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Proceeds of Crime Act 2002 - The impact of Bowman v Fels

Philip Way considers the impact of Bowman v Fels on the family lawyer

PROCEEDS OF CRIME ACT 2002 – THE IMPACT OF BOWMAN V FELS

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Philip Way, Partner, Addleshaw Goddard

On 8 March 2005, the Court of Appeal handed down its decision in the matter of Bowman v Fels [2005] EWCA 226; (2005) The Times, 14 March: Brooke, Mance and Dyson LJJ). The decision was eagerly awaited by family practitioners who have been struggling to comprehend and observe the requirements of the Proceeds of Crime Act 2002 (the Act) since it came into force on 24 February 2003.

The decision overrules the President of the Family Division's decision in P v P (Ancillary Relief: Proceeds of Crime) [2004] Fam 1.

The facts and the judgment at first instance

Ms Bowman and Mr Fels were estranged cohabitees. Ms Bowman claimed a beneficial interest in a property registered in Mr Fels' sole name arising out of a constructive trust. In the course of the litigation that arose from the breakdown of Ms Bowman and Mr Fels' relationship, the solicitors acting for Ms Bowman made an authorised disclosure to NCIS (in accordance with what they understood to be their obligations under the Act) of their suspicion that Mr Fels had included the cost of work he had carried out at the property in his business accounts and VAT returns, even though these works were unconnected with his business. A consequence of the disclosure was for Ms Bowman's advisers to seek a delay in the trial because it was believed that the appropriate consent required from NCIS to permit them to continue with the litigation would not be forthcoming before the trial. Ms Bowman's solicitors did not feel that it was appropriate for them to inform Mr Fels' solicitors of the reasons for seeking an adjournment. On an interlocutory application, His Honour Judge Cowell found that Ms Bowman's solicitors should explain to Mr Fels' solicitors why they were seeking an adjournment and that their refusal to continue preparing for trial whilst awaiting consent from NCIS was inappropriate.

Ms Bowman's solicitors appealed the decision because of the criticism of their interpretation of the Act. The Law Society, the Bar Council and NCIS intervened in the appeal.

The decision in the Court of Appeal

By the time the matter reached the Court of Appeal, the issues between Ms Bowman and Mr Fels had been resolved by consent. The Court of Appeal was, however, anxious to give a decision on the issues arising from the interpretation of the Act because it was aware that the orderly conduct of litigation was being affected by the Act and that the matter was one of public importance as well as for the legal profession.

The Court of Appeal reached conclusions on what the judgment terms the central issue and the narrow issue.

The central issue

The central issue is said to be that:

"the proper interpretation of s328 ["a person commits an offence if he enters into or becomes concerned in an arrangement which he knows or suspects facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person"] is that it is not intended to cover or affect the ordinary conduct of litigation by legal professionals." [paragraph 83 of the judgment]

The narrow issue

Having found that legal professionals will not commit the offence of entering into or becoming concerned in a prohibited arrangement when engaged in the ordinary conduct of litigation, their Lordships went on to consider what they termed the narrow issue:

"If we were wrong in our conclusion on the central issue, the question would remain whether on its true construction s328 has the effect of overriding legal professional privilege and the terms on which lawyers are permitted to have access to documents disclosed in the litigation process."

Their Lordships found that much stronger language than that which is used by s328 would have been required if s328 were to override legal professional privilege and that s328 does not, therefore, override legal professional privilege (paragraph 87 of the judgment). Further, their Lordships addressed the position that, in so far as a lawyer gains information from documents disclosed by another party to adversarial litigation and not read in open court, disclosure of those documents to a third party without the express or implied permission of the court or express, clear, Parliamentary sanction would be a contempt of court. Their Lordships found that s328 does not override the lawyer's implied duty to the court. Accordingly, if knowledge or suspicion of the proceeds of crime comes to a lawyer's attention from the other party to litigation, no disclosure to NCIS is required because s328 does not override the implied duty of the lawyer to the court.

Consensual settlement

Having found that s328 is not intended to cover or affect the ordinary conduct of litigation by legal professionals, their Lordships addressed the issue of consensual settlement. Paragraph 100 of the judgment addresses the point and finds that the settlement of litigation is to be encouraged and is not to be caught by s328 as "an arrangement."

The judgment does not deal expressly with circumstances in which assets are divided between estranged couples without litigation, perhaps by way of a separation deed. A forceful view has been expressed by Michel Kallipetis QC and Philip Bartle QC that the exemption from s328 applies to settlements concluded by mediation. By extension, it would seem logical for the act of negotiating a separation deed to fall outside the ambit of s328. Regrettably, the decision does not put the matter beyond doubt. For the time being, it must, therefore, be for the practitioner to decide in circumstances outside of litigation whether to make an authorised disclosure thus potentially breaching client confidentiality or not making such a disclosure and potentially facing prosecution pursuant to s328. The Law Society has published guidance about Bowman v Fels which is available on the Law Society website. At paragraph 2.4 of that guidance, the Law Society expresses the view that the exclusion must apply to Alternative Dispute Resolution. At paragraph 2.6 of the same guidance, the Law Society expresses the view that lawyers advising in "out of court settlements" are not involved in s328 arrangements and do not therefore need to make authorised disclosures.

Further issues not dealt with by the decision

The following are the most significant issues identified thus far which are not specifically dealt with by the decision:

Transactions pursuant to the conclusion of litigation

The decision is clear that lawyers should not make authorised disclosures when engaged in ordinary litigation including the consensual conclusion of such litigation "to final disposal by judgment". The decision does not, however, deal with the transactions which arise from the conclusion of such litigation. The position will frequently arise where a family lawyer knows or suspects that a property which is to be transferred from one spouse to another at the conclusion of ancillary relief proceedings has been purchased at least in part with the proceeds of crime. The decision does not expressly say that the act of transferring such a property at the conclusion of ordinary litigation is exempt from the operation of s328 in the way that the litigation itself has been found to be.

The Law Society's view, expressed at paragraph 2.3 of its guidance is that the exemption from s328 extends to dealing with the final division of assets in accordance with a judgement or settlement including the actual handling of the assets which are "criminal property." The guidance does, however, go on to say at paragraph 2.8 that whilst the litigation and related processes may fall outside of the ambit of the offences, the property itself remains "criminal property" for the purposes of section 340(3) of the Act. Accordingly, the Law Society continues, any future dealings with property after the terms of any judgment or settlement have been carried out will require a re-examination of whether a report to NCIS is required.

The position of the forensic accountant

It appears that the ICAEW are taking the view that forensic accountants, in line with their instructing solicitors, no longer need to make authorised disclosures to principal offences. The Law Society's longstanding view remains that there is no duty on forensic accountants to make protected disclosures pursuant to s330 because they are covered by the legal professional privilege defence. There are those who disagree and the point is not put beyond doubt by current ICAEW guidance.

Legal advice outside contemplated litigation

In view of the robust finding that the actions of parties who seek to pursue litigation fall outside s328, it would seem highly unlikely that those who seek advice in order to structure their affairs through a pre-marital contract would be caught by s328. The possibility of a protected disclosure would be most unlikely to arise by operation of the statutory legal professional privilege defence.

Retainer letters

The paragraph dealing with the Act previously recommended by resolution to be inserted in retainer letters should be deleted.