Dirty money?

Your client is a first time offender. He pleads guilty to acting as a courier in the supply of cannabis on one occasion. He would have earned £200 for this. When sentenced, he is served with a statement of information under the Proceeds of Crime Act 2002. The statement means nothing to your client and not a lot to you, but you can at least tell him that it alleges that he has made £200,000 from crime over the previous six years. What do you do? To whom do you turn for help? This article will, I hope, help answer these questions.

Punishment or reparation?

Lesley Thomson wrote in Confiscation (W Green, Edinburgh, 2000): “While symptoms of fear and boredom seem to affect non-accountants when first faced with accounting problems, there are no esoteric concepts involved in the assessment of drug trafficking proceeds and, providing the logic underlying the format of the computation is understood, the rest is not difficult”.

Under the Proceeds of Crime Act 2002 the concept of criminal lifestyle was introduced so that convictions for certain offences, mainly those itemised in sched 4 to the Act, trigger the confiscation process. No longer does confiscation rarely affect anyone other than convicted drug traffickers; its ambit is already wide and, in time, is likely to follow offences currently outside the scope of the legislation. The 2002 Act also introduced civil recovery to sweep up in those instances where no conviction has taken place.

The origin of current confiscation law was the report of the committee chaired by Derek Hodgson. In 1984 this recommended that legislation should “restore the status quo before the offence”, i.e. put the criminal in the position he would have been in if there had been no crime. This reparative principle was reiterated by Peter Alldridge, reader in law at Cardiff University, who stated: “the principle against allowing people to profit from crime... can never justify the seizure of sums exceeding profits” (Money Laundering Law (Hart Publishing, Oxford, 2003)). However, confiscation legislation has adopted a punitive, not reparative, approach and the quantum of the punishment has been the amount of the direct costs and overheads of the crime. The justification for this is that no deduction is allowed for the costs of carrying out a crime, for example the cost of illegal drugs, or blank CDs for counterfeiting.

The Scottish statement of information

In Scotland, as in England & Wales, the offender receives a statement of information on conviction. The contents of the respective statements differ so much north and south of the border that they scarcely deserve the same name.

In Scotland, the statement of information has the following features:

• a brief narrative introduction (largely an expanded description of the financial schedules);

• seven main financial schedules (“schedule 8”, if present, is the petition and interlocutor);

• many subsidiary schedules to support the main ones;

•     a format that has not varied since 1995 (HMA v McLean 1993 SCCR 917 refers to 13 schedules, but the overall approach appears to have been the same then as now).

Schedule 1 purports to summarise the benefit from criminal conduct (the “recoverable amount”) over the six years to the date of arrest. It does this in three stages:

• stage 1 measures the respondent’s household’s increase in assets/wealth (W);

• stage 2 measures total expenditure (E) met from bank accounts and cash;

• stage 3 deducts from the total of stages 1 and 2 the household’s legitimate income (I).

The remainder is the benefit from crime (C).

The logic is that legitimate income (I) + crime (C) = expenditure (E) + wealth increases (W). Therefore if expenditure increases, but legitimate income and wealth stay the same, the reason for the increase must be crime.

Schedule 2 attempts to measure changes in wealth by listing individual assets and liabilities at the end of each of the seven years prior to arrest. In accounting language it shows seven years’ balance sheets on one page. The changes, between one year and the next, are used in schedule 1.

The next three schedules are devoted to measuring expenditure.

Schedule 3 summarises bank withdrawals from each account for each of the six years, net of any funds transferred between accounts.

Schedule 4 lists specific items of expenditure paid for from unknown sources, for example cash used to reimburse credit cards or to pay for holidays.

Schedule 5 calculates notional household expenditure from government statistics, relative to family size, composition, and known legitimate income levels. This is a controversial, and often inappropriate, use of statistics.

Schedule 6 lists known legitimate household income.

Schedule 7 lists the current values of the respondent’s assets, plus any tainted gifts, but after deducting secured liabilities, all of which are potentially available to the Crown in the event of its success in confiscation proceedings.

However, any confiscation order will be for the lower of the “recoverable amount” and this “available amount”.

If the available amount is the lower of the two figures, but further assets are subsequently found to have existed, the confiscation order can be increased.

The statement in England & Wales

Although I am not instructed in cases south of the border, as a member of the forensic accounting network NIFA I have the opportunity to share information and compare approaches. I base my comments on one English statement of information. This may be atypical in some minor respects, but I have consulted an English forensic accountant to ensure that the principles are those adopted generally by the Crown Prosecution Service (CPS).

The CPS statement of information ran to 19 pages of detailed narrative, into which two tables were embedded. One table was that of benefit from criminal conduct, and the second, not surprisingly, was that of the available amount. Much background to the proceedings was given in the narrative, such that the reader was left in no doubt why the CPS had concluded that certain assets and some expenditure had been funded, at least in part, by crime. The statement contained sections that followed the headings in the Act itself, for example “Property transferred to the defendant after the relevant date”, “Property held at any time after the date of conviction”, and “Expenditure incurred after the relevant date”. In complete contrast to the Scottish equivalent there were no schedules, and no assumption that the defendant had cash expenditure hidden from view that somehow matched UK Government household expenditure statistics. Unlike the Scottish statement it provided details of bank lodgments from unknown sources as part of “Property transferred to the defendant after the relevant date”.

The CPS approach is more asset-, or property-based than in Scotland: if an asset was not acquired entirely from legitimate sources, the whole of its current market value is the benefit from crime.

I am told by the same English forensic accountant that this is the textbook approach, and that a more pragmatic approach is likely to be adopted in practice. In particular, the contribution of a mortgage to the acquisition of a property would be accounted for. Nevertheless the statement justified its “textbook” stance thus: “If any part of any payment used to fund the purchase, any element of any subsequent mortgage payment, or any capital sum repayment was made – using unexplained monies, the court must apply the statutory assumptions in respect of the whole value of the benefit obtained, namely the value of the house (the rationale being that the acquisition/retention of the property could not have occurred/been enabled without the use of funds derived from criminal conduct)”.

Practical differences

If the respondent has invested his benefit from crime such that he has enjoyed capital growth, he would be liable to pay more under an English confiscation order than a Scottish one. I illustrate this by two examples.

The first is the Court of Appeal decision in R v Mouldon [2004] EWCA Crim 2715. Although this was an appeal under the confiscation provisions of the Drug Trafficking Act 1994, the judgment interprets wording that was carried forward into the 2002 Act. In para 27, the judge found that the benefit from crime was not an initial investment of £40,000 derived from crime, but the £400,000 profit that the investment ultimately realised.

The second example refers to a better known, if rather older, crime. The wife of one of the notorious “Great Train Robbers” was interviewed for a television programme broadcast this year. In her interview she stated that she had bought a house with some of the money from the robbery, which took place in 1963. The house cost £6,500. In 1976 she sold it for £185,000. Had this happened today and the gain been made over only six years, the CPS would seek to confiscate the entire gain (£185,000), while Crown Office in Scotland would content itself with £6,500.

Not all aspects of the English approach are more severe than in Scotland. In England, a respondent who has not bothered to use banks very much, except perhaps when robbing them, would not have to convince an English court that his cash expenditure on weekly shopping differed from that of the man on the Clapham omnibus. There is no equivalent of schedule 5 in England.

Finally, harking back to days before any Proceeds of Crime Act legislation had been enacted, Bernard Levin wrote the following piece in the Times on 15 October 1990: “All estimates of booty mentioned in courts trying cases of alleged drugs trafficking, whatever the context, should be divided by five if any serious approximation is to be had. All sums expressed as street value should be divided by nine.”

Nothing has changed.

Forensic Accountants and NIFA

There is no current qualification called “forensic accountant” in the UK; it is simply a specialist area within accounting, writes David Adamson. At the moment there is some debate whether accountants without professional qualifications should be able to use the term “accountant”. Forensic accountants have the same dilemma. There are many wearing stetson hats and riding horses called Trigger who call themselves forensic accountants. As the Scottish Legal Aid Board may not be able to recognise the genuine article, real experts have had to take steps to protect their livelihoods.

It cannot be in your clients’ interests to have to rely on “experts” whose work is governed by no recognised forensic standards, or for solicitors to run the risk of giving poor advice to clients. Accountants, like solicitors, have areas of particular knowledge. The instructing solicitor should therefore ensure that the forensic accountant is either a member of a forensic accounting network and has expertise in the required field, or works within a firm large enough to have a forensic accounting department.

The main British network is the Network of Independent Forensic Accountants (“NIFA”), founded in 1999. Its aims are:

• to bring together small and medium-sized firms within this specialist field;    
• to standardise and improve their work; and    
• to share their knowledge and expertise.

Members of NIFA meet at least three times a year, must all join either the Expert Witness Institute or the Academy of Experts, are subject to annual external file reviews, and must follow NIFA’s regulations and standards, including formats of reports. Currently NIFA consists of 18 accredited forensic accounting firms.

Areas of expertise within NIFA include:

• confiscation proceedings – what is the real benefit from crime, and what does the statement of information actually tell us?
• loss of earnings (and pension) in personal injury cases;
• partnership disputes, particularly over the value of goodwill when there is no partnership agreement;
• share valuation (a difficult area when shares are rarely traded);
• fraud, theft and embezzlement investigations, involving VAT, benefits, identity, direct tax, or missing business or charity funds;
• matrimonial disputes and divorce proceedings;
• insurance claims over loss of profits;
• professional negligence;
• commercial disputes.

All are members of ICAEW, ICAS or ICAI, and keep up to date with non-forensic accounting practice.

Information on NIFA is available through its website www.NIFA.co.uk .

Initially the forensic accountant will provide a detailed and realistic quote, estimating his time and quoting his charge-out rates for different parts of the work, his total fee, outlays and VAT. If his quote is accepted, he will issue an engagement letter that details his responsibilities, then take instructions from the solicitor, examine relevant statements and documentation, often meet with the client, and finally prepare a structured, understandable and detailed report, supported by financial appendices.

His involvement may end there, or be followed by meetings intended to elucidate matters and narrow the matters in dispute, all with a view to settling the case out of court. However, he must ultimately be able to justify all his conclusions to the court. In confiscation cases, his aims should be to ensure that:

• the benefit from criminal conduct is measured as accurately as possible;

• the report and appendices fairly represent the respondent’s position in the confiscation proceedings in instances where this position is clear and credible (where unclear or not credible, it should state this);

• the respondent’s legal representatives understand the strengths and weaknesses of their client’s position and are able to proceed from a fully informed standpoint; and

• the work is carried out in as efficient a manner as possible.

Use an expert witness when you recognise you are faced with problems beyond the limit of your own expertise; employ forensic accountants to deal with financial matters that are a wee bit beyond your ken.