Mark Jenner & Co Limited – Forensic Accounting Services

Use of an expert witness in civil litigation

A long raging argument over proportionality of expert witness costs has resulted in a fundamental review of the rules and procedures governing the costs of civil litigation. Lord Justice Jackson was appointed by the Master of Rolls in 2008 to carry out this review culminating in his 555 page report on 14 January 2010. This contained just two proposals of interest to expert witnesses

One change proposed is to alter Civil Procedure Rule 35 so that any party wanting to bring an expert witness to the matter should provide to the court an estimate of the cost of doing so.

The second change is a proposal to introduce the Australian practice of concurrent expert evidence known Down Under as “hot tubbing”

With hot tubbing, two expert accounting witnesses for example would be sworn in at the same time and would attend a discussion chaired by the Judge. The agenda would be fixed by a joint statement from the two experts from an earlier meeting of experts held under CPR 35.12 which would record the matters upon which the experts still disagreed. The discussion could be attended by counsel from either party who can ask questions as would the Judge who would steer the meeting.

Another system of expert evidence management is being currently proposed by the Law Commission whereby the evidence is tested pre-trial in order not to waste the time of a full court.

The hot tubbing should allow the evidence to be explored in advance of any full blown hearing but its success will be down to the skills of the Judge – running the risk that the latter may well secretly favour one party or another. However, it is unlikely that the hot tubbing will save any money! By the time the experts are ready to come to the discussion “in the tub” they will have expended all their time and effort in preparing their reports. Although there may be many ways in which expert evidence can be better used to reduce the cost of litigation, the Jackson report does not address them.

Ways to reduce the costs of litigation (relevant to expert accounting witnesses)

These methods are applicable to an expert witness or a forensic accountant operating under civil procedure rules as well as criminal procedure rules and relate to private funded experts and those paid by the Legal Services Commission:

• All reports written under civil or criminal procedure rules are done so as if they were to be placed before the court – irrespective of whether this happens or not. Costs would be saved by the introduction of advisory statements that could assist understanding.
• Staged instructions would allow for just the required amount of input to be obtained from the experts up and until a matter perhaps settles, without the need for a full report and a court hearing.
• If experts were involved earlier there is much opportunity for saving, as opposed to expensive and rushed last minute instructions. Expert work can avoid unnecessary avenues of investigation.
• Wasted court dates are expensive and could be avoided by proper court funding and management.
• By choosing the “cheapest” forensic accountant (a favorite ploy of the Legal Services Commission) very rarely is best value obtained.
• Expert instructions are often vague leaving the expert to decide what should be done. Sometimes this can produce valuable input into a case but more often leads to inefficient and uninformed work.
• Late payments of experts has been considered as one of the major forces inflating experts’ fees – it is not helpful and leads to an aggressive stance on occasion by the expert witness. It is not acceptable for public funders in particular (LSC) to withhold funds to ensure their budget spending patterns are maintained.

(This newsletter is circulated in hard copy format around solicitors and baristers throughout the UK)

Welcome to the second edition of “Fraud Briefing” this year.  Following positive feedback gratefully received from many of you, I am now planning to publish this newsletter every two or three months. Given the vagrancies of the postal system and a recent flurry of new cases I have decided to send this one out in good time and apologise if this festive edition reaches you before the season begins.

New cases picked up recently include old favourites of criminal defence frauds, money laundering indictments and Proceeds of Crime confiscations, but I was glad to get the opportunity to work on another Ponzi based scam. This time my interesting task is to look at the professional involvement of an accountant providing services to the investment fraudsters. I also seem to be receiving a few enquiries with an international flavour, possibly because I have put in more commitment to my Internet marketing through technical article writing?

Insolvency cases – when will the floodgates open?

One recent approach from an individual residing in the Far East has now turned into an investigation into a “pre-pack” administration in the UK. Pre-packs have been the subject of much criticism, being a process with little regulation and making it far too easy to establish a “phoenix” company when businesses fall on hard times. I understand that such has been the public complaint that the Insolvency Service carried out a review of the 572 pre-packs that took place in the first six months of 2009. It is astonishing to learn that 35% of these did not comply with government legislation and that 17 were deemed serious enough to be referred for full investigation.

My source in the Insolvency Service tells me that  the typical problems being seen are when a company diverts its trade and debtors elsewhere in order to demonstrate insolvency. Then the administrator is astonished to find that the company that he sold the business assets to is suddenly being managed by the same directors as before.

It is still asset stripping…the diversion of trade prior to a pre-pack seems to continue the theme that I discussed in my previous newsletter. Is there no end to the methods devised by the fraudsters for obtaining value from a business and then leaving the creditors to pick up the pieces?

The future of criminal defence under threat?

I don’t want to be alarmist or jump the gun, but the intention of the Legal Services Commission to reduce expert fees in criminal defence cases by 20% has given me a number of sleepless nights over the past two months.  I have always prided myself on managing a broad portfolio of fraud related assignments, from investigating fraud, asset recovery and assisting the regulators to providing expert accounting witness services to the defence team in criminal fraud and proceeds of crime cases.

In most areas of my work each new assignment brings different issues and varied circumstances in which fraud has occurred.  However in criminal defence work a pattern really does emerge and “practice” definitely does make perfect.  Having worked as an expert in criminal defence matters for many years now I like to think that my approach has become efficient and most certainly cost effective as far as LSC funding is concerned.  It does seem rather a shame that they are now threatening to make good on their proposals originally aired in a consultation five years ago and currently being discussed again – that defence experts are paid at rates commensurate with  prosecution costs or more aptly…public sector pay scales.  This is a ridiculous hypothesis and a couple of objections (I know there are many more) spring to mind:

• The Government fraud regulators, prosecutors and the LSC have all seen fit to waste astonishing sums of money on pursuing certain headline causes when the political will has been there and then complain that they do not have enough to manage their day to day business – think of the £15 million Rover investigation, £60 million for the London Underground fiasco…; and
• The rates they are proposing are more likely to be in line with public sector remuneration levels, yet we do not have a guaranteed pension, secure job and flexible hours that might make the low rates more bearable.

I am sure we will all muddle through.  It may be that the poorer criminals will not have the access to justice that they have enjoyed in the past.  It may be that sophisticated fraudsters will be able to fund their high quality defence and the less successful criminals take what they are given. 

What will the New Year hold?

We wait to see what will happen with expert funding as we do with all the other areas of public sector funding cuts.  In the meantime it has to be business as usual.  I believe that I am in a position to continue to give personal and efficient attention to criminal defence cases, small and large, with an experienced team of criminal defence forensic accountants behind me.  I will also be looking to that area of expertise that gives me much satisfaction – recovering assets in insolvencies.  This I feel will become  hot topic soon as I do get the feeling that there is a huge volume of businesses teetering on the brink – despite the ever hopeful claims of being out of the depression/recession. 

Corporate asset stripping will continue to keep me occupied it seems, and as the world shrinks and the Internet grows I am alert to the possibility that more and more of my work will involve telephone calls in the middle of the night from different time zones.  Fortunately there is less likelihood of foreign travel now given the ease with which we can communicate – but I am having to brush up on my “KYC” due diligence procedures!

I wish you a Merry Christmas and a Happy New Year.

Mark Jenner

Confiscation Proceedings and POCA indictments within fraud cases impact a large proportion of the work carried out at Mark Jenner & Co. We see case after case involving anything from a few £1000 being stolen from the DWP to confiscations following major organised attempts to defraud government agencies of £millions.  However, in all cases the initial amount of benefit and hopeful level of realisable assets figure usually bear no relation to the severity of the crime committed, and in most cases after lengthy and expensive proceedings the Crown accepts much more modest terms…

There is no doubt of the commitment of the present Conservative and previous Labour Governments to the Proceeds of Crime Act 2002 and its intended use to cripple organised and career criminals. Criminal lifestyle (no obvious income) cannot always be linked easily to a specific offence – however the recent legislation moves the burden of proving innocence firmly over to the criminals. It has been applied in the field now for a number of years and is becoming a routine process in many cases.

Sometime the process is so routine that prosecutors do not bother to prepare a comprehensive Section 16 Statement, using the freedom they have to make certain assumptions to the extreme! However, this does often lead to a robust defence that can result in more lenient orders for sums being confiscated.

The Section 16 Statements are statements of information that provide the reasons, but not necessarily all the evidence, for applying criminal lifestyle assumptions to the source of a defendant’s assets. The Statement will set out the level of criminal benefit based both on the specific crimes that have been committed and also on the assumptions that other activities are also criminal (i.e. the defendant has a criminal lifestyle). The Statement may also indicate the assets that the defendant owns to satisfy any confiscation order and even give an indication, again not necessarily with evidence, of any assets thought to be hidden away.

With such a broad remit for indicating what is benefit and what may be available as realisable assets to satisfy the order it is clear that the prosecutors are simply setting out some of the information they have in relation to the defendant. This is on the basis that they are hopefully covering the level of the actual criminal activity and challenging the defendant to explain everything else. In effect they are often seeking to do just enough to ensure that the defendant loses all he currently owns.

This approach does happen in practice. Unfortunately, although it may deliver draconian but deserved justice for some, it creates a somewhat unfair situation for some other defendants. For example take the case where a defendant has been convicted of trafficking drugs, has not kept details of any financial transactions and in all likelihood has not paid any tax on any legitimate work he has been undertaking as a cover for his drug dealing. If only one or two of the defendant’s bank accounts are analyzed and demonstrate adequate transactions to ensure the ensuing confiscation order is large enough, then the defendant will lose everything and no doubt the prosecution (and indeed the rest of us as well) will accept that justice has been served.

However, compare the last case to another, where a businessman has been caught defrauding his employer by substantially inflating his corporate expense account for a number of months running, by several £1000s. He is caught, convicted and must serve a prison sentence as punishment for theft. Of course he will also have to pay back the money through subsequent confiscation proceedings. If he is technically deemed to have a criminal lifestyle because he has stolen more than £5,000 over a six month period, the prosecutor will have the opportunity to throw the book at him, preparing a Section 16 Statement that will seek recovery of not only the money that he stole, but everything he owns and has ever transacted – going back 6 years from the time of arrest or charge. When all the receipts into the bank accounts over 6 years are totted up, this “benefit from general criminal conduct” can reach huge sums. The scale of such an assumed level of benefit, if awarded against the defendant as a confiscation order, can never be paid back. The unfortunate defendant would have to serve a default sentence having more years added to his original penalty.

Of course it is possible to defend such a situation. The defendant’s legal team would realise that whereas it would be necessary to repay the level of money stolen, it would be somewhat unfair to have to repay income earned legitimately over recent years. This is what an uncontested confiscation order would involve in such a case. Therefore, the defence must show to a civil standard of proof that his income (other than the actual proceeds of crime) was from legitimate sources.

This is where the defence forensic accountant would be called in. He will examine the Section 16 Statement together with all the defendant’s financial evidence (such as bank statements, business records etc) and demonstrate the legitimate nature of the income. This usually means that he must go further than the prosecutor because he will need to undertake a comprehensive review of everything – it is up to the defence to demonstrate the legitimacy of income or assets. To do this may mean examining accounts that the prosecutor has not bothered with, to show the source of all transfers for example.

The big problem arises because the public funding of such cases is under threat. The public sector is having its budgets cut drastically by the Government in an attempt to redress the fiscal measures put in place to counter the pressure on banks over the past year or so. As an example the Legal Services Commission is losing a big part of its annual operating budget. It is reducing its spend on expert witnesses, including the forensic accountants, by a disproportionately large amount – 20% was initially swiped of the annual bill with promises of even more cuts. This is around £20 million less being spent on defence experts in the coming year.

The mechanics for doing this were proposed in a consultation paper regarding levels of experts’ fees. It is proposed that a forensic accountant would be paid between £47 to £100 per hour with the upper rate unlikely to be ever paid. For those that think that £100 per hour is a lot, remember this is the total cost – out of which must be paid pension, sickness, disbursements and the high cost of running a business. To put the rate into comparison, my work for my Masters Degree in Fraud Management showed that the average cost of a forensic accountant and of a police officer or member of the Court (clerk/manager etc) or of the Criminal Prosecution Service were broadly comparable. In fact the real cost of putting an officer on the beat is a lot more than £100 per hour, let alone the cost of a detective in an economic crime unit.

If a well trained and experienced forensic accountant were to be paid £100 (assuming he or she can achieve this top rate) then they would be unable to remain in even a small firm of accountants as they would be unable to earn enough to fund their firm’s overheads. There is evidence that the Legal Services Commission sees the solution as forcing the forensic accounting services into the hands of retired practitioners and “one man bands” who can survive (albeit barely) on the rates that are proposed. In a previous consultation paper several years ago this very outcome was mooted as the way forward. At that time all that came out of the consultation perhaps was more determination by the public sector funding body to restrict and delay payments for experts.

The most recent news is that from 3 October 2011 a new payment framework for expert witnesses is to be implemented by the LSC. A London based firm may charge between £50 – £144 for its forensic staff:

£50 – general staff

£80 – accountant

£108 – manager

£144 – partner

The regional firms are not much different – being allowed rates of between £50 and £135.  At the end of the day, the payments will depend on the competitive tendering nature of the assignation of cases – but composite average rates of £100 seem to be what the LSC are expecting to pay experts on all but the biggest of cases.

Mark Jenner & Co provides specialist forensic accounting services to criminal defence lawyers throughout the UK.