As an increasing number of criminal offences are now covered by the confiscation regime, Caroline Lee (left) and James Moss (right) look at how the legislation has been used and provide guidance for in-house lawyers who may face the consequences
Many jurisdictions have legislation that permits regulators to confiscate assets obtained by those convicted as a result of their criminal conduct. Since being introduced in England and Wales in the late 1980s, the confiscation regime has expanded to cover a wider range of criminal offences. This tool has been given to a large number of prosecutors, who have used it with vigour.
Corporations and their legal advisers must therefore be alive to the implications of the regime because it can be used as a form of corporate ‘capital punishment’ by ordering firms to pay large sums of money, forcing them into insolvency. This is a stark contrast to the level of fines traditionally handed down by the British courts. Company directors facing prosecution should also be aware that default on payment of a confiscation order can lead to lengthy terms of imprisonment.
The current regime is set out in the Proceeds of Crime Act (POCA) 2002, a lengthy and tortuous act of parliament that came into force in March 2003. It is judicially recognised as draconian and is drafted so as to severely limit any judicial discretion that might mitigate its effects.
To complicate matters further, for offences wholly or partly committed before March 2003 one of two other regimes may apply. The consequences of falling within the earlier regimes are significant, and must be considered by defendants and their advisers as an important strand of any strategy for dealing with a potential prosecution.
This article seeks to explain and highlight some of the complexities of the law as it applies today, together with its effect and possible use by prosecutors.
Confiscation of assets
The confiscation of assets obtained as a result of criminal conduct is, in principle, a reasonable and proportionate response by the state to acquisitive crime. Prosecutors were first given the power to confiscate assets in the 1980s. The legislation was designed to deprive drug barons and career criminals of the proceeds of their unlawful conduct. However, over the following 20 years the regime has expanded beyond recognition. In 2009 a new tranche of regulators were given powers to confiscate the assets of convicted defendants. The list now includes:
- Counter Fraud and Security Management Service of the NHS;
- Department for Business, Innovation and Skills (BIS);
- Department for Work and Pensions (the DWP);
- Environment Agency;
- Financial Services Authority (FSA);
- Gambling Commission;
- Gangmasters Licensing Authority;
- Local authorities in England and Wales;
- Medicines and Healthcare products Regulatory Agency;
- Office of Fair Trading (OFT);
- Revenue and Customs Prosecutions Office;
- Royal Mail;
- Rural Payments Agency;
- Serious Fraud Office (SFO);
- Transport for London; and
- Vehicle and Operator Services Agency.Where a confiscation order is made by the court, the prosecuting agency can receive up to 50% of the amount obtained. In times of economic recession, and when impending budget cuts are affecting government departments and agencies, it is easy to see why asset recovery is being increasingly utilised by prosecutors.
The Times reported in October 2009 that the Home Office had set a yearly £250m asset seizure target for 2010, rising to £1bn per annum thereafter. If this were not incentive enough for prosecutors, it was also reported that many officers received personal performance bonuses for hitting asset recovery targets.
Confiscation orders have been made following prosecutions by the SFO, the OFT, the Department for Business, Enterprise and Regulatory Reform (now BIS), local authority trading standards, the DWP and the Environment Agency. Since November 2007 the Environment Agency and partners are said to have confiscated more than £1.5m from environmental polluters. Given the financial incentives, no doubt it is only a matter of time before others seek to exercise their powers.
Three regimes
Confiscation proceedings are governed by three different regimes, depending on the dates of the criminal conduct involved.
Regime 1: Criminal Justice Act 1988 (the 1988 Act)
For offences that took place wholly or partly prior to 1 November 1995, regime 1 will apply. Here, a Crown Court judge can only make a confiscation order if the prosecution lodges a formal request. Once a request has been made the judge has the discretion to:
a)decide whether or not to make the order; and
b)decide the amount payable, ‘as they see fit’.
under regime 1
In September 2009 the SFO obtained a confiscation order under regime 1 in the sum of £1.1m against Mabey & Johnson for corruption and breach of economic sanctions. The total value of the contracts said to have been obtained as a result of bribery was £60m. If the case had been decided under either of the other two regimes, a starting figure for any order would have been £60m.
Regime 2: the 1988 Act, as amended by Proceeds of Crime Act 1995
For offences committed after November 1995 the confiscation regime is far more draconian:
- The court must conduct a confiscation enquiry if the prosecutor requests it. It may also do so of its own volition.
- The court has no discretion in determining the amount to be confiscated and the calculation of benefit is arithmetically determined by statute.
- The lifestyle provisions put property held or obtained by the defendant in the six years prior to proceedings at risk of confiscation. The lifestyle provisions are widest under regime 3.
Regime 3: POCA 2002
Confiscation under POCA 2002 is a five-step process:
- The court must conduct a confiscation enquiry if the prosecutor requests it or the court can proceed of its own volition.
- The judge must decide whether the defendant has a criminal lifestyle (see description on p5).
- The judge must then determine whether the defendant has benefited from criminal conduct. If the defendant has a criminal lifestyle this triggers a historical enquiry into the defendant’s general criminal conduct. If the defendant does not have a criminal lifestyle the judge considers the benefit from the offences that the defendant has been convicted of.
- The judge determines the gross value of benefit from the defendant’s criminal conduct. If there is a criminal lifestyle then the judge must apply the relevant assumptions. The burden of disproving an assumption is on the defendant.
- The judge must make a confiscation order in the sum of the benefit unless the defendant can prove that the value of all their existing assets (the ‘available amount’) is less, in which case the court will make an order in that amount.
- A period of imprisonment in default of payment will be imposed.
Draconian effect of POCA 2002
Confiscation involves a forensic assessment of the benefit obtained from the offences committed by a company and its ‘realisable assets’, ie the means at its disposal to pay the order. Once proceedings are set in motion there is little discretion involved:
‘The making of an order is mandatory and its amount is arithmetically determined but cannot be moderated by judicial discretion.
It also follows that, not infrequently, and perhaps even ordinarily, the amount of money confiscated will exceed the profit made by the criminal from their offence.’ (Shabir v R [2009])
POCA 2002 is draconian, setting out strict rules regarding how the amount of the order is to be calculated. This is an arithmetic exercise without discretion, even where the amount confiscated is far greater than any actual gain (see ‘Under POCA 2002’, on p6).
POCA 2002 is intended to deprive defendants of the benefit they have gained from criminal conduct, whether or not this benefit has been retained. The benefit is calculated as the total value of the property or advantage obtained, not net profit (see the case example below).
recent fsa action
In December the Financial Services Authority (FSA) completed its second criminal prosecution for insider dealing. The trial resulted in two individuals, Matthew and Neel Uberoi, receiving custodial sentences. The FSA also sought a confiscation order under the Proceeds of Crime Act (POCA) 2002.
Matthew Uberoi was an intern at a corporate broking firm, working on takeovers and other price-sensitive deals. On several occasions he passed inside information to his father, Neel Uberoi. Neel Uberoi then purchased shares in the relevant companies, making £110,000 profit.
Neel Uberoi received a two-year custodial sentence and Matthew Uberoi received one year. Neel Uberoi’s net profit totalled approximately £110,000. Testar J held that the benefit was the full worth of the shares purchased, £288,050.05.
Criminal lifestyle
Under POCA 2002 the court is required to make lifestyle assumptions where the defendant is deemed to have a criminal lifestyle. These can be applied:
- where a defendant’s conduct forms part of a course of criminal activity (ie continues for a six-month period, involves a conviction for three or more offences, or two previous relevant offences); or
- where there is a conviction for certain specified offences, the most relevant being money laundering (this can be charged where money or assets obtained from criminal conduct are transferred or used in some way by the defendant).
It is relatively easy for a defendant to come within these provisions. Many confiscation matters are currently dealt with as lifestyle cases. Once a defendant has been deemed to have a criminal lifestyle the court is required to make four assumptions. These are:
- any property transferred to the defendant at any time after the relevant date (six years before the start of criminal proceedings, which is generally taken as the date of charge) was obtained as a result of criminal conduct;
- any property held by the defendant at any time after their conviction was obtained as a result of criminal conduct;
- any expenditure incurred at any time after the relevant date was met from property obtained from criminal conduct; and
- any property obtained by the defendant was received free of any other interest.
The implications of such a finding can be severe (see ‘Case of X: part 1’, on p6).
Case example
In R v Neuberg [2007] EWCA Crim 1994 Clive Neuberg had traded under a prohibited name contrary to the Insolvency Act 1986. The benefit of his criminal conduct was determined as the gross turnover of the company for the relevant period, not the net profit.
Tainted gifts
Tainted gifts are another extremely problematic issue. The realisable amount includes the value of any property held to be a tainted gift, defined as any transfer at undervalue after the date the offences commenced. Where assets are transferred to third parties at an undervalue and are subsequently dissipated, they are still classed as a tainted gift. The defendant is then ordered to pay the equivalent amount, even if the asset is worthless or has vanished (an example is shown in the box below).
tainted gifts
In 2009 Y, a former civil servant, was convicted of fraud offences occurring in 2005 leading to confiscation proceedings.
In 2006 Y sold their house to their daughter for £300,000.
A valuation obtained by the prosecution showed the market price in 2006 was £350,000. Accordingly the house was held to have been sold at an undervalue and was therefore a tainted gift.
A valuation of the house in 2009 showed that the house had fallen in value to £250,000. Nevertheless, the confiscation order of Y was increased by £50,000 because the gift was valued at the time it was given.
What if the defendant cannot pay?
Enforcement of confiscation orders is equally harsh. There is a sliding scale of imprisonment in default of payment linked to the amount of the order. This starts at seven days for amounts under £200, rising to ten years for amounts exceeding £1m. Any period in default:
- is distinct from the sentence for the substantive offence;
- can far exceed the original sentence; and
- would be served consecutively.
While a defendant only serves half of the default period, the provisions for early release from normal custodial sentences do not apply (see ‘Case of X: part 2’, on p6).
On release from serving a default sentence the debt is not extinguished. It remains indefinitely, with 8% interest accruing from the date when the order fails to be paid. While a defaulter cannot be sent to custody again for failing to pay the original amount they can, in principle, be sent back to prison for failing to pay the interest.
Directors and companies
Confiscation orders are regularly made against company directors.
In August 2009 the Environment Agency obtained a confiscation order of £234,393 against two directors of a waste management company following prosecution for controlled waste offences. Each received a conditional discharge for two years for the substantive offence and three years custody in default. The company was given no separate penalty but was ordered to pay full prosecution costs.
The courts have also confirmed that confiscation is equally applicable to corporate defendants.
In 2006 London Boroughs of Brent and Harrow Trading Standards (Brent and Harrow) convicted Alami International Ltd for offences in relation to the sale of counterfeit goods. The company was fined £24,000 and was ordered to pay £23,500 in costs for eight offences under the Trade Marks Act 1994.
Working with the London branch of the Regional Assets Recovery Team, Brent and Harrow obtained a confiscation order of £400,000 under POCA 2002.
Under POCA 2002
If there are four defendants to an offence of fraudulently obtaining a loan of £100,000, the court must hold that each has benefited in the sum of £100,000. Each defendant would, subject to their available assets, be ordered to pay £100,000. The state could therefore recover £400,000.
case of x
Part 1
Defendant X is an international businessperson and director of several companies. X was convicted of laundering £190,000 in 2010. X was automatically assumed to have a criminal lifestyle.
X was charged in 2006. The court therefore considered all money and property passing through their hands since 2000 to be from criminal conduct. The benefit figure was calculated at approximately £11m.
Because of the criminal lifestyle assumption, X had to prove that the £11m passed through the accounts legitimately by providing a detailed explanation of every entry over £1,000 in every personal and company bank account used during that ten-year period.
X was able to prove that £10m passed through the accounts legitimately. Criminal benefit was therefore determined to be around £1m. The £190,000 that X laundered therefore resulted in a confiscation order of £1m because it could not be proven that the additional money was obtained legitimately.
Part 2
X was sentenced to four years in custody for the offence of money laundering. This led to an early release with an electronic tag after less than two years.
Because X was ordered to pay £1m in confiscation, they were liable to face a default sentence of up to ten years. In fact, following submissions, X was given a default sentence of five years. If X defaults on payment they will be liable to serve two and a half more years, a period greater than that already served for the substantive offence.
Case of x
Part 1Defendant X is an international businessperson and director of several companies. X was convicted of laundering £190,000 in 2010. X was automatically assumed to have a criminal lifestyle.
X was charged in 2006. The court therefore considered all money and property passing through their hands since 2000 to be from criminal conduct. The benefit figure was calculated at approximately £11m.
Because of the criminal lifestyle assumption, X had to prove that the £11m passed through the accounts legitimately by providing a detailed explanation of every entry over £1,000 in every personal and company bank account used during that ten-year period.
X was able to prove that £10m passed through the accounts legitimately. Criminal benefit was therefore determined to be around £1m. The £190,000 that X laundered therefore resulted in a confiscation order of £1m because it could not be proven that the additional money was obtained legitimately.
Part 2X was sentenced to four years in custody for the offence of money laundering. This led to an early release with an electronic tag after less than two years.
Because X was ordered to pay £1m in confiscation, they were liable to face a default sentence of up to ten years. In fact, following submissions, X was given a default sentence of five years. If X defaults on payment they will be liable to serve two and a half more years, a period greater than that already served for the substantive offence.
Can a confiscation order be limited by agreement with the prosecutor?
Where a corporate defendant is facing prosecution for any offence that has produced a financial benefit, advisers must assume that the relevant prosecutor will seek a confiscation order. Before accepting any corporate liability, it is important to consider the impact of the relevant regime. While there may be some room for manoeuvre to control the effects of the confiscation regime – on the basis of the charges laid, the agreed facts and any financial statements put before the court – the fact that the quantum of benefit and realisable assets are agreed between the prosecutor and a potential corporate defendant will not and cannot, in itself, bind a Crown Court judge in confiscation proceedings.
The judge is positively obliged to investigate any agreement between the prosecution and defence as to the appropriate quantum of any confiscation order, and to reject it if it is not in accordance with the statutory scheme.
For most corporate advisers it will be counterintuitive to admit misconduct over a prolonged duration. However, when it comes to confiscation this could be advantageous as offences dealt with under the earliest of the three regimes would have the benefit of judicial discretion.
Conclusions
This is an extremely complex and constantly evolving area of law. As can be seen in the examples of this article, the potential consequences for both individuals and companies can be serious. In worst-case scenarios long periods of custody for individuals and extremely large financial penalties can result from the confiscation regime.
All indications point towards the increasing use of confiscation powers by a larger number of regulatory bodies. Once confiscation proceedings are set in motion the courts have very limited powers to stop them and limited discretion to alter the ultimate outcome. It is therefore a worrying development that agencies that may have little or no experience of bringing confiscation proceedings are now empowered to do so.
The key point for any individual or company potentially facing a prosecution where a confiscation order may be made is to seek specialist advice at an early stage.
Very important strategic decisions must be taken under advice. When deciding whether to plead to any offence, the impact on confiscation must be considered. For advisers negotiating any basis of plea, the facts on which a conviction is based must be carefully agreed.
Confiscation and prosecutorial policy: SFO
The lack of discretion under POCA 2002 may also hamper the efforts of prosecutors to meaningfully engage with corporates. The SFO’s director, Richard Alderman, is trying to encourage companies to self-report past wrongdoings for overseas corruption.
Self-reporting corruption is all well and good for those companies who manage to negotiate a Civil Recovery Order, such as Balfour Beatty and AMEC. The advantage here is that the settlement is largely in the hands of the SFO, the corporate defendant and its advisers. There is no conviction or complex confiscation proceedings to contend with. This is not so with criminal settlements if the fact pattern means that either of the later two regimes apply.
If the practice of self-reporting and plea discussions is to be supported and encouraged by corporates and their advisers, the challenge of finding a pragmatic approach to the issue of confiscation must be met.