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The POCA regime is repeatedly celebrated by politicians, law enforcement and the courts as intentionally draconian. Defendants facing confiscation proceedings are forced to deal with reverse burdens of proof and assumptions heavily pitted against them while the state attempts to recover as much of their criminal proceeds as possible. Whatever the merits and demerits of the regime may be, it is undeniable that third parties represent a category of (potentially wholly innocent) individuals who risk being caught up in confiscation proceedings. This blog takes a look at a number of cases involving third party assertions of interest in property at risk of recovery, and how the courts have determined which claims have merit and which not.
A common scenario involving third parties in confiscation proceedings is where the matrimonial home is under threat. In Customs and Excise Commissioners v A and Another  EWCA Civ 1039, the Judge decided in favour of the defendant’s wife and dismissed the commissioner’s application to have the husband’s interest in the matrimonial home included as realisable property. She was found to have had no prior knowledge of her husband’s criminal activities, and no part of the house had been purchased with the proceeds of his drug trafficking.
In SFO v Lexi Holdings  EWCA Crim 1443, the court was asked to decide whether the debt owed to an unsecured third party creditor (L), arising from a civil claim for summary judgment, could justify the variation of a restraint order made against M, the second respondent. It was decided, taking into account s69(2)(c) of POCA 2002, that the court should ignore any debt owed by M to L, to avoid the risk of conflict with any current or prospective confiscation order made against M.
Lexi Holdings demonstrates the prioritisation of confiscation; the third party must have a proprietary claim upon the property itself in order to have any prospect of removing it from the ambit of an order. Summary judgments are considered akin to unsecured judgment creditors and will not take precedence over a confiscation order, unless the court is satisfied that the defendant’s assets are sufficient to satisfy both. The distinction between this case and one involving a matrimonial home is evident.
Another marital scenario, Gibson v Revenue and Customs Prosecution Office  EWCA Civ 645 demonstrates the greater protection afforded to third parties on the basis of their proprietary interest in the assets in question, even where there may be suspicions that the third party has guilty knowledge of tainted assets. This case established that it was for the prosecution to assert a public policy jurisdiction entitling the court to include the wife’s 50% share of the matrimonial home in a confiscation order when she had not been convicted, there was no confiscation order made against her, and there was no statutory confiscation provision in the Drug Trafficking Act 1994 on which the prosecution could rely.
The Judge at first instance had decided that the wife had guilty knowledge: funds used to pay the mortgage and fund two jointly-held bank accounts was not legitimately earned, but acquired through her husband’s role in a conspiracy to import large quantities of cocaine. The Judge further held that that her guilty knowledge of tainted assets should be taken into account against her, in line with public policy. The wife’s appeal was allowed because she was not applying for any exercise of the court’s discretion – she already owned the assets and did not require any court order in her favour. Although she was not entirely innocent, that in itself was not sufficient to ‘sustain the confiscatory jurisdiction necessary for the prosecution to proceed against her’.
Prior to the introduction of section 10A of POCA (by way of the Serious Crime Act 2015), third parties had no right to make representations concerning the extent of their interest in particular assets prior to enforcement proceedings initiated by the Crown. While the cases described above demonstrate that third parties with genuine proprietary claims could succeed in protecting their interests, it was nevertheless felt that these third parties were unfairly disadvantaged by being excluded from the early stages of confiscation proceedings. Such exclusion also led to unnecessary litigation over issues that could be resolved earlier. S10A allows third parties to make representations at the investigation stage; they can state their claim to the asset in question, apply to be separately represented, and call evidence to establish ownership, thus reducing the risk of becoming entangled in litigation in the event that a confiscation order is made to include them/their assets.
10A Determination of extent of defendant's interest in property
On one view, the tone of s10A contrasts with the otherwise draconian character of the Act by providing third parties with an opportunity to become actively involved in proceedings at an earlier stage, and securing the court’s recognition of their interest. However, the extent of the s10A’s protection is in fact limited; not merely because of the continuing inequality of arms between defendants and third parties in confiscation proceedings (by, for example, the unavailability of public funding for third parties), but also because the practical effect of s10A has been determined in a recent case to be less significant than it may have first appeared.
R v Morrison  EWCA Crim 351 serves as a reminder that the emphasis of the confiscation regime remains very much on the defendant and deprivation, even where that may lead to apparent unfairness to a third party. In 2016, Morrison’s partner (C) experienced financial difficulties. M transferred £38,200 to C to assist with the purchase of her Local Authority housing at a substantial discount. This money was, arguably, the proceeds of M’s money laundering. The recorder noted that, within the meaning of s.77 POCA, these funds constituted a “tainted gift”, but declined to make any order in relation to it because the effect on C would be disproportionate. M had no interest in the property and C was not in a position to sell the house because she would have to repay the discount awarded to her, leaving C’s children homeless.
Section 6(5) of POCA 2002 requires the court to make a confiscation order if it would not be disproportionate to require the defendant to pay the recoverable amount. The recorder had based his decision upon the risk of hardship to a third party.
In March this year, the prosecution successfully appealed the recorder’s decision. The Court of Appeal held that basing his assessment of proportionality upon the potential hardship or injustice caused to a third party was a fundamental error in law. It was emphasised that s10A provides that the court may consider the extent of the defendant’s interest in a piece of property in circumstances where there is a competing third party interest. It does not provide for third party rights to be taken into account at the time of making the confiscation order. The third party’s injustice or hardship was to be taken into consideration at the point of enforcement action, where appropriate.
So the situation for third parties in confiscation remains perilous. While s10A POCA appears to offer them a voice earlier than before, seizing the opportunity to speak is by no means straightforward, and the focus remains firmly on what is available for the confiscation order. The protection of third party interests remains a matter to be considered later on, and without taking into account the fairness or proportionality of an order’s impact on any third party. The reality is that the courts will continue to cast the net as widely as possible when deciding what property a confiscation order should target.
Ed Smyth is a Senior Associate in the Criminal Litigation Department. his practice encompasses investigations, prosecutions and other litigation (by a variety of different agencies) concerning complex fraud, financial crime and money laundering. He has considerable experience of confiscation and asset forfeiture proceedings and of challenging the exercise of search and seizure powers. He has acted in cases involving the SFO, the Information Commissioner, the Electoral Commission and various professional disciplinary bodies.
This blog was co-authored by Jaya Narang in the Criminal Litigation team.
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