D (UK) Ltd v Revenue & Customs Prosecutions Office

LORD JUSTICE LONGMORE: This is an appeal from a decision of His Honour Judge Pert, sitting in Nottingham, to grant a variation of a restraint order to include a sum of about £366,000 held in the account of a company, 'R'. Revenue and Customs maintain that that sum should be available for confiscation at the end of a trial of the alleged fraudster, Mrs S.

We have not been shown the detail of the criminal proceedings against Mrs S, but we have been told that they contain currently wide-ranging allegations from which it will or may be apparent after trial that Mrs S has benefited from her criminal conduct to the tune of £21 million.

The general scheme of the fraudulent conduct put before the judge, on the aspect of the case with which we are concerned, was a VAT fraud alleged by the Customs to have been committed by Mrs S in relation to non-existent but alleged goods, in the form of computer processing units. These units were supposedly imported into the United Kingdom by a company, 'S1'; they were then allegedly sold on to a company, 'S2'; then they were allegedly sold on to the company with which we are concerned, R; and then they were sold on to a company, 'D', to be exported from the United Kingdom. It is in fact D who appear today by counsel to appeal the judge's order granting the variations of the restraint order.

VAT, of course, is payable on alleged sales made in the United Kingdom. When, however, D allegedly export the goods out of the United Kingdom they make a reclaim, from the now Revenue and Customs, of the VAT which they have supposedly paid in acquiring the goods. The case for Customs is that all of this is a sham and is designed to generate large sums of money, initially in the hands of D, in the form of reclaimed VAT which they say D had no right to reclaim. Customs also say they have evidence which tends to suggest that the goods do not exist, that they are goods which are in some instances the same as those sold by other United Kingdom companies to the same purchaser as that to whom D claims to have sold the goods and that they are in some instances goods which can be identified as having been purchased by a major computer manufacturer in the States called Dell. They say, further, that the goods originate in theory from Hong Kong, pass through the hands of four United Kingdom companies, almost simultaneously or at least on the same day, and are then exported again to Hong Kong, which they say is a series of transactions which flies in the face of commercial reason.

They are able to point to instances where they say that two of the four United Kingdom companies, that is to say S1, the importer, and D, the exporter, are in contact to this extent: that the purported purchase order from S2 to S1 asks that the goods be delivered directly to D: effectively the importer delivering to the exporter and cutting out any possibility of genuine profit by the middleman. Revenue and Customs say again that this does not have the ring of commercial reality about it.

Customs are further able to point to another suspicious arrangement. D, having on paper paid on delivery for four previous transactions, when it came to the fifth transaction, and after the Royal Bank of Scotland had refused to release the money the subject of the restraint order with which we are concerned, brought paperwork into existence which gave the appearance of money having been paid in advance for a deal which then fell through. Given the limited trading history between the two companies, alleged to have met through the internet, Revenue and Customs say that D would not have parted with a third-of-a-million pounds on those terms. They say further that the sum currently held by R must be money which is part of the trading capital of the fraudster.

In short, what Customs and Excise say is the whole trading arrangement is a sham; that the appearance of arm's length commercial transactions, or, indeed, any commercial transactions at all, is a pretence designed to show a (bogus) commercial paper trail and to distance the importer from the exporter, in order to create circumstances in which Revenue and Customs might be wrongly induced to paying VAT refunds.

It is now accepted that there is a good arguable case of criminality of the kind we have described. What is, however, said is that the Proceeds of Crime Act 2002 only permits restraint of sums in which the defendant (or a person otherwise proceeded against for the purpose of obtaining a restraint order) has an "interest"; that the only defendant against whom proceedings have been instituted is Mrs S and that Mrs S has no "interest" in the sum in the R account, even if Revenue and Customs' contentions are all otherwise correct.

The steps in the argument are:

This is so even though section 84(2)(h) provides:

The judge rejected that argument, saying:

The single judge, Fulford J, refused leave to appeal, but the full Court of Appeal granted leave on being informed that D accept that there is a good arguable case of fraud on the part of Mrs S and the companies S2, R and D and the persons behind those companies but wished to argue that (1) the only offender against whom proceedings had been instituted were Mrs S and (2) it was not arguable that Mrs S had an interest in the sum of £366,000 standing to the credit of R in their bank. It was, it was said, insufficient that Mrs S might have ultimately received those funds since that did not give rise to an interest in the funds.

This court gave leave saying that it was arguable "that the term 'holds an interest' should be construed as being limited to the holding of a legal or equitable interest in the property that would be recognised by English property law and it should not be construed so widely as to include an inchoate future benefit such as is contemplated in this case."

It is ironical that for the purposes of this argument D are not merely just accepting that Revenue and Customs have an arguable case that there is a fraud to which both Mrs S and D are a party but they are positively asserting that they are guilty of that fraud and that as between fraudsters or co-conspirators no enforceable rights can exist so that no conspirator can "hold an interest" in sums in his co-conspirator's bank account. As Mr Brodie for D put it, if Jack, John and Jill steal cash from a bank and it is held by Jack (whether at his own bank or in a chest under his bed), John and Jill could not possibly be said to hold an interest in the sum however much they may have agreed among themselves they should share the sum or that it should be handed over to one of them.

There is the yet further irony in this case in that once it is accepted by D that it is arguable that there were no genuine goods and thus no genuine transactions, D cannot possibly be entitled to the return of the money in the R account. In the light of the fact that R makes no claim itself to the money in its account, we wonder who is entitled to the money?

Nevertheless, Mr Brodie's argument has to be addressed. If correct, it would be liable to drive the proverbial coach and horses through the essential confiscation and restraint provisions of the Proceeds of Crime Act 2003. But the argument is, of course, not correct at all.

The way in which the confiscation provisions used to work under the old Criminal Justice Act 1988 and the Drug Trafficking Acts and continue to work under the Proceeds of Crime Act 2002 is that the court, after conviction, has to decide whether the defendant has benefited from his crime: see section 6(4) of the 2002 Act. Section 6(5) then provides for the court to decide "the recoverable amount" and make an order requiring the defendant to pay that amount. By section 7, the "recoverable amount" is an amount equal to the defendant's benefit unless the defendant can show that "the available amount" is less than that benefit; in that event "the recoverable amount" is "the available amount"; but the court must state its findings as to the matters relevant before deciding that amount. The available amount is defined in section 9 as the aggregate of the total of the values of all the free property held by the defendant (less priority sums) and the total of the values of all tainted gifts.

The relevant statutory assumptions, which the court is required to make in calculating the recoverable amount, mean that all property of the defendant is liable to confiscation, not just sums which, pursuant to a particular fraud, fraudsters may have agreed to pass to one another. The restraint provisions mirror this picture. If, therefore, Revenue and Customs can show that there is a good arguable case that the money in R's account in R's bank was part of the benefit obtained by the alleged fraudster, Mrs S, that money will be liable to restraint until an confiscation order is made.

In our judgment Revenue and Customs do not have to show that there is any enforceable right to the money as between the fraudsters. If they can show an arguable case of fraud in which R (or any other party which may claim entitlement to the money) were participating, money retained in the execution of the fraud is, for the purposes of the legislation, the fraudster's money. No doubt the legal title to the chose in action constituted by R's account at its bank while it is in credit is in R, but the beneficial interest lies with any of the fraudster participants in the fraudulent scheme. It is thus an existing beneficial interest which can be subject to a restraint order, not, as Mr Brodie sought to persuade the full court in his supplemental skeleton argument in order to obtain leave to appeal, "an inchoate future benefit".

The evidence adduced by Revenue and Customs is sufficient, in our judgment, to show a good arguable case that any sum in R's name in its account is part of the alleged fraudster's assets (or Mrs S's working capital, as Mr Talbot for Revenue and Customs called it). That sufficiently appears from what we have already said about the paper transactions, which is very largely taken from the judgment of His Honour Judge Pert below. What, in our judgment, clinches the matter is the collection of three documents we were shown this morning at pages 67, 72 and 77 of the bundle, which evidence Mrs S's control of the disposition of the sums which she received or expected to receive from the immediate buyer from her, S2, at a time when the paper transaction was purportedly completed. If there are no genuine goods (as is, at any rate, arguably the case) she was getting money for nothing; both S2 and R were holding the money as her nominees. Money in R's account, although it never got to her because it has been restrained, is thus part of her assets which should be available for confiscation in the event that she is convicted. That sum should now therefore be subject to a restraint order and this appeal will be dismissed.

MR TALBOT: A consequential application - and somewhat oddly, although we are in this division of this court, these are civil proceedings in character - there is an application for costs in principle. Costs of course follow the event as a basic rule in civil proceedings. I have served my learned friend with an estimate of costs, and I invite your Lordships to summarily assess them. I understand the amount is not in dispute: £3673.75.

LORD JUSTICE LONGMORE: Mr Brodie, you do not dispute that you have to pay the costs or that that is the appropriate sum to which we should make a summary assessment?

MR BRODIE: No.

LORD JUSTICE LONGMORE: In that case we will summarily assess that sum.

MR BRODIE: There is a question upon which I would ask the court to consider certification. We have agreed it. It is in a bit of a scrawl. But what it is at the moment:

LORD JUSTICE LONGMORE: I think we had better see it.

MR BRODIE: It is a combination of handwriting and typewriting.

LORD JUSTICE LONGMORE: (Same handed.) Not having discussed this with my brethren, of course, it would be churlish perhaps to say that the case does not raise a point of law. Whether it is a point of law of general public importance is perhaps a further question, but at any rate it is a point that does not seem to have been decided on this Act, and to that extent it may be fair to do so. I am not sure I like the word "is" at the beginning. It is really "can", is it not?

MR BRODIE: If we say "can", I think we have to state the word "be" before "capable".

MR JUSTICE POOLE: Stick the word "be"?

MR BRODIE: Before "capable".

LORD JUSTICE LONGMORE: For grammatical purposes yes, certainly. But "is" involves going into all the facts, which is not really a point of law.

MR BRODIE: No.

LORD JUSTICE LONGMORE: I think "can" raises the point of law better than "is".

MR BRODIE: I am obliged.

LORD JUSTICE LONGMORE: "To perpetrate a fraud" is rather confining, is it not, because this case is more "in pursuance of a fraud"?

MR BRODIE: It would be impossible for the fraud to be perpetrated without the assets being moved. I am happy for "in pursuance" to be added.

LORD JUSTICE LONGMORE: "In pursuance" would cover to perpetrate, would it not?

MR BRODIE: Yes.

LORD JUSTICE LONGMORE: I think I would prefer "in pursuance of" rather "in order to perpetrate". And the Recorder of Winchester suggests "carry out".

MR BRODIE: I am in the court's hands on that.

LORD JUSTICE LONGMORE: I think I still prefer "in pursuance of". So it now reads:

So framed, that is an agreed question which you invite us to certify is a question of law of - what is the phrase - public importance. Perhaps you had better show us the statute.

MR BRODIE: A point of law of general public importance.

LORD JUSTICE LONGMORE: General public importance, yes. Supposing we were minded to certify, you would then have another application, would you?

MR BRODIE: I would; but I anticipate what the answer to that application will be.

LORD JUSTICE LONGMORE: Quite. But you, Mr Talbot, have no further submissions to make on the formulation of the question of law?

MR TALBOT: I certainly cannot improve on the court's improvement to the question.

LORD JUSTICE LONGMORE: Yes, we will certify a question as giving rise to a question of general public importance in the following terms:

We are also asked for permission to appeal to the House of Lords. We refuse permission and will leave it to the House of Lords themselves to decide whether to give leave. But in so refusing we make the observation that, although we have certified a question of general public importance on this legislation, if the Revenue and Customs are in fact correct in their arguments on the facts and if in fact this money does, as D accept, arguably represent the proceeds of the actual fraud that we have described in our judgment, we see no reason why Revenue and Customs should not be entitled to a civil freezing order because, on D's own arguments, it is effectively the Customs' money. In those circumstances we do wonder whether much purpose would be served in granting permission to appeal. But, as we say, we do not do so.