Johnson, R v

This is an appeal against a confiscation order made under the Proceeds of Crime Act 2002 (the Act). It requires consideration of the tainted gifts regime created by the Act.

The appellant has leave and the benefit of a representation order granted by the Single Judge. There is no appeal against the sentence which was imposed after the appellant pleaded guilty to 16 counts of fraud against her employer, the Leeds Credit Union. On 25^th September 2012 she received a sentence of 2 months imprisonment suspended for 2 years with requirements to undertake unpaid work for 120 hours and with a low level activity requirement for 30 days concurrently on all counts.

The confiscation order was made on 22^nd January 2014 by Miss Recorder Heeley who also presided over the subsequent hearing in the Crown Court on 17^th July 2015. The transcripts of the hearings show that she conducted them in a fair and focussed way. Confiscation proceedings are not without complexity and the Judge demonstrated a sure grasp of the statutory scheme. She found that the appellant had benefited from her criminal conduct by £45,000 and determined that the available amount was £20,000. She assessed the recoverable amount at £20,000 and applying section 6(5) of the Act made a confiscation order requiring the appellant to pay that amount. The order required her to pay £20,000 by 21^st July 2014 with a 12 month prison term in default of payment.

The offences were committed between April 2007 and January 2009. The appellant dishonestly transferred funds to the accounts of members of her family either by transfers from the accounts of members or by creating loans for customers without their consent.

At the January 2014 hearing it was accepted by counsel for the appellant that she had a criminal lifestyle as defined section 75 of the Act. Each offence involved conduct which formed part of a course of criminal activity and the appellant had benefited by more than £5,000. Counsel’s concession was therefore correct.

The prosecution alleged that the benefit figure was made up of £44,675.90 of unexplained transfers, £12,000 particular criminal conduct which she had accepted by her pleas, and a £20,000 tainted gift to her daughter. This gift was equity in 44 Dewsbury Road, Wakefield (“the property”) which the appellant sold to her daughter in July 2008. The available amount was said to be the value of the gift, £20,000. It was accepted by the prosecution that the appellant had no assets. She subsequently became bankrupt. On 22^nd January 2014 when the order was made, the evidence was that the mortgagee was expected to take possession of the property and the mortgage was in arrears. It was expected that sale would leave a substantial debt owed by the daughter to the mortgagee and that the sale price would be far less than £140,000. These expectations subsequently proved to be right. The position was, therefore, that the gift of £20,000 had been lost by the daughter who could not realise it. This may have been because the July 2008 value had been overstated, or because the value of the property had fallen between the date of the gift and the date of the hearing, or perhaps both. The failure of the daughter to make mortgage repayments had also contributed to the position.

In her affidavit the appellant had said this about the property:-

“Prior to my marriage I purchased the above property for £69,000 and eventually sold it to my daughter in June [the Crown asserted that the date of the sale was actually in July] 2008 for £140,000 but I gifted her £20,000 in the conveyance.”

We interpret this as meaning that the agreed price was £140,000 but the appellant only required payment of £120,000. If £140,000 accurately reflected the value of the property at the time of the transaction, this was a gift of £20,000 by the appellant to her daughter. There was very little detail about the transaction before either the Crown Court or this court but the Judge proceeded on the basis of this admission and held that there had indeed been a gift worth £20,000 as at July 2008. It was not an arms length sale and we have seen no evidence that the property was valued, although the Crown submits that there must have been some evidence of valuation because the property was bought by the daughter subject to a mortgage. The Crown suggested that it was reasonable to approach the case on the basis that the property was actually worth £140,000 in July 2008. Events cast some doubt on that proposition. The appellant had paid £69,000 for it, and the mortgagee eventually sold it in March 2015 at auction for £86,000, leaving a debt owed by the daughter to the mortgagee of £44,000. Nevertheless the Judge proceeded on the basis of the admission made by the appellant which was made in a formal document namely an affidavit sworn by her when she had the benefit of legal advice in the confiscation proceedings.

The Judge moved to section 77:-

77 Tainted gifts

(1)

Subsections (2) and (3) apply if—

(a)

no court has made a decision as to whether the defendant has a criminal lifestyle, or

(b)

a court has decided that the defendant has a criminal lifestyle.

(2)

A gift is tainted if it was made by the defendant at any time after the relevant day.

……….

(9)

The relevant day is the first day of the period of six years ending with—

(a)

the day when proceedings for the offence concerned were started against the defendant, or

(b)

if there are two or more offences and proceedings for them were started on different days, the earliest of those days

The gift was made after the relevant day and was therefore a tainted gift. In calculating the available amount the provisions of sections 9, 81 and 79 of the Act apply, which, so far as relevant, provide as follows:-

9 Available amount

(1)

For the purposes of deciding the recoverable amount, the available amount is the aggregate of—

(a)

the total of the values (at the time the confiscation order is made) of all the free property then held by the defendant minus the total amount payable in pursuance of obligations which then have priority, and

(b)

the total of the values (at that time) of all tainted gifts.

81 Value of tainted gifts

(1)

The value at any time (the material time) of a tainted gift is the greater of the following—

(a)

the value (at the time of the gift) of the property given, adjusted to take account of later changes in the value of money;

(b)

the value (at the material time) of the property found under subsection (2).

(2)

The property found under this subsection is as follows—

(a)

if the recipient holds the property given, the property found under this subsection is that property;

(b)

if the recipient holds no part of the property given, the property found under this subsection is any property which directly or indirectly represents it in his hands;

(c)

if the recipient holds part of the property given, the property found under this subsection is that part and any property which directly or indirectly represents the other part in his hands.

(3)

The references in subsection (1)(a) and (b) to the value are to the value found in accordance with section 79.

79 Value: the basic rule

(1)

This section applies for the purpose of deciding the value at any time of property then held by a person.

(2)

Its value is the market value of the property at that time.

(3)

But if at that time another person holds an interest in the property its value, in relation to the person mentioned in subsection (1), is the market value of his interest at that time, ignoring any charging order under a provision listed in subsection (4).

The effect of these provisions is that the court was required to assess the value of the tainted gift and to include it in the available amount. At the date of the hearing the value was nil, but section 81(1) operates to require the court to take the greater of the value of the property given at the date of the gift or the value of the daughter’s interest at the date of the hearing.

In this case the Judge accepted that the value of the property at the date of the hearing was £110,000 which was less than the sum outstanding on the mortgage. She accepted that the appellant had no other assets to satisfy the order. The order would not therefore be paid and the term of imprisonment would be served in default. Counsel who then appeared for the appellant sought to distinguish R v. Kim Smith [2013] EWCA Crim 502; [2013] 2 Cr. App. R. (S) 77 and sought to rely on the extract from the opinion of Lord Bingham in May (Raymond George) [2008] 1 AC 1028; [2009] 1 Cr App R (S) 31 at [35]:

“From the 1986 Act onwards, the courts have been required to reinforce confiscation orders by the imposition of a term of imprisonment to be served in default of payment. But it has been recognised that a defendant may lack the means to pay a sum equal to the aggregate of the payments or rewards he has received, or the value of the property or pecuniary advantages he has obtained. It has also been recognised that it would be unjust to imprison a defendant for failure to pay a sum which he cannot pay. Thus provision has been made for assessing the means available to a defendant and, if that yields a figure smaller than that of his aggregate benefit, making a confiscation in the former, not the latter sum.”

Elias LJ in Najafpour (Ahmed) [2009] EWCA Crim 2723 relied on that passage and held that in a case where a court was required to value a debt owed to an offender for the purposes of assessing his free property under section 9(1)(a) of the Act that

“If it is impossible to recover the debt then it would be quite inconsistent with the structure of the Act as explained by the judgment of Lord Bingham in May to trigger the default sentence. A defendant is not to be imprisoned if he satisfies the court that he simply does not have the assets available: see the decision of this court in Chen [2009] EWCA Crim 2669; [2010] 2 Cr. App. R. (S.) 34.”

The appellant relied on those statements as applying to tainted gifts where it was clear at the date when the order was made that the defendant could not recover the value of the gift as it had been at the date when it was made. The Judge rejected that submission, pointing out that the Court of Appeal in Kim Smith had also rejected it. That argument is available where the court is assessing free property under section 9(1)(a) but not where the court is valuing a tainted gift under section 9(1)(b) and applying the statutory regime which we have set out above. She said this

“One must remember that at this moment in time the capital asset, i.e. the house, still exists and if the house remains in the hands of the Defendant’s family then over the course of the next months or years it may well increase in its value enabling payment to be made. If I declare it of no value at this stage the house may end up still being kept within the Defendant’s family and the Defendant’s family then have the benefit of any increase in house prices.

“This is a sad and unusual case and I do have some sympathy for the Defendant….I accept that there is at this stage no prospect of recovering the £20,000 but there is clearly potential for it in the future. In any event I do not need to trouble myself with recoverability, as I say there is no provision for that within the scope of the Proceeds of Crime Act, all I have to satisfy myself is that this was a tainted gift within the meaning of the Act. I find that it was a tainted gift and therefore the £20,000 is an available asset.”

The Judge allowed 6 months for payment “in the hope that there is a recovery in house prices and something happens or there is ability to remortgage or some other way”. She then said this

“In terms of the default period for the figures between £10,000 up to £20,000 it is up to twelve months, This is right at the top of that and therefore I impose a default sum of twelve months’ imprisonment if it is not paid. I do appreciate the particular circumstances of this case and I am very sorry, but my hands are tied by the law in this matter.”

The Crown applied for and obtained an order that any money that is recovered should be paid to the Leeds Credit Union, and the Judge acceded to that submission. The order as drawn up allows for a compensation order in the sum of £12,000 which was the loss directly caused by the offences on the Indictment to which the appellant had pleaded guilty.

The money was not paid. On 17^th July 2015 the case came back before the same Judge because the appellant had applied for a variation of the confiscation order under section 23 of the Act which provides:-

23 Inadequacy of available amount: variation of order

(1)

This section applies if—

(a)

a court has made a confiscation order, and

(b)

the defendant or the prosecutor, or a receiver appointed under section 50, applies to the Crown Court to vary the order under this section.

(2)

In such a case the court must calculate the available amount, and in doing so it must apply section 9 as if references to the time the confiscation order is made were to the time of the calculation and as if references to the date of the confiscation order were to the date of the calculation.

(3)

If the court finds that the available amount (as so calculated) is inadequate for the payment of any amount remaining to be paid under the confiscation order it may vary the order by substituting for the amount required to be paid such smaller amount as the court believes is just.

……….

(5)

The court may disregard any inadequacy which it believes is attributable (wholly or partly) to anything done by the defendant for the purpose of preserving property held by the recipient of a tainted gift from any risk of realisation under this Part.

The Judge held that by reason of section 23(2) she was required to value the tainted gift in the same sum as she had previously done because the date of valuation remained the date of the gift, and not the date of the section 23 application. There is no appeal against this decision because no appeal can be brought against a decision under section 23, see section 50(1)(cb) of the Criminal Appeal Act 1968. Mr. Byrne had relied on R v. Richards [2008] EWCA Crim 1841 and Najafpour (the passage cited above) in support of a submission that the plain words of section 23(2) should be read with section 23(5) so as to require the court to take into account any inadequacy which it was not empowered to disregard by that sub-section. There is, however, a difficulty with that submission created by the words “(as so calculated)” in section 23(3). The available amount as calculated under section 23(2) applying section 9 as required was still £20,000 and was not therefore inadequate in the sense which brings section 23(5) into play. In any event, we do not consider that the existence of a power to disregard an inadequacy in particular circumstances implies a duty to take all other types of inadequacy into account even where the plain words of the Act provide the contrary. This court does not have jurisdiction to entertain an appeal against the decision of 17^th July 2015. Nevertheless since we received these submissions we have given our conclusion about them. We consider that the Judge was right.

After the failure of the section 23 application for variation, the appellant served a notice of appeal against sentence to this court. This related to the confiscation order made on 22^nd January 2014. The extension of time required was later granted by the single judge.

The case was listed before the Magistrates Court for enforcement of the order on 12^th August 2015. They imposed the default sentence.

At the start of the hearing, Mr. Byrne told us that the appellant was sitting in the well of the court. We enquired why that was and we were informed that the confiscation order had been paid in full and that she had spent 7 days in prison before that had happened. We were told that the money had been provided by family members and Mr. Byrne told us of his instructions as to who had paid what and how it had been raised. No evidence was produced and Mr. Stranex said that the prosecution had not been able to investigate the source of the money. On the basis that Mr. Byrne’s instructions are correct, it would follow that this appeal is now being brought in substance for the benefit of those who paid the confiscation order to secure the appellant’s freedom. They presumably hope to secure repayment if the order is quashed. In part, their money has been paid to the Leeds Credit Union in satisfaction of a compensation order made in its favour. That compensation order was made because the appellant had stolen at least that sum and was liable as a matter of civil law to repay it. It is not clear to us that quashing this order would require the Leeds Credit Union to repay it, which satisfied in part a debt which the appellant did owe. Neither is it clear that it would result in the refund of the £8,000 which has not been paid under the compensation order. We do not have to decide this issue, and cannot do so because we have heard no argument about it. Prior to the hearing we had been under the impression that the issue we had to decide was whether we could or should make an order which freed the appellant from a prison sentence which appeared, on the face of it, to be unjust.

Mr. Byrne essentially submits that the Judge made an order which was unjust and should be quashed. He relies again on May and Najafpoor which we address above. These decisions did not concern the tainted gift provisions but the valuation of free property.

A finding of criminal lifestyle has two consequences: the tainted gift provisions apply and four statutory assumptions are made. The statutory scheme is different as between each. The rule relating to the four assumptions is as follows:-

10 Assumptions to be made in case of criminal lifestyle

(1)

If the court decides under section 6 that the defendant has a criminal lifestyle it must make the following four assumptions for the purpose of—

(a)

deciding whether he has benefited from his general criminal conduct, and

(b)

deciding his benefit from the conduct.

………..

(6)

But the court must not make a required assumption in relation to particular property or expenditure if—

(a)

the assumption is shown to be incorrect, or

(b)

there would be a serious risk of injustice if the assumption were made.

The court thus has a duty not to make an assumption if it is shown to be incorrect or if it would create a serious risk of injustice but there is no such duty (or power) in respect of tainted gifts. They must be included in the available amount and at a value which may be higher than the value of any identifiable property held by the recipient of the gift to which the person against whom the order is made may have access.

The difference between the two regimes is explicable by the statutory purpose. The tainted gift regime is designed to deprive offenders of the proceeds of crime which have been apparently given away so that they are apparently beyond the control of the offender and owned by an apparently innocent third party. Scepticism about arrangements of this kind underlies the statutory approach. Offenders do not commonly risk the commission of offences in order to give away the proceeds. It is far more likely that assets have been disposed of in order to shield them. The prison sentence in default exerts a pressure on the offender to recover the value of the “gift” from its recipient. Parliament no doubt expected that there would be cases where that was not possible, either because the value of the gift had fallen before the date when the order was made or because the recipient refuses to co-operate and the offender has no right of action to recover the value of the gift. That will involve hardship if there is no other way of paying the confiscation order because the default term will be imposed.

R v. Kim Smith cited above supports the proposition that this is the purpose of the tainted gift regime. The statutory policy is to apply pressure to those who have dissipated (or more usually laundered) their assets during a period when they were benefiting from crime. The aim is coerce them into making good the losses they have caused by all means at their disposal. If they were always able to defeat confiscation proceedings by relying of gifts of assets which cannot be recovered this would undermine the efficacy of the scheme. Such transactions may be difficult to investigate. The recovery of gifts by legal proceedings against the recipient is a matter which is unlikely to be capable of easy determination in confiscation proceedings and may raise complex issues of civil law. Legal proceedings against the recipient may only rarely actually be required if the offender faces a term of imprisonment unless the gift is returned by the recipient. The recipient will return the value of the “gift”. Protestations about the difficulty of proceedings which will never happen should carry little weight. This is why the tainted gifts regime is as it is.

The Judge did not have the benefit of the amendment to section 6(5) of the Act effected by the Serious Crime Act 2015 as from 1^st June 2015. This sub-section now reads as follows, with the new amendment in square brackets:-

This, as has been explained by Lord Hughes JSC in his dissenting judgment in R v. Harvey [2015] UKSC 73 at paragraph 69, made express the requirement to read down section 6(5)(b) by adding the qualification “except insofar as such an order would be disproportionate and thus a breach of Article 1 Protocol number 1”. This is statutory codification of the decision in R v. Waya [2012] UKSC 28; [2002] AC 294, at paragraphs 15 and 16 which read

15 Section 6(5) of POCA sets out the final stage of the process of assessment of a confiscation order:

“If the court decides under subsection (4)(b) or (c) that the defendant has benefited from the conduct referred to it must— (a) decide the recoverable amount, and (b) make an order (a confiscation order) requiring him to pay that amount.”

16 It is plainly possible to read paragraph (b) as subject to the qualification: “except in so far as such an order would be disproportionate and thus a breach of article 1, Protocol 1.” It is necessary to do so in order to ensure that the statute remains Convention-compliant, as Parliament must, by section 3 of HRA , be taken to have intended that it should. Thus read, POCA can be “given effect” in a manner which is compliant with the Convention right. The judge should, if confronted by an application for an order which would be disproportionate, refuse to make it but accede only to an application for such sum as would be proportionate.

The obligation on the court to make a confiscation order in the amount of the recoverable amount is not therefore absolute. The editors of Smith, Owen and Bodnar on Asset Recovery at II.2.239 say this:-

Although provisions identical or closely similar to those contained in POCA were to be found in the preceding legislation,¹ they have the potential to work a violation of the right to the peaceful enjoyment of his possessions enjoyed by the recipient of the gift under Article 1 of Protocol 1 to the Convention. Whilst the justice of avoiding a gift which is a sham designed to defeat the confiscation legislation is obvious, the necessity (and therefore proportionality) of deeming property in the hands of a non-party to the proceedings as transferable to the state whatever the circumstances of the case is less immediately apparent.² Surprisingly, at the time of writing the issue has yet to be litigated, but it may be that the courts will be required to read a discretion akin to that found in CJA 1988 into POCA in order to avoid having to declare the gift provisions incompatible with a recipient's Convention rights.

It appears that the answer to this concern may be found in section 6(5) as read down in Waya and as now amended. No argument was addressed to the Judge in this case about the proportionality of making an order in the full amount of the recoverable amount in the circumstances of this case and none has been addressed to us. The concept of disproportionality in the field of confiscation has been further considered by the Supreme Court in R v. Harvey cited above in which judgment was handed down after we had heard argument in this case. The Supreme Court held that a trader in a criminal lifestyle case had obtained the VAT element in the sums he had obtained by fraud even where he had accounted to HMRC for those sums. It would nevertheless be disproportionate to make an order in that sum and the VAT element should be stripped out from the amount to be paid. This was said to be “quite similar” to the Waya situation where the property which had been obtained had been restored to the loser by the offender, see paragraph 34. In Harvey a further type of case where disproportionality exists was identified, but the concept of disproportionality was not further defined.

We consider that neither the Crown Court nor the Magistrates Court has any power to ameliorate the position after the order, including the default term, has been made. The various powers to reconsider the order or to reduce the default period after the event which are contained in the Act all apply in particular circumstances and do not apply to the present case. It appears to us, therefore, that where an order is sought by the Crown which seeks to recover the value of a tainted gift which appears to be worthless at the date of the Order, the Judge should carefully consider three things:-

We consider that the Judge was right in her construction of the Act. The provisions are clear in their meaning. It follows that she was right to assess the recoverable amount at £20,000. Did it follow that an order in that sum must be made, or that the term of imprisonment in default should be fixed without taking into account the fact that the only available asset was, at the time of the order, worthless? The Judge was not addressed on these matters and did not make a ruling about them. We will address the issue of disproportionality because she was not invited to do so, to ensure that her order is proportionate.

It appears that the issue on any argument as to proportionality would turn on whether the present case is analogous to the case described in Waya at paragraph 33:-

33 A confiscation order in such a case is not compelled by the House of Lords decision in R v Smith (David) [2002] 1 WLR 54 , although the contrary appears often to be asserted. In R v Smith the defendant had evaded the payment of duty on imported cigarettes by smuggling them past the customs post. The decision in the case was that the pecuniary advantage thus (admittedly) obtained had not retrospectively been undone by the subsequent seizure of the cigarettes. That was plainly correct. Lord Rodger held, at para 23, that the subsequent seizure of the cigarettes was in like case to subsequent loss of or damage to goods obtained in the course of crime; such loss or damage would not affect the propriety of a confiscation order—consider for example the case of a burglar who hides the householder's goods in the open air so that they are ruined by the weather or stolen by someone else. The House was not, however, considering the case in which the criminal property obtained has been restored to its owner undamaged. On the contrary, Smith was agreed to have obtained the pecuniary advantage of avoiding payment of the duty, at any rate temporarily.

Here, the asset concerned had lost its value after the date of the gift and was arguably within the category of cases described by Lord Rodger where the thief bears the risk of diminution of value in the goods after their theft. However, it was not alleged to be the proceeds of crime. The asset (equity in the house) had been acquired by the appellant because she held the property while it appreciated in value. There was no evidence that she had bought the house with the proceeds of crime. It was brought into account for the purposes of confiscation because of the criminal lifestyle and tainted gift provisions. The combined effect of these is to treat an asset as proceeds of crime even though it was not. The justification for this is described above. The appellant would not have been able to make a gift of £20,000 if she had not been benefiting from a criminal lifestyle and therefore the Act treats it as if it were the proceeds of crime.

The categories of disproportionality which have so far been recognised by the courts appear to be cases where the conduct of the offender has extinguished or reduced the loss. In Waya the loan obtained by the mortgage fraud was repaid because there was enough equity in the property which was purchased to do that. To that extent the confiscation order was reduced so that it reflected the amount which had been obtained and not recovered, namely the gain in value which the offender would otherwise have retained. In Harvey the offender had accounted for VAT in the ordinary way of business. To include it in the confiscation order would involve an element of double recovery. In each case the amount gained was reduced by the provision of value by the offender. In R v. Mohid Jawad [2013] EWCA Crim 644; [2014] 1 Cr App R (S) 16 the Court of Appeal decided that a confiscation order was not disproportionate where it included a sum payable under a compensation order which might result in its being recovered by the loser. The principle in Waya was applied and the result was different because liability to restore property under a compensation order and actually restoring it are not the same thing. It is not easy to identify any principle of general application from these three cases beyond cases involving the same or closely analogous facts. The cases do not seek to establish any rule for determining what is proportionate, beyond stating the general principle set out above at paragraph 31(ii) in Waya. What can certainly be said is that the present case is a long way from them. The amount gained was not reduced by any value flowing from the appellant. The amount gained from the crime, by way of the deeming provision, was £20,000. The amount which was deemed to be available was also £20,000. It was, in fact, nil perhaps because the appellant had over-valued the gift in the first place but certainly because of a fall in property values and the accrual of mortgage arrears. None of those factors effected any reduction in the amount which the appellant had obtained from crime. It was that issue which was central to the decisions in Waya, Jawad and Harvey. The statutory aim is the recovery of that amount and the means used, a confiscation order calculated in accordance with the provisions of the 2002 Act, are proportionate to it.

For these reasons we do not consider that the decision of the Judge was manifestly excessive or wrong in principle. If she had conducted a proportionality exercise with the benefit of argument based on Waya, Jawad and Harvey, she would, in our judgment, have come to the same view. Confiscation orders are not orders made against particular assets but are in personam money orders against individuals. In this case the order was for far less than the amount by which the appellant had benefited from her criminal conduct and was for a sum which she could, as it transpired, pay within 7 days of being imprisoned. We have no evidence about how she did that, see paragraph 21 above.

After this judgment was distributed in draft, the appellant’s solicitors write a letter to the court setting out their instructions about the source of the payments. This was too late to be investigated by the Crown and is of no evidential status. It does not alter the position as it was at the hearing, which is that there is no evidence as to the source of the payments.

For these reasons, we dismiss the appeal against the order.

Given that the order has been paid and the default sentence will not now be served, we do not see any necessity to consider further whether it should have been shorter in the circumstances of this case and, if so, how long it should have been.