the value of £50,000 to allow X to pay that amount in confiscation. A confiscation order was therefore made in that amount.
Subsequently, Y did not accept that there was any such understanding and in any event would not agree to release the £50,000. Indeed it was recognised by the court that such an understanding would have been bizarre as it involved Y giving away £50,000 that it could otherwise have recovered.
The outcome was unsatisfactory for both parties. X could not pay the confiscation order and faced imprisonment in default for non-payment. Y had not received any compensation for their losses and faced further costly civil proceedings to recover the money from the properties.
The situation was eventually resolved following an application by X that allowed the court to re-evaluate the available amount as zero.
This example illustrates the difficulties involved both for victims seeking to recover losses, and for defendants seeking to agree confiscation orders who find themselves at the mercy of third parties.
Although a confiscation order under POCA 2002 is generally mandatory once the relevant requirements are met, the position changes when civil proceedings for compensation have started or are anticipated. In such circumstances confiscation becomes discretionary, allowing the court to give priority to the civil proceedings. This means that assets can be realised and paid to the aggrieved party rather than being taken by the state.
In the above example, the court was unable to make an order for compensation because of the existing charge and freezing order against the properties. Ironically, by acting quickly to secure the money owed to them, the company Y was precluded from taking advantage of the potentially easier route of compensation in the criminal courts. Aggrieved parties should seek detailed advice from an advisor who fully understands the POCA 2002 confiscation regimes before deciding how best to recover their losses.
As explained above, there is a procedure that allows a convicted defendant to go back to the court to ask for a confiscation order to be reconsidered. An application is made on the basis that the amount that is now available to pay the order is inadequate to meet the amount owed.
For proceedings pre-dating POCA 2002, the application must be made to the High Court under the Criminal Justice Act 1988 In contrast, under s23 of POCA 2002, the application must be made to the same Crown Court that made the original confiscation order.
The procedure under either regime is fraught with difficulties and should not be regarded as a simple way of avoiding payment if sufficient funds cannot be found to pay an order.
Several cases have narrowed the scope of any application for inadequacy. In essence, such an application cannot be used to question or revisit the original findings of the court. The proper avenue for that would be the Court of Appeal, which presents its own difficulties.
If, contrary to the defendant’s evidence and assertions, the court making the confiscation order finds that a defendant has an interest in a particular asset, the amount equivalent to the value of that asset can be the subject of the order. Any argument that the defendant does not own or control the asset, and is unable to realise the funds, cannot form the basis of an application for inadequacy. This applies in particular where the court has found there are hidden assets or tainted gifts.
A tainted gift is defined in POCA 2002 as a transfer at undervalue by the defendant during the qualifying period. What this provision is designed to avoid is a defendant passing assets to associates to put them out of reach of the confiscation regime, then being able to reclaim them at a later date.
If any asset is found to have been transferred at an undervalue it is deemed to still be an ‘available asset’ of the defendant, even if it has lost value or has disappeared. In such circumstances a defendant cannot rely on inadequacy proceedings to argue that they should not have to pay the sum ordered. The reality is that the defendant will have to find the funds elsewhere or face the prospect of serving a period in custody in default of payment.
The position with hidden assets is similar. Where the court finds that an asset has been transferred to an unknown location to be hidden from the courts and potentially recovered by the defendant at a later date, its value can form part of the confiscation order. Any argument that the asset is not in fact hidden but has gone cannot be revisited as part of an application for inadequacy. The only exception is if a defendant reveals where an asset is hidden and can then show that its value has been dissipated. In such cases the relevant available amount can be re-assessed.
A judgment of particular concern is R v Bailey , which demonstrates that, even where a defendant relies on what turns out to be potentially misleading advice, they cannot change the terms of a confiscation order.
Case Study B: Bailey
Mrs Bailey was convicted of deception offences and confiscation proceedings followed. The amount of benefit was calculated to be in excess of £600,000. It was accepted that her available assets were much less than that amount, and consisted of her interest in a property, which she held with her husband.
Mrs Bailey was apparently wrongly advised by her counsel that she should agree an available amount equivalent to the equity in the property, and that the issue of her husband’s interest would be taken into consideration at a later date via an inadequacy application to the High Court. The correct procedure would have been for her husband’s interest to have been established by evidence at the confiscation hearing and an order sought to reflect only her part of the equity in the property.
Upon realising that she could not pay the confiscation order, Mrs Bailey appealed to the Court of Appeal to reduce the confiscation order. The Court of Appeal held that:
The confiscation order should stand. It was made with the consent of the appellant, albeit in reliance on legal advice which was or may have been incorrect.’
This case further illustrates that once an order is made by agreement it is difficult if not impossible to vary it at a later stage if that agreement proves to have been unwisely made, even when it was based on legal advice that may have been incorrect.
In Bailey the defendant would not have been able to rely on an application for inadequacy because the order had been made by agreement and there had been no change in the value or ownership of the asset after the confiscation order was made. The Court of Appeal’s finding was that only the defendant would know what their interest in the property was, and if they had agreed to an order in a certain amount that should stand.
Both case studies illustrate the complexities and potential pitfalls in dealing with a confiscation order, particularly where assets exist and there are competing claims to their ownership.
Civil Confiscation Proceedings
In addition to the criminal confiscation regime, POCA 2002 also allows for the state to bring civil proceedings to recover the proceeds of unlawful conduct. Such proceedings could be brought after a finding of guilt or even in the event of an acquittal. Civil confiscation proceedings differ from the criminal proceedings already dealt with in several important respects.
There is no need for anyone to have been convicted of a criminal offence. Whereas criminal confiscation can only follow conviction for a criminal offence (which has to have been proved beyond reasonable doubt or by a guilty plea), civil confiscation proceedings have no such requirement. Furthermore, the ‘unlawful conduct’ required need not be of the individual against whom the proceedings are commenced.
Civil confiscation proceedings do not seek to recover sums that are deemed to be ‘criminal benefit’. Rather they deal with ‘recoverable property’, which is defined as either property that is obtained directly through criminal activity, for example money that was stolen, or property that represents property so obtained, for example anything bought with stolen money. Civil confiscation proceedings therefore require a more detailed asset tracing exercise than in criminal proceedings and attach more directly to property derived from crime.
The burden of proof is different. As stated above, before criminal confiscation proceedings can commence there must be a finding of guilt beyond reasonable doubt. In civil recovery proceedings the burden of proof is the civil balance of probabilities (more likely than not), making it significantly easier for the party bringing proceedings to establish that property is obtained as a result of unlawful conduct. This means that in circumstances where there is insufficient evidence to prove to a criminal court that a particular offence has been committed, the property obtained as a result of the apparent criminal conduct can still be pursued and confiscated under the civil procedure.
There is no requirement in civil confiscation proceedings to prove precisely which crime on which particular date produced the property in question. It is sufficient for it to be proved that activity of a particular kind has been committed and the property in question results from that activity.
Civil Recovery and the Serious Fraud Office (SFO)
Current debate has focused on the SFO’s use of its powers of civil recovery and confiscation against corporates that have benefitted from corruption overseas.
Despite the terms of POCA 2002, the courts have pronounced that civil recovery and confiscation are not appropriate where there are insufficient funds available for a court fine, and that civil recovery itself will ‘rarely be appropriate’ as the criminality of corporates must not be ‘glossed over by a civil as opposed to a criminal sanction’ (Thomas LJ, R v Innospec Ltd ).
Nevertheless, the director of the SFO, Richard Alderman, has confirmed that it is his intention that the SFO will continue to use its civil recovery powers, where it deems appropriate, for companies who self-report corruption issues. In such cases, it is the SFO’s intention to also publish ‘far more material, including, in particular, why [the SFO] considered that a civil rather than criminal outcome was appropriate’.1
The continued availability of civil resolution with the SFO will be welcomed by companies that want to self report a corruption issue. This will be particularly important for those whose business would be severely damaged by the mandatory exclusion from participating in public contracts within Europe on criminal conviction.2 It goes without saying that companies must take specialist legal advice in such circumstances.
As can be seen from the above there are many areas of complexity involved in the practical application of the confiscation regime. Specialist advice is always important and valuable at an early stage, particularly given the situations illustrated, where agreements that turn out to be inappropriate cannot always be changed.
By Richard Smyth, partner,Caroline Lee, associate, andJames Moss, solicitor, DLA Piper.
R v Bailey  EWCA Crim 2873
R v Innospec Ltd  EW Misc 7 (EWCC)