Serious Organised Crime Agency v Fenech

This is an adjourned application by the Serious and Organised Crime Agency (hereafter referred to as “the Agency”) for a freezing order against the Respondent. The matter was adjourned by Stadlen J on 28 September 2010 when he made various orders as to the terms of the adjournment, including at Clause 3 where he directed that:

For completeness, I mention that the relevance of the date 30 September 2010 in clause 3 is that originally the relevant funds which are the subject of this application were held by the Agency pursuant to a cash detention order which expired on that date and therefore the order made by Stadlen J was to maintain the status quo pending the hearing before me and my ruling.

A claim form dated 21 September 2010 has been issued [2/4] and also served are Particulars of Claim dated 2^nd November 2010 [2/5] in which the Agency claims £235, 407.02 plus further accruing interest under section 86 of the Taxes Management Act 1970 (“the TMA 1970”) and costs.

I have before me and have considered with care the following materials:

Six helpful skeleton arguments and written submissions:

The Agency’s dated 24^th September 2010 and prepared for the hearing before Stadlen J;

The Agency’s dated 9^th November 2010;

The Respondent’s dated 9^th November 2010;

The Agency’s in Reply dated 10^th November 2010;

The Agency’s dated 15^th November 2010;

The Respondent’s dated 18^th November 2010, to which the Agency indicated that it did not intend to respond.

The order of Stadlen J dated 28 September 2010;

The Agency’s application notice, claim form and draft order;

The first affidavit of Roy Stoddart and exhibits thereto;

The second affidavit of Roy Stoddart and exhibits thereto;

A report from Bushwood Accountants (“Bushwood”) dated 8^th November 2010 and written by that firm’s managing partner, Darren Edmonston and relied upon by the Respondent;

A confidential and heavily redacted document headed “SOCA log” (“the Log”) dated 20^th May 2010 and first produced during the Agency’s oral Reply;

The third affidavit of Roy Stoddart producing formally the Log and explaining its genesis and contents. [I note that the Respondent complains that it is unfair that the Log has been made available so late in the day and the third affidavit of Roy Stoddart was served so late too].

I am indebted to both Counsel for their industry in the presentation of their respective cases. I will be forgiven I hope if I do not recite all the points raised. I mean no discourtesy by this and I have taken into account all the arguments. However, as the hearing evolved much previously said or written tended to fade in significance leaving the issues in play, plainly revealed.

This much is common ground and so can be shortly stated:

The Agency’s claim relates to tax debts due and payable under the TMA 1970. The Agency has power to adopt the functions of HMRC under section 317 of the Proceeds of Crime Act 2002 (“POCA”) and has done so in relation to the Respondent as is explained in Mr Stoddart’s evidence [see 1/A/4.1-4.3, 8.1].

The Agency asserts that the relevant tax statutory machinery has been followed – assessments have been raised [1/B/31/274-284] and appealed by the Respondent by way of a letter from Bushwood dated 7^th July 2010 [1/B/32/285].

The approach to the raising of the assessments and the route to the calculated sums now claimed is evident from the analysis and explanation offered by Mr Stoddart – see [1/A/8.4-9.2]. These assessments relate to Income Tax and National Insurance contributions for years 2004/05 to 2008/09.

The origin of these proceedings is as follows. On 11^th May 2010, the Court of Appeal Criminal Division gave judgment in the case of R v MS and RO [1/B/36/1-9] refusing the prosecution leave to appeal against a terminating ruling at Ipswich Crown Court that there was no case for the defendants in that case to answer. The case concerned the finding on 28^th March 2009 of £227,760 in the possession of the two defendants, in three sums of money (£79,950, £123,000, and £24,820). The facts of the prosecution case do not matter. What does matter is this: it was the pleaded case for the Defence that all the money came from the Respondent and belonged to him. Indeed, as the judgment records, after the seizure of the money the Respondent made a formal claim for the return of the money – see 1/B/27/251 and 1/B/28/259. More particularly, the Respondent asserted that (a) he had a fear of using banks and dealt in cash (b) the money came from the dissolution of Slates Direct (London) Limited, and (c) that company had been funded by monies raised by his mother through mortgage borrowings.

The Respondent’s evidence being to that effect, had three consequences:

Firstly, the criminal proceedings were stopped as no jury could be sure that the money wasn’t the Respondent’s;

Secondly, it prompted an investigation into his tax affairs, the Agency having assumed taxation functions under Part VI of POCA 2002 for the fiscal years 2002/2003 to 2008/2009;

The investigation led the Agency to believe that the Respondent had failed to disclose for tax purposes the full extent of his income for the period covered by its mandate.

As regards the cash, on 31^st March 2009, at Westminster Magistrates Court a cash detention order was obtained and that continued until 30^th September 2010, by which time the order of Stadlen J had intervened.

On 21^st May 2010, the Agency wrote informing the Respondent of its role and identifying its concerns and that was followed on 18^th June 2010 by the first assessments being raised, to be followed by further assessments later.

At the time of the hearing of 28 September 2010:

the Respondent had not made any application under TMA 1970 s 55(3) to postpone the tax due under the assessment whilst his appeals are determined by the First-tier Tribunal (Tax Chamber) (“the FTT”). In July and August there was correspondence between the Agency and the Respondent’s solicitors, as explained in Mr Stoddart’s evidence [1/A/9.1-9.3] but it was to no conclusive effect.

the Respondent was out of time to make such an application unless he could demonstrate a change in circumstance of the case (as is stated in TMA 1970 s 55(3A)). It was the Agency’s case that no such change was made out.

As I have said, on 28^th September 2010 the application now before me came before Stadlen J.

At this hearing, the Respondent applied for an adjournment of the Agency’s application. The Respondent’s counsel submitted that an adjournment was required so that the Respondent could properly prepare so as to argue that the Agency did not have a “good arguable case”. This was the only point in which the Respondent’s counsel identified as being positively in dispute albeit he reserved his client’s position in relation to all other matters.

The Respondent, in particular, submitted that:

An “out of time” application for postponement would be made under TMA 1970 s 55(3A);

A relevant change in circumstances relied on would be the conclusions of an accountancy report which was in the process of being produced.

On the basis that an adjournment would not prejudice the Agency, Stadlen J allowed the adjournment making the order I have referred to above already.

Later on the 28^th September 2010, the Respondent applied out of time to the Agency under TMA 1970 s 55(3) and (3A) for postponement of tax [2/7/1-2]. The Agency rejected the application on 29 September 2010 [2/7/3].

Bushwood state in their letter dated 8 November 2010 [separate] that they have referred the Respondent’s application for postponement to the Tribunal under s 55(3)(b).

The amount claimed to be due to the Agency in relation to income tax and national insurance contributions amounts to £235,407.02 although for the purposes of this application the agency is content to limit its application to the £227,760 held under Stadlen J’s Order.

The issues before me are now:

Has the Agency established that it has a good arguable case or has it failed to prove the qualifying condition under section 317?

Has the Agency established that it has a good arguable case or has it failed to establish a quantified loss?

Has the Agency established a real risk of dissipation?

The Respondent also raised briefly the questions of

Delay;

Whether he may apply to strike out the Agency’s claim.

All these point fell away, and I say no more about them than that.

I turn now to deal with the three live issues.

Section 317 of Proceeds of Crime Act 2002 (“POCA”) reads in its relevant parts as follows:

For the purpose of this Section the qualifying condition is that (SOCA) has reasonable grounds to suspect that-

income arising or a gain accruing to a person in respect of a chargeable period is chargeable to income tax or is a chargeable gain (as the case may be) and arises or accrues as a result of the persons or another’s criminal conduct (whether wholly or partly and whether directly or indirectly...)”.

This is known as the “qualifying condition.”

Section 326 in Part 6 of POCA defines “criminal conduct”

Constitutes an offence in any part of the United Kingdom, or;

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

A possible consequence of the qualifying condition being satisfied, is dealt with in sub-sections (2) to (4) which read:

Thus, the Agency may exercise the functions of the Board when it has, and continues to have, reasonable grounds for suspecting that the subject derived income or made gains from his own or another’s “criminal conduct”.

If the Agency does not have reasonable grounds for suspecting this, or if, as time goes on, it becomes apparent that no relevant income or gain arose from criminal conduct, the Agency has no jurisdiction, and cannot continue to act. In such a situation it cannot serve a notice under Section 317(2). If one had already been served, whether rightly or wrongly, a notice of withdrawal must be served under sub-section (4)(b).

The Respondent rightly makes the point that unless the Agency establishes that it has reasonable grounds to suspect (section 317(i)) that the taxpayer is caught by the criminal conduct provision (section 326) it has no jurisdiction to act, in that the qualifying condition is not met.

The developed submission of the Respondent is to this effect:

section 326(2) expressly excludes conduct constituting an offence relating to a matter under the care and management of the Board;

this provision determines that if the only conduct said to be criminal arises in relation to tax affairs, rather than what might be called “non-revenue crime” no jurisdiction arises;

the Respondent’s only putative criminality is in relation to a subject’s tax affairs, and so the Agency cannot act. The Board‘s management of those matters remains;

it is now common ground, that the Respondent has committed no crime, save and except the suggestion that he has under-declared his income or may have filed inaccurate tax returns, and therefore the case cannot fall, or alternatively ceases to fall, within the remit of the Agency;

moreover, in oral submissions Mr Broatch for the Respondent made much of the terms of Mr Stoddart’s then extant evidence which, he argued, was to the effect that the Agency had adopted the revenue functions based upon a suspicion of tax evasion alone and therefore there was no satisfaction of the qualifying condition. In particular he fastens on the words in Mr Stoddart’s first affidavit at 1/A/5.1 as evidencing, it is argued, the proposition that the Agency was relying upon revenue related conduct.

The Agency agrees with the Respondent that the criminal conduct relied on cannot be criminal conduct in relation to the Respondent’s tax affairs. But, the Agency contends that the criminal conduct which formed the basis of the its suspicion was:

Mortgage fraud by the Respondent and/or the Respondent’s mother;

Money laundering by the Respondent;

Theft of building materials by the Respondent and handling stolen goods.

As regards the suspicion of mortgage fraud:

I had before me two applications by the Respondent’s mother [1/B/7/107-118 and 1/B/150-161].

In the first application signed on 21 January 2005 the Respondent’s mother self-certified that she had an income of £28,000 as a result of a 30% shareholding in “London Slate Co and Slates Direct London”.

In the second application signed on 7 December 2006 the Respondent’s mother self-certified that she had income of £75,000, £78,000 and £82,000 for the years 2003, 2004 and 2005 as a result of a 50% shareholding in “Slates Direct Wholesaler”.

The Agency alleges that none of these statements were correct and in the Agency’s view amounted to a fraud to which the Agency believes the Respondent was a party (being the recipient of the mortgage monies advanced).

As regards the suspicion concerning money laundering,

the Agency accepts that the Respondent, after being arrested, was not charged or prosecuted for any offence.

the Agency challenges the basic tenet of the Respondent’s argument that therefore the Agency cannot continue to have a reasonable suspicion in relation to this. The Agency contends this is patently incorrect – it is one thing to prosecute on the basis that the Agency could prove beyond all reasonable doubt that the Respondent was guilty, it is another to have “reasonable grounds to suspect”.

As regards the suspicion concerning theft of building materials and handling stolen goods:

the Agency submits that notwithstanding the Respondent’s acquittal in relation to theft of tiles from a church roof, it could continue to have reasonable grounds for suspicion. The acquittal post dated the decision of the Agency to adopt revenue functions and the Agency asserts that it can legitimately continue to have a reasonable suspicion notwithstanding the Respondent's acquittal. In truth, little turns upon this point;

furthermore, the Respondent is on Police bail to return for further enquires in connection with stealing bricks from an antique wall albeit that he has not been charged with any offence in relation to this matter.

The Agency accepts that on the appeal of any assessment before the FTT, it is open to the Respondent to challenge the s 317 condition – see Khan v Director of the Assets Recovery Agency[2006] STC (SCD) 154:

The relevant test was then set out by the Special Commissioners at paragraph 39:

The Agency submits that contrary to the Respondent’s argument that it does not need to have a suspicion of a criminal offence in relation to the money detained. Rather, all the Agency has to show is that it has reasonable grounds to suspect criminal conduct (of whatever kind) and that there is income or gain (however indirect) which flows from it. They go on that there is no need to trace the income or gain into the cash. The cash simply is the subject matter of this freezing injunction application and will go towards satisfying the Respondent’s tax debts.

The Respondent asserts in his primary written argument of 9^th November 2010, where this point was raised for the first time:

Conversely, the Agency argues that the Respondent’s argument that the Agency has no real prospect of showing that it has reasonable grounds of suspicion (in effect two “low threshold” tests) is not made out.

Mr Broatch takes issue with the following features of the use of the Log, Mr Stoddart’s Third Affidavit, and indeed the arguments upon them in the Agency’s written submissions dated 15^th November 2010 [page 6 paragraph 11 and following]. It is said that:

The Log should not be received in evidence

The Third Affidavit should not be received in evidence

I should not receive the further submissions of the Agency at all.

I have considered the written arguments that lead Mr Broatch to assert that I should be:

I see no cause for such circumspection or reluctance:

Firstly, the way it arose was through the late arrival of the point on 9^th November in Mr Broatch’s skeleton argument. Until that point there could have been no anticipation that section 317 was in play.

Secondly, I reject the suggestion that the Third Affidavit is in some way giving in to temptation to invent a false line of reasoning to sustain and justify a previously determined decision. There is no proper basis for the suggestion which is in any event wholly incompatible with the evidence set out in the Log.

Thirdly, I reject the suggestion that the Third Affidavit goes beyond permissible bounds.

Fourthly, there is plainly no prejudice to the Respondent in receiving this material as late as he did. I gave time for submissions upon it and those I am grateful to have received.

As to the further submissions of the Agency dated 15^th November 2010, I reject the notion that I should not take them into account. Furthermore, having read the submissions and Mr Broatch’s responses, I have concluded that they go very little beyond that which Mr Yates said orally at the hearing and where they do, I should take account of the arguments raised.

Of some potential importance is whether the language of section 317 permits of corporate or cumulative reasonable grounds for suspicion, or whether it has to be the reasonable suspicion of A or B. Mr Broatch says the latter, and Mr Yates says the statutory language permits of the former for reasons given in his further skeleton paragraph 13(5) or, he says, the point is moot given the evidence of the “A” or “B” i.e. Mr Stoddart.

I prefer the Agency’s reasoning and reject Mr Broatch’s analysis of the section.

In my judgment the argument of the Agency is correct and the qualifying condition is satisfied.

I so conclude for these reasons:

Firstly, a two stage test is to be applied:

Stage 1: had the Agency corporately and Mr Stoddart personally formed the genuine suspicion that the income arose as a result of the criminal conduct of the Respondent? If yes,

Stage 2: was that genuine suspicion, viewed objectively, reasonable in the sense that it amounted to a reasonable suspicion?

Secondly, the answer as to both stages is “yes”.

Thirdly, I agree that all the Agency has to show is that it has reasonable grounds to suspect criminal conduct (of whatever kind) and that there is income (however indirect) which flows from it. There is no need to trace the income into cash. The cash simply is the subject matter of this freezing injunction application and will go towards satisfying the Respondent’s tax debts.

Fourthly, the Respondent’s construction of the evidence of Mr Stoddart is just not correct. To read 1/A/5.1 alone is to do a disservice to his evidence overall. I accept entirely the explanation provided for the phrasing of this paragraph supplied in his Third Affidavit at paragraph 18 [separate].

Fifthly, were there any lingering doubt about whether the Agency had a reasonable suspicion based on the evidence of Mr Stoddart in his first and second affidavits, it is in my judgment banished by the express, referenced and particular views set out in the Log as explained and bolstered by Mr Stoddart’s Third Affidavit between paragraphs 3 and 12 which together make out a compelling case of the Agency having reasonable grounds to suspect criminal conduct involving mortgage fraud, theft, handling stolen goods, and, money laundering.

It follows that the first issue is determined in favour of the Agency.

The Agency’s position is simple: it says the Respondent has no defence for the tax debts due because:

Firstly, the relevant statutory procedure has been complied with and the tax and National Insurance contributions are due and payable as a matter of law;

Secondly, given that tax has not been postponed, the Respondent has no defence to any claim brought by the Agency for this amount in the High Court – any challenge could only be made within the jurisdiction of the FTT (see inter alia the House of Lords in Autologic v IRC[2006] 1 AC 118) otherwise this would defeat the statutory scheme set down by Parliament;

Thirdly, the evidence spoken of by the Respondent before Stadlen J and set out in the report of Bushwood does not begin to dislodge the Agency’s asserted “good arguable case”. They say that the evidence served is (at best) insufficient in that:

The assertion that there is no basis for the Agency to infer that un-banked cash exists, is plainly unsustainable given the very arguments of the Respondent himself as to his dealings in cash and his mistrust of banks (see above) as well as the evidence at [1/B/9/123/3.7 – Citroen Wells report of the first meeting of statutory creditors] which speaks of the payment of £48,000 cash for a consignment of bricks;

The assertion that the Respondent drew money on credit cards, deposited that money in the bank and then repaid the credit card is not evidenced and is a commercial nonsense the more so when the Respondent himself reported to the Official Solicitor that the company did not use a credit card [1/B/25/216/4.5];

The assertion that income due to the Respondent’s wife has been included in the assessments for him, is inconsistent with other information produced to and by Bushwood and is entirely unevidenced;

The author of the Bushwood report, Darren Edmonston, has no apparent qualifications. Whilst not in and of itself fatal to the opinions expressed, it is not a promising start.

Fourthly, unless and until the Respondent’s out of time postponement application is heard and is successful the tax claimed is due and payable. At the least, the proper application of Practice Direction 7D leads to their being a good arguable case made out.

The Respondent asserts in his primary written submissions [see page 8, paragraph 9.1 (v)] that the Agency does not have a good arguable case because:

Firstly, by application of the Mareva principles, the conventional balance of convenience test should be applied;

Secondly, the assessments will probably not be upheld at the hearing of his appeal by the Tax Tribunal in light of the evidence of Bushwoods that shows the quantum of the assessments can be shown to be wrong.

My conclusions are as follows:

Firstly, the statutory regime is clear and correctly analysed by Mr Yates for the Agency;

Secondly, as things stand, and subject to any out of time appeal to the Tax Tribunal which is resolved in favour of the Respondent, he is liable to pay the sums claimed;

Thirdly, I would not go so far as to say that that the conventional Mareva principles are rendered wholly irrelevant by the regime, I do not find their application particularly helpful or illuminating here when read against a clear statutory code that all agree is applicable;

Fourthly, with all due respect, the evidence from Bushwoods, which was served just before the hearing is not remotely compelling comprising as it does unsubstantiated assertions that are variously inconsistent with other information emanating from the Respondent’s own side, not evidenced and not remotely good enough to displace the otherwise compelling arguable case as made out in my judgment by the Agency.

It follows that the second issue is determined in favour of the Agency.

The Agency point’s [Mr Stoddart’s evidence 1/A/25/12] to five factors in support of the contention that there is a real risk of dissipation of assets in this case:

The Respondent’s criminal history;

His undeclared income;

His substantial tax liability;

That he is now on notice regarding the tax assessments and the substantial outstanding liabilities which are claimed.

Furthermore, the Agency says that the factors which the court needs to consider are:

The subject matter of this application is physical cash;

The circumstances in which the cash was originally seized – see the judgment of the Court of Appeal in Regina v MS and RO [2010] EWCA Crim 1127 at paragraphs 4-9;

The Respondent has, even on his evidence, failed to properly account to HMRC in relation to his or his companies’ tax responsibilities in circumstances which would suggest fraudulent conduct.

As to the first factor:

the Agency applied for permission to rely on the Respondent’s spent convictions under section 7 of the Rehabilitation of Offenders Act 1974. It is debateable whether an application of this sort is necessary since section 4(1) of the Rehabilitation of Offenders Act 1974 does not apply to proceedings pursuant to a notice under section 317(2) of the POCA. The Agency submitted that these are such proceedings since they relate to tax debts which arise out of assessments issued by the Agency following the serving of a notice under section 317(2) and therefore sought to adduce evidence of the spent convictions at the hearing. In written submissions they develop at length and in detail the statutory route that they say entitled them to adduce these convictions.

the Respondent mounts an argument under Article 6 of the ECHR which is developed over six pages of its written submissions of 18^th November.

However, neither party puts this argument to the centre of its case. In its submissions dated 15^th November the Agency says [page 3 paragraph 6] “the Respondent’s spent convictions whilst relevant are not likely to be a significant factor in the exercise of the Court’s judgment and discretion” and in the Respondent’s submissions dated 18^th November [page 12 paragraph 7.15] he says that one way of avoiding the complex arguments mounted on both sides regarding the use of these spent convictions is for “the Court to exercise its discretion not to adduce the material”.

I have concluded thus:

Firstly, there is abundant evidence before me as to a risk of dissipation. This application concerns physical cash, originally seized in very unusual circumstances when the Respondent has, even on his evidence, failed to properly account to HMRC in relation to his or his companies’ tax responsibilities in circumstances which I accept would suggest fraudulent conduct.

Secondly, I see no need to look to the spent convictions to determine this or any other issue in this case. Whilst not deciding whether they are strictly relevant in law, I discount them entirely for the purpose of my decision in this case. Therefore I find it unnecessary to determine the interesting and potentially far reaching arguments advanced.

It follows that the third issue is determined in favour of the Agency.

I will make the Order in accordance with the Draft that appears at 2/3.

I invite the parties to draw up an agreed order for approval taking account of the potential discussions intimated by Mr Broatch and Mr Yates at the end of the Oral hearing.

I will of course be pleased to receive any further submissions from the parties as to

Consequential orders [if any];

Costs.