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25 May 2018

The Criminal Finances Act 2017; why UWOs and tax evasion are not what really matter

The Criminal Finances Act 2017 (CFA) is probably the most significant statute in relation to criminal fraud since the Proceeds of Crime Act 2002 (POCA). Whilst the Criminal Justice Act 2003 effected widespread changes in the criminal law in relation to hearsay, bad character and disclosure, none of these were focussed on fraud in particular. The Fraud Act 2006 and of course the Bribery Act 2010 are both significant but their effects are limited. The former, for example, was enacted in part in order to abolish recourse to the “prosecutor’s darling”, the common law offence of conspiracy to defraud, but this offence endures as the SFO’s favourite. The bribery statute, whilst an important milestone on the road to a new and expanded model of corporate criminal liability, is otherwise narrowly focussed.

Judging by the number of articles written about the CFA, Chapter 1 of Part 1 and Part 3 of it are regarded as its most important provisions. The former concerns unexplained wealth orders (UWOs). Furthermore, in an early bid for some helpful publicity about itself after recent setbacks, notably the failure to have the SFO subsumed into it, the NCA within 28 days of this Part being implemented proclaimed that it had obtained two UWO’s. This was soon followed by an unwise intervention by Boris Johnson. He heralded UWOs as a tool to be deployed against Putin’s supposed UK-based cronies. He thus made it likely that the High Court will scrutinise with extra rigour any UWO application where the putative respondent is a Russian. Judges will not tolerate a UWO being used for such a political purpose.

Part 3 of the CFA concerns the new corporate criminal offence of facilitation of tax evasion. Only a handful of prosecutions pursuant to it per annum are contemplated and of these, almost none (many commentators think none) in relation to non-UK evasion.

I predict that neither of these provisions will be the subject of substantial litigation. This is principally because their lasting importance lies in their symbolism not their enforcement. They serve as a warning from the State to the UK financial sector and to UK-based professional advisors that they should tread even more carefully when checking the provenance of wealthy foreign clients and where tax avoidance appears to be the principal attraction of a proposed investment. A UWO is an addition to the investigative armoury of a financial investigator, and is intended to make the grant of a civil recovery order easier in certain circumstances. I am sceptical that it will the progenitor of many such orders.

As to the new corporate fiscal offence, I believe that its significance is comparable to the s330 offence in POCA which arguably criminalises a negligent failure to report a suspicion of money laundering. Not a single prosecution on this basis has ensued. However, the threat of one has been a sufficient nudge to those working in the POCA-defined “regulated sector”.

Other reasons for my prediction that civil recovery orders based on an UWO will be sparse is firstly that the UK financial sector has almost uniformly erected stringent anti-money laundering measures since POCA, with the result that “dirty money” has for many years only infrequently been used to buy UK-based assets. There is not much low-hanging fruit any longer as organised criminal proceeds, especially emanating from Eastern Europe and Russia, have become more sophisticated and shifted towards new financial centres like Dubai. Secondly, that the high cost and expense especially in terms of law enforcement resources of securing a civil recovery order in the High Court where this is resisted will render them a rarity. The history of pre-UWO civil recovery orders, originally presented as a step-change in the fight against financial crime, shows that resource-starved law enforcement desires quick results not prolonged litigation before the High Court. These orders have dwindled in number and under Mr Alderman’s reign as SFO director (2008-12) reached a squalid nadir of being used by the SFO to reach lenient settlements with companies concerning foreign bribery.

I contend that Chapter 3 of Part 1 will come to be regarded as the most important or far reaching change to criminal law which this Act promulgates. Moreover, this will be because of a single section within it, s16 “Forfeiture of money held in bank and building society accounts”. This is an uninviting, if not intimidating, read for all but the intrepid. The undergrowth of various amended and re-amended sections of POCA is already dense and s16 only adds to its impenetrability. The section inserts a new section to that statute, section 303Z1-19. This nomenclature conveys my point; originally s303, then s303Z and now s303Z1.

The purpose of s16 is to extrapolate the pre-existing Magistrates Court summary cash seizure and forfeiture regime to credit balances held in a UK bank or building society. Since 2003, this regime has been used frequently. Experience of it has been that magistrates are readily persuaded by submissions made on behalf of law enforcement, whether it be the prolong the period of the cash’s detention or to authorise its forfeiture. S16 also reverses the decision of the Admin Court in R (Bunnvale) v CCC [2017] EWHC 747 which held that cash-at-bank was not amenable to that regime.

S16 provides law enforcement with an extended power which hitherto was only available to it via a Crown Court restraint order. Accordingly, a lay bench sitting in a country town (there are still a few such courts left) on a written and probably ex parte application made by an law enforcement official (the NCA, the SFO etc.), can grant as asset freezing order (AFO). This can last for up to two years (the period can be up to one year at a time) in respect of an entire credit balance, which may of course be millions of pounds or the equivalent in foreign currency. An AFO may be the precursor to an eventual application for an asset forfeiture order which a lay bench may also grant. In some circumstances, forfeiture can be effected administratively if the person seemingly associated with the bank account does not signal their opposition within 28 days of an application for such an order.

Why is s16 destined for importance? Because it provides an easy means by which law enforcement can freeze and potentially seize enormous sums of money. Easy firstly because the degree of judicial scrutiny is likely to be far less in a magistrates’ court than in the Queens Bench Division where any application for a civil recovery order must be determined. Secondly, no criminal antecedent or extant investigation or prosecution is required. Contrast this with the onerous reporting requirements concerning a pre-charge restraint order and the requirements of trial and conviction before confiscation can occur. Previously this vista was only available as regards cash.

Thirdly, despite the possibly vast sums in play (people can’t carry even in a suitcase such large sums in cash), the cash seizure and AFO regimes dispense with certain basic criminal law safeguards. Firstly because it is supposedly an in rem not in personam relief. Secondly because the legal environment is civil litigation the balance of probabilities test prevails and, for example, there is no pre-trial duty of either evidential or unused material disclosure equivalent to a criminal prosecution. In this vein and thirdly, the test is whether, on the balance of probabilities, the money is as defined by Part 5 POCA, “recoverable property”. There is no need to prove to the criminal standard that it is “criminal property” as defined by Part 7.

Fourthly, the applicant’s reasonable grounds to suspect can be formulated with minimal effort, and could merely be reproduced from the SAR which the UK bank transmitted to the NCA. Finally, and as a further incentive, a share of such seized money will be given to the law enforcement agency which sought it pursuant to the Home Office’s asset recycling programme.

There will be, I submit, an overriding temptation by law enforcement to perceive this enlarged summary seizure regime as a simple way of looking effective in the financial crime arena. It is a ready opportunity to convert a SAR into money. In consequence restraint orders may fall into desuetude. This regime is another major step in the march away from criminal law and to have ever more serious allegations of criminality determined summarily. Where there is big money at stake which the State may be able to seize, trial by jury is increasingly regarded as an expensive anachronism.

Despite the above commentary, I wouldn’t want to overlook the potential flies in the ointment. From my defence or should I say, respondent, perspective, I can see pitfalls ahead for law enforcement.

First of all, one should not overlook the significance of the statutory language used. Is a credit balance necessarily an asset? No. The landmark judgment of the House of Lords in Preddy [1996] AC 815 is a warning from history that credit balances may on analysis of the circumstances be far from being an asset in the account-holder’s name or be easily convertible into money. This case and a tranche of subsequent banking law authorities establish in essence that a credit balance is often a complex bundle of legal rights and entitlements with competing interests and third party rights. Asking a lay bench to disentangle them may result in perverse and legally chaotic decisions. The Admin Court may thus be busy with JR applications.

Secondly, whilst the intention was to extrapolate the previous cash-only seizure regime, there are some unavoidable or inherent complexities which may bog the process down. As the frozen credit balance may be a person’s only means of paying their living and legal expenses, the new regime has had to cater for the situation of the account-holder seeking interim drawings from it. This will both deplete and complicate. Law enforcement resources may need to be devoted to monitoring that person’s spending. Next if the amount at issue is substantial, ferocious litigation can be expected and the notion that a forfeiture order application could be made in an afternoon may be naïve. In other words, that what is currently perceived as “summary” proceedings may be anything but.

Thirdly, who will preside? Law enforcement unsurprisingly expects magistrates whom traditionally are perceived are biased in favour of the State or at least, risk-averse. However, the respondent is at liberty to petition for a circuit or even puisne judge to sit as a magistrate if the facts or amount of money at stake so warrants.

There are other potential counter-measures which a well-advised respondent may have available to frustrate the seemingly simple process.

Finally, respondents should not be misled by an important lacunae in s16 and in the corresponding rules of procedure, the Magistrates Court (Freezing and Forfeiture of Money in Bank and Building Society Accounts) Rules 2017 (2017 No. 1297). Hopefully the omission was mistaken. Presently if a law enforcement applicant obtains an AFO on an ex parte application, there is no requirement on them to subsequently serve their written application made to the court (it must be in writing) on the respondent, just the AFO. That of course transgresses natural justice and Rule 3 thus requires amendment. In the meantime, a respondent who has to confront an recalcitrant law enforcement official who for example, demands attendance at an “investigatory” interview prior to disclosing their reasons or otherwise intimates that the respondent is taking an uncooperative and potentially harmful attitude in demanding this, can rely upon BSB v CCC [2011] EWHC 3451.

This article was published in New Law Journal and Fraud Intelligence, behind paywalls.

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