SOLICITORS JOURNAL Confiscation proceedings - the forensic accountant’s role George Sim examines some recent developments ‘cent judgments in the House of Lords and the Court of Appeal have clarified the law on confiscation. The judg- ments should therefore assist lawyers, forensic accountants and others involved in confiscation proceedings. Confiscation of the proceeds of erime was introduced by the Drug Trafficking Offences Act 1986. The Proceeds of Crime ‘Act 2002 (POCA) consolidated the legisla tion and extended the confiscation powers of the court in England and Wales. There are alternative confiscation provisions under POCA in Scotland and Northern Ireland. In confiscation proceedings the court determines the benefic that the defend- ant has derived from the offence. In cases involving serious crimes such as drug dealing, the defendanc is deemed to have a ‘criminal lifestyle’, and in such cases POCA tequites the court to make various assumptions about the defendants “benefit fcom crime for che purposes of deciding that benefic. The court also considers the realisable assets of the defendant, as the amount confiscated will be limited t these if they are lower than the benef. “The role played by forensic accountants in confiscation proceedings may include: ww assessing the performance of a defend. ant’s business to establish the extent ro which fands may have been derived from lawful sources; wm evaluating a defendant's other sources of income; wt appraising the evidence adduced in ela tion to the benefits alleged to have been obtained by a defendant; and 1 evaluating the evidence adduced in rela- tion to the realisable asers ofa defend Assessing a defendant's business Defendants in confiscation proceedings may have operated legitimate businesses despite being deemed to have benefited from a criminal lifestyle. Ie is necessary in such cass to establish che extent ro which funds aequired by the defendant arose from legitimate business as opposed to criminal conduct. Records of the legiimace business may often be limited, particularly if, as is often the case, it operates on a cash basis, In such circumstances it may be necessary to consider certain aspects ofthe business’ financial performance by reference to simi- lar businesses for which information on profiability is publicly available In Birmingham City Council » Ram [2007] EWCA Crim 3084 (21 December 2007) the Court of Appeal upheld the judgment in the original confiscation heating, which highlighted che impor- tance of expert accountancy evidence. In this case, the defendant operated a business manufacturing and wholesaling clothing and was convicted of various trademark offences as instanced by specimen charges. ‘At the confiscation hearing the prosecu- tion estimated the defendane’s benefit 0 be approximately £9 million The expert accountant engaged on behalf ofthe defendant identified the ten largest suppliers by value to the defendant's business in che six months preceding the visits by trading standards officers which led to the prosecution. Each supplier was cor appeared to be an established business The expert accountant asked each supplier to indicate the extent of the trade during the sample period and whether the goods supplied were branded or unbranded, Addi- tionally, the expert accountant reviewed a very large proportion of cheque payments by the business, although he recognised that these would obviously not cover unrecorded cash sales, part of the purpose of examining invoices from the suppliers boeing to see whether they pointed towards the possibility of unrecorded sales by the business. The expert accountant accepted thar there were deficiencies in the busi- ness’ book keeping, but concluded chat there was evidence that the overwhelming majority of the trade of the defendant's business was in legitimate goods, and that income received from this trade was used for business purposes. The nub of the ease in the confiscation hearing vias whether the defendant could persuade the judge that his business had been lawfully conducted over the relevant period, Despite adverse credibility findings about the defendant, the judge concluded ‘on the balance of probabilities that the defendant had not made any benefit from his criminal lifestyle beyond the value of the goods seized by the authorities (£1,33454) That being so, the judge made «confiscation order in that amount. ‘The Court of Appeal dismissed the appeal by Birmingham City Council, noting inter alia that although the defend: antwas an unsatisfactory witness che judge in the confiscation hearing had given his reasons for concluding thatthe defendant's ‘business was legitimate and that central to that reasoning was the acceptance which he placed on the value of the evidence of the expert forensic accountant, Bank account transactions ‘Analyses of movements on defendants’ bank accounts are often carried out as part of the process of estimating the alleged benefit from criminal conduct. Such analy- ses may contain errors: common mistakes include arithmetical errors in comput- ing totals, the double-counting of credits to accounts when funds are transferred between accounts and the inclusion of receipts from known sources in coral cred- its. Similarly, cheques which have been re-presented by a bank for payment may bbe included in tral credits. On occasion, transfers thar occurred before the period covered by the Indictment, normally six years before che day on which proceedings were commenced againse the defendant, say be included incorretly Hidden assets Ifa defendant's known assets are not consistent with the cash flows he is known to have generated, itis possible that assets hhave been concealed. It may then be neces sary to carry out a general review ofall the relevant evidence to determine whether it suggests that the defendane as assers such as overseas properties or investments held by others on his behalf which have been concealed from the authoritis Funds flow within a criminal activity In cases in which part of the proceeds of cxime are used to fund further illegal aciv- ity (eg. the purchase of drugs for resale) and there is no evidence to the contrary, a defendant may be able to contend thatSOLICITORS JOURNAL benefit would be counted twice if the purchase price of the drugs were to be added to the sale price in the computation of benefit, on the basis that the benefit comprises either the funds used for the purchase, or the funds derived from the sale, bur nor both. In this context, one case involved an analysis by us of cash receipts and payments on behalf of solicitors repre- senting a defendant who engaged in large- scale drug dealing. The defendant and an associate kept detailed records of purchases -and sales on spreadsheets in which drugs were given code names. Some double- counting in the prosecution's computa- tion of alleged benefie was eliminated on the basis chat it appeared that the sales proceeds of one consignment of drugs appeared to have been used to purchase further supplies and that che purchase price was therefore likely to have come From this source rather than from unknown sources as assumed by the prosecution. Double-counting Double-councing of purchases and sales ‘was considered by the Court of Appeal in Rev Green {2007} EWCA Crim 1248 (25 ‘May 2007) ia relation to a confiscation ‘order made under the Drug Trafficking ‘Act 1994 (DTA). The prosecution argued thatthe defendant's proceeds of drug era ficking comprised (intr alia): 1m che value of che drugs imported (on the basis that they represented property received in the course of drug traffick- ing): w= the purchase price ofthe drugs supplied {applying the assumption in section 4(3) (b) DTA that any expenditure during the relevanc period had been met out oF payments received in connection with drug crafficking); and = payments received on the sale of the drugs in the United Kingdom (on the basis thar they represented the proceeds of drug trafficking); Ac the start of the confiscation hear- ing the prosecution's position was that the value of the defendane’s proceeds of drug trafficking was over £10.5 million, the main elements of thar sum being the purchase price of the drugs (£3.8 million) and the proceeds of sale (5.6 million). ‘The judge in the confiscation hear- ing decided for the purpose of assessing the appellant's proceeds of drug traffick- ing to aggregate the purchase and sale values of 1.5 metric tons of cannabis at the prices indicated by an expert witness. ‘That produced a figure of £5.25 million, compared with the £9.4 million originally argued for by the prosecution. To that the judge added an estimated amount repre- senting a further 10 months’ trading for which there was no direct evidence and a further sum representing the value of certain individual assets passing through the appellant's hands during the period of six years immediately prior to the proceedings. The toral of the additional sums was about £2.1 million. The judge therefore assessed the toral value of the appellants proceeds of drug trafficking at £7345,450. In relation to the aggregation of purchase and sale values, the Court of Appeal noted chat for the purposes of making a confiscation order DTA directs that the value of the defendants proceeds of drug trafficking isthe aggregate value of the payments or other rewards received by him in connection with drug traffick- ing. The section therefore requires the court to ascertain what the defendant has received by way of money and other property during the relevant period, to assess its value and to decide whether it was received in connection with drug traf- Ficking. However, in reaching its conclu- sions the court is required ro make certain assumptions about the source of property coming into the defendane’s hands and about the source of the money used to Finance expenditure. ‘One of the assumptions which the ‘court is required to make under DTA, ic. that any expenditure dusing the relevant period was financed by the proceeds of drug trafficking unless proved otherwise, was intended to ensure that funds whose origins could not otherwise Be accounted for should be treated as having been obtained in that way. The prosecution submitied that the court may assume that a drug dealer who has bought drugs for the purposes of resale has met the cost of doing so out of the proceeds of drug trafficking and referred the Court of Appeal co the case of Delleway [2001] 1 CrApp RIS) 77 SIM KAPILA Chartered Accountants in support of that proposition. It argued that it was appropriate in Rv Green to add to the proceeds of sale the cost of buying fresh stocks with which to continue trad- ing, “The Court of Appeal, however, consid- cred that the situation in Dellaway was a different situation from that in Rv Green. In Dellaway, the defendant and others had brought into the country drugs valued at £143,000. The fact that the drugs were in the defendants’ possession implied to the court that the defendants had already paid for them, or were in a posi- tion to pay for them, and it was therefore necessary to assume that the money used for that purpose had been derived From drug trafficking. However, the Court of ‘Appeal considered that if cher is evidence which the court accepts, as there was in Rev Green, that the proceeds of sale were regularly reinvested in new stock, the posi- tion was different. Iwas clearin Rv Green thac the proceeds of sale and the money used to buy the new stock was the same money and that it would be wrong to treat the defendant as having received two separace sums of money when in fact he had received only one, The court recalcu- lated the value of benefic using the higher price for drugs originally put forward by the prosecution but excluding purchases: after making ocher adjustments, the total benefit was computed as £6.8 million. An appeal to the House of Lords on appeal on a matter unrelated to the point discussed above was dismissed Issues becoming clearer Confiscation proceedings have become an Jmporcane part of the criminal justice proc- ess and coure rulings such as those summa- rised in this article are clarifying issues such as the computation of benefit. The Financial aspects of a defendanc’s affairs may be so complex thar the confiscation proceedings take on a ‘life of their own’, In such cases a detailed forensic examina- ‘lon of relevant transactions is likely to be ‘worthwhile George Sim isa partner at Sim Kapila, Chartered Accountants, a firm based in London WI which specialises in forensic and investigative accountancy E-mail gsim @simhapilacco.uk St. George's House 14-17 Wells Street London WIT 3PD ‘Telephone 020 7636 7699 Facsimile 020 7636 7717 E-mail mail@simkapila.co.uk