Reid, R. v

On 7 April 2016 in Southwark Crown Court the appellant, now 47, was convicted of five counts of obtaining a money transfer by deception contrary to section 15A of the Theft Act 1968, one count of attempting to obtain a money transfer by deception, and one count of fraud contrary to section 1 of the Fraud Act 2006. He was sentenced on 25 April 2016 to twenty-four months' imprisonment suspended for twenty-four months with an unpaid work requirement of 240 hours.

Proceedings under the Proceeds of Crime Act 2002 ("POCA") followed, culminating in an order on 21 July 2017 under section 6 of POCA for the appellant to pay £703,501 within three months or in default to serve six years' imprisonment (“the confiscation order”).

This is his appeal against the confiscation order on a single issue said to be novel and important, namely the correct approach in calculating benefit arising out of remortgage transactions for the purpose of section 6 of POCA.

The issue has been formulated thus before us:

The allegations against the appellant related to seven separate mortgage applications made between 2003 and 2007 either to buy or remortgage six different properties for residential and buy-to-let purposes. The appellant provided false details to lenders, dishonestly inflating his income.

The appeal relates to three of those properties on which the appellant made remortgage applications, namely:

7. Count 2: 82 Chigwell Road, London E18. This property was acquired untainted in 2004 with the assistance of a mortgage from the Bank of Ireland in the sum of £118,729. The remortgage involved a mortgage advance of £139,400 in 2005 by The Mortgage Business, part of the Lloyds group. It was repaid on the sale of the property in 2014. The increase in equity subsequent to remortgage claimed was £153,510, representing 85 per cent of a rise in value of £180,600 to sale.

8. Count 3: Flat 4, 5 Somerset Road, New Barnet. This property was acquired untainted in 2005 with borrowed monies which were repaid upon the remortgage. The remortgage involved a mortgage advance of £125,700 by Mortgage Express (now part of Bradford & Bingley) later that same year. The appellant had undertaken to repay it. The increase in equity subsequent to remortgage claimed was £31,920, representing 76 per cent of a rise in value to £207,000 to April 2016.

9. Count 7: 55 Furzehill Road, Borehamwood. This property was acquired untainted in 1997. The remortgage involved a mortgage advance of £260,000 in 2007 by Cheltenham & Gloucester. The sum of £61,000 was used to pay off the existing mortgage with some £34,000 going towards discharge of other secured debts. The appellant did not explain what happened to the balance of £165,000, nor was he pressed to do so. The appellant had undertaken to repay the remortgage monies. The increase in equity subsequent to the mortgage claim was £17,390, representing 47 per cent of a rise to £587,000 in April 2016. In addition, and a point to which we will return, benefit was also claimed by the prosecution for the £165,000 balance to which we have just referred.

There was no evidential dispute between the parties in relation to the three properties. The case proceeded on the factual basis that the remortgage loans in question either had been repaid or would within a short period of time be repaid, although the prosecution contended such repayment to be irrelevant to the exercise.

The prosecution, relying on R v Waya [2013] 1 AC 294 ("Waya"), contended that the correct approach was to work out the extent of the increase in value of the equity attributable to the fraudulently-acquired mortgage loan and then to add on rental income received. The purpose of the POCA regime was to ensure that criminals do not profit from their crimes. Where the defendant is soon discovered and quickly repays the loan, he may be in a position similar to that of a theft or benefit fraudster who makes full reparation or restores the stolen goods and there is no benefit, but where not soon discovered and he enjoys the benefit of the loan for a number of years it will be otherwise; he has not been denied the profit of his crime. It would not be proportionate for any confiscation order to be made, but it would be unjust and disproportionate to require him to pay the same sum again. The Waya analysis as applied to acquisition mortgage should be applied to remortgage cases as well. The fact of past or prospective repayment is irrelevant. Further, or alternatively, the prosecution contended that it would be appropriate to apply a pecuniary advantage analysis. The appellant had at least obtained a pecuniary advantage by the receipt of the loan, which by virtue of section 76(5) of POCA was to be considered as equivalent to a cash sum.

The appellant responded by contending that in relation to remortgage transactions such an approach would result in a disproportionate confiscation order. The correct approach was to limit the benefit to the value of the remortgage obtained. Since the appellant had either repaid the loan or undertaken to do so it would be disproportionate to make any confiscation order in relation to those sums. There is an analogy to be drawn as a matter of principle between such a scenario and the scenario in which civil proceedings are proposed, in which case it would be disproportionate to confiscate the sum the subject of prospective civil judgment. On the alternative analysis the appellant responded that the pecuniary advantage analysis was wholly artificial in a remortgage case and one wrong to adopt as a matter of principle. A pecuniary advantage was obtained classically in a situation in which a defendant evades a liability (see R v Smith (David Cadman) [2002] 1 WLR 54).

In a reserved written judgment which was careful and full the judge ruled that the approach in Waya was to focus on the equity of redemption to which the mortgagor was entitled. Thus upon a remortgage the bundle of rights and liabilities between mortgagor and mortgagee was replaced by a new bundle of rights and liabilities. One equity of redemption was extinguished and another created. The approach of the appellant, described as one that was “technical”, was dismissed. The property obtained by the appellant in connection with his criminal conduct was the associated proportion of the increase in the equity of the property.

On this basis, for the purpose of section 6 of POCA the benefit was then found to be £834,368.08, and the available realisable amount £703,501.

The appellant raises a central ground of appeal. It is said that the judge erred in holding that the correct approach to benefit in a remortgage case where a defendant initially acquires property legitimately by means of untainted funds and subsequently obtains a fraudulently-induced loan/remortgage is to apply a calculation based on equity increase. Instead, since the appellant had acquired properties legitimately initially using untainted funds, the benefit should be nil since the remortgages obtained have been or will be repaid. The appellant contends that his approach reproduces a clear, simple and legally-principled approach to calculating benefit in a remortgage case where it is suggested that there is a legally different reality.

After discussion before us, Mr Owen has advanced an alternative additional point that is not dependent on success on his central ground of appeal as identified above. That additional point relates to the judge’s finding on count 7 of additional benefit of £165,000 in relation to the balance of mortgage monies not accounted for by the appellant.

On the central issue as identified, the prosecution responds that the judge was correct to conclude that the right approach was to calculate the benefit proportionately based on the equity increase achieved. The underlying purpose of the legislation demands such a result. It would not be disproportionate to make a confiscation order even in relation to sums repaid or promised to be repaid. An honest person taking out such a loan would have already obligated himself to repay. The correct approach was to seek to confiscate the loan amount, which was not something the prosecution sought to do, but rather to identify a proportionate figure based on the appellant's benefit obtained pursuant to that loan. The question of repayment of the loan was irrelevant.

We start from relevant first principles as they apply to confiscation orders, guided by the decision of the Supreme Court in Waya: (a) criminals should not be allowed to profit from their crime; (b) the purpose of confiscation proceedings is to recover the financial benefit that the offender has obtained from his criminal conduct;

(c) POCA is framed in broad terms and its language must be given a fair and purposive construction in order to give effect to its legislative policy. Thus by way of example, sections 76(4) and (5) are framed loosely:

It will in general terms be disproportionate to make a confiscation order when a defendant has restored to the loser any proceeds of crime which he had ever had, or where restitution is assured or certain (see Waya at [28] and Davenport [2015] EWCA Crim 1731 at [66]). It would not achieve the statutory objective of removing the proceeds of crime but simply be an additional financial penalty.

Waya in no way precludes a confiscation order ever being made in respect of a fraudulently-obtained loan subsequently repaid. Whether or not it would be proportionate to do so depends on the facts of each case.

Waya was a case of money lent because of a fraud but subsequently repaid in full and always secured. The majority in the Supreme Court held (at [35]) that if in such a case the fraud were discovered immediately any confiscation order which included the same sum as had been repaid in full would be disproportionate. However:

We reject the submission that there is a fundamental difference, as the appellant suggests, because the result of obtaining a loan by way of mortgage as opposed to remortgage is that one obtains an interest or legal title in the property the subject of the mortgage.

On a remortgage it is suggested by the appellant that one only obtains a sum of money, such that there is nothing else upon which a confiscation order can fasten beyond the loan which is to be repaid. But this is toignore the reality of the situation, which is that the appellant did obtain a benefit from the remortgages beyond the loan monies. They allowed him to discharge debts including the original mortgage or other secured debts and to maintain his interests in the properties, which then rose in value. It also ignores the focus placed by the Supreme Court in Waya on the equity of redemption to which the mortgagor is entitled. On a remortgage one equity of redemption is replaced with another. There is thus no clear materially different legal reality. The fact that there is no change in legal title is nothing to the point. The question is the amount of benefit. As this case demonstrates, there is nothing unduly complex in the exercise of identifying that amount by reference to the amount of the loan and the increase in value of the property over the relevant period.

It would in our judgment be counter-intuitive for a court to decide that the benefit figures on these three properties should be nil because the loan had been repaid or was shortly to be repaid, and to ignore the appellant's financial gain arising out of his interest in the properties maintained as a result of or in connection with his fraudulent activities. The appellant had clearly benefited in each case for many years - about a decade in each case - by reference to the increase in the properties' values over the periods when the fraudulently-obtained loan monies were used to maintain his title and interest in those properties. As already indicated in respect of at least two of the three properties, the fraudulently-obtained monies on remortgage were used at least in part to discharge the previous mortgage used to purchase. On the third (Flat 4, 5 Somerset Road) the monies were used again, at least in part, to repay monies lent to the appellant for his original purchase. The appellant's declared willingness to pay or actual repayment does not extinguish the benefit here.

This is not a question of requiring the appellant to pay the same sum as the repaid loans or loans to be repaid, such as was disapproved in Waya at [48], where the court said:

We have one area of reservation as to the result on the facts, however, relating to a different but related aspect. On count 7 the approach of the judge was to add to the extrapolated increase in equity a further element as claimed by the prosecution, namely the amount of the remortgage which was not used to discharge existing borrowing used for the original purchase: the sum of £165,000. In relation to this part of the finding the learned judge said this:

The judge appears to have proceeded on a hybrid basis so far as count 7 was concerned, namely to combine an approach based on increase in value of equity with a straightforward award for a cash benefit of £165,000. The submission before him below appears to have been that as a matter of over-arching proportionality such an additional finding of benefit would not offend and would be justified in all the circumstances.

On any view the additional finding of benefit involves an element of double counting, since the full amount of the loan monies on count 7 (including the £165,000) was taken into account for the purpose of calculating the percentage of property tainted at the time of remortgage. The approach also falls foul of the essential approach in Waya, since the sum of £165,000 was fully secured on the property and is as much part of the secured debt as the other monies advanced.

In our judgment the sum of £165,000 should not have been added to the benefit figure under count 7. The position might have been otherwise if there had been evidence as to the use to which the £165,000 had in fact been put, such that any benefit resulting might have been capable of identification and calculation. But there was no such evidence. The benefit figure on count 7 should therefore be limited to the proportionate increase in equity value, as was the case on counts 2 and 3. Any other result is inconsistent with the approach that we have adopted and that the judge himself adopted below, as identified above.

Returning to the central issue on this appeal and to conclude, the benefits from a remortgage can be treated in the same way as the benefits from a mortgage. Thus, absent other property obtained, the benefit is likely to be the proportion of the increased value of the property represented by the amount of the remortgage plus any rent earned since the remortgage, again on a proportionate basis. Standing back, and subject to the discrete issue relating to count 7, the result reached by the judge was not disproportionate to the nature and extent of the appellant's offending, particularly in circumstances where the availability of confiscation proceedings was a matter specifically taken into account by the judge when imposing the sentence in the terms that he did, or by reference to the legislative purpose of POCA, nor is it in some way wrong in principle. To this extent the appeal fails.

However, because of the error relating to count 7 we would allow the appeal to that extent, quashing the finding of benefit in the sum of £834,360.08 based on a benefit of £182,390 on count 7, and replacing it with a finding of benefit in the sum of £669,360.08 based on a benefit of £17,390 on count 7. The figure of £669,360.08 is less than the available amount and is therefore the sum that the appellant is ordered to pay.

In all other respects the order remains unaltered.