Mark Jenner & Co Limited – Forensic Accounting Services

As I regularly see a dozen or more new confiscation proceedings every year as a forensic accountant appointed on behalf of the criminal defence team, I can’t fail but to notice the lack of consistency with the Crown’s approach in dealing with a defendant’s home or investment properties.

When the Crown’s accredited investigator sees a property or two within the estate they immediately apply the assumptions available to them under the Proceeds of Crime Act 2002 which allows the said assets to be deemed criminal property – unless good reason can be shown that they are not.

Therefore, I will see a number of things within the Section 16 Statement of Information that attempt to bring the property into the benefit estimate.

• The full current market value of the property.
• The purchase price of the property.
• The value of any mortgage obtained when buying the property.
• Any further advances taken out against the value of the property.
• Rental income in respect of the investment.
• The sales proceeds of the property.
• On some occasions a spouse’s share is included, other times it is not.

All of these sums of money might be appropriate in certain cases. However, it is often the case that a simple current value for the property is used regardless of the circumstances. Even worse, several of these different methods for placing value on a property can be taken together thus providing a source of benefit strands for the Crown’s favourite tool in confiscations – double counting!  I have also seen a full “Zoopla” valuation used, using selling prices for similar properties in the street dating back to 2006 well before the property crash!

My first step when approaching a property is to compare its acquisition date to the relevant date, i.e. six years before proceedings were commenced against the defendant in the predicate matter.  If it was purchased outright before this time then the property has no bearing on the benefit calculations, though it may be treated as an available asset for realisation in due course.

If the property was purchased before the relevant date with a mortgage then this potentially complicates matters. Then I will consider two issues separately:

• I will calculate the equity owned at the relevant date as this must be kept out of the benefit.
• Then I will look at the increase in equity since the relevant date, and determine the proportion of this that has been funded using legitimate funds and the amount that may have been funded by the proceeds of crime.

Thus I will attempt to produce a value for the equity held in a property that could potentially have been funded by criminal activities.  It is often the case after the property crash in 2008 than many properties are in negative equity, or at least have lost value since a typical relevant date for current matters (presently around 2003 to 2005).  This can mean that there is little or no criminal property held by the defendant.

Another favourite approach by the Crown’s investigator is to accuse the defendant of obtaining a mortgage fraudulently.  Then they will often simply bring in the full market value of the property again as a result.  The basis for such an allegation, which will never be tested by a jury, is that the declared income on the mortgage application form has been inflated.  Unfortunately, this was industry practice leading up to the credit problems which commenced around 2008.

Notwithstanding the fact that usually any fraud was being committed by the mortgage broker and not the defendant, my approach to dealing with such a case would be to consider whether or not the mortgage represented a transfer of funds to the defendant.  Normally, a mortgage is advanced directly from the lender, via the solicitors to the seller. The buyer never holds the funds and given that the lender holds security over that part of the equity represented by the loan, will only ever receive the benefit of the equity relating to his deposit and any subsequent increase in value.

Therefore, I would consider a mortgage advance typically not to be a transfer of criminal property, and focus on the source of deposit and repayment funds, together with the value of any increase in equity since purchase (or the relevant date).

Every property case has been different in my experience, and cannot just be treated as current market value.  I have had properties purchased outright prior to the relevant date included as benefit, properties inherited with all taxes paid legitimately, and cases where the purchase price, subsequent sale price and the separate value of the loan have all been added into the benefit mix  – triple counting ! Therefore, any estimate of benefit that includes a property or two must be properly scrutinised before the inevitable negotiations between prosecution and defence counsel begins.

There has always been a significant use of tax legislation in the fight against serious and organised crime.  Al Capone was a raketeer, an extortionist and a murderer, yet was put behind bars for tax evasion.  Since the Proceeds of Crime Act 2002 this has become a common place theme and many criminals large and small who think they are in for an easy option by pleading to the seemingly lesser charges of tax fraud may be in for a a rude awakening when confiscation proceedings kick in.

So long as the tax authorities pursue a civil route with their investigations, a tax ”avoider” or “evader” may look forward to paying the tax and penalties but escape the wrath of the criminal courts.  Once the criminal route is taken all bets are off!

I was involved in a case a couple of years ago involving a Hawala banker being investigated by NCIS in association with HMRC – such collaborative investigations are commonplace especially these days.  NCIS were investigating a gang of suspected drug traffickers and HMRC were looking at the unpaid tax by those suspected of laundering the money.

This Hawala banker had 40 bank accounts through which some £40,000,000 of funds were transferred over a four year period. Yet his tax returns showed that he was earning next to nothing!  HMRC decided to calculate his likely profits by considering two different ways in which the Hawalador might be making a profit:

• The difference between income and expenditure – thus giving an overall profit or margin
• As a % of money taken in for onward transmission

Both are very valid ways of roughly estimating levels of profit – on their own - only HMRC decided to add the results of both methods together and claim double the tax was owed!

That was one big clanger – then my examination of their workings showed that even in their actual calculations they had made 70 different and material arithmetical errors.

HMRC originally suggested that £1,000,000 was owed in tax.  I said it was likely to be around £30,000 to £100,000, at least £30,000 of which had already been paid by the Hawalador (i.e. it was possible that nothing was owed).  HMRC promptly dropped the claim within the criminal proceedings.

The Hawalador pleaded guilty to money laundering on the basis that subsequent confiscation proceedings would be limited to the meagre assets that he currently owned.  NCIS accepted this and the defendant went to prison for a short while.

Meanwhile HMRC passed the files to another of their departments who promptly put in a claim for the top level figure I had calculated (£100,000) in the full knowledge that the defendant had already had all his available assets confiscated.  The only outcome that could be obtained would be a judgement for the debt resulting in bankruptcy.

Now the defendant had been jailed and had lost everything – a good thing too – in a proportionate outcome as an unwitting and unexcusable negligent participant in crime.  What purpose was served in bankrupting him after the fact is not easily answered and the overall cost to the public purse should have been considered.

Two main lessons can be taken from this case that I was involved in:

1. It pays to examine and investigate any tax assessment raised by HMRC if they are using estimated means

2. HMRC can be quite tennacious in pursuing a result – it may pay to argue with them but please ensure that you are polite, reasonable, timely and measured in all your responses!

The Labour government has been criticised widely for the huge raft of legislation it has introduced in its 12 or so years of reign. Much of it has been lengthy and often arguably unnecessary. The burden of regulation on any business attempting to obtain business loans and trying to struggle through the current down turn has increased and is significant.

However, there must be credit in the attempts being made to improve the anti-fraud and white collar crime framework within the UK. The Proceeds of Crime Act 2002 introduced what some say are draconian powers of confiscation for the authorities to use. Draconian they may be but that is fair enough when they are used against the ones they were designed for – the organised criminals with the obvious trappings of unearned income. There can be some criticism when the letter of the law is used to attempt to obtain large sums from petty criminals with default sentences when they can’t be paid.

One bit of legislation that makes you wonder who is actually writing these laws is the Fraud Act 2006. I know that many of the regulatory authorities that I work with are a bit dubious about this Act. Those police officers and prosecuting lawyers tell me that they were happy with the Theft Acts and the Common Law offence of conspiracy to defraud. The Fraud Act was meant to codify these and other areas - and it may be that using it will require a few more years of testing through the courts.

I did note in the Fraud Act that some Companies Act style amendments were contained within it, whereby the prohibition on directors loans, quasi loans, credit transactions and related transactions had been abolished and replaced by a requirement for shareholder approval. Breaches are no longer criminal offences and the de minimis level for needing shareholder approval has increased from £5,000 to £10,000.

My first impression is that this will lead to a huge increase of petty frauds in the £5 to £10,000 range.

New legislation, Fraud Reporting Centres and Strategic Fraud Authorities are fine and to be admired. However, it is no substitute for investment at the sharp end. We need stronger regional police economic crime units who all have access to fraud investigation and experienced forensic accounting resources. This is really where a public and private sector liaison would work, and was one of the ideas behind the various regional fraud fora that have been established around the UK.

If a person is defrauded he or she must present a clear cut case to the authorities. It is no good shouting “fraud” – it needs investigating and presenting clearly. Of course this is a hurdle that many victims fall at and the fraudster escapes to ply his trade again somewhere else. Those that do investigate, even employ their own forensic accountants to build a financial case to present to the authorities, can be equally at a disadvantage if they get the investigation wrong.

Say for instance a company decides to investigate a £9,000 director loan that is thought to be defalcation by the director. The director is not committing a crime under the Fraud Act - the matter will likely be civil. Therefore the police will not be interested and it will be hard to recover such unauthorised borrowing. There are still difficulties with more substantial “borrowings”. Say £50,000 is missing and this time it is fraud. The culprit is not presenting a defence of taking the money as a loan – he is simply denying the matter. The Defendant may argue that he was simply seeking tax relief by exploiting timing differences in respect of any payments received, and that he was planning to pay the money back next fiscal year!

Any accusations made during an investigation will not help, the director may simply leave citing constructive dismissal and the business may end up paying out as much and more than it had already lost in compensation awarded by an employment tribunal.

The point is that if the police are to enlist the help of the private sector in the fight against fraud, funded by the victims, then they should have sufficient resources employed to monitor and assist with the private sector enquiries. This will enable them to be carried out properly and in a way that will result in a successful prosecution for the authorities, civil asset recovery for the victims and/or justified and successful confiscation proceedings that will help to fund both the authorities and the out of pocket victim.

Organised criminals such as fraudsters, drug dealers and people traffickers all deal in large amounts of criminal proceeds. They need some way to manage this money, so they can spend it without the authorities seeing that it is proceeds of crime. They need to clean the money – to launder it. Money laundering is the biggest financial crime there is, because it encompasses all the other crimes.

The money laundering of criminal proceeds is not easy, as most countries have enacted severe legislation (some say draconian) in an attempt to stop the proceeds of crime benefiting the criminals. In the UK the Proceeds of Crime Act 2002 was the beginning of the big thrust against the organsised criminal in an attempt to hit him where it hurst most – in the pocket. The Act and associated Money Laundering Regulations have brought in a raft of measures that include the appointment of professionals such as lawyers and accountants to act as gatekeepers between their potentially criminal clients and the law enforcement agencies.

Now professionals have a legal obligation to firstly ensure that their clients are legitimate individuals or organisations and secondly to report any suspicions they may have, that proceeds of crime may be being transferred. This means that they have to do detailed checks on their clients before accepting work from them, to make sure they are who they say they are, and also to educate all staff to know what to do if they should come across a suspicious transaction that might need reporting to the authorities.

Previously the criminals would recruit professionals in order to give them a veneer of respectability. Lawyers would be asked to set up corporations that would be used to layer the criminal proceeds in different cities or even countries. Accountants would prepare accounts that absorbed proceeds of crime within legitimate accounts. Bankers had already been targeted by the authorities in the fight against money laundering and have similar obligations to fulfil.

Professional negligence is now a major crime. A lawyer or accountant found to be assisting in the laundering of money can face up to 14 years in jail and would no doubt face swinging asset confiscation proceedings as a matter of course. It is not possible to claim client confidentiallity either. Even a lawyer, who is normally able to claim legal priviledge in communications with criminal clients, cannot turn a blind eye from reporting money laundering of the proceeds of crime to the appropriate authorities.

The Proceeds of Crime Act 2002 is often used as the relevant legislation in cases of professional negligence. It is difficult for an accountant to say that he thought criminal funds were legitimate, when as a financial expert he ought to have known something was amiss. The Fraud Act 2006 could also be used, as dealing with client’s ilegitimate funds could easily fulfil its definitions of fraud:

The professional must seek to protect himself and his staff by taking all appropriate measures, appointing a Money Laundering Reporting Officer (MLRO), ensuring Know Your Client Checks (KYC) are undertaken per the Anti Money Laundering Regulations, educating all staff and ensuring that appropriate action is taken when suspicious activities are discovered (SAR). There is now no excuse for inadvertant mistakes.

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.

In the UK, the interpretation of the Proceeds of Crime Act 2002 when using asset confiscation as a weapon in the criminal regulators’ arsenal of sanctions will continue to develop and solidify over time.  However, in recent years it seems that the courts, lawyers and regulators alike struggle to understand the spirit of the law.  On one hand the prosecutors seem to be applying the “lifestyle” assumptions with complete abandon whereas the court, while certainly not ignoring the law, on occasions comes up with common sense judgements when enforcing what many commentators have labelled as “Draconian” legislation.

What is criminal benefit and how much might be realised during confiscation is commonly disputed and was a notable issue in the recent R – v – May appeal during 2008.  The judge had originally reduced an individual’s benefit by the amount of monies recovered elsewhere in a fraudulent matter.  It was subsequently ruled that he had erred in doing this as he had been confusing realisable assets with benefit.

What is clear after this decision is that the benefit obtained from money laundering for the purpose of the Proceeds of Crime framework is not the profit (or commission earned) of carrying out the crime but the sum of the criminal property dealt with.  This means that if you facilitate the laundering of a million pounds for a friend for a £10,000 fee, your benefit will be assessed at the level of one million pounds. Put simply, it is the amount of criminal proceeds flowing through your hands.

The quantum of recovery can therefore be much more than the cash earned by doing the crime!  This is the case if a person is deemed to have a criminal lifestyle.  Then it is not just the value of the particular criminal conduct that has taken place that becomes the benefit, but the value of all assets owned and monies transacted during the previous six years.  So in theory, if you fail to pay a few parking tickets you stand to lose your house, car and life savings.

It is up to a defendant to prove that all monies passing through his or her bank account do not represent the proceeds of criminal activity.  This means that all income must be verified.  This is easy for an average employee whose main income will be a salary through the PAYE system with perhaps an occasional injection of funds from an identifiable source such as parental gift or lottery win.  It is not so easy for the person who has lived as a wheeler and dealer, often paying little or no tax and certainly keeping only minimal accounting records.  Explaining cash receipts into a bank account can be difficult and the Prosecution will always assume these to be benefit.  Furthermore, when assessing realisable assets all payments out of a bank account will be deemed to be dispersal of criminal proceeds as “hidden assets” unless the purchase can be identified clearly.  Identifying these transactions, which are often simply innocent household outgoings, can be difficult without a properly documented paper trail.

The system penalises those that do not live a conventional lifestyle, dealing in cash and therefore very often not paying appropriate taxes. It is a lesson for those that do deal in cash but otherwise keep their legal obligations up to date – to keep good records!