The Relationship Between Criminal Prosecution and Civil Recovery

By WwarbyKennedy Talbot writes in the Civil Litigation Publication "Solutions" on the relationship between Criminal Prosecution and Civil Recovery. It makes for essential reading for anyone who deals with financial wrongdoing and gives an insight into Prosecutors' new strategic thinking.

RELATIONSHIP BETWEEN CRIMINAL PROSECUTION AND CIVIL RECOVERY Criminal prosecutions, particularly paper intensive fraud, corruption and money laundering cases are expensive. The standard of proof is high, the result is difficult to predict and the system is not primarily intended to forfeit the proceeds of criminality in favour of the State.

Some might think that this explains the introduction of free-standing forfeiture proceedings and the recent conferment of the power to bring them on the prosecuting authorities.

These sort of powers are not completely new. For example, HM Customs have long had powers to forfeit goods. But general civil recovery powers were introduced by Part 5 of the Proceeds of Crime Act 2002.

The proceedings are commenced in the High Court and are governed by the CPR. Initially, only the Director of the Assets Recovery Agency could bring them. The ARA was abolished and its powers transferred to the Serious Organised Crime Agency in 2007. At the same time the Crown Prosecution Service, Revenue and Customs Prosecutions Office and Serious Fraud Office were given the right to bring such civil proceedings.

The structure of the civil recovery provisions is that if property is found by the Court to have been obtained by or through crime or is traceable to crime then the Court must forfeit it to the State. There are some exceptions, notably where the owner of the property is a good faith purchaser to value without notice of its criminal origin. There are interim powers available to preserve property, principally the power for the Court to make a property freezing order, similar to a Part 25 freezing injunction.

The use of these powers raises interesting questions. How should the decision be taken by a prosecutor to conduct a civil case rather than a criminal one? Will civil proceedings be used to side-step the safeguards in the criminal process? Is it right that serious criminality is not marked by prosecution and a conviction of the guilty? What are the consequences to civil recovery proceedings if criminal proceedings have been brought?

Prosecuting authorities’ decision to conduct civil recovery proceedings

The opening section in Part 5 of the Proceeds of Crime Act is s.240. This provides:

“General purpose of this Part

240.—(1) This Part has effect for the purposes of

(a) enabling the enforcement authority to recover, in civil proceedings before the High Court or Court of Session, property which is, or represents, property obtained through unlawful conduct.

(b) [similar in respect of cash forfeiture]

2) The powers conferred by this Part are exercisable in relation to any property (including cash) whether or not any proceedings have been brought for an offence in connection with the property.”

Section 2A of POCA (originally s.2 and reworked when the ARA was abolished) sheds some light on the hierarchy between criminal and civil proceedings. By this section the powers in POCA conferred on SOCA and the prosecuting authorities must be exercised to reduce crime. The Home Secretary must issue guidance to SOCA and the Attorney General must issue guidance to the prosecuting authorities. That guidance must say that the reduction in crime is best achieved by criminal prosecution, rather than civil recovery proceedings.

Thus, by statute it is clear that civil recovery proceedings are secondary to criminal proceedings. Generally, criminal proceedings should be brought if they can. If they cannot be brought or have been brought and fail, civil recovery proceedings can properly be considered. So Collins J. in Director of the ARA v He and Chen [2004] EWHC 3021 (Admin) (a case prior to the abolition of the ARA) said:

“Thus, the approach of the Director must be to let criminal proceedings take precedence, as it were, and only act if such proceedings are either not being taken, or for any reason may have failed if, notwithstanding their failure or the inability for whatever reason to take them, she takes the view that she can establish within the requirements of the Act that the property in question was unlawfully obtained...."

It is important that the scheme is understood, and that it is apparent that the powers given to the Director are wide-ranging and the purpose behind this part of the Act is, as I have indicated, to enable property which has been obtained by means of criminal conduct to be recovered from the person or persons who were involved in that criminal conduct, whether or not a prosecution has ensued or been successful.”

Similar comments can be found in (1) Satnam Singh v Director of the ARA [2005] 1 WLR 3747 where Latham L.J. said that “Generally speaking the civil process is intended to be subsidiary to the criminal process” and (2) SOCA v Olden [2010] EWCA Civ 143 where Sir Scott Baker, having considered the changes brought about the Serious Crime Act 2007, said “The philosophy of the legislation remains that the public interest is best served by giving priority to criminal proceedings where they can be brought and it is in the public interest to bring them.”

Joint guidance was given by the Home Secretary and the Attorney General to SOCA and the prosecuting authorities on the 5th November 2009 and can be found on the Attorney General’s web-site. In summary, it says that:-

(1) Criminal prosecution must be considered first.

(2) If the case does not meet the criteria for prosecution (evidential sufficiency + public interest), then civil recovery can be considered.

(3) In deciding whether the public interest criteria is met for prosecution, SOCA/the prosecuting authorities are entitled to take the view that the public interest is better served by civil recovery proceedings.

(4) A criminal investigation does not need to be completed before civil recovery can be considered.

(5) A criminal investigation / prosecution can continue in tandem with a civil recovery investigation, but criminal and civil proceedings cannot be carried on at the same time in relation to the same criminality.

(6) A prosecution which fails can then result in civil recovery.

(7) Civil settlements may be entered into to compromise civil recovery proceedings, but a potential defendant cannot buy his way out of prosecution by making a civil payment; if the case justifies a prosecution, criminal proceedings should be brought.

With the possible exception of the absolute prohibition on criminal and civil proceedings co-existing, the guidance seems sensible and in accordance with the statutory regime and the authorities decided under it.

It is not clear what is meant in the guidance by criminal and civil proceedings cannot be “carried on” “in relation to the same criminality” at the same time. If all that is meant is that if there are criminal proceedings, then civil recovery proceedings should not be actively pressed by litigation, then it is unobjectionable. However, it is possible to envisage cases where it is sensible to have at least a civil recovery property freezing order in force at the same time as criminal proceedings. For example where property derived from crime carried out by X is held by Y; X is prosecuted and Y (for whatever reason) is not.

In R v Innospec Limited [2010] EW Misc 7 EWCC (Southwark Crown Court), Lord Justice Thomas sat in the Crown Court to sentence Innospec a company which had pleaded guilty to corruption. The Crown and Innospec had agreed, subject to approval by the Crown Court, the amount of a criminal confiscation order: $6.7m. It was also agreed between the parties, and would in due course have to be approved by the High Court, that Innospec would submit to a civil recovery order for a further $6m.

Thomas LJ explained that a prosecutor could not agree a specific penalty in this way and should never enter into an agreement of this type again. The Consolidated Criminal Practice Direction only permitted ranges of sentence, in accordance with authority, to be identified. The UK’s international obligations under the OECD Convention on Combatting Bribery of Foreign Public Officials 1997 require the UK to implement criminal sanctions which are “effective, proportionate and dissuasive.”

Thomas LJ emphasised that companies guilty of corruption should be treated like any other criminal defendant. It was “rarely appropriate” for criminal conduct by a company to be dealt with by a civil recovery order. This was particularly so in the case of corruption, guilt of which should be made patent by a criminal sanction. There may be room for civil recovery in addition to a fine and the Lord Chief Justice should consider directions that would allow the same judge to consider both at the same time.

Thomas LJ’s comments must be seen in context. The context was a company against whom there was a realistic prospect of conviction; indeed it had pleaded guilty. Thomas LJ cannot have meant that wherever there is any evidence of corruption (or for that matter any serious acquisitive crime) then there should be a prosecution and it would rarely be appropriate to bring civil proceedings; otherwise Thomas LJ would be encouraging prosecutorial decision making contrary to the Code for Crown Prosecutors. What Thomas LJ must mean is that where the test for prosecution in the Code is satisfied a prosecution should normally follow.

Construed in this way, Innospec is consistent with the Code for Crown Prosecutors and the Joint Guidance. If criminal proceedings can be brought and it is in the public interest to bring them, they should be brought, rather than civil proceedings. The Joint Guidance permits the prosecuting authorities to take account of the availability of civil recovery when deciding whether it is in the public interest to prosecute. But as said in paragraph 4 of the Joint Guidance:-

“care must be taken not to allow an individual or body corporate to avoid a criminal investigation and prosecution by consenting to the making of a civil recovery order, in circumstances where a criminal disposal would be justified under the overriding principle that the reduction of crime is generally best served by that route, and in accordance with the public interest factors in the relevant prosecutors' Code.”

The prospect of dealing with a corruption or other serious proceeds of crime inquiry by civil proceedings therefore remains open. The SFO, in particular, is likely to see this as good news as it is promoting a policy on corruption which encourages self-reporting with the prospect of the case being dealt with by a civil recovery order rather than prosecution.

Bringing civil recovery proceedings where criminal proceedings have failed

It is entirely understandable that defendants triumphant in criminal proceedings are dismayed to be served with a claim form for civil recovery alleging the same criminality.

However this is expressly provided for by s.240(2) set out above and, for what it is worth, supported by the Joint Guidance.

Further, in a series of unbroken cases, so far at least, the Courts have consistently held that such a course is within the statute.

In Director of ARA v Green and Others [2004] EWHC 3340 (Admin) the submission that where criminal proceedings had been stayed as an abuse of process, it would be wrong for the ARA Director to bring civil recovery proceedings was rejected by Collins J. POCA specifically permits recovery proceedings to be brought whatever fate had befallen earlier criminal proceedings. The ARA Director was a separate entity from any prior prosecuting authority. The fact that criminal proceedings had been stayed as an abuse of process did not in itself make it an abuse to pursue recovery proceedings in the High Court.

Similar comments can be found in Director of the ARA  v He and Chen [2004] EWHC 3021 (Admin).

In most of these cases the Court was influenced by the separate role of ARA or SOCA as opposed to the function of a prosecutor. So in Olupitan and another v Director of the Assets Recovery Agency [2008] EWCA Civ 104 the Court of Appeal approved Langley J the trial judge when he said:

“The Director is not to be equated with the Crown as prosecutor.  The Director is independent with a different role and powers. That role and those powers exist regardless of criminal proceedings; section 240 (2) (the 2002 Act).”

And in Serious Organised Crime Agency v Olden (above) the defendant had successfully appealed to the Court of Appeal against his conviction on the grounds that evidence had been unlawfully obtained and should not have been admitted. His conviction was quashed. Civil recovery proceedings were brought. The Court of Appeal upheld the trial judge’s decision to admit the evidence. Reference was made to the cited passage from Langley J’s ruling in Olupitan. The Court of Appeal held that the decision to admit the evidence was one for the trial judge who should take it free from the decisions taken by the criminal courts.

All these cases, save Olden were where the only person who could bring civil recovery proceedings was the Director of the ARA. The only case decided after the changes brought about by the Serious Crime Act 2007 is Olden. But in Olden the claimant was SOCA, not the former prosecuting authority, and the Court of Appeal seemed to place some emphasis on the fact that SOCA were not a prosecuting authority.

Consequently, the conferment by Parliament of civil recovery functions on the prosecuting authorities requires reconsideration of whether civil recovery proceedings can be brought by the same body which failed in criminal proceedings.

It is thought that the answer can be found in the statute. S.240(2) specifically allows civil proceedings where criminal proceedings have failed. If property is found by the Court to be the proceeds of crime, it must be made subject to a recovery order (s.266). The standard of proof is lower – a balance of probabilities (s.241(3)). And the Joint Guidance, authorised by s.2A, specifically permits civil recovery where criminal proceedings have failed. These features by themselves are sufficient for a civil recovery claimant to be the same body that previously unsuccessfully prosecuted the same defendant.

Any relief for the defendant must be found in the general jurisdiction of the High Court, available in all actions and identified in CPR Part 3.4 to strike out the claimant’s case as abuse of process. As said, it is not thought that the bringing of civil proceedings where a prosecution has failed is, by itself, an abuse. But it is possible to envisage circumstances where it might be. For example, if the prosecuting authority and a defendant reach an agreement as to benefit from crime in the making of a confiscation order, it might well be an abuse for the same prosecuting authority to then commence civil recovery proceedings which, on the facts, go behind that agreement (see by parity of reasoning Lunnon [2005] 1 Cr App (S) 24, where an agreed basis of plea for sentence restricted the Crown’s assertions in confiscation proceedings thereafter).

Civil recovery proceedings where there has been a confiscation order

POCA makes provision to prevent multiple recovery. Part 2 of POCA creates the power of the Crown Court to make a confiscation order following conviction. It is an order to pay a sum of money. It is calculated by assessing the amount of the convicted defendant’s “benefit” from crime. Benefit is the value of the property obtained by the defendant (not retained). It can also be the value of a financial advantage obtained (eg a tax or other liability evaded); and if so, the defendant is taken to have obtained a sum of money to that value (s.76(5)). The benefit amount then becomes payable as a confiscation order, unless the defendant shows he cannot pay it from his assets. Then the order is limited to the value of the defendant’s assets.

POCA makes a somewhat dismal attempt to prevent unfair civil recovery where there has already been a confiscation order.

First, s.308(9) provides that property is not recoverable if it has been taken into account by the Crown Court when deciding a person’s benefit for the making of a confiscation order. This is a dreadfully badly thought out statutory provision. Although perhaps aimed at preventing double recovery, it can prevent any recovery at all.

For example, if a defendant is convicted of stealing a painting worth £50,000 which he sells to a fence for £20,000, his benefit is £50,000, that being the value of the painting at the time he acquired it (s.80). If he has dissipated the £20,000 and has no assets, no confiscation order can be made (save for a nominal amount) (s.7(2)). But the effect of s.308(9) is that the painting cannot be recoverable property. It therefore cannot be the subject of civil recovery proceedings in the hands of the fence, nor any other person who subsequently receives it. Further, if the fence sells it on for £40,000, the £40,000 in the hands of the fence would not be recoverable property as the tracing rules in POCA require the new property to have been exchanged for recoverable property, which in this example the painting is not (s.305).

The same problem arises where there is a joint obtaining and only one defendant is convicted. A joint obtaining means each obtains the whole, whatever may subsequently happen to the property (May [2008] 1 AC 1028). So if A is convicted of fraudulently obtaining £1m and passes it to B, who for whatever reason cannot be prosecuted, no civil recovery proceedings may be brought against B or any other person who subsequently deals with the funds or property traceable to it. This is so, even if A has no assets and so no confiscation order was made against him.

This is a serious legislative error and needs to be corrected by Parliament.