By Richard Fisher QC and Liam Walker

By Peter Caldwell 

Casenote: Bilta (UK) Ltd v Royal Bank of Scotland Plc [2017] EWHC 3535 – A decision of the Chancellor of the High Court, Sir Geoffrey Vos considering the issue of dominant purpose for the operation of litigation privilege.

As we await the outcome of the appeal against the decision of Mrs Justice Andrews in SFO v ENRC (to be heard in June), the Chancellor has given a decision which many will see as more alive to the realities of dialogue between corporates and government agencies.

The claimants had applied for disclosure of documents, including 29 interview transcripts, which had been prepared as part of a report provided by RBS to HMRC in response to an HMRC investigation of VAT fraud.  RBS had asserted privilege, maintaining that dominant purpose of producing the report and the intention behind the conduct of the interviews had been to resist HMRC’s almost inevitable tax assessment.

The background concerned an investigation commenced by HMRC in 2010 into claims for input tax (nearly £90 million) from a suspected MTIC VAT fraud paid to a subsidiary of RBS which had been engaged in spot trading of carbon credits in 2009. 

RBS assisted HMRC with its investigation from 2010, but in 2012 HMRC sent RBS a letter stating that there might be grounds to deny RBS’s VAT reclaim under the Axel Kittel principle and gave RBS an opportunity to provide further information.  RBS instructed external solicitors who conducted an internal investigation and in 2014, submitted a final report on the factual circumstances surrounding the trading relationship with the counterparties.  The report stated that RBS did not waive LPP in providing the report to HMRC.

The parties were agreed that the test for whether litigation privilege can be claimed was accurately stated in Three Rivers District Council v Governor & Company of the Bank of England (No 6) [2005] 1 AC 610.  There was no dispute that the documents were brought into being when litigation was in contemplation, nor that the litigation in question was adversarial in character.  The issue was whether RBS had established that the documents were made for the sole or dominant purpose of conducting that litigation.

In seeking to defeat the claim of privilege the Claimants relied heavily on the decision in Serious Fraud Office v Eurasian National Resources Corporation Ltd [2017] 1 WLR 4205 (ENRC).  There, Andrews J had rejected the argument that litigation privilege could extend to third party documents created in order to obtain legal advice as to how best to avoid contemplated litigation (even if that entailed seeking to settle the dispute before proceedings were issued).  She had referred to the relationship with the SFO in that case being collaborative rather than adversarial; that the “commitment to transparency and sharing of information” was made in the knowledge and expectation that the SFO would want to satisfy itself that the reports were accurate and thorough, and carry out its own audit.  A document created with the specific purpose or intention of being shown to a potential adversary in litigation, therefore could not subject to litigation privilege. 

In referring to ENRC the Chancellor identified a tension between Andrews J’s judgment and the decision in Re Highgrade Traders [1984] BCLC 151, a case which he noted did not appear to have been directly cited to her.  In Highgrade the Court of Appeal had held that there may well be two purposes in obtaining reports; to assess liability based on an investigation and to make evidence available to defend litigation.  To limit consideration of the dominant purpose to only those documents created for the purpose of actually being used in evidence was to confine litigation privilege within too narrow bounds.

The judgment of Andrews J had relied upon dicta from the Federal Court of Australia in Bailey v Beagle Management Pty [2011] FCA 185 to the effect that a privilege could not attach to a document which was created for the purpose of being shown to the other side, particularly where as in SFO v ENRC, litigation had not commenced.

The Chancellor did not regard the commencement of litigation as a necessary threshold to be crossed.  Although the contemplation of adversarial litigation had not been in dispute, he stressed that HMRC’s 2012 letter indicating the possibility of an adverse assessment marked a watershed in the relationship, however collaborative it might have remained.  In a courteous analysis of the decision of Andrews J he noted that the court’s consideration of the dominant purpose issue is a fact specific determination. 

He did depart from Andrews J however, in holding that the cooperative nature of RBS’s interactions with HMRC had not changed the position in principle.  He noted that it is commonplace for HMRC to canvass the views of large corporate taxpayers prior to formally issuing an assessment and the burden was plainly on RBS to convince HMRC not to do so.

That approach may be said to reflect greater appreciation of the realities of interactions between corporates and government authorities.  The report had set out the reasons why RBS thought that HMRC was not entitled to deny it input tax. It was supported by a detailed, legal and factual analysis.  It would be have been possible or appropriate to fillet the interviews over which privilege was claimed from the analysis contained in the report.

Andrews J had distinguished between the purposes of a party equipping itself with evidence to mount a defence and equipping itself with evidence to persuade a potential opponent from commencing proceedings.  Assuming contemplation of adversarial litigation, however, it is hard to see why as a matter of principle a distinction should be made between these two purposes, which in practice are very likely to be contemporaneous.  It might questioned why the underlying process of assembling a party’s case should be determined by the opposing party’s decision whether to pursue a claim. 

Although the decision on the facts might be said to have been open to Andrews J, on closer consideration of the authorities it is to be doubted whether that decision should have been expressed as a statement of principle.  That may be the preserve of the Court of Appeal later in the year.

By David Hislop QC

In the recent Court of Appeal decision in R v Reynolds & Farnish [2017] EWCA Crim 1455 the CA dealt with the sometimes difficult problem in confiscation proceedings in valuing the benefit to a defendant of the criminal proceeds for the purposes of the making of a confiscation order.

This issue arises in confiscation proceedings when the Judge, asks the three principle questions as were summarised in R v May [2008] UKHL 28 (see Endnote) and recently repeated and affirmed in R v Ahmad and Fields [2014] UKSC 36 (see para.34):

1. “Has the defendant benefited from relevant criminal conduct?
2.  If so, what is the value of the benefit?
3. What sum is recoverable?”

The issue plainly stated is do we value the benefit to offenders by reference to profit or turnover? Are expenses taken into account?

The legal framework is contained in POCA 2002. Under s.76(4), a person “benefits from conduct” if he “obtains property as a result of or in connection with the conduct”. Further, by s.76(7), if a person benefits from conduct, “his benefit is the value of the property obtained”.

Turning to authority in R v Waya [2012] UKSC 51; [2013] 1 AC 294: For present purposes, the importance of Waya lies principally in its treatment of the essence and purpose of confiscation orders, together with the requirement that such orders should be proportionate.

It follows from the above that on the face of it in the majority of cases the value of benefit will be the “property obtained” and that will be the turnover or gross figure. But it may not always be the case. 

In Reynolds & Farnish over a six-year period, M and V worked for a local authority as a stores controller within the highways department and a receptionist respectively. During that period, M used one company to supply highway blades to the local authority. The company had been established with V and X as directors. S regularly visited M at the local authority. As its sole customer, the company sold the blades to the local authority at up to four times the cost price. The prosecution argued that the company was established for the sole purpose of supplying the blades to the local authority, that the two couples were acting together, that S and X would not have generated the income they did had M not worked for the local authority, and that M and V would have made no gain had they not acted dishonestly. In considering the confiscation orders, the judge relied on R v Sale [2013] EWCA crim 1306 saying that in Sale that the   court found that the order should be based on the defendant's profit rather than turnover. He noted that the goods supplied were legitimate and no complaint had been made as to their quality. The local authority's loss, and therefore the respondents' gain, was assessed at £87,500, such amount to be apportioned equally between them.

The Judge purporting to follow the case of Sale assessed the confiscation order as the amount of gain to the defendants the rationale for which the gain for the defendants equalled the Council’s Loss. The gain on the facts being, he said the profit.

The Prosecution contended that the confiscation orders should be made up of the turnover amount less expenses and thus a sum representing a profit figure which was considerably more than contended by the defendants and the Judge.

The Court of Appeal demonstrated that in fact there had been a misreading of the case of Sale.  In Sale the value of the benefit was not only the profit figure but also the value of the pecuniary advantage to the defendants obtained by their criminality. In the end however on the facts of Sale in fact the value of the benefit assigned was the profit only figure but only because no one had given a figure to the “pecuniary advantage” not because the latter was irrelevant.

However at paragraphs 47 and 48 of the Judgment the Court recognised that there may be cases where a profit only valuation is the properly proportionate approach. Such cases might be where the loser has been wholly restored to his or her original position or substantially so.

Conclusions:

1. The confiscation order regime is and is intended to be severe - but not disproportionate: Waya.

2. The purpose of confiscation orders is to deprive wrongdoers of the financial benefit obtained from their criminal conduct: Waya, at [21].

3. Certainly in a great many POCA cases where the Court is concerned with what is no more and no less than a criminal enterprise, turnover (i.e., the gross proceeds received) will provide the proper measure of the wrongdoer’s benefit. In such cases, the expenses incurred by the wrongdoer will be disregarded: Waya, at [26]. This proposition was vigorously endorsed in the still more recent Supreme Court decision, R v Harvey [2015] UKSC 73; [2017] AC 105, especially but not only in the dissenting judgments of Lord Hughes and Lord Toulson JJSC, at [54] – [57] and [98] – [100] respectively.

4. In some cases, for example, where legitimate goods or services are supplied but the business or transaction in question is otherwise tainted, it may be appropriate to make a confiscation order in the amount of the wrongdoer’s profits (i.e., net proceeds), permitting him to deduct the expenses incurred in supplying the goods or services in question. Sale; King [2014] 2 Cr. App. R. (S.) 54

5. In cases where business has been obtained by corruption, prosecutors should be alert to the pecuniary advantage likely to have been obtained by market distortion and thus forming an additional benefit to the wrongdoer, capable (if properly quantifiable) of increasing the amount of a confiscation order where the measure adopted has otherwise been limited to the amount of the wrongdoer’s profits: Sale, at [60].

6. The amount lost by the loser is generally irrelevant save (a) where, coincidentally, it equals the amount of the wrongdoer’s benefit; and/or (b) where the wrongdoer has fully restored the benefit to the loser, so that to require the wrongdoer to pay the same amount again would be disproportionate: Waya, at [29].

By Abigail Bright 

When assessing corporate risk, would businesses value a single sentencing statute that is the single source on procedure for sentencing tribunals when sentencing business crime offences?

Businesses value ability to predict and understand how courts respond to offending. Businesses recognise the value of courts assessing seriousness of harm caused by offending to commercialism. A classic hallmark of assessing the impact of crime on a business is what is captured in a ‘business loss and impact’ statement. These work in the same way after conviction of an offender as a victim impact witness statement. Business loss and impact statements show and tell how loss mattered to a company. Did a business survive loss sustained by criminality? Were jobs lost? Were opportunities missed? Was insurance sufficient to redress loss sustained by being the target of an offence or offences?

Businesses also value knowing what the basis is upon which sentences are passed on corporate individuals and corporate organisations. Commercial risk and offsetting of risk entails taking informed, defensible decisions about the likely practical consequences of corporate offending. Costs of offending are monetary and reputational. Presently, the basis upon which corporate offenders (individuals and entities) are sentenced is split across several types of sources. For businesses to look at what is within the contemplation of a sentencing tribunal (lay or professional magistrates or Crown Court judge), regard must be had to various guidelines. Offence-specific guidelines do not exist for numerous types of business crime. 

The Law Commission intends to change this. Its draft Code ushers in a ‘clean sweep’ regime of a single governing code for sentences. Has it gone far enough to really help business?

Published on 27^th July 2017, the Law Commission, led by Professor David Ormerod Q.C., published a consultation paper on a draft Sentencing Code and draft accompanying legislation. The consultation document marked the Law Commission’s third (to date) consultative exercise on the Sentencing Code. The number of consultations is an immediate indication of the sheer nature and ambitious scale of the extensive consulting task undertaken. The Law Commission’s draft Sentencing Code can be viewed by clicking here. 

Chapter six of the Law Commission’s consultation (‘Financial orders and orders relating to property’), questions 27 to 33, inclusive, is what will interest businesses most. The schema of the draft Sentencing Code is not, however, a panacea for corporate uncertainty about what are the financial consequences of types of monetary offending. Businesses will welcome that the Law Commission has included, broadly stated, what are general provisions and principles governing the types and monetary values of fines. Business are, however, likely to find it desirable that the Law Commission reconsiders an aspect of its present stance – exclusion from its draft Code of levels and maxima of fines for particular offences.

On this, businesses are likely to align with the views expressed by the Law Reform Committee of the General Bar Council of England and Wales (‘the Bar Council’).  You can access a copy of the Bar Council's response to the consultation by clicking here. The Bar Council takes the view [at paragraphs 88 and 89 of its consultation response] it would be helpful to specify fine bands (A, B, C) and also fine levels. That can be done in a simple table appended to the Code.  

The Bar Council [at 88 and 89] recorded the force in not incorporating into the draft Code Part 3 of the Magistrates’ Court Act 1980, for the reasons given by the Law Commission in its consultation [at §6.6-6.8].

On a separate point, the Bar Council agrees with the Law Commission [at §6.2 of the consultation] that little is gained by specifying in the Code each type of offence presently on the statute book attracting a fine, together with statutory maxima. The two together conclude that declining to specify statutory maxima coheres with the approach taken by the Law Commission to its presentation, generally, of sentence levels. Businesses are likely to think this is a missed opportunity to bring clarity. Whilst the Code should be as free of clutter and the dispensible as possible, businesses are likely to highly prize a Code that at least specifies statutory maxima. The Code can remain current without needing legislative refreshment if it incorporates predictable facility to increase levels of fines according to standardised or indexed inflation. That can be done whilst preserving stated statutory maxima for particular offences. Doing so would be a modest but meaningful improvement to the draft enabling legislation intended to give effect to the Sentencing Code.

Where businesses and the Bar Council are likely to agree is that the Law Commission has reason to remove from the draft Code [clause 84] the table presently showing the levels of summary fines passed over time. The Law Commission asked consultees whether it is helpful to include this table. Businesses and the Bar Council surely agree it is unhelpful. The reality is that sentencing courts are unlikely to refer, in practice, or to refer on more than a very few occasions, to any such table – especially so because the Law Commission’s focus in its table is on offences committed between 1983 and 1992. Economic realities and modes of commercial practice have overtaken monetary values that prevailed three or four decades ago. 

The Law Commission further consulted on the value of stating the general power of magistrates’ courts to impose fines [clause 80]. The Bar Council responded [paragraph 92] that this should be done simply and clearly, by inserting a clause as follows:

“If the relevant offence provision provides that a person convicted of that offence is liable to a fine, a magistrates’ court dealing with an offender for that offence may impose a fine of a particular amount.”

The Bar Council commended the draft Code’s new, streamlined compensation order provisions. Those make explicit – and so more accessible – the statutory and common law iterations of how compensation orders are separate to, but tend to interact with, the confiscation and proceeds of crime regime. Businesses will value this.

The Law Commission also consulted on what other ‘signposts’ to conviction forfeiture powers should be included in the Code [clause 113]. Businesses will welcome the Bar Council’s practical proposal [at paragraph 87 of its consultation response] that the Code also specifies certain powers under which forfeiture orders are commonly made as found in the Trade Marks Act 1994 and Consumer Protection Act 1987. The Bar Council proposes that these provisions ought to be incorporated if a non-exhaustive list that extends beyond mandatory forfeiture orders is included in the Code.

Abigail Bright was part of the Bar Council’s Law Reform Committee that responded to the consultation. The Bar Council published its response in February 2018.

By Richard Fisher QC

The Court of Appeal considered a number of points in this applicant’s application for leave to appeal against the sentence (confiscation order) imposed in the Crown Court and also to quash the conviction in the Magistrates Court. This commentary focusses on the confiscation order, but for anyone interested in further commentary on matters relating to the original conviction, the application for a venire de novo, and abuse of process, you can find this in a commentary written by my colleague Paul Taylor QC in our Criminal Appeals Bulletin.

THE FACTS

The applicant owned a property in west London where an outbuilding had been converted into residential accommodation without planning permission. An enforcement notice was issued against the applicant on 8 May 2009 which ordered cessation of use and removal of the kitchen and bathroom facilities. The second enforcement notice was dated 24 October 2012 and required the removal of extensions that had been erected without planning permission, cessation of use as residential flats and restoration of the building to the original condition. A third party, Mr Abdul-Jalil, impersonated the applicant during the Magistrates’ Court proceedings including the trial on 26 August 2014. The magistrates convicted the applicant and committed him for sentence to the Crown Court pursuant to s.70(5) of POCA 2002. It was not until the 15 September 2017 that the applicant was sentenced due to the Crown Court considering several applications to appeal (out of time) and an application to stay of the confiscation proceedings as an abuse of process. The confiscation hearing lasted eight days and an order of £4,310,311 was made (the benefit figure and the available amount were found to be in the same sum). The judge imposed fines of £1,000 on each offence.

THE APPEAL

The sentence appeal was limited to the confiscation order. The applicant’s particular criminal conduct was the sum of £26,000 and the remainder, £4,284,311, was assessed to be the applicant’s benefit from his general criminal conduct. This was a criminal lifestyle case by virtue of the fact that the offences were committed over a period of at least six months and he had benefitted in a sum in excess of £5,000 (s.75(2)(c) of POCA 2002 applied). On appeal the applicant submitted firstly, that the judge was wrong to apply the criminal lifestyle assumptions contained in s.10 because to do so created a serious risk of injustice, seeking to rely on s.10(6), secondly, and in the alternative, the applicant submitted that the confiscation order was in breach of the applicant’s rights protected by Article 1 of Protocol 1 of the ECHR, because it was disproportionate.

Their Lordships made light work of the applicant’s submissions. They rejected the first submission because they found that the judge heard extensive evidence over several days which looked at the applicant’s activities worldwide. Their Lordships cited the fact that the judge had found that much of the applicant’s evidence was false and manufactured. In addition there was no reason to find that the judge had erred in not disapplying the s.10 assumptions. As to the second submission their Lordships found that the confiscation sum was not disproportionate; it was the proper calculation of the benefit from the applicant’s criminal lifestyle.

COMMENT

This case perfectly illustrates the excoriating effect POCA confiscation proceedings can have in cases where the defendant is found to have a criminal lifestyle and the full force of the s.10 statutory assumptions then apply. In addition, it demonstrates the difficulties an applicant will face on appeal.

It is worth noting that the applicant’s benefit from the offences he was prosecuted for was assessed at only £26,000 which was a mere 0.60% of the confiscation order. The balance of £4,284,311 was all assumptions based benefit which the applicant had failed to disapply pursuant to s.10(6)(a) or (b). That is a stark result, no criminal convictions were secured in relation to that £4.28million of property obtained as a result or in connection with the conduct. What was the conduct you may ask? Well, the answer is: it doesn’t really matter because the assumptions apply and therefore as a matter of law it is assumed that the conduct was criminal due to the offender having a criminal lifestyle.

In such a case an applicant faces a very difficult task on appeal. Where a judge has heard the evidence at the confiscation hearing, in the absence of establishing clear errors of law and/or fact, the Court of Appeal will be reluctant to interfere with findings as to credibility.

By Richard Fisher QC

R (on the application of Gibson) (Appellant) v Secretary of State for Justice (Respondent) [2018] UKSC 2

SUMMARY

The case concerned enforcement of a confiscation order and the calculation of the default term of imprisonment to be served in circumstances where part payment of the order had been made and interest had accrued.

THE FACTS

Mr Gibson was convicted of drug trafficking offences and sentenced to 25 years imprisonment. On 29 March 2000 a confiscation order was made in his case under the Drug Trafficking Act 1994 (“DTA 1994”) for £5.4 million, to be paid within 12 months with six years imprisonment in default of payment. On 4 May 2007, an appointed enforcement receiver paid £12,500 towards the order and the magistrates deducted seven days from the six-year term in default to account for that part payment. At that time interest had increased the net sum outstanding to £8.1 million. Later in 2007 and 2011, the enforcement receiver made further payments towards the order of £12,500 and £65,370. The prison authorities calculated the reduction in the six-year default term on the basis of the proportion which these payments made to the £8.1 million, that produced a total reduction of 24 days. Had the arithmetic been applied instead to an outstanding figure confined to the original amount of the confiscation order of £5.4m an additional 11 days would have been added to the reduction. The issue on the appeal was whether interest is included in the starting point under s.79(2) Magistrates’ Courts Act 1980 (“MCA 1980”) for the giving of proportionate credit for part payment of a confiscation order.

THE JUDGMENT

The Supreme Court decided unanimously that the calculation of the days to be taken off the default term should have been by reference to the amount of the original confiscation order and not the outstanding amount that had increased by the addition of interest. Under s.10(1) interest is treated for the purposes of enforcement as part of the amount to be recovered under the confiscation order and under s.10(2) a Crown Court judge may refix and increase the default term if the addition of accrued interest takes the sum outstanding into a higher bracket in the relevant schedule of defaults terms. Section 76 of the MCA 1980 contains the magistrates’ power to commit an individual to prison for failure to pay a fine. Section 79 of the MCA 1980 is the only provision dealing with part payments.

The enforcement of confiscation orders is achieved by applying statutory provisions which were not in fact designed for them. A confiscation order is treated as if it was a fine imposed by the magistrates. The difference between a fine imposed by a Magistrates Court and one imposed by a Crown Court is that the former do not fix a default term if imprisonment when imposing the fine. In the Magistrates Court imprisonment in default is only considered in the event of a default and, at that time, the magistrates will know whether the default is total or partial. If it is partial then credit can be given for the part payments that have been made and the default term can be calculated accordingly. In the Crown Court, s.139(2) of the Powers of Criminal Courts (Sentencing) Act 2000 (“PCCSA 2000”) requires the fixing of a default term at the time the fine or order is imposed.

The difference in practices led the lower courts to analyse s.79(2) MCA 1980 as assuming the standard magistrates’ practice and thus to conclude that the references in that subsection to a period of imprisonment having been “imposed… in default of payment” were references to the act of the magistrates in issuing the warrant of commitment to prison. This interpretation overlooked the fact that s.79(2) said nothing about how to deal with part payments made in Crown Court cases between the making of a confiscation order and the later enforcement proceedings in the Magistrates Court.

The period of imprisonment in default of payment is “imposed” for the purposes of s.79 when the Crown Court makes the confiscation order (including setting the default term) and discharges its statutory duty under s.139(2) of the PCCSA 2000.

The operative words of s.79(2) expressly state that the days to be deducted are to be the number which bear the same proportion to the total default term imposed (by the Crown Court) as the part payments bear “to so much of the said sum… as was due at the time the period of detention was imposed”. At the time the Crown Court imposed the default term of imprisonment there had not been any accrual of interest.

Lord Reed and Lord Hughes stated at paragraph 21 of the judgment:

21. We have concluded that this straining of the wording of s.79(2) cannot be justified where it would adversely impact on the period of imprisonment to which a person is subject. Penal legislation is construed strictly, particularly where the penalty involves deprivation of liberty.

They decided that the natural construction of s.79(2) is that the starting point for the arithmetical calculation of reduction in days of imprisonment is the sum outstanding at the time the Crown Court order is made, not later.

COMMENT

The DTA 1994 provisions have been repealed and replaced with POCA 2002 for all confiscation cases post 2003. The wording of the equivalent provisions in POCA 2002 is not identical. However, the approach in similar circumstances under POCA 2002 should be the same. Where partial payment is made and interest accrues, the term to be served from the default term should be calculated by reference to the amount of the confiscation order and not the latter amount which has increased by the accrual of interest. Bearing in mind the significant number of individuals who are currently serving default terms of imprisonment there will undoubtedly be other instances where the terms have been incorrectly calculated. Those serving such sentences should consider their own positions carefully and take advice. The difference in Mr Gibson’s case was 11 days too much, in other cases it may be more. Frankly, any day is a day too long.