Directors' Exposure under Confiscation Proceedings

 

As readers of this site have been well reminded, the number of confiscation proceedings under POCA 2002 have been increasing as the number of governmental agencies using the legislation has mushroomed. Companies are  also be subject to confiscation and although confiscation orders against companies are less common there are increasing examples of them in the case law.  Mabey & Johnson Ltd was made subject to a confiscation order for £1.1 million in 2009.  The Weir Group PLC was made subject to a confiscation order for £13.9 million in 2011.

 However, the directors themselves are being made the subject of confiscation proceedings, which has led to apparent contradictions in law when it has been the company that has been convicted of an offence but the confiscation proceedings drag the directors into the fray. Traditionally, individuals have believed that forming a private limited company gave them some degree of personal protection. Increasingly there are attempts to ‘pierce the veil’ of corporate identity, especially in confiscation proceedings and make the directors liable under POCA 2002 for the criminal benefit of their companies.

There has been significant case law development in the last few years. In the cases of R v Seager and Blatch the Court of Appeal found that ‘it is hornbook law that that a duly formed and registered company is a separate legal entity from those who are its shareholders and it has rights and liabilities that are separate from its shareholders.’ However, the problem for your clients is when the prosecuting authorities attempt to lift the veil of corporate identity and attach to the directors, as opposed to the shareholders, full exposure for the transgressions of the company. In terms of the confiscation legislation the consequences can be mind blowing.

An increasing number of confiscation proceedings are taken against companies right across the UK, whose legal and accounting advisers have little contact with the top drawer legal advice from barristers chambers in London. It is precisely such companies that are at risk. We have read about the partnerships  such as Perkes in which confiscation proceedings have been brought against individual partners and more significantly, Del Basso  when confiscation proceedings have been brought against individual directors.

Previous postings have referred to the experience of the ‘average accountant’ but the reality is that this term is becoming outdated. Every accountant in public practice has clients who are potentially at risk und ender the increase of legislative burden and the real secret is that if you cannot deal with the issue then seek professional advice. It is not rocket science but it may help you both to retain your client and, in a worst case scenario, avoid you being sued by your own client for poor advice!     

                

Comments
davidwinch's picture

Piercing the veil of incorporation

davidwinch | | Permalink

Gerard

In my experience what prosecutors have more often sought to do is to prosecute one or more individual directors (and sometimes employees who are not directors, as in the case of Mr Jennings referred to below) for criminal offences perpetrated through a limited company and then, once the individual(s) has / have been convicted, to pursue confiscation proceedings against the convicted individual(s).

In those confiscation proceedings the prosecution then assert that monies received by the company into its bank account are (or, in criminal lifestyle cases, ought properly to be assumed to be) for confiscation purposes, 'benefit' of the convicted individual(s).

If I might extend the quote which you make from R v Seager and Blatch [2009] EWCA Crim 1303 at para 76:

"There was no major disagreement between counsel on the legal principles by reference to which a court is entitled to "pierce" or "rend" or "remove" the "corporate veil". It is "hornbook" law that a duly formed and registered company is a separate legal entity from those who are its shareholders and it has rights and liabilities that are separate from its shareholders. A court can "pierce" the carapace of the corporate entity and look at what lies behind it only in certain circumstances. It cannot do so simply because it considers it might be just to do so. Each of these circumstances involves impropriety and dishonesty. The court will then be entitled to look for the legal substance, not the just the form.

In the context of criminal cases the courts have identified at least three situations when the corporate veil can be pierced. First if an offender attempts to shelter behind a corporate façade, or veil to hide his crime and his benefits from it. Secondly, where an offender does acts in the name of a company which (with the necessary mens rea) constitute a criminal offence which leads to the offender's conviction, then "the veil of incorporation is not so much pierced as rudely torn away": per Lord Bingham in Jennings v CPS, paragraph 16. Thirdly, where the transaction or business structures constitute a "device", "cloak" or "sham", ie. an attempt to disguise the true nature of the transaction or structure so as to deceive third parties or the courts."

In those circumstances the prosecution may well contend that the assumed benefit of each convicted individual should include an amount equal to the total sums banked by the company since the 'relevant day' (normally the day 6 years prior to the day on which the individual was charged with the offence of which he has ultimately been convicted).

In order to satisfy the confiscation order the individual will, in all probability, ultimately have to sell his shareholding in the company.

It may also be the case that the prosecution will seek a restraint order, long before the making of any confiscation order (a restraint order may be obtained by the prosecution under s41 PoCA 2002 at any time after a criminal investigation has been commenced, although in practice restraint orders are often sought only after an individual has been charged with an offence).  In my experience such restraint orders sometimes (but not always) seek to 'freeze' not only the personal bank accounts of the individuals concerned, but also company bank accounts as well.

Unless the restraint order makes provision to allow transactions in the ordinary course of the company's business (or the defence swiftly makes application for the restraint order to be modified to permit this) the effect on the company may be almost immediate and catastrophic.

In these circumstances companies and their directors need to obtain proper professional advice urgently in order to limit the damage to the business.

As you say, it behoves accountants to have at least some awareness of these dangers!

David

P.S.  Just to be clear, a director can only be subject to confiscation if he himself has been convicted of an offence.  Similarly a company can only be subject to confiscation if it has itself been convicted of an offence.

But where an individual (normally, but not always, a director) has been personally convicted of an offence which has been perpetrated through a company then the 'veil of incorporation' may be pierced so that, in calculating the individual's benefit of his criminal conduct for confiscation purposes account is taken of monies received etc by the company.

Lifiting the veil of incorporation

Stephen Morris | | Permalink

It is right that shareholders should be protected from confiscation proceedings. To punish the shareholders would be lifting the veil of incorporation. Punishing directors is not lifting the veil. Why should directors be protected? Companies require human agents to act and to make their decisions. These acts and decisions are instigated by the directors. Directors often enjoy very large rewards and wield almost absolute power within their fiefdoms. There is not much shareholder power in the world of corporations. If a company has obtained illegal profits then the directors instigated the policy or strategy that acquired those profits. The directors should be held to account for those criminal benefits, not the shareholders. To confiscate the assets of the company would punish the shareholders. That would effectively lift the veil of incorporation because it deprives shareholders of their property. No, go for the directors!!! SOCA it to them!

davidwinch's picture

@Stephen

davidwinch | | Permalink

Technically the way in which prosecutors (and not just SOCA) go after directors does amount to 'lifting the veil of incorporation'.

This is because in confiscation a person's benefit from criminal conduct is what is obtained by him as a result of, or in connection with, that criminal conduct (see s76 PoCA 2002).

But monies banked in the company's account are obtained by the company rather than by the director himself.  By 'piercing the veil' the prosecutor can treat those monies as "obtained by him" (i.e. obtained by the individual).

Of course in a typical small company the directors will also be significant shareholders in the company.

In relation to criminal offences carried out by directors through a company the prosecution can charge the company itself, or the directors, or both the company and its directors, with criminal offences.

Of course a company cannot be sent to prison, so in many cases the prosecution will be thinking in terms of prosecuting individuals rather than just the company if there is evidence of criminal conduct or dishonesty by particular individuals.

In theory confiscation should only take from an individual or a company that which he / it should never have had (i.e. benefit of crime) but in practice things may not work out that way (particularly as 'benefit' means gross receipts, not profit realised)!

David

Concepts of companies

Stephen Morris | | Permalink

@David

I suspect the concept of a company may be evolving. One concept, the entity concept, might view a company as the legal entity employing assets, managers and workers and having a life independently of its shareholders. It excludes the shareholders. It consists of all the business assets and the managers and workers employed by the legal entity.

The second concept, the propietorial concept, might view a company as a group of shareholders who have combined to share risks and rewards - a "company of investors"

The veil of incorporation seperates the two groups. If this become the accepted view then holding directors responsible for the criminal acts of a company is not lifting the veil. Only the shareholders are behind the veil using this model. Even though the company (a separate legal entity) has committed the crime it is the directors or employees that caused the crime to be committed. But by confiscating a company's criminal assets it is the shareholders who are penalised (because they ultimately/indirectly own the assets).  If the company's criminal assets are confiscated then the shareholders should have an action in law to recover the same value from the directors. Is this the case, do you know? In any case, it would be a lot simpler for the authorities to prosecute the directors and to confiscate the value wongfully obtained by the company from the directors' private assets rather than from the company.

I recognise that in small companies directors and shareholders may be the same individuals. In these cases, the individuals should be prosecuted in their capacity as directors. Confiscating their shares would be piercing the veil because that penalty would apply to them in their capacity as shareholders. Confiscating the company's assets would also penalise them in their capacity as shareholders.

I know this way of looking at things differs from the way I was taught company law many years ago but this model  seems to be more consistent in explaining and understanding judicial and prosecutorial decisions given the frequency that the veil, as traditionally understood, is being pierced in modern times.

In short, I think the veil has moved.

 

 

 

Gerard Murray's picture

Directors and Strict Liability Offences

Gerard Murray | | Permalink

 

It would appear that directors are exposed by the growing number of criminal prosecutions taken for strict liability offences, for example trading without the necessary licences or contrary to industry regulations. In such cases, it is difficult to mount a sustainable defence.  In the case of Del Basso and Goodwin v R [2010] EWCA Crim 1119 the Parking Association had operated illegally in breach of a local authority planning enforcement notices and as Judge Baker had stated in the Crown Court criminal case ‘’the activity of conducting a ‘park and ride’ operation was entirely and inherently criminal from the moment the enforcement notice became effective.”  The Parking Association became a limited company and one of the questions to be considered by Crown Court was “whether it was apt to allow the court to pierce the corporate veil to equate the activities of the company with those of Mr Del Basso and Mr Godwin.” In this case the Crown court judge decided not to pierce the corporate veil.  However, before directors start whooping with joy they should be reminded of the closing, blunt words of Judge Baker with which the Court of Appeal concurred-  "I conclude with a final observation about the mentality of the [appellants] and other similar law breakers. I have received the strong impression that neither the [appellants] nor … their accountant appreciated fully the risk that the companies and individuals involved in the park and ride operation faced from confiscation proceedings. They have treated the illegality of the operation as a routine business risk with financial implications in the form of potential fines or, at worst, injunctive proceedings. This may reflect a more general public impression among those confronted by enforcement notices with the decision whether to comply with the law or to flout it. The law, however, is plain. Those who choose to run operations in disregard of planning enforcement requirements are at risk of having the gross receipts of their illegal businesses confiscated. This may greatly exceed their personal profits. In this respect they are in the same position as thieves, fraudsters and drug dealers. Although the peculiar facts of the present case have led me to exclude the receipts of the parking company from the confiscation, that is a decision reached very much having regard to the unusual circumstances presented to me. [Counsel for the prosecution's] submission that a defendant should not escape the confiscation consequences of his conduct by the expedient of running his unlawful operation through a company will, I expect, generally carry the day."

davidwinch's picture

'Strict liability' offence

davidwinch | | Permalink

It might help to explain a bit about a 'strict liability' offence.

A 'strict liability' offence is an offence which I can commit without even knowing I am doing anything wrong.

Take an example.  I believe that I have motor insurance.  I drive my car.  I am stopped by police for a routine check and asked to produce my documents.  It turns out that my motor insurance has expired and not been renewed as a result of a bank error.  The bank failed to action a direct debit.  I have done nothing wrong - but I am guilty of the 'strict liability' offence of driving without insurance.

Contrast that with a theft.  I am out shopping with my 6 year old daughter.  We go into a jewellers and look at the displays.  Then we leave.  Outside the shop I am stopped by store detectives.  I am found to have a valuable diamond ring from the shop in my pocket.  When the shop CCTV is viewed it can be seen that my daughter picked up the ring from the display and placed it into my pocket without my knowing.  I am not guilty of theft since I had no mens rea (wrongful intention or guilty mind).  Theft is not a 'strict liability' offence (it requires a dishonest intention).

Of course just because the prosecution do not have to prove mens rea does not necessarily mean there was none.

A person might deliberately drive a car without having insurance.  In that case there would be mens rea - it simply wouldn't be a necessary element of the offence.

Now imagine I am director of a company which has employees who use machinery which, by law, is required to have safety covers.  The machines do not have the required covers.  That is a strict liability offence.  The company, as the employer, can be prosecuted for it.

But can the directors also be prosecuted?  Yes, if they agreed to the use of the machines without safety covers, or if they were aware of it and did nothing to stop it, or if they were unaware of it through negligent failure in relation to their obligations or duties.

But my understanding of the position with regard to confiscation (and here I think Gerard disagrees with me) is that if a director (or employee) is convicted of an offence perpetrated through his company the veil of incorporation will only be pierced by the court if the individual had the appropriate mens rea

In the case of Mr Del Basso he was clearly aware of the fact that the trade was being carried on (by him as a director of the company operating the business) in contravention of the criminal law.  He had previously been prosecuted for a similar breach on the same site.

So I do not see directors (or employees) as being at risk of confiscation based upon the turnover of the company purely as a consequence of being convicted of one or more offences which they were not even aware they were committing.

David

New expectation Gap

The Black Knight | | Permalink

Perhaps the judge was a bit confused as to what the accountants remit is/was to make such a comment.

I doubt whether (or hope not that) the accountant was involved in breaking the law in the advice given otherwise Criminal proceedings would have followed against the accountant for assisting (14 years is it not?) rather that the accountant was instructed to deal with a new limited company.

We do not advise on planning or other breaches of law, only consider their affect on the work we may be doing ( usually going concern issues.)

Admittedly many of us do not have a working knowledge of POCA as this is still new to even the specialists, but would the accountants instructions or actions be any different even if a knowledge that POCA would follow such a conviction (sometimes)

The fact remains that these cases are few and far between and most of the country is in breach of one law or another. Is it even a real risk so far as going concern is concerned if you are one company of a 100,000 ? I appreciate that might not be the correct attitude from our professional point of view but reality in the field.

You can lead a horse to water but you can't make it drink.

May be we all need to write an extra paragraph in our engagement letters, specifically denying any responsibilty for criminal offences that might lead to a POCA.

Even those that write the legislation are not aware of it !

davidwinch's picture

What the judge thought

davidwinch | | Permalink

My reading of the judgment is that the judge thought that Mr Del Basso and his accountants knew he was breaking the law but he decided deliberately to continue breaking the law in the (mistaken) belief that the worst that could happen was a relatively modest fine which he could afford to pay out of the income being generated.

Instead he suffered confiscation proceedings which financially wiped him out.  Then he appealed on the basis that it was not fair that he should suffer so harshly.

The judges right down the line had no sympathy with someone deliberately flouting the law to generate income and the comment made by them is the judicial equivalent of a two fingered salute!

David

Judge Baker's comments

Stephen Morris | | Permalink

@Gerald

Judge Baker seems to be confirming that piercing the veil of incorporation, at least in respect of directors, will become routine in confiscation proceedings. How meaningful will it be to talk of the existence of a veil when it is being pierced routinely as predicted by the Judge? It will become a myth, at least in respect of directors hiding their criminal acts behind the veil of incorporation. Personally, I believe this is how it should be. Incorporation was never intended to protect directors from criminal behaviour, or, if it was, then it is obviously a matter that should have been revisited by the legislature or judiciary.

perhaps

The Black Knight | | Permalink

the message should have been extended to the accountant for not reporting then, or even assisting.

Why do we not see this happening in practice ?

There seems to be opportunities for a public hanging ? ... and I understood when the legislation was first issued the authorities were looking for an accountancy and a legal firm to make an example of, ? or was that just sabre rattling.

carnmores's picture

the regulatory burden is now so high for sole practicioners and

carnmores | | Permalink

as to be intolerable - how  a sole practicioner is expected to be upto date on all matters is getting beyond me  

davidwinch's picture

@Carnmores

davidwinch | | Permalink

I have to say that one of the reasons I ceased to be a general practitioner years ago was that (in my view at least) being a general practitioner is far more difficult than being a specialist and far less valued.

As a specialist I can command - with a relatively narrow field of knowledge - higher fees than I could command as a general practitioner.  And I don't have to keep up with developments in international accounting standards, tax, audit, pensions and investments . . .

As the Americans would say, "Go figure".

But I think what the general practitioner needs is not a detailed knowledge (we quickly get into some deep waters in this discussion group!) but a sufficient awareness to hear alarm bells ringing and at that stage either get detailed advice or get rid of the problem appropriately (which might involve dropping the client, steering the client away from a particular activity, telling the client to seek legal advice, or making a Suspicious Activity Report to SOCA).

David

carnmores's picture

david

carnmores | | Permalink

i agree with you i am heading that way again! ; but not everybody has the niche skillset required and those are the people that will suffer

Gerard Murray's picture

Will Piercing the Veil become a routine matter?

Gerard Murray | | Permalink

Stephen

I think that Judge Baker was sending a shot a across the bows of businesses ( and their advisers) who clearly know that the business is in breach of trading or planning regulations but continues on its  merry way. As David has noted, the inference from the case is that Mr Del Baso may well have thought that the most he would received would be a fine for contravening the relevant legislation and regarded this as a price worth paying. 

Interestingly, while Judge Baker stated 'the activities of conducting a 'park an ride' operation was entirely and inherently criminally unlawful from the moment the enforcement notice became effective' he did not, in this case, pierce the veil of incorporation. He even went further in saying 'the decision whether or not to pierce the veil is very much a fact specific decision...It is a matter of judgment on the facts rather than a more general discretionary decision.'    

davidwinch's picture

An example of piercing the veil

davidwinch | | Permalink

The case of CPS V Jennings [2008] UKHL 29 gives a good example of a situation in which the Courts will pierce the veil of incorporation.

Mr Jennings was a senior employee of a company of which his co-defendant, Mr Phillips, was the sole director and controlling shareholder.

The company's trade was that it offered to the public to source personal loans, particularly to individuals with poor credit status.  An initial fee was charged to the individual, which was not refundable in the event that no loan could be sourced.

In practice the company in virtually every case simply pocketed the initial fee and then told the applicant he had been unsuccessful.  Of tens of thousands of applications received, only a handful actually obtained loans.

In short the entire trade of the company was a fraud.

Both Mr Phillips and Mr Jennings were convicted (Mr Phillips had pleaded guilty).  The Crown sought confiscation on the basis that each of them had obtained the monies received by the company.  Mr Jennings argued that it was inappropriate to pierce the veil of incorporation in this way.

The House of Lords' judgment on this point was:

"In the ordinary way acts done in the name of and on behalf of a limited company are treated in law as the acts of the company, not of the individuals who do them. That is the veil which incorporation confers. But here the acts done by the appellant and his associate Mr Phillips in the name of the company have led to the conviction of one and a plea of guilty by the other. Thus the veil of incorporation has been not so much pierced as rudely torn away."

So the law would not protect the individual fraudsters from the consequences of their actions, even though the fraud had in fact been perpetrated through a limited company.

David

Gerard Murray's picture

Tell-Tale Signs for Potentiial Confiscation Proceedings

Gerard Murray | | Permalink

David is quite right in his comment that the average accountant cannot be expected to have a detailed knowledge of the complex area of confiscation proceedings under the Proceeds of Crime act 2002. However, there are a number of tell-tale signs that should alaert the average accountant, and his client, to the posssibility that confiscation proceedings will be the eventual outcome of events that are set in motion. 

Anyone facing sentence in Crown Court can find himself the subject of a Proceeds of Crime Act 2002 enquiry. The first condition for an enquiry is that the defendant has been:

a)convicted of an offence in the Crown Court;

b)committed to the Crown Court for sentence; or

c)committed to the Crown Court under S 70 POCA 2002 itself for specifc consideration of  a confiscation order.

It is of benefit to be aware of the Guidance for Prosecutors on the Discretion to Instigate Confiscation Proceedings

In making this assessment in a particular benefit case, prosecutors should consider the three questions posed by the House of Lords in the case of

(i) Has the defendant (D) benefited from relevant criminal conduct?

 (ii) If so, what is the value of the benefit D has so obtained?

(iii) What sum is recoverable from D?

 

 

Before deciding whether to instigate confiscation proceedings, prosecutors should first examine the facts of the case closely in order to determine the correct statutory regime and to assess whether the statutory preconditions for the making of a confiscation order are met.

Gerard

The Black Knight | | Permalink

I think at that stage the client is an ex client, surely.

Is it likely that as a general practitioner, you would even have any involvement in what follows.

Unless I still believed the client was innocent I would feel that our professional relationship had broken down beyond repair.  Added to which there will be no money to pay fees.

how are experts in POCA appointed ? and what happens when you and David fly into action.

cymraeg_draig's picture

.

cymraeg_draig | | Permalink

In making this assessment in a particular benefit case, prosecutors should consider the three questions posed by the House of Lords in the case of

 

(i) Has the defendant (D) benefited from relevant criminal conduct?

 

 (ii) If so, what is the value of the benefit D has so obtained?

(iii) What sum is recoverable from D?

  Posted by Gerard Murray on Wed, 02/03/2011 - 11:07

 

 

This legislation really was drafted by the local village idiot.

  • The guy who uses the proceeds of his crime to pay off his mortgage, ends up losing his home.
  • The guy who lives in a council flat, and spends his ill gotten gains on wine, loose women, and holidays, ends up losing nothing.

The whole Act from start to finish is a hotch potch of bad ideas, poorly thought out provisions, and almost infantile definitions and assumptions.

 

Gerard Murray's picture

The Client in Court

Gerard Murray | | Permalink

Kalden

Many respectable compaies and busineses find themselves before the courts and the instant kne-jerk reaction of their accountants should not be to show them the door. As postings have illustrated, an increasing amount of busineses fall foul of POCA legisaltion for having been firstly convicted of offences such as trading without the necessary licences or breaking quotas such as fishing quotas. These people do no regard themselves as criminals and are often really angry that legislation that they thought was introduced to deal with terrorists and drug dealers is being applied to them. 

What I have been trting to highlight is the reality that the confiscation powers vested in the Proceeds of Crime Act 2002 are being applied by an increasing number of regulatory agencies and that in the case of limited companies having commited the original offences, the Crown may also charge the companies directors as well as he companies. 

You have asked what is the role of the specialist when this happens. Let me relate a recent case when I was brought in as a forensic acountant bydefence solicitor after both his client company and one of its dirrectors had pleaded guilty in Crown Court to offences and the Crown then invoked the confiscation provisions of the Proceeds of Crime Act. 

The Crown then presented its computation of the criminal benefit of both the company and its director. My work as a forensic accountant was firstly to examine the figures as computed by the Crown, secondly to compute the amount available by each defendant and thirdly to engage in discussions/negotiations on the case.  

From experience, specialist advice should be sought as early as possible rather than after the conviction in Crown Court. Once there is the merest possibilty of proceedings under regualtory legislation a business and its advisers should be thinking POCA!   

davidwinch's picture

Expert witness in the Crown Court

davidwinch | | Permalink

I am normally approached by solicitors acting for a convicted defendant subject to confiscation proceedings, or for an unconvicted defendant facing trial in the Crown Court charged with a criminal offence (such as fraud, 'white collar' theft, false accounting, money laundering, etc).

In a confiscation case the Crown will already have issued a statement (under s16 PoCA 2002 or equivalent) setting out the nature of the conviction, whether the case is (asserted to be) a 'criminal lifestyle' case, and the prosecution's figures for the defendant's 'benefit' and his 'available amount' - with supporting schedules and documents.

My task initially is to quote a maximum fee (based on anticipated hours and hourly rates) for preparing a report examining the prosecution's figures and evidence (and taking account of any defence evidence to be provided in rebuttal).

That quote will typically be one of two or three submitted by the solicitor to the LSC (Legal Services Commission) for 'prior authority'.  They select the cheapest quote and authorise that.  Then I get instructed (if I was cheapest) to prepare a written report suitable for submission to the Court (which means that it has to comply with various requirements, such as the Part 33 of the Criminal Procedure Rules 2010).

Because my report is for lawyers, rather than accountants, I use lots of words and very few figures.  So a report can be anything from 20 pages to over 200 pages in length.

Note that the Rules expressly provide that "An expert must help the court . . .  by giving objective, unbiased opinion on matters within his expertise".  In other words an expert is not a 'hired gun' whose mission is to advance the interests of 'his side'.

If the defence decide to rely on my report (and they usually do) then it must be copied to the prosecution and to the court in advance of the hearing date.

In most cases on the day of the hearing negotiations are opened up between the two sides and compromise figures are agreed.  These figures are then put before the judge in a short hearing.  In that event no witnesses are called.

However if no agreement is reached then the matter will go for a full hearing before the judge (but without a jury).  The judge will hear brief speeches from both counsel and witnesses for both sides (who will be subject to cross-examination by the opposing counsel).  In these circumstances I will normally be called as a witness by the defence.  The judge will then make decisions about the defendant's 'benefit' and 'available amount' and make a formal confiscation order.

Attendance at court is paid on a daily scale rate.

David

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