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:

  1. The court must conduct a confiscation enquiry if the prosecutor requests it or the court can proceed of its own volition.
  2. The judge must decide whether the defendant has a criminal lifestyle (see description on p5).
  3. 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.
  4. 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.
  5. 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.
  6. 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:

  1. 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
  2. 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:

  1. 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;
  2. any property held by the defendant at any time after their conviction was obtained as a result of criminal conduct;
  3. any expenditure incurred at any time after the relevant date was met from property obtained from criminal conduct; and
  4. 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.

Access to environmental information often creates conflict between the rights of citizens to understand the environment in which they live and the legitimate confidential interests of businesses that provide services to public bodies. The Environmental Information Regulations (EIR) 2004 came into force over five years ago, but there are still frequent skirmishes in the courts over the scope of access to commercially sensitive documents, and the public (and non-governmental organisations in particular) are becoming increasingly creative in their efforts to obtain this information. Two recent examples are Veolia ES Nottinghamshire Ltd v Nottinghamshire County Council & ors [2009] and Office of Communications (Ofcom) v The Information Commissioner [2010], both of which have reshaped the contours of this area of law. Uncertainty exists in both the operation of the individual legislative routes to accessing information and in the interaction between them, which is of concern to the large number of commercial enterprises that do business with the public sector.

Continue reading “Access all areas: how safe is your commercially sensitive environmental information?”

Last year saw an increase in legislative activities concerning competition law in several central and eastern European (CEE) and south-east European (SEE) countries. The non-EU member countries in the region continue to harmonise their competition law regimes with international standards applicable in most jurisdictions in the EU. This should facilitate the competition law assessment for undertakings active in numerous jurisdictions across Europe. Continue reading “Competition law developments in CEE and SEE countries”

The world of tax is quite interesting at the moment – to me, at least – because it brings into sharp focus the way that tax is used as an instrument of policy and what role it is playing in the field of social policy. It is hardly news that the state of public finances in most western economies is, to be charitable, delicate. No doubt the finances will be redressed, to an extent, by cuts in spending. However, it is equally clear that some of the improvement will have to come from an increase in public revenues. Continue reading “Tax and social policy”

Supershield Ltd v Siemens Building Technologies FE Ltd [2010] takes us back to the nuts and bolts of contract law – to the question of remoteness of damage.

A type of loss resulting from a breach of contract cannot be recovered if it is too remote. The law in this area has become unsettled in recent years, but the Court of Appeal’s new judgment helps clarify when a type of loss will be considered too remote to be recovered.

The commercial background of the contract has, as a result of Supershield, taken on greater significance in this area of the law.

Facts of Supershield

Supershield gave rise to an interesting and apparently unprecedented point on the remoteness of damage. The defendant (D), a subcontractor of the claimant (C) in the construction of an office building, breached its contract with C.

D had to install a ball float valve and lever arm (such as you might find in a domestic toilet cistern) so that the water storage tank of a sprinkler system would be refilled whenever the water level dropped. After D had installed the ball float valve and lever arm, the nut and bolt connection between them failed, and the bolt fell out. The judge at first instance found that D had not screwed the nut sufficiently tight. After the bolt fell out, the valve was left open so that water flowed into the tank, but the valve did not close as the tank filled up. The tank overflowed.

The design for the office building had incorporated several protection measures to ensure that an overflowing tank would not cause any damage. The tank room had built in drains that were designed to remove any leaking water and an alarm system to warn of any overflow.

As it was, the drains became blocked and the alarm system was not being monitored. Water flooded from the tank room into the office building basement and caused substantial damage to electrical equipment.

Multiple protection measures all fail

This was, apparently, an unprecedented point. D argued that the parties could not have foreseen that overflowing water would cause damage, as they would not have anticipated the drain being blocked and the alarm being unmonitored. The building was designed specially to avoid such damage. Did the unexpected failure of multiple protection mechanisms make the resulting damage too remote to be recovered?

To resolve this question, the Court of Appeal reviewed the law on the remoteness of damage. This has, in recent years, become rather uncertain as a result of the House of Lords judgment in Transfield Shipping Inc v Mercator Shipping Inc [2008]. But the Court of Appeal has now helped to clarify the law.

A loss reasonably contemplated or in the natural course of things?

The classic case of Hadley & anor v Baxendale & ors [1854] remains the starting point when considering whether a type of damage is too remote to be recovered.

Damages were held to be recoverable according to a two-limbed test:

1. when the damages may be fairly and reasonably considered to arise naturally, ie according to the natural course of things; or
2. when the damages may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.

On the facts, the defendant carriers had not been informed that late delivery of the crankshaft they were transporting would delay the operation of the mill and, as far as they were aware, the owner might have had another crankshaft. Therefore the mill owner could not recover the lost profits as this type of loss was too remote.

Applied to the facts of Supershield, it could be argued, on the one hand, that flooding would naturally be expected to result from the faulty installation of the tank valve. On the other hand, the overflowing water might have been expected to flow away down the drains or to have been prevented after activation of the alarms.

A sufficiently likely loss?

In C Czarnikow Ltd v Koufos (The Heron II)[1967], the House of Lords developed and restated the rule in Hadley. Whether a type of loss was recoverable depended on the likelihood, or the degree of foreseeability, that the type of loss would occur as a result of a breach.

Although no single formulation of the rule was agreed, the crucial question according to Lord Reid was:

Applied to the facts of Supershield, the question could be constructed as follows: did the multiple protection measures in place make the flooding sufficiently unlikely for this kind of damage to be too remote?

An assumed responsibility?

The House of Lords in Transfield brought significant uncertainty to this area of the law. In Transfield, ship owners had chartered out their ship and it was due to be redelivered to them by 2 May 2004. They also agreed a new hire to a new charterer at a lucrative rate, with the vessel to be delivered to the charterer by 8 May 2004 at the latest. The vessel was delayed and it was not redelivered to the owners by the earlier charterers until 11 May 2004. The new charterer still agreed to take the vessel, but only at a much reduced rate. Due to an unexpectedly volatile market, the difference between the lucrative rate and the much reduced rate was very large.

The majority of their Lordships introduced a novel dimension into their judgments in suggesting that losses would only be recoverable if the party who had breached the contract could be reasonably assumed to have undertaken responsibility for that kind of loss. Lord Hoffmann, in particular, emphasised that the extent of a party’s liability depended on the construction of the contract as a whole in its commercial setting. On this basis, the Lords held that the loss of the very lucrative charter rate, which was the central issue in the dispute, was too remote, as, even if it was perfectly foreseeable, the earlier charterer could not reasonably be seen as having undertaken responsibility for the whole period of the new charter.

Could this approach hold the key to the question in Supershield? Had D assumed responsibility for the losses caused by the overflowing water?

A loss within the scope of the contractual duty?

The Court of Appeal in Supershield reasoned that the very purpose of installing the ball float valve had been to control the flow of water and so D had undertaken responsibility for the consequences of the water overflowing. It would have been strange for the extra protection measures put in place to have diminished D’s responsibility, as the whole point of protection measures was for them to act as a backup, rather than to reduce the importance of the water not overflowing in the first place.

The losses caused by the overflow of water were within the scope of D’s contractual duty to C. As such, the losses would not have been too remote for C to recover, even if the parties could not have predicted them.

The Court of Appeal held that the rule in Hadley, as rationalised and restated in The Heron II, remains the ‘standard approach’, but that the reasonable expectations or intentions of the parties may cause the court to depart from this rule.

The Court held that ‘if, on the proper analysis of the contract against its commercial background, the loss was within the scope of the [contractual] duty’ the loss will not be too remote to be recovered, even if loss of that kind ‘would not have occurred in ordinary circumstances’.

Comment

The House of Lords in Chartbrook Ltd v Persimmon Homes Ltd & ors [2009] and the Supreme Court in Sigma Finance Corporation, Re [2009] have recently emphasised the importance of interpreting contracts against their commercial contexts.

The Court of Appeal in Supershield has now also cemented the reasonable intentions of the parties against the commercial background as a key element of the law of remoteness of damage. The scope of the contractual duty and the contractual assumption of responsibility will now always have to be considered when determining what type of loss can be recovered. It will be interesting to see how this area continues to develop in light of Transfield, as the law is still very unsettled.

Final key point

For practitioners, when drafting contracts, the Supershield judgment is a further reason to allocate responsibility for the consequences of breach clearly and in a way that signposts the underlying commercial rationale.

In a unanimous decision released on 21 January 2010, the Supreme Court of Canada clarified the discretion of a federal responsible authority (RA) to make decisions regarding the scoping of projects for purposes of the federal environmental assessment (EA) process. In MiningWatch Canada v Canada (Fisheries and Oceans) [2010], the court overturned a Federal Court of Appeal decision that granted RAs discretion to scope a project to determine the type of EA process or ‘track’ that will apply. The track determines the level of the intensity of the EA review.

Continue reading “Supreme Court clarifies scope of regulatory discretion on environmental reviews”