The Fraud Act and the Future of Fraud Prosecutions

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1 The Fraud Act and the Future of Fraud Prosecutions Andrew Bodnar Matrix Chambers Butterworths Serious Crime Conference 30 th March 2010 Although it has been in force for over three years, the precise reach and construction of the Fraud Act 2006 has yet to receive detailed consideration by the Criminal Division of the Court of Appeal; such detailed consideration as there has been has come from the Civil Division of the Court when construing s. 13(4) of the 2006 Act in the context of the abrogation of the privilege against self incrimination. Cases which have come before the Criminal Division of the Court of Appeal on appeal against sentence have shown the Act to be used in cases concerning the over-claiming of benefits, 1 the manufacture of false immigration documents, 2 and working in the UK while not entitled to do so, 3 as well as the sort of conduct one might traditionally consider to constitute fraud. The offence under s. 1 (there is in fact only one offence of fraud, which can be committed in one of three ways) is broad enough to cover conduct which can be dealt with by a summary disposal, right through to conduct meriting a sentence of 10 years imprisonment and an unlimited fine. Examples of cases at the top end of the scale, which might be expected to raise issues concerning the proper construction and application of the Act, have so far been few and far between, perhaps because the legislation only came into force on 1 st January 2007, and can only apply to conduct committed after that date. However, a juxtaposition of recent case law and statutory developments reveals that when these issues do come before the Court for determination, the Court is going to be faced with disparate strands of authority leading to potentially confused results. This talk considers the structure of the legislation, the interpretation thus far placed on it by the appellate courts, and juxtaposes recent developments in the jurisdiction of prosecuting authorities and the approach to asset recovery issues. 1 R v Mafe [2009] EWCA Crim R v Omuwanle [2009] EWCA Crim R v El Saide [2010] EWCA Crim 27 1

2 The Application of the Legislation Sections 2-4 of the Fraud Act set out three types of fraud which can constitute the offence under s. 1; - Section 2: Described as fraud by misrepresentation, its elements closely mirror the tort of fraudulent misrepresentation and is similar to the offences proscribed in ss. 15 and 16 of the 1968 Theft Act and some aspects of the offences under ss. 1 and 2 of the 1978 Theft Act. - Section 3: Described as fraud by failing to disclose information, its elements can be summarised as failing to comply with a statutory duty of disclosure for a gain or leading to loss. - Section 4: Described as fraud by abuse of position, its elements closely reflect an actionable breach of fiduciary duty, even requiring that the person concerned be in a position where he is expected to safeguard, or at least not act against, the financial interests of any person. One example of a case which might have been expected to raise issues about the reach of the Fraud Act was R v Gale, 4 a case concerning the shipping of a substance illegal in the United States to that country. The facts were as follows: Mr. Gale worked for DHL at Heathrow and was in a position whereby his preparation of a document certifying goods in a package as known goods would substantially reduce, if not eliminate altogether, the security checks which such a package would be subjected to. He was approached by third parties who paid him 100 to receive a package in a pub car park, certify it as containing known goods and arrange for the package to be sent to New York. He did not know what the package contained, but it turned out that it contained 500kg of a substance legal in the UK but illegal in the United States, with a street value of some $170,000. Perhaps surprisingly, Mr. Gale was prosecuted for an offence under ss. 1 and 4, on the basis that he had abused his position of trust within DHL for gain, namely 100. Section 4 actually provides: 4 Fraud by abuse of position (1) A person is in breach of this section if he (a) occupies a position in which he is expected to safeguard, or not to act against, the financial interests of another person, 4 [2008] EWCA Crim

3 (b) dishonestly abuses that position, and (c) intends, by means of the abuse of that position (i) to make a gain for himself or another, or (ii) to cause loss to another or to expose another to a risk of loss. (2) A person may be regarded as having abused his position even though his conduct consisted of an omission rather than an act. In context it might be thought that this section targets those who abuse a fiduciary position to make a gain for themselves or cause loss to their principal or beneficiary. There is absolutely no indication on the facts as summarised by the Court that Mr. Gale that anyone addressed the question of whether he held what could properly be described as a fiduciary duty towards anyone, and if so whether he breached that duty in acting as he did. Certainly the facts as set out above do not easily fall within what is commonly understood by the term breach of fiduciary duty ; it is a case about drugs smuggling. However, if one looks at the facts again and the reads the section disjunctively, it is possible to discern a rationale for the charge: Mr. Gale was in a position where his certification of goods as known would prevent them being subjected to the usual checks by Revenue and Customs; indeed the Court highlighted this fact. That certification process applied whatever the goods, so that in essence Revenue and Customs would take his word for it that the goods were as described for the purposes of assessing any duties which had to be paid on them. He could therefore be described as being in a position in which he was expected to safeguard, or not to act against, the financial interests of another person, viz. Revenue and Customs. He unquestionably abused that position of trust, though not in a way which caused any financial loss to the Exchequer. He intended to make a gain for himself by abusing his position (viz. 100). Therefore, on one view he rightly pleaded guilty to an offence which charged his conduct, being party to the trafficking of drugs, as fraud. However, it is surely a shame that the issue was not raised to enable the Court of Appeal to consider it. The nature of fraud was considered in detail by the Civil Division of the Court of Appeal in Kensington International Ltd v Republic of Congo and Others, 5 a case concerning enforcement of a judgment debt. Kensington was a company engaged in activity sometimes described as a vulture fund, and had bought a sovereign debt of Congo on which it had defaulted. It obtained judgment in the United Kingdom on the debt and sought something akin to a third party debt order against an oil trading company in Switzerland to enforce it. Kensington then sought orders from the UK court against a subsidiary of the oil trading company preventing it from making any further payments to Congo for oil and for disclosure concerning its contracts with the country. Amongst other issues, the oil trading company sought to set aside the disclosure orders on the basis that the answers may tend 5 [2008] 1 WLR

4 to incriminate it. The offence of which it feared prosecution was bribery of a Congolese official. The issue was therefore whether the privilege against self incrimination was abrogated by s. 13 of the Fraud Act, and in turn whether corruption could be described as an offence involving any form of fraudulent conduct or purpose for the purposes of s. 13(4) of the Act. In the course of analysing this question, Moore-Bick LJ, with whom the other members of the Court agreed, defined fraud in the following terms: 59 For my own part I think that the essence of fraud is deception of one kind or another coupled with injury or an intention to expose another to a risk of injury by means of that deception. That broadly coincides with the view expressed by Stephen in his History of Criminal Law quoted in paragraph 7.8 of the Law Commission's Report on Fraud (2002) (Law Com No 276) (Cm 5560). Both misrepresentation and the wrongful withholding of information, when knowing and deliberate, amount to calculated deception and even abuse of position of the kind falling within section 4 can be described as deception of a kind since the wrongdoer deliberately deceives the person whose interests he is bound to safeguard by allowing him to believe in his trustworthiness while actively falsifying that belief. Although I find it difficult to see how fraud of any kind properly so called can be committed without dishonesty, dishonesty is not the critical distinguishing mark of fraud. These considerations lead me to the conclusion that in order for an offence to involve some form of fraudulent conduct or purpose it must involve an element of deception in the sense mentioned earlier. His Lordship then applied this definition to conclude that corruption, by its nature, involves an element of deception, and by definition involves the risk of harm to the principal of the corrupted individual, so that offences of bribery necessarily involved fraudulent conduct. Moore-Bick LJ expressly stated that the person who receives a bribe is engaging in conduct which is covered by s. 4 of the 2006 Act, but the applicability of the statute surely does not stop there; a person who pays a bribe and conceals it (as will usually be the case), will necessarily make a false representation, and do so with the intention of making a gain for himself or another, and, on the Court s analysis in Kensington, exposing another to loss. It must therefore surely follow that a person who pays a bribe and conceals the fact is guilty of fraud contrary to ss. 1 and 2 of the Act. If that is right then, subject only to questions of territoriality, the Bribery Bill is completely unnecessary, at least insofar as it criminalises the act of paying and receiving bribes. The question arose again before the Civil Division of the Court of Appeal in JSC BTA Bank v Ablyazov and Others, 6 a case once again concerning disclosure and the privilege against self incrimination. In this case the offence which the appellant company feared prosecution of was an offence contrary to s. 328 of the Proceeds of Crime Act, commonly referred to as money laundering. Moses LJ, with whom the other members of the Court agreed, said; 22. The important feature of the definition under s.13(4)(b) is that it defines related offence by reference to the quality of the conduct brought within the scope of the charge and not 6 [2010] 1 Cr. App. R. 10 4

5 merely by reference to the intention of the alleged offender. The conduct falling within s.328(1) is entry into or becoming concerned in an arrangement which facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person. Such an arrangement enables one who has obtained the proceeds of crime to retain the benefit of those proceeds whilst concealing their true source. Whether the alleged offender knows or suspects that the arrangement will facilitate that consequence is not to the point. He has deliberately chosen to enter into or become concerned with such an arrangement despite his knowledge or suspicion. 23. S.13(4)(b) is wide enough to include an offence which charges conduct which has a fraudulent quality, notwithstanding that it has no fraudulent purpose. The effect of the arrangement is necessarily to conceal from public officials and the public at large the criminal source of the property. That, in my view, involves deception in the way described by Moore- Bick LJ in Kensington at [61] and [63]. 24. Nor does it seem to me to be relevant that the criminal property might itself not be derived from fraud. Even if the property is, for example, obtained as a result of dealing in drugs, the effect or potential effect of the arrangement into which the offender enters despite his knowledge or suspicion is to conceal the fact that the property is derived from drug-dealing. That element of concealment is, in my view, deceptive and fraudulent, even if the offender was only suspicious when he entered into or became concerned with what I consider to be a deceptive arrangement. On this analysis, therefore, the laundering of the proceeds of drug trafficking is to be described as fraudulent. Although the Court limited its consideration to the question whether money laundering was related to fraud, the logical consequence of its decision is once again at least arguably much broader; by s. 5 of the Fraud Act a gain can be made when a person retains what he has. It is the essence of money laundering that a misleading representation is made concerning the origin of the funds laundered. If a person dishonestly makes a misleading representation with the intention of thereby enabling another to retain what they have they are guilty of an offence under ss. 1 and 2 of the 2006 Act. It would therefore appear to follow that the act of laundering the proceeds of drug trafficking constitutes the offence of fraud under the Fraud Act. Because the offence-creating provisions are so very broadly drafted, there must surely be a temptation for prosecutors to avoid the complications inherent in proving a more specific criminal offence and instead to charge nearly all forms of financial crime as fraud. 5

6 Procedural Consequences As can be seen from the above, the provision which has given rise to the most detailed litigation so far is s. 13 of the Act, which abrogates the privilege against self-incrimination in proceedings relating to the recovery of property. The question of what is meant by that phrase also arose in Kensington International Ltd, 7 a case predicated on a claim on an outstanding loan. Building on case law decided under s. 31 of the Theft Act 1968 it was held that a claim for the payment of a debt constituted proceedings relating to the recovery of property for the purposes of s. 13(1) of the Fraud Act, even where the claim involved no allegation of dishonesty. Significantly, the Court recognised that a claim for the payment of a debt cannot sensibly be described as a proprietary claim, even if it can be described as an action for the recovery of property. From the perspective of private law proceedings in the civil courts the apparent effect of this judgment, taken together with the decision in JSC BTA Bank 8 is that the privilege against self incrimination has been abrogated in all proceedings where money or other property is claimed, regardless of whether the claim itself alleges dishonesty, wherever the offence prosecution for which the party concerned fears is a crime concerning property involving some form of deception. This is a potentially powerful evidential tool for claimants in such cases. However, the counterbalance to the abrogation of the privilege against self-incrimination is that any answers given to questions or material provided in answer to any order made in such civil proceedings may not be used in evidence against the party concerned in any subsequent criminal proceedings for an offence either of fraud within the 2006 Act or a related offence. There is no exception providing for the admissibility of such evidence where the party concerned makes a statement in subsequent criminal proceedings which is inconsistent with the statement or information provided in the civil proceedings. Since both corruption and money laundering have been held to be related offences for the purposes of this provision one is forced to ask where the line is to be drawn. It is suggested that the dicta in Kensington and JSC BTA Bank must lead to the conclusion that such material may not be admitted in evidence in any proceedings in which a misrepresentation or other deception concerning money or other property is alleged, even if the material would tend to disprove the version of events put forward by the defendant in the criminal proceedings. That is a very broad exclusion from the perspective of the criminal justice system. The position is further complicated by recent authorities concerning the restraint regime under POCA. In Serious Fraud Office v Lexi Holdings 9 the SFO had obtained a restraint order against property held by a defendant to a substantial fraud allegation. The victim of that fraud took proceedings in the Chancery Division and obtained judgment against the defendant. Part of that judgment granted a proprietary remedy enabling Lexi Holdings to trace into certain funds held in a 7 [2008] 1 WLR [2010] 1 Cr. App. R. 9 9 [2009] QB 376 6

7 bank account, and part was for liquidated damages. Lexi sought a variation to the restraint order to permit the defendant to meet his judgment debt, which was granted at first instance. On appeal the question which arose was whether it was permissible for the Crown Court to vary a restraint order to permit a defendant to pay a debt such as the defendant owed to Lexi in this case. The issue was the correct construction of the legislative steer in s. 69 of the Proceeds of Crime Act (POCA). Section 69(2) requires that the powers of the Crown Court to make and vary restraint order should be exercised in such a way as to ensure that the assets of the defendant available to meet any confiscation order which may be made following conviction are not diminished. Section 69(4) requires that the Crown Court exercise its powers in such a way that a third party is able to recover the value of any property held by them. The Court concluded that Lexi was entitled to a variation to recover the traceable funds, but that the Crown Court had been precluded by s. 69(2) from varying the restraint order to permit the defendant to satisfy that part of the judgment awarding liquidated damages. That approach was followed by the Court of Appeal in Re Stanford International Bank, 10 a case in which a receiver appointed by the District Court in Texas, a liquidator appointed by the High Court in Antigua and the SFO all sought control over some $120m located in various accounts in London. The guiding principle in both cases was that the restraint order is intended to hold the ring until the question of the defendant s guilt or innocence is decided, and there should be orderly distribution of the sum available through the criminal confiscation and compensation regimes by the prosecuting agency. Therefore there appears to be a tension between the policy which seems to underpin the Fraud Act (that victims of fraud should be able to progress their claims without the defendant being able to assert the privilege against self-incrimination to frustrate the proceedings) and the policy which has been held to underpin the Proceeds of Crime Act. Indeed it is not inconceivable that a situation might arise in which the victim of a fraud succeeds in obtaining judgment against the fraudster, and in the process leaves a prosecutor unable to call evidence of that same fraud because it was disclosed by the defendant in the civil proceedings, but that same victim is unable to recover their loss because a restraint order prevents the defendant from making such a payment. Quite how such an empasse is to be resolved is not addressed in the legislation. It is now clear that where a defendant is made bankrupt any property subject to a restraint order is excluded from the bankrupt estate and any sums subject to a bankrupt estate are excluded from the operation of a restraint order. 11 However, when the Court comes to consider the making of a confiscation order any property which is then vested in the defendant s trustee in bankruptcy remains theoretically available to satisfy any such order. 12 This somewhat paradoxical situation is borne of the fact that the debt owed under a confiscation order survives the defendant s bankruptcy (unless the Crown Court varies the confiscation order) and is intended to ensure that unscrupulous defendants are not able to circumvent the confiscation regime by declaring themselves bankrupt. 10 [2010] EWCA Civ POCA ss. 417 and POCA s. 84, R v Shahid [2009] 2 Cr. App. R. (S.) 105 7

8 Civil recovery vs. Criminal Prosecution Of course no issues arise in relation to the admissibility of evidence in civil proceedings. This in turn would seem to mean that a prosecuting agency will be able to rely on any material provided by a defendant to a private law claim in answer to a question or court order to which s. 13 of the Fraud Act applies in subsequent proceedings for a Civil Recovery Order under Part 5 of POCA. Since such proceedings bite in rem there is also no question concerning priority between a claim under Part 5 of POCA and the insolvency legislation. In those circumstances one could envisage a future for the prosecution of fraud in which victims are left to pursue those guilty of fraud and the prosecuting agencies pursue civil recovery proceedings seeking the residue of any gain from the criminal activity not caught by the civil claim, with long and complex fraud prosecutions disappearing over time. 8