King v The Serious Fraud Office

The applicant, David Cunningham King, applies for leave to appeal against orders made by His Honour Judge Wadsworth QC at Southwark Crown Court on 23 April 2007. On that date the Judge dismissed an application by the applicant to discharge a Restraint Order (the RO) and a Disclosure Order (the DO) made by him on an application without notice by the respondent, the Serious Fraud Office, on 31 May 2006. We give leave.

The appellant is aged 51 and is a British national by birth. For the last 30 years he has been resident in South Africa working as a businessman.

For a number of years the authorities in South Africa have been investigating the appellant’s financial affairs and, in particular, his tax affairs. The investigation resulted in the start of civil and criminal proceedings against the appellant in South Africa. The civil proceedings include proceedings in the South African Tax Court started by the South African Revenue Services (SARS). These proceedings are still outstanding.

The criminal proceedings against the appellant have been instituted by the National Prosecuting Authority of the Republic of South Africa (the NPA). The appellant was arrested by the NPA on 13 June 2002 and released on bail. He was subsequently charged with a number of offences in proceedings started in the High Court. On 29 April 2005 an indictment was served upon the appellant and a trial fixed for 25 July 2005. On a later date the trial was postponed until 31 July 2006. An amended indictment was served on 17 March 2006. In the event, the trial did not start on 31 July but was again postponed. The trial is currently due to start on 18 April 2008 but we are told on that date it will be further adjourned to 31 July 2008.

The amended indictment alleges tax fraud and the contravention of exchange control regulations. It is alleged against the appellant that between 1990 and 2002 he devised and carried out a fraudulent scheme or schemes to evade the payment of income tax, thereby defrauding SARS. It is alleged against the appellant that in the execution of the fraudulent schemes he transferred, or arranged to be transferred, his shares in various South African registered companies into the name of Agnes King, his mother, who lives in Scotland, for no consideration or nominal consideration. The prosecution allege that subsequently the fraudulent scheme involved:

(1)

the applicant establishing offshore trust structures, involving companies incorporated in the British Virgin Islands and Guernsey (the alter ego entities), with the appellant controlling these trust structures and using them as vehicles for fraud;

(2)

in contravention of exchange control regulations, arranging for shareholdings in South African companies to be exported and become assets of the companies within the trust structures;

(3)

in order to evade liabilities for income tax making false tax returns in South Africa, deliberately failing to declare material facts about his true assets, including the assets held by his alter ego entities; further, giving false information to tax officers and failing to submit a tax return for the tax year 2000.

The prosecution allege, in general terms, that in the three years up to 2001 the appellant made profits of more than R1 billion and spent hundreds of millions of Rand in South Africa, whereas his income tax returns for those three years were those of a man earning a modest income who had accumulated assets worth only R550,000 in the 23 year period that he had been in South Africa. It is also alleged that members of the public had sustained losses as a result of his activities.

Counts 1 to 20: The appellant faces 20 counts of common law fraud in respect of 20 tax returns and amended tax returns submitted by him during the period 1990 to 2001. In the alternative he is charged with contravening various sections of the Income Tax Act.

Counts 21-40: The appellant faces 20 counts of common law fraud (and in the alternative contraventions of the Income Tax Act) for the same period and for the same tax returns and amended tax returns; but these counts are only applicable in the event of the court finding that the alter ego entities were not the alter egos of the appellant.

Counts 41-47: These are counts of fraud, and in the alternative of contravening the Income Tax Act, and are applicable in the event that the court finds that the alter ego entities were not the appellant’s alter ego. The charges are based on allegations that the appellant as the representative of Ben Nevis Ltd, a company incorporated in the British Virgin Islands, had the responsibility to render a tax return for Ben Nevis or Metlika Trading Ltd, another company incorporated in the British Virgin Islands. It is alleged that Ben Nevis or Metlika derived income from a source deemed to be within the Republic of South Africa and had its effective place of management in the Republic as it was effectively managed by the appellant. It is alleged that the appellant wrongfully and unlawfully failed to apply for the prescribed tax return form and render the return; and, by omitting to comply with his obligations in this regard, made a representation by way of omission.

Counts 48-50: These are counts of fraud and in the alternative of contravening the Income Tax Act and relate to the appellant’s failure to render tax returns in respect of the tax years ending 28 February 2002, 28 February 2003 and 28 February 2004. It is alleged that the appellant’s failure in relation to his obligations in this regard constitutes a misrepresentation by way of omission.

Counts 51-58: These counts allege contravention of the Income Tax Act and are based on SARS’s requests for information and the appellant’s alleged false answers to those requests.

Counts 59 and 60: These allege a failure by the appellant to provide information requested by SARS.

Count 61: This is a count of fraud and in the alternative an allegation of contravening the Income Tax Act and is based on four applications made with the knowledge and consent of the appellant to SARS to de-register him as a tax-payer with effect from 1 March 2001 on the basis that he was no longer in receipt of taxable income.

Count 62: This count alleges a failure by the appellant to furnish, file or submit his income tax return for the year 2000.

Counts 63-85: These are 23 counts alleging the contravention of the Income Tax Act in respect of the alleged failure by the appellant in January 2002 to reply to or answer truthfully and fully questions put to him.

Counts 86-319: These are counts alleging contravention of various Exchange Control Regulations.

Count 320: This is a count of money laundering in contravention of s.28 of the South African Proceeds of Crime Act 76 of 1996 (SAPOCA).

Count 321: A further count of money laundering in contravention of s.4 of SAPOCA.

Count 322: This count alleges against the appellant a count of racketeering in the terms of SAPOCA. The period covered by the racketeering count is March 1999 to December 2003. Many of the charges on the indictment fall into the category alleged in this count as allegations of fraud.

On 31 May 2006 HHJ Wadsworth QC at Southwark Crown Court made the RO against the appellant and a number of corporate entities alleged to be the appellant’s alter ego entities. The order was made on the application of the respondent under article 8(1) of the Proceeds of Crime Act 2002 (External Requests and Orders) Order 2005 (S.I.2005/3181) (the Statutory Instrument). On the same day the judge made the DO under article 8(4) of the Statutory Instrument. The orders relate to all property held by the appellant (and the alter ego entities) including property held both inside and outside England and Wales. The orders were made without notice of the application to the appellant. The application made by the respondent was pursuant to an external request dated 9 May 2006 from the NPA.

On 20 September 2006 the order was varied, again on an ex parte application by the respondent.

On 13 December 2006 the appellant served a notice of application to discharge the orders. The application was heard on 26-28 March 2007 and 4 April 2007 and, as we have already stated, on 23 April 2007, dismissed by the judge. The judge also made an order for costs in favour of the respondent and ordered disclosure to be made by 24 May 2007. The DO has been suspended pending the application for leave to this court.

The power to make the Statutory Instrument is provided by s.444 of the Proceeds of Crime Act 2002 (POCA). This section gives power for secondary legislation to be made providing for prohibition on dealing with property which is the subject of an external request. Section 447 defines an external request as “a request by an overseas authority to prohibit dealing with relevant property which is identified in the request”: see s.447(1). An external request is contrasted with an external order which is defined as an order made by an overseas court (s.447(2)). Property is defined in s.447(4) as “ … all property wherever situated …” The expression “relevant property” which appears in the Statutory Instrument is defined in s.447(7) in the following way:

“Property is relevant property if there are reasonable grounds to believe that it may be needed to satisfy an external order which has been or which may be made.”

It is relevant to note that s.447 appears in Part 11 of POCA under the heading “Co-operation”. Part 11 also makes provision for separate enforcement of external requests in different parts of the United Kingdom.

Part 2 of the Statutory Instrument is headed:

GIVING EFFECT IN ENGLAND AND WALES TO EXTERNAL REQUESTS IN CONNECTION WITH CRIMINAL INVESTIGATIONS OR PROCEEDINGS AND TO EXTERNAL ORDERS ARISING FROM SUCH PROCEEDINGS

For the purposes of this appeal the relevant articles are articles 6, 7 and 8. We set out those parts of the articles which are material for the purposes of this appeal. They read:

“6.

– Action on receipt of external request in connection with criminal investigations or proceedings

(1)

Except where paragraph (2) applies, the Secretary of State may refer an external request in connection with criminal investigations or proceedings in the country from which the request was made and concerning relevant property in England or Wales to –

We set out the judge’s reasons in summary because the grounds of appeal raise much the same issues as were before the judge. We shall deal more fully with them below. For present purposes, the following short summary will suffice.

The judge found that the statutory framework provided the court with power to restrain assets outside the jurisdiction. He reached his conclusion by construing article 7(3) as providing a gateway to the making of a restraint order. Relying on article 7(3)(a), he ruled that provided there was relevant property in England and Wales the court had power to restrain assets outside the jurisdiction as well as within the jurisdiction. In support of this conclusion he relied on the definition of property in s.447(4) which, it will be recalled, contained the expression “… property wherever situated …”. He concluded that once that condition was dissatisfied the court has power to make an order within the terms of article 8.

Further, he went on to conclude that article 8 provided the court with power to restrain property not specifically identified in the letter of request. Having reached this conclusion he held that the court had power to make a disclosure order. Accordingly, he granted the respondent’s application for the DO.

Finally, the judge dealt with issues of disclosure. It had been argued before him, as it is before us, that the respondent was in breach of its duty to make to the court full and frank disclosure of all matters which might affect the exercise of the court’s discretion to grant the order. Having carefully set out various matters which were relied on by the appellant he expressed his conclusion in the following terms:

“Clearly there is a very important principle at stake here. Mr Perry says with considerable force that where there is a failure to disclose matters to this court or an abusive use of this court the remedy must lie here in the United Kingdom and cannot simply be referred back by me to another court in another country. Of course, that must frequently be so. Where there is a clear abuse of the proceedings of the court the court must act both to protect the parties suffering from the abuse and to protect the court’s own integrity. For instance, if the court finds that there has been perjury, forgery of documents relied upon or the like then the court must act. But in the present case the essential allegations made are of abuse of the process of this court in the light of the conduct of the prosecuting authority in its own country. The matter can only come before the court after the Secretary of State has exercised his discretion whether or not to refer the external request to the Director of the Serious Fraud Office under Article 6 of the Order, and the initial decision whether this court should be asked to assist any given external territory is essentially one for the Secretary of State. Where the court is asked to assist the prosecuting authority of another country it should be slow to consider whether the prosecutor has acted in accordance with his powers and duties within the country in making the request. These questions are essentially for the Secretary of State or for the court of the requesting country.”

In the light of these conclusions the judge declined to discharge the RO.

There are three grounds of appeal. They are:

(1)

The judge was wrong to conclude that article 8(1) of the Statutory Instrument gave the court a power to make a restraint order in respect of property located outside England and Wales.

(2)

The judge was wrong to conclude that article 8(4) of the Statutory Instrument gave power to the court to make an order for disclosure in respect of property located outside England and Wales.

(3)

In exercising his discretion whether or not to discharge the RO and the DO the judge acted erroneously and ought to have exercised his discretion in favour of discharging the orders.

We shall deal with the grounds of appeal in the order set out above. However, it is clear that grounds (1) and (2) stand or fall together.

Mr David Perry QC, for the appellant, founds his submission on the language of articles 7 and 8 in the Statutory Instrument. He submits that in order to satisfy either the first or second condition required by article 7 before the court can give effect to an external request, the court must be satisfied that relevant property in England and Wales is identified in the external request.

Article 8 gives the court power to make the restraint order from dealing with relevant property which “is identified in the external request”. Mr Perry submits that the power to prohibit dealing with relevant property is provided by the words of article 8(1) and is restricted to the property identified in the /external request, which in turn throws the court back to the requirement of the second condition in article 7. What has to be identified is relevant property in England and Wales.

Mr Perry submits that this interpretation of the two articles is consistent with the explanatory material put out by the Home Office at the time of and after POCA had passed through Parliament sought to explain the scope of the Statutory Instrument and the statute itself. He further contrasts the statutory scheme for enforcement of the external requests with the statutory scheme for the enforcement of domestic restraint orders. The latter enables the relevant authorities to seek assistance from an overseas territory in restraining property held in that territory (see s.74 of POCA). He points out that unlike domestic restraint orders which can be enforced through the mechanism provided by s.74, there is no such structure or regime for enforcing a restraint order made under article 8.

Mr Andrew Mitchell QC, for the Respondent, relies on the language of POCA and also the language of the Statutory Instrument. He points to provisions in POCA which support the proposition that Parliament intended the court to have wide powers in relation to both internal restraint orders and restraint orders made as a result of external requests. In particular, Mr Mitchell relies on the definition of relevant property in s.447(4) which defines such property as “property wherever situated”. He submits that once the gateway criteria provided by article 7(3) are satisfied the court may restrain property wherever it is. Once there is, in his words, “a sufficient nexus” with the United Kingdom, the court’s jurisdiction to make a world-wide order is available and can be exercised subject to the court’s overriding discretion to refuse to make such an order.

Mr Mitchell points out that such an interpretation is consistent with this country’s commitment to co-operate in the suppression and control of international crime. It is also consistent with previous legislation (see for example the Criminal Justice Act 1988) and with the regime in civil proceedings.

Further, Mr Mitchell reminds the court that the Government’s view of the effect of legislation put forward in Explanatory Notes and other material issued by a Government department cannot be used so as to determine the intention of Parliament or in respect of the proper construction of the Statute and delegated legislation (see per Lord Steyn in (R (Westminster City Council) v National Asylum Support Service [2002] 1 WLR 2956).

The above is a short summary of the submissions attractively deployed by both counsel in the course of oral argument. We were treated to further wide-ranging submissions which involved comparisons of the language used in POCA with that used in the Statutory Instrument. Mr Mitchell also referred us, as we have remarked, to the statutory provisions of earlier statutes. However, in the end, in our judgment, the resolution of the issue on this ground of appeal comes down to a narrow issue on the proper construction of the Statutory Instrument in the context of POCA.

We accept Mr Mitchell’s submissions that the Explanatory material from the Home Office on the effect of the statutory provisions with which we are concerned cannot be used as demonstrating the intention of Parliament in such a way as to overrule the clear statutory meaning. It is permissible to use Hansard and other background material to identify the mischief at which the Statute was aimed (see Pepper v Hart [1993] AC 593). Also, a “categorical” assurance by a Minister to Parliament in the course of debates as to the meaning of statutory language may be relied on by an individual so as to preclude the Government contending to the contrary vis-à-vis that individual (see the narrow ratio of Pepper v Hart explained by Lord Steyn in McDonnell v Christian Brothers Trustees [2004] 1 AC 1101 at para 29). Neither of these two principles applies in this case.

We also are not impressed by Mr Perry’s submission that the NPA in its letter of request appears to have accepted the court has power to make the restraint order only in respect of property within the United Kingdom. We have found neither of these two matters helpful in reaching a conclusion on the proper construction of the Statutory Instrument.

We also accept Mr Mitchell’s submission that s.447(4) of POCA plainly defines property as all property, whether within England and Wales or overseas. Where we part company with Mr Mitchell’s submission is that this definition of property applies to article 8 so as to provide jurisdiction for the court to make an order under article 8(1) prohibiting a person from dealing with property outside the jurisdiction of the court.

We prefer Mr Perry’s submissions on the meaning and effect of article 7(3) and article 8(1) of the Statutory Instrument. In our judgment article 8(1) does have the restrictive effect contended for by Mr Perry. It states that the power of the Crown Court to make a restraint order is in respect of relevant property identified in the external request. It seems to us that this can only mean relevant property in England and Wales as is identified in the external request (see article 7(3)(a)). It is only property in England and Wales that is identified in the external request. Mr Perry concedes that this does not prevent the requesting state from adding to the property identified in the external request which was not initially specified in the request. However, he submits, and we accept, that the added property can only be property within England and Wales.

We find support for this construction of article 8 by reference to article 6(7). Had it been intended that article 8 gave power to the court to make a world-wide restraint order there would in our judgment have been no need for article 6(7). Any world-wide restraint order made by a Crown Court in England and Wales would have effect in Scotland and Northern Ireland without the need for the external request to be dealt with by the courts in Scotland and Northern Ireland. Furthermore, the effect of the order in this case may, in certain circumstances, come into conflict with another order made, for instance, by the court in Guernsey after a similar external request was addressed to the authorities in Guernsey.

In our view this construction of articles 7 and 8 is not undermined by the definition of property in s.447(4) of POCA. Mr Mitchell points out that article 7(4) requires the court when determining whether the first or second condition is satisfied, to have regard to the definitions in, inter alia, sub-section 4 of s.447. We do not, however, accept his submission that this has the effect of importing into articles 6, 7 and 8 a power of the court to make a world-wide order. If it was intended that the crown court should have such a power in our opinion it would require a clear expression of that power in either the Statutory Instrument or POCA. The reference in article 7(4) to the need for the crown court to have regard for the definition of property given in this subsection can, we think, as Mr Perry submitted, just as easily be attributed to the requirement in article 7(3)(c) that the defendant has benefited from his criminal conduct.

As we have said, in our judgment, the effect of articles 6, 7 and 8 read as a whole is to provide a scheme to make a restraint order in response to an external request only in respect of property in England and Wales. Again, we point out that there would be no need for the separate jurisdictions of the courts in Scotland and Northern Ireland if it was intended to provide power to the Crown Court in England and Wales to make a world-wide order.

Finally, we should add that this limitation on restraint orders made in respect of external requests seems to us understandable. As Mr Perry points out, there is a considerable difference between a domestic restraint order made pursuant to ss.40 and 41 of POCA. In the case of the latter, the investigation or proceedings are instituted in England and Wales. The purpose of a restraint order in such cases is to protect property which following a trial in this country may become the subject of confiscation proceedings.

In the case of the former, the court can be asked to protect property in the United Kingdom, but not to provide a forum for world-wide protection, which, in this case, could just as well be provided by an order of the requesting state had the authorities chosen to do so. Further, article 18 provides for the action to be taken by the court when it receives an external order. That order is clearly confined to property in England and Wales. In our judgment this is another indication that this part of the Statutory Instrument is concerned only with property in England and Wales.

This ground is in two parts. First, it is submitted by Mr Perry that the judge’s approach to the question of discretion was wrong. Secondly, it is submitted that the respondent when making its initial ex parte applications was in breach of its duty to disclose material which might have affected the court’s decision to make a restraint order. We deal first with the issue of the judge’s approach. We have already set out the final passage of the judge’s ruling. In it the judge said that failures in respect of disclosure on this case were matters for the Secretary of State to consider or for the South African courts to deal with. Mr Perry submits that this demonstrates a wrong approach. He relies on the fact that the South African authorities chose to apply for a restraint order in England and Wales rather than in South Africa. For that reason, if no other, the Crown Court should have itself considered the failures of disclosure.

There are three particular matters which it is alleged the respondent and the NPA failed to disclose to the judge on the initial application for the RO. These are:

The judge dealt with these three matters after directing himself on the approach set out in Jennings v CPS [2004] 4 AER 391. The judge said:

“Applying the test set out in Jennings I am quite satisfied that the failures relied upon, even on the assumption that they are failures and I make no finding on that point, are not such as would enable me in the public interest to discharge this order.”

Mr Perry concedes that the judge correctly directed himself. It is clear from this passage in the ruling that the judge dealt with these three factors as matters to be considered by him when exercising his discretion. In our judgment the passage at the end of his ruling, which we have already cited (see para 30 above), can only refer to other factors which the judge considered after dealing with these three. In the circumstances we can see no error of approach by the judge to the exercise of his discretion in respect of these three factors.

The final two factors were first an allegation that the behaviour of NPA has throughout been aggressive, unreasonable and unjust. Secondly, Mr Perry relies on matters surrounding the respondent’s ex parte application to vary the RO on 28 September 2006.

In respect of the former, the judge referred to a judgment of the South African court in which the judge stated that he was “ … seriously averse to apportioning blame to any of the parties for the quagmire in which we find ourselves”. Judge Wadsworth, in our judgment, correctly ruled that it would be inappropriate for him to delve into a matter which the trial judge felt would not help.

The second factor focuses on the application by the Respondent to seek and obtain a variation of the RO. It was dealt with by His Honour Judge Goymer. That was also an application dealt with by the judge on papers. There was no hearing.

A number of statements have been filed by both sides on this issue. In addition a large bundle of correspondence has been exhibited. The complaint made on behalf of the appellant is that the respondent and the NPA ought to have disclosed the whole correspondence to the judge when making its application for a variation of the initial order. Further, it is submitted that, at the very least, by not notifying the appellant of the application the Respondent was guilty of a very serious breach of its duty to disclose all material matters to the judge when making such an application.

Mr Perry submitted that SARS and the NPA manipulated the proceedings in order to remove from the RO certain property, the Scheerpoort property, which belonged to the appellant. It is submitted that the correspondence shows quite clearly that the appellant was unwilling for this property to be released for the purpose of a subsequent sale. The alleged motive for this application is that SARS intended to use the proceeds from the sale of the property to satisfy tax debts due from the appellant. Further, it is alleged that SARS sought to manipulate proceedings in South Africa so as to cause the Appellant to undergo cross-examination in the civil tax proceedings.

On behalf of the respondent, Mr Mitchell candidly accepts that the respondent ought to have notified the appellant that it was going to make the application to vary the RO and informed him of precisely what was being sought (see paragraph 59.4(2) of the Criminal Procedure Rules). However, Mr Mitchell submits that the respondent acted in good faith, albeit careless of the appropriate procedures.

The judge in his ruling stated that he had no doubt that the correspondence should have been made known to the respondent by the NPA and thus to the court. He said that it was difficult to see what justification there could be for the failure of the NPA and SARS to disclose this material. However, he took the view that there had been no prejudice to the appellant and accordingly concluded “narrowly and with some hesitation” that it would not be right to discharge the order on this ground. Accordingly, it seems clear to us, that the judge did exercise his discretion without reference to the need for the matter to be considered by the Secretary of State or the South African courts. In our judgment that was a conclusion which, in the exercise of his discretion, the judge was entitled to reach.

Finally, on the issue of disclosure, we turn to a submission made by Mr Perry that the Crown Court ought not to have allowed itself to be used as a “primary policeman” so as to aid the authorities of one country who had deliberately chosen not to seek an order in their own country which would be subject to judicial scrutiny there. It seems to us that it was in that context that the judge made the comments in the final paragraph of his ruling (see para 30). Like the judge, we regard this as an important matter. From the passages in the ruling to which we have referred, in our opinion the judge did exercise his discretion in relation to the non-disclosure matters without reference to the need for those matters to be dealt with by the Secretary of State or the South African court. It is not entirely clear to what issue the judge was referring in the final paragraph of his ruling. We can see that the submission made by Mr Perry that it was inappropriate for the Crown Court to act as the primary policeman in respect of this matter has some force. However, since we have concluded that the court had no jurisdiction to make a worldwide restraint order, in our judgment, the relevance of this submission is substantially reduced. If it were necessary for us to hold that the exercise by the judge of his discretion was flawed and that we must exercise the discretion afresh, we would conclude that all these matters of non-disclosure are not sufficient to cause us, in the exercise of our discretion, to reach a different conclusion from that of the judge.

It follows from our above conclusions that in our judgment the RO Order and the DO Order made by the Judge must both be quashed. In their place we would substitute a restraint order prohibiting the appellant from dealing with any property of his in England and Wales. We leave counsel to draft the appropriate order. It is conceded by Mr Mitchell that in these circumstances there is no basis for making a disclosure order other than in respect of property located in England and Wales. For these reasons and to this extent this appeal is allowed.

The Criminal Procedure Rules make provision for applications in respect of proceedings pursuant to POCA. Rule 59.4(1), (2) and (5) deal with the giving of notice of applications for a restraint order and variation of such an order. In this case, Mr Mitchell accepted that notice of the application to vary the RO ought to have been given to the appellant. We wish to draw attention to these rules and emphasize that they must be complied with.

We were surprised to be told that ex parte applications pursuant to POCA are normally dealt with by crown courts on paper without the attendance of the party making the application. It seems to us that in an application of this importance and complexity it ought normally to be dealt with at a hearing whether or not it is being made ex parte. The same applies to applications to vary the order. At such a hearing a full record of the hearing should be made. This would bring proceedings on such applications more in line with applications for Freezing Orders in the civil courts upon which these orders are based.