K, R. v

The question of law that arises on this appeal is whether the proceeds of cheating the Revenue can amount to “criminal property” within the meaning of section 340(5) of the Proceeds of Crime Act 2002 (“POCA”), where the trade whose profits are liable to income tax or whose turnover is subject to VAT is a legitimate trade. This is an appeal pursuant to section 58 of the Criminal Justice Act 2003 against a ruling by His Honour Judge Elwen on 26 February 2007 that there was no case to answer against IK on counts 1 and 2 of the indictment.

The indictment contains 12 counts. Counts 1 and 2 charge SK and IK with money laundering contrary to section 328(1) of POCA. The particulars are that between 1 April and 6 December 2003, they entered into or became concerned in an arrangement which they knew or suspected would facilitate the retention, use or control of criminal property, namely banknotes, by persons unknown. Counts 3-7 allege offences of false accounting contrary to section 17(1)(a) of the Theft Act 1968 against SK and IK. Counts 8-10 allege offences of false accounting against another defendant. Count 11 charges MR with cheating the Revenue contrary to common law. The particulars are that between 1 January 1999 and 6 December 2003 MR “did with intent to defraud and to the prejudice of Her Majesty the Queen and the Commissioners of Inland Revenue and the Commissioners of Customs and Excise, keep an account which purported to be a true trading record of Ambrosia, which account omitted receipts from one of the tills at his market stall”. Count 12 charges SK and MR with money laundering contrary to section 328(1) of POCA. The particulars are that between 1 October and 6 December 2003, SK and MR “entered into or became concerned in an arrangement knowing or suspecting that the arrangement would facilitate the retention, use or control of [MR’s] criminal property, namely banknotes”.

The prosecution case is that between 1 April and 6 December 2003, a money service business called Kaz Money Exchange (“KME”) was used to launder almost £6 million criminal cash. Its head office is in Green Street, London E13. SK was the owner of KME. It is the prosecution case that his son IK assisted him in running KME.

KME is a money transfer business. Customers in the UK wishing to send money to friends or relatives in Pakistan deposit cash at KME or one of its agents. The cash is paid into the KME bank account. Between 1 April and 6 December 2003, a total of some £60 million was deposited into the KME account.

In the autumn of 2003, KME was investigated by HMCE. On 6 October, officers stopped two men in Green Street. They were taking £197,000 in cash to KME. On 6 October, SK was interviewed about the money. He claimed that it was money that had been accumulated in the course of his business on 4 and 6 October together with money from an agent called PME. His account was supported by receipts and other documents which were demonstrably false. There was no challenge to this part of the prosecution case.

On 6 December 2003, 2 men were stopped at the door of KME. One was carrying a box of fruit. Hidden under the fruit was £100,000 in cash. The cash had come from MR who runs a two-unit grocery and greengrocery shop called Ambrosia. The shop is about 100 metres away from the head office of KME. This was money which the prosecution say was being taken to KME to be sent on to Pakistan. There is evidence strongly suggesting that MR had sent £100,000 in cash to KME on 14 November 2003 as well, as was conceded by counsel for MR for the purposes of the submission of no case to answer.

There was evidence that both amounts of cash (totalling £200,000) were undeclared takings from the trading of Ambrosia. It was the prosecution case that MR syphoned off his undeclared turnover and sent the money out of the jurisdiction via KME. There was evidence that MR had (at least) 2 tills in use at Ambrosia, provided his accountants with the figures from only one till and that he had under-declared his takings to the Revenue authorities by a substantial amount. MR kept memo books in which were recorded the true takings of his business. These were not disclosed to his accountants, who prepared the accounts for the purposes of income tax and VAT returns. MR told the customs officers that the takings recorded in the memo books were dishonestly inflated so that, if he ever wished to sell his business, they would give a misleadingly rosy picture of the size of his turnover.

In summary, the prosecution case in relation to counts 11 and 12 was that MR had systematically cheated the Revenue of tax and VAT between 1 January 1999 and 6 December 2003 (count 11). The banknotes which were the subject of count 12 were undeclared takings from Ambrosia and represented, at least in part, tax and/or VAT of which the Revenue had been cheated.

We turn to counts 1 and 2. When the records of KME were analysed following the arrest of SK and MR, it was discovered that, although approximately £60 million had been deposited into the KME sterling account, a smaller sum was shown in the daily reconciliation sheets. The existence of a discrepancy of £5.9 million was not in dispute. It is the prosecution case that this discrepancy represents the proceeds of criminal conduct and that this is the reason why it was not shown in the records. More than 2500 false customer receipts were produced. It was an admitted fact in the case that the receipts are false. In addition, false customer lists and statement summaries were produced which purported to show business with a Pakistan based business called “Wall Street Lahore”. The name “Wall Street Lahore” does not appear on any of the reconciliation sheets. It is the prosecution case that SK and IK deliberately and dishonestly concealed £5.9 million of large cash transactions and then manufactured false documents which purported to be a true record of KME money transfers.

There was no evidence of the provenance of the £5.9 million. The case was put on the basis that the jury could properly infer a criminal source from the dishonest non-recording of the transactions and the subsequent wholesale forging of documents designed to paper over the absence of records of the money laundering. It was said that the cheating of the Revenue which was the subject of count 11 and which gave rise to the criminal property which was the subject of count 12 was an example of the type of criminal conduct which might have given rise to the discrepancy which was the subject of counts 1 and 2.

Section 328(1) of POCA provides:

So far as material, section 340 provides:

On 23 February, the judge ruled that there was no case to answer in relation to count 12. He acceded to the argument advanced on behalf of SK and MR that the £200,000 cash were the proceeds of legitimate trading and were not criminal property within the meaning of section 340(3). It was submitted that “the banknotes relied upon cannot be criminal property, because they are the product of legitimate trading, and nothing done or not done in relation to them can suddenly convert them into criminal property” (transcript p 50F). The judge accepted that neither the trading conducted by MR at Ambrosia nor the takings from that trading were illegal. He considered that he was in any event bound to reach this conclusion by the decision of this court in R v Gabriel[2006] EWCA Crim 229. He said:

On 26 February, submission was made to the judge that in the light of his earlier ruling, he should rule that there was no case to answer in relation to counts 1 and 2. He ruled as follows:

Following these rulings, the judge certified that the prosecution be granted leave to appeal on two grounds. The first is that he erred in law when he ruled that the cash from MR (count 12) could not amount to “criminal property” either in whole or in part for the purposes of section 340(5) or (6) of POCA. The second ground of appeal is that the judge erred in law when he ruled that, since the prosecution could not show that any of the £5.9 million was not the proceeds of cheating the Revenue (exemplified in count 11), there was insufficient evidence that the money referred to in counts 1 and 2 was criminal property.

Having decided that there was no case to answer in relation to counts 1,2 and 12, the judge directed the jury to acquit SK on all three counts and MR on count 12. The unfortunate result is that, if this appeal is allowed, IK alone will face counts 1 and 2. Although no defendant now has to face count 12, it remains relevant to the issues that arise on this appeal. This is because, as is apparent from his second ruling, the judge’s reasoning in relation to count 12 informed his decision in relation to counts 1 and 2. It is clear that the reason why the judge certified that leave to appeal should be given was because count 12 raised a point of law of some importance as to the meaning of “criminal property” in section 340 and as to the reach of the decision of this court in Gabriel.

The appellant was convicted on two counts of possession of criminal property contrary to section 329(1)(c) of POCA. He had been found by the police to be in possession of certain sums of cash which the prosecution said were the proceeds of crime. After the jury had retired, the jury asked a question whether the regular buying and selling of goods to supplement the household income without declaring it constitute a criminal offence “given the declarations made on application for benefit (or lack of declaration to the Inland Revenue)”. The Recorder answered that “both matters can constitute a criminal offence provided that there is dishonesty on the part of the person concerned”.

The appeal was allowed. Gage LJ (giving the judgment of the court) said:

We shall start by considering the judge’s ruling in relation to count 12. It is important to keep in mind that in this case there was an allegation that between January 1999 and December 2003, MR had cheated the Revenue (count 11). It is unnecessary to decide whether keeping separate records as a preliminary step could amount to cheating the Revenue, since it was accepted by MR that count 11 raised a case to answer. The case was that, over a period of four years, MR had systematically cheated the Revenue of income tax and VAT by under-declaring the takings of his business and transferring to KME for transmission to Pakistan sums of money which had not been declared. The sums so transferred represented, at least in part, the tax and VAT of which the Revenue had been cheated. In fact, count 12 was restricted to the sum of £200,000 which, the prosecution alleged, SK and MR intended to transfer between 1 October and 6 December 2003.

Was it open to the jury to find that the £200,000 was “criminal property”? In our judgment, a person who cheats the Revenue obtains a pecuniary advantage as a result of criminal conduct within the meaning of section 340(6) of POCA. We did not understand Mr French to contend otherwise. Accordingly, MR was taken to have obtained a sum equal to the value of the amount of which the Revenue was cheated: again, section 340(6). That sum is a benefit by reason of section 340(5). The question is whether the undeclared takings “constitutes a person’s benefit from criminal conduct or it represents such a benefit (in whole or part and whether directly or indirectly)”: section 340(3)(a).

To take a simplified paradigm case, let us suppose that over a 2 year period D fraudulently under-declares the takings of his business by £250,000 per annum with the result that he deprives the Revenue of £100,000 in income tax and £25,000 in VAT in each of the 2 years. In each year, D has obtained a pecuniary advantage of £125,000 as a result of his cheating the Revenue. That is a “benefit” within the meaning of section 340)(3)(a) of POCA. The undeclared takings of £500,000 “represent” that benefit “in part” within the meaning of section 340(3)(a) in the sense that the undeclared takings of £500,000 should have borne tax and a sum representing or equivalent to part of that figure should have been paid in tax.

We did not understand Mr French to contest any of this. He submitted that, if a trader receives or retains money received legitimately in the course of business, but whilst doing so harbours a secret intention not to disclose the true trading levels to the Revenue, the mere fact of harbouring such a secret intention cannot convert the legitimately received or retained funds into criminal property within the meaning of POCA. He said that such funds would only become criminal property once a false declaration was made.

We are prepared to assume that these submissions of Mr French are correct. In the present case, the prosecution submitted that it was open to the jury to infer that part of the £200,000 found in the circumstances in which the cash was found in this case, represented the fruits of cheating which had already taken place.

The basis on which the judge ruled as he did in relation to count 12 was that he was bound by Gabriel to do so. He ruled that the fact that the cash was the takings of MR’s business was of itself fatal to the submission that it (or part of it) represented the fruits of criminal conduct and was therefore criminal property. MR’s business was lawful and that was determinative of the issue. If that were correct, it would mean that the money laundering provisions of POCA can never be invoked in relation to tax evasion where the business concerned is engaged in a lawful trade or other activity. That would be a surprising conclusion to reach. It is clear from the pre-POCA jurisprudence that unpaid tax which was the product of cheating was a pecuniary advantage and, therefore, a “benefit” for the purpose of confiscation order proceedings under the Criminal Justice Act 1988: see, for example, R v Moran [2001] EWCA Crim 1770, [2002] 1 WLR 253. It cannot have been intended that the money laundering provisions of POCA, particularly those relating to the obtaining of benefit in the form of a pecuniary advantage, should not extend to the fruits of cheating the Revenue.

Was the judge bound by Gabriel so to hold? In our view, he was not. We agree that profits made from trading in legitimate goods without declaring the profits to the Revenue or the Department of Work and Pensions do not become criminal property simply by reason of the failure to declare profits. The profits are not of themselves illegal or criminal property: they are the product of a business carrying on a lawful trade. We do not consider that the court in Gabriel went as far as the judge in the present case thought.

In para 20, Gage LJ started by saying that the jury’s question assumed that a failure to declare income “per se gave rise to criminal property”. It was the failure of the Recorder to dispel that assumption which led to the court allowing the appeal. With respect to the court, it is obviously right that a failure to declare income does not of itself give rise to criminal property. The point was made again in the penultimate sentence of para 20 and in the second sentence of para 21: “profits from legitimate trading could not constitute criminal property”.

The nearest that Gage LJ came to saying anything that could support the judge’s ruling in the present case was towards the end of para 20 where he said: “However, we do not agree …that profits made from trading in legitimate goods, without declaring the profits to the Inland Revenue or the Department of Work and Pensions could in any circumstancesconvert the profits into criminal property” (emphasis added). Judge Elwen may have been misled by this sentence. In our judgment, however, these words do not mean more than that profits from legitimate trading can never without more give rise to criminal property. Understood in this way, they are consistent with the other passages to which we have referred. They are also consistent with the recognition (at the end of para 21) that failure to declare profits may give rise to an offence and with the whole of para 23. At para 23, Gage LJ said that benefits obtained on the basis of a false declaration may amount to obtaining a pecuniary advantage (section 340(6)), but that was not how the prosecution had put its case.

If (contrary to our view) the judge was right in holding that Gabriel decided that the mere fact that a business is engaged in a lawful trade is of itself fatal to a successful money laundering prosecution based on takings not declared to the Revenue, then that conclusion was not necessary for its decision, and, for the reasons that we have given, we would respectfully disagree with it. In Gabriel it was not necessary to analyse section 340 closely.

The view that we have expressed as to the scope of the decision in Gabriel appears to accord with that expressed by Professor Ormerod at [2006] Crim LR 854 in his commentary on the decision. He argues that there are 3 potential ways of proving that the property which forms the basis of the charge of money laundering constituted “criminal property” within the meaning of section 340. The second of these is that the property was acquired as a result of legitimate dealing, but not subsequently declared as trading income for tax purposes. He says property so acquired is not criminal property, since there is no prior offence. D committed none in acquiring the property and at the time that D came into possession of the property, the fact that she had not declared it as trading income did not render it criminal property. There is no offence unless the Crown can prove cheat.

The difference between Gabriel and the present case is that in the present case, as was not disputed, the prosecution had made out a prima facie case of cheat.

We conclude, therefore, that the judge was wrong to withdraw count 12 from the jury.

It is submitted by Mr French that the second ruling was a straightforward application of the principles enunciated in R v Galbraith [1981] 1 WLR 1039. But it is clear that the judge decided that there was no case to answer in relation to counts 1 and 2 only because of his ruling in relation to count 12. It was the defence who argued that the earlier ruling required the judge to take this course. No submission about counts 1 and 2 had been made or suggested as a possibility until after that ruling. Their argument was that the jury could not be sure that the whole of the discrepancy of £5.9 million which formed the basis of counts 1 and 2 was not the fruits of the same kind of cheating of the Revenue as had formed the basis of count 12. The judge had ruled that no part of the £200,000 was capable of being criminal property, since it was the proceeds of legitimate trading. Since the prosecution could not identify the provenance of any of the £5.9 million, the possibility could not be ruled out that all of it was the proceeds of legitimate trading in the same way as was the £200,000 emanating from MR’s business.

Since the judge was wrong to rule as he did in relation to count 12, the basis on which he ruled on counts 1 and 2 must also fall away. No other argument was advanced that there was no case to answer in relation to counts 1 and 2. It is clear that, but for their success in relation to count 12, the defence would not have submitted that there was no case to answer in relation to counts 1 and 2.

It was open to jury to infer that the discrepancy of £5.9 million was the product of criminal conduct and was therefore criminal property. It is true that the prosecution could not identify the provenance of the money. But the facts to which we have referred at paras 9 and 10 above provided ample material from which the jury could make the necessary inference.

Accordingly, we allow the prosecution appeal against the judge’s ruling in relation to counts 1 and 2 in so far as it affects IK.