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:

“(1)

A person commits an offence if he enters into or becomes concerned in an arrangement which he knows or suspects facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person.”

So far as material, section 340 provides:

“(1)

This section applies for the purposes of this Part.

(2)

Criminal conduct is conduct which-

(a)

constitutes an offence in any part of the United Kingdom, or

(b)

would constitute an offence in any part of the United Kingdom if it occurred there.

(3)

Property is criminal property if-

(a)

it constitutes a person’s benefit from criminal conduct or it represents such a benefit (in whole or part and whether directly or indirectly), and

(b)

the alleged offender knows or suspects that it constitutes or represents such a benefit.

(4)

It is immaterial-

(a)

who carried out the conduct;

(b)

who benefited from it;

(c)

whether the conduct occurred before or after the passing of this Act.

(5)

A person benefits from conduct if he obtains property as a result of or in connection with the conduct.

(6)

If a person obtains a pecuniary advantage as a result of or in connection with conduct, he is to be taken to obtain as a result of or in connection with the conduct a sum of money equal to the value of the pecuniary advantage.”

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:

“It is absolutely plain to me that in relation to any confiscation proceedings that may follow upon a conviction for cheating the Revenue, that the arguments advanced by the Crown in relation to the meaning of “criminal property” would hold water. With regard to the money laundering count, awkward though it may be, it seems to me that the conclusions reached by Lord Justice Gage in Gabriel carry the day and that there is a fatal flaw in Count 12.

I will conclude that incomplete disclosure of takings cannot convert legitimate takings into criminal property as defined. Count 12 will therefore be withdrawn from the jury.”

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:

“In the light of my ruling on Friday, feeling myself bound by the Court of Appeal’s decision in Gabriel, 2006 EWCA Crim[3] [229], I ruled that there was no case for [SK] and [MR] to answer on Count 12 on the indictment.

In the light of that ruling the submission is now made that there can, therefore, be no case to answer on counts 1 and 2. Those counts arise under Section 328 (1) of the Proceeds of CrimeAct 2002, which make it an offence for a person to enter into or become concerned in an arrangement which he knows or suspects facilitates, by whatever means, the acquisition, retention, use or control of criminal property, by or on behalf of another person.

All that has been said and argued, both on Friday and today, centres on this question of what is criminal property within the meaning of Proceeds of Crime Act 2002, in other words, what is the correct interpretation of the various subsections of Section 340.

The Crown accepts that there is no predicate offence in relation to Counts 1 and 2. It did, however, open the case on the basis that the events giving rise to the allegation in Count 12, where a clear illustration of criminal property being laundered. Notwithstanding Mr Martin Evans’ careful submissions, it is clear to me that in the light of the decision in Galbraith, it would be wrong to invite the jury, taking the Crown’s case at its highest, to infer, in the context of Counts 1 and 2, that there was criminal property which had been laundered, and I so rule.”

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:

“20.

In our judgment the difficulty raised by the jury's question is that it appears to assume that a failure to declare income from the buying and selling of goods to the Inland Revenue and the Department of Work and Pensions per se gave rise to criminal property. The Recorder's answer does nothing to dispel this assumption. Mr O'Brien on behalf of the prosecution accepts that that would appear to be the proper assumption to be gleaned from the jury's question. He submits that a trade in stolen goods would mean that the profits obtained were criminal property. We agree with that proposition. However, we do not agree with his submission 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 circumstances convert the profits into criminal property. We do not see how it can be said that, after the second and third occasion of the claim for benefits, in the knowledge that there were profits obtained from legitimate trading, that could of itself convert the profits into criminal property. In our judgment the failure to declare the profits does not make the trading a criminal offence.

21.

It was for the prosecution to prove that the money the subject of the counts was criminal property. The answer given by the Recorder to the jury did not explain that profits from legitimate trading could not constitute criminal property. In our judgment he ought so to have done. This difficulty is not overcome by the Recorder's direction that it must be dishonest. He did not explain who must have acted dishonestly and at what stage or in what connection, and with what transaction the dishonesty must be proved. We recognise that the failure to declare profits for the purposes of income tax may give rise to an offence, but that does not make the legitimate trading in goods an offence of itself.

22.

The prosecution's submissions in relation to that part of the question which relates to benefit fraud are stronger. We can see how benefits obtained on the basis of a false declaration or a failure to disclose a change in circumstances may amount to obtaining a pecuniary advantage, namely the benefits: see section 340(6) of the Act. But in this case no attempt was made to prove that the appellant or anyone else in her family had made any false declaration or failed to disclose a change of circumstances. Miss Manley points out that it appears that at least some of the benefits that were obtained were benefits which were granted on a non-means-tested basis. There was no evidence as to how much were on a non-means-tested basis.

23.

This gives rise to what we consider to be one of the main difficulties in the way of the prosecution's attempt to uphold these convictions. The case as opened by counsel, and as put to the appellant, was one of alleged money laundering. It was not put on the basis of an income tax fraud or benefit fraud. The suggestion made to the appellant was that either she or someone else in her house had been engaged in some criminal activity. It was never suggested that she was trading legitimately and not declaring income to the Inland Revenue or the Department of Work and Pensions. The question from the jury raised a matter which had never been the subject of any evidence or any allegation.”