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The Proceeds of Crime Act 2002 in Financial Remedy Proceedings Part 2.

In the second of a Two Part Article, Christian Jowett, Barrister, Temple Chambers, Cardiff and Newport, and Rhys Taylor, barrister, Thirty Park Place Chambers, Cardiff, offer insights for the family lawyer into the law and practice of confiscation proceedings and their impact on financial remedy proceedings.

Christian Jowett, Barrister, Temple Chambers, Cardiff and Newport, and Rhys Taylor, barrister, Thirty Park Place Chambers, Cardiff.

Part One of this article dealt with the basic concepts relevant to the making of a confiscation order. Part Two looks at the interface between confiscation orders and third parties in the matrimonial context.

The Matrimonial Context
In the matrimonial context, the ability of third parties to protect their proprietary interests depends upon the stage of proceedings:

1. making the order; or
2. enforcing the order by enforcement receivership.

1: Making the Confiscation Order
Third parties cannot be parties to proceedings for the making of a confiscation order. This initially appears unfair. Third parties may have proprietary interests, which they would want to protect. However, it must be remembered that at this stage, the third party's interests are in fact simply not affected. The fundamental point is the nature of the order: it is personal not proprietary. It obliges the defendant to pay a fixed sum. Consequently, it does not of itself affect third party interests. Such interests are, of course, relevant to the defendant's available amount. The defendant may assert that assets are not available to him because they are, in fact, the property of a third party. The third party may (or may not) give evidence; he or she may not even know of the confiscation proceedings. The court may, of course, find that these assets are part of the available amount and not subject to the third-party interest. However, this finding goes only to the amount the defendant has to pay. The third party's interest is not extinguished at this stage.

2: Enforcement Receivership
The position is different if an enforcement receiver is appointed at the enforcement stage. Here, third party proprietary interests in realisable property will be at risk, as the court will decide what property may be used to enforce the order. However, a third party may claim a beneficial interest in this property by way of constructive or resulting trust. Alternatively, in applications under the Matrimonial Causes Act 1973 ('MCA') the third party may seek to acquire an interest in this property via a property adjustment order.

An enforcement receiver may be appointed under s.50 PoCA. The court may confer upon the receiver various powers, including the power to take possession of the realisable property, and to realise it in such manner as the court may specify: s.51(2)(a) and (c) PoCA.

The distinction between the recoverable amount and realisable property is important here. The recoverable amount is the amount the defendant is required to pay under the confiscation order. Realisable property is any free property held by the defendant, or by the recipient of a tainted gift: s.83 PoCA. The enforcement receiver will deal with the realisable property: the free property held by the defendant, in order to obtain the recoverable amount.

Perhaps unsurprisingly, there is a tension in PoCA as to the exercise of the enforcement receiver's powers. The powers must be exercised with a view to allowing a person other than the defendant or a recipient of a tainted gift to retain or recover the value of any interest held by him: s.69(3)(a) PoCA However, they must be exercised without taking account of any obligation of the defendant or a recipient of a tainted gift, if the obligation conflicts with the object of satisfying any confiscation order that has been or may be made against the defendant: s.69(2)(c) PoCA.

Importantly, the third party has a right to be heard at this stage: In re Norris [2001] UKHL 34 at [16]. It is also not an abuse of process for a third party to seek to assert such an interest even if that third party has given evidence at the Crown Court and, as in Norris, been disbelieved: Norris [23-26].

How will those powers be exercised? How will the courts strike the balance?

Subsisting legal and beneficial interests.
The position is comparatively straightforward where issues of subsisting beneficial ownership arise.

H v CPS [2007] EWHC 1291 (Admin)
This case concerned the DTOA and MCA. In March 2002, the defendant husband and former wife separated. The former matrimonial home was sold. The former wife received £133,562 from the sale to purchase a new house for herself and their children to live in. The defendant husband had nothing to do with finding or choosing it. However, it was bought in their joint names, and with a joint mortgage, because the former wife could not otherwise have raised a sufficient mortgage.

In December 2003 the defendant husband was arrested for drug trafficking offences. A restraint order was made in October 2004. He was convicted in 2005, and confiscation proceedings took place which were compromised in respect of the new house on the basis that the defendant's equity was £45,000, and that the agreement could not bind the wife. The wife then sought a variation of the restraint order.

Holman J found that the former wife was the sole owner of the house. His Lordship found that, whilst the defendant husband had contributed to its purchase a portion of his share of the former matrimonial home, that contribution was by way of gift or payment to, and for the benefit of, the wife and/or children on the basis of a clean break. The Court therefore found that the defendant husband's beneficial interest was nil, so there was nothing upon which the confiscation order could 'bite'. This is a good example of ordinary property law principles being applied in respect of a confiscation order.

Gibson v Revenue and Customs Prosecution Office [2008] EWCA Civ 645
In May 1999, the defendant husband was convicted of drug trafficking, in respect of an offence committed between 01st October 1996 and 27th March 1998. A confiscation order was made in the sum of £5,430,671-00, although his benefit was in excess of £38 million.

The confiscation order figure included the equity in a property which was in the joint names of the defendant husband and former wife. They had bought it I 1990 and it was registered in their joint names.

Proceedings took place in the High Court to enforce the confiscation order. The former wife was joined to those proceedings, claiming that she was the beneficial owner of half of the equity in the matrimonial home. Applying the principles set out in Stack v Dowden [2007] UKHL 17, Mr James Goudie QC, sitting as a Deputy High Court Judge, found that the former wife was the beneficial owner of 50% of the equity.

However, at least from 1993, the defendant husband had proceeds of crime on a huge scale. Between 1993 and 1998, large cash sums were paid into accounts from which mortgage payments and payments in respect of endowments were made. Mr Goudie found that at least from 1993, tainted money was to be taken to have been used to fund the payments, and that the wife had guilty knowledge. Mr Goudie then found that, as a matter of public policy, the taint of which the wife had guilty knowledge should be taken into account against her.

The Court of Appeal disagreed. May LJ held that the wife's share was not realisable property, regardless of knowledge and taint:

21. There is thus, in my judgment, no identifiable power in the court, supported by a public policy which in general I acknowledge, to supplement presently existing statutory provisions to achieve what the prosecution want to achieve in violation of Mrs Gibson's rights under Article 1 of Protocol 1 of the European Convention on human Rights. Although, in the language in that Article, the result contended for might be in the public interest, it would not be subject to conditions provided for by the law. I decline to invent such conditions judicially.

Financial Remedy Applications
The position is clearly different if an application is to be made for a property adjustment order where the wife does not already own any legal or beneficial interest, or the application concerns the half share not legally and beneficially owned by her already. Here,

'when making a confiscation order, the Crown Court must disregard what a former wife may obtain in other proceedings over and above any interest which she holds at the time of the confiscation order is made. The mere right of the wife to apply for relief under MCA 1973 does not amount to "an interest" falling within the terms of section 69(3)(a) of POCA: see section 84(2)(f). At that stage, the Crown Court has no regard to, and makes no allowance for, any possible adverse consequences for a former spouse and her child when deciding the amount to be confiscated': Webber v Webber [2006] EWHC 2893 (Fam) per Sir Mark Potter P at [44] (obiter).

Under the DTOA, it had been held in respect of a property adjustment order that 'the right to apply, and the application itself, do not of themselves confer any property rights on the party making the application': HM Customs and Excise & ANR v MCA & ANR, A v A [2002] EWCA Civ 1039, [9] per Schiemann LJ.

Key principles
Several cases, under both the old legislation and PoCA, have addressed how the courts will deal with concurrent PoCA and MCA applications. The key case here is HM Customs and Excise & ANR v MCA & ANR, A v A [2002] EWCA Civ 1039 Schiemann J held that:

• Neither MCA nor PoCA takes priority over the other, and parity between the statutes prevents injustice [43];
• It is not axiomatic that enforcing a confiscation order is more in the public interest than making a property adjustment order [44]; and
• Both statutes confer a discretion, the exercise of which depends on the facts of the individual case [43].

How will the court exercise its discretion?
The court is therefore confronted with a balancing act. There are numerous decided cases, such as:

• HM Customs and Excise & ANR v MCA & ANR, A v A [2002] EWCA Civ 1039
• CPS v Richards & Richards [2006] EWCA Civ 849
• H v CPS [2007] EWHC 1291 (Admin)
• Stodgell v Stodgell [2009] EWCA Civ 243

However, exercises of discretion are essentially fact-specific. Nonetheless, several basic principles can be distilled from the above authorities. In exercising the discretion to make a property adjustment order, the following factors may be relevant (although not exhaustive):

• The Court should be careful to ensure that the applicant is genuinely innocent and the injustice real (A, [76-79], per Schiemann LJ);

• Whether the applicant had knowledge of the defendant's criminal activities (A, [36] [47-48], per Schiemann LJ);

• Whether the property was purchased with the proceeds of crime or is tainted (A, [36] [47-48], per Schiemann LJ);

• Whether the property was preserved by the defendant's criminal conduct (Stodgell, [10] per Hughes LJ):

• Where assets are tainted with the proceeds of crime and subject to confiscation, in most cases they should not ordinarily be distributed, as a matter of public justice and policy; but the court is not deprived of jurisdiction to make such distribution, and circumstances may exist where such order is justified (Richards, per Thorpe LJ [26]).

The leading financial remedy / ancillary relief cases in detail.
HM Customs and Excise & ANR v MCA & ANR, A v A
[2002] EWCA Civ 1039
This case concerned the DTOA and MCA. The former wife of the defendant sought a property adjustment order in respect of the entirety of the equity in the former matrimonial home, and two endowment policies. The former matrimonial home had been acquired in July 1989, and the endowment policies supported a subsequent re-mortgage. The defendant, by around November 1996, had become involved in drug trafficking. The divorce petition was filed on 03rd June 1997 and decree nisi granted on 20th June 1997. Form E in support of the application for ancillary relief was filed on 03rd December 1998. Meanwhile, on 09th July 1998 the defendant was convicted in respect of the importation of cannabis in August 1997. On 04th December 1998, a confiscation order was made, ordering him to pay £47,868-22. A receiver was appointed, who subsequently applied for the former matrimonial home and the two endowment policies to be included in the realisable property. The MCA and DTOA proceedings were joined.

It was accepted that no part of the equity in either the house or the policies was acquired with the proceeds of crime, and that the couple had separated before the husband began his drug trafficking. There was a finding of fact that she was not only innocent of any involvement in drug trafficking, but she also lived in a house and enjoyed the benefit of policies all untainted by drug trafficking.

Schiemann LJ considered this finding of critical importance [37]. His Lordship concluded that:

47. Above all, in my judgment, the assumption that the provisions of [DTOA] 1994 exclude the operation of section 24 MCA 1973 is capable of leading to an injustice which parity between the statutes would prevent. It is for this reason that I regard the facts set out in paragraph 36 above as being so important. Mrs. A is entirely innocent of any drug trafficking. The property in which she lives was not purchased with the proceeds of drug trafficking and is untainted. Her beneficial interest is entirely genuine. She is not in good health and has only modest employment. If the Appellant is right, and [DTOA] 1994 excludes MCA section 24, Mrs. A will lose her home, and she is likely to be dependent on the public sector for housing. If, as is likely, her health is affected (she suffers from agoraphobia which she has managed to overcome) by the loss of her home, she will become dependent on state benefits.

48. In short, if the Appellant is right, a substantial injustice will be done to Mrs. A in order to garner the sum of £29,360 into the coffers of the State. I cannot regard that, on the facts of this case, as a proportionate outcome, or one which is in the public interest.

CPS v Richards & Richards [2006] EWCA Civ 849
This case concerned the MCA and DTOA. The parties' relationship began in 1994. The defendant husband became involved in drug-trafficking, and was convicted in the Netherlands in 2004. The Dutch court could therefore proceed to make an 'external confiscation order' in respect of his assets in this country.

In the High Court, Bennett J found that all family assets (other than a gift) were the proceeds of drug trafficking. His Lordship found that "the wife knew that the husband was involved in criminal activities and that she really knew that from the word go". It was therefore the case that the family assets comprised tainted money which the wife new was tainted, and that the whole of the family assets were susceptible to confiscation. His Lordship, then awarded a lump sum of £39,250 out of the net proceeds of sale of the family assets to the wife under the MCA.

The Court of Appeal allowed the prosecution's appeal. Thorpe LJ held that:

25. This court in Re MCA clearly anticipated, in a case such as this, assets should not be distributed see paragraph 13 quoted above. In the instant appeal the whole of these tainted assets should be subjected to confiscation procedures and simply not distributed to satisfy any ancillary relief order. We had wondered, at one stage, whether the judge could have met the policy objection by making the order in favour of the untainted child under Section 23(1)(f) of the 1973 Act but that is clearly open to the same objections that no assets available should be distributed where, to the knowledge of the applicant seeking relief, they were derived from drug trafficking.

26. Where assets are tainted and subject to confiscation they should ordinarily, as a matter of justice and public policy, not be distributed. This is not to say that the court is deprived of jurisdiction under the 1973 Act nor to say that no circumstances could exist in which an order would be justified; an example of a seriously disabled child living in specially adapted accommodation was mooted in argument. It is to say that, in most cases, and certainly in this one, the fact that the assets are tainted is the decisive factor in any balance. The error of the judge lay in thinking that the requirement to conduct a balancing exercise meant that in every case, all factors are relevant. In cases such as this the knowledge of the wife, throughout her married life, that the lifestyle and the assets she enjoyed were derived from drug trafficking is dispositive.

H v CPS [2007] EWHC 1291 (Admin)
The facts of this case have already been outlined. However, Holman J went on to consider what the position would have been if the defendant husband had retained some beneficial interest in the house. His Lordship considered that whilst it could not have been said as clearly as could have been said in A v A that there was no taint at all in the funding of the house, the facts were nowhere near as far towards the other end of the spectrum as Richards. There was no drug trafficking or criminal behaviour whatsoever during the marriage. Nor was there any evidence or suspicion that the former wife had the least knowledge of any criminal activity on the part of the defendant. There had, and continued to be, a very significant contribution by the former wife. The criminality came many months after the parties' agreement at the time of acquisition. Even if there may have been some taint in that some of the interest payments were made with the proceeds of crime, the former wife was unaware of this, and the amount of payment was no more than the defendant ought to have been paying to maintain his children. The husband had been deprived of his property. Public policy did not require any part of the house to remain available for satisfaction of the confiscation order. In exercising the court's overall discretion, such beneficial interest as the defendant retained would be transferred to the wife.

Stodgell v Stodgell [2009] EWCA Civ 1243
This case concerned the MCA and DTOA. The defendant husband and former wife married on 1997. The marriage broke down in 2003, and the parties divorced in 2004. Throughout the marriage, the husband traded as an art dealer. He had been fraudulently evading tax for many years. He was charged with cheating the revenue in 2006, and a restraint order was made. On 20th November 2007, a confiscation order was made in the sum of £900,453. The defendant's assets were not less than the benefit. However, by the time of the High Court hearing before Holman J, the available assets were insufficient to meet the order. Holman J stayed the wife's application for ancillary relief until the discharge of the confiscation order.

The Court of Appeal dismissed her appeal. The wife was not complicit in her husband's crime; she was entirely innocent. However, Hughes LJ held [9 and 10] that whilst non-complicity on the crime is a necessary condition for the wife to succeed in ancillary relief, it was not sufficient. In this case, it was not critical that two properties were not acquired from crime. Rather, it was critical that they could not have been and could not be preserved without the non-payment of tax and penalties.

What happens to the confiscation order if a property adjustment order is made?
If a property adjustment order is made, the position in confiscation proceedings will depend upon whether a confiscation order has yet been made.

If a confiscation order is in force, the defendant is not relieved of his personal obligation to satisfy it, and the object of the confiscation legislation is not defeated because, in default of payment, the defendant becomes liable to serve an additional period in prison (A, [46], per Schiemann LJ). However, the Crown Court must have regard to the property adjustment order on adjusting the available amount under the confiscation order, if such application is made by the defendant or the prosecutor pursuant to s.23 PoCA (Webber, [46], per Sir Mark Potter P).

Alternatively, if a confiscation order has not yet been made, the Crown Court must have regard to the property adjustment order when determining the available amount (Webber, [46], per Sir Mark Potter P).

Finally, it is worth noting that the claimant wife in related financial order and PoCA proceedings appears to stand on a more favourable, footing to "commercial" third parties. In SFO v Lexi Holdings plc (in administration) and M [2008] EWCA Crim 1443 it was held that a restraint order could not be varied prior to the making of a confiscation order unless this did not conflict with the satisfying of the confiscation order. This meant that commercial third party creditors would have to wait and see if the defendant retained any assets after the order was satisfied. At paragraph [73] the Court of Appeal contrasted this approach to the balance which is struck by the competing public policy objectives of PoCA and the MCA, stating that that cases involving a financial remedy were a "special situation."

Jurisdiction and procedure.
Prior to PoCA, in relation to restraint and enforcement proceedings, if ancillary relief proceedings were pending, it was possible (and convenient) for cases where there were enforcement or restraint proceedings, and concurrent ancillary relief proceedings, for cases to be dealt with by a single High Court Judge with appropriate expertise. This was because the High Court had jurisdiction over both sets of proceedings.

However, PoCA has changed this. In Webber v Webber (CPS intervening) [2006] EWHC 2893 (Fam), Sir Mark Potter, P., held that:

49. I have no doubt that the procedure adopted pre-POCA whereby, in relation to restraint and enforcement proceedings, if ancillary relief proceedings were pending, the matter was dealt with by a single High Court Judge with appropriate expertise, was a thoroughly sensible, convenient, and cost-saving procedure. However, it is equally clear to me that, the sole jurisdiction to deal with all matters of restraint, confiscation, and enforcement now resides in the Crown Court (save that the High Court is the venue for applications made by the enforcement authority for recovery orders pursuant to section 243 POCA).

The issue of appropriate venue for the disposal competing PoCA and MCA applications is a matter of concern. It should be noted in the case of T v B v RCPO [2008] EWHC 3000 (Fam) the President of the Family Division accepted that he had the jurisdiction to sit as a Crown Court judge when hearing family proceedings. However, on the facts of that case his Lordship declined to do so.

When considering what directions are required to justly dispose of these cases there is very useful guidance in the case of W v H (HM Customs & Excise Intervening) [2006] 2 FLR 258, where Munby J (as he then was) sets out a comprehensive list of directions which should be sought by the parties to such applications. However, this case was decided prior to PoCA and so the directions concerning transfer to Family Division judge who is also a nominated administrative judge would no longer apply, given the decision in Webber (although note that a not dissimilar result may be possible via the T v B approach of a Family Division judge agreeing to sit as a Crown Court judge, or indeed a Crown Court judge who is also a nominated family judge).

The interaction between confiscation proceedings and financial remedy applications is highly fact sensitive. The different legislation does not always sit easily together. The wife cannot be a party when the confiscation order is made. She can join in at its enforcement, and has a right to be reheard on matters which were determined in the confiscation proceedings, even if she appeared (and was disbelieved) as a witness at that stage. There are also interesting case management issues, in ensuring that both jurisdictions know what is happening in the other. Cases involving a confiscation order which have a negative impact on family finances are also likely to result in the wife successfully invoking the issue of 'conduct' in the financial remedy proceedings.