England and Wales Court of Appeal (Criminal Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CRIMINAL DIVISION)
ON APPEAL FROM INNER LONDON CROWN COURT
HIS HONOUR JUDGE CAMPBELL

		Royal Courts of Justice Strand, London, WC2A 2LL
		30 October 2002

The Recorder of Liverpool:

1. This is a renewed application for leave to appeal against sentence. On 9 February 2000, in the Crown Court at Inner London before HHJ Campbell, the appellant was sentenced to five years’ imprisonment for an offence of conspiracy to supply a controlled drug, to which he had pleaded guilty. At the same time a Drug Trafficking Confiscation Order was made in the sum of £234,315.54, to be paid within 12 months, and in default of payment the appellant was ordered to serve two years’ imprisonment, consecutive.
2. The application for leave to appeal relates only to the confiscation order, and only to one part of it. In short, the complaint relates to the inclusion, as one of the items of property constituting the proceeds of drug trafficking, of his home at 66 Constable Court, in London SE16, which continued to be occupied by his girl-friend and their young child. Alternatively it is argued that if that property was correctly included, the valuation should have been only the equity of redemption, after deducting the outstanding mortgage liability, rather than the gross value of the house.
3. The Crown was represented on the hearing of the renewed application and responded to it. It was quickly clear that an arguable ground of appeal existed, leave was granted and we moved directly to the hearing of the appeal.
4. For present purposes the facts of the case can be briefly stated. The conspiracy to which the appellant and others pleaded guilty was laid in the indictment as extending from February 1998 to February 1999. It involved the importation of cannabis into the UK, its distribution and sale and the laundering of the proceeds of sale to Gibraltar. It was detected as the result of an elaborate undercover police operation.
5. In the course of that operation the appellant was observed handling and transporting a package containing 50 kg of cannabis resin with an approximate street value of £250,000. Other observations were made, and after his arrest he was found to have control of large sums of cash. In due course he pleaded guilty on the basis that he was, from the end of July 1998 onwards, involved as a “medium wholesaler” handling amounts of the order of 10-50 kg.
6. Drug trafficking confiscation proceedings were in due course launched in relation to all the defendants and a hearing took place over several days, culminating in a lengthy and detailed ruling on 8 February 2000. It is clear that the judge took great care, dealing not only with the detailed financial issues but also with arguments advanced under the Human Rights Act and Convention, to which he had regard even though they were not yet in force. It is a tribute to him that only one discrete element of his ruling has been challenged.
7. In the amended Prosecutor’s Statement, served pursuant to s11 of the Drug Trafficking Act 1994, the then current market value of the property was included in the proceeds contended for, namely £90,000. That valuation was not in itself challenged on behalf of the appellant, but the judge was provided with written details showing that the house had been bought in 1995 at a price of £52,750 with a 90% mortgage of £47,475 from the Halifax Building Society.
8. The appellant did not give evidence in the confiscation proceedings.
9. It was not in issue before the judge, the appellant having pleaded guilty, that he had benefited from drug trafficking. The judge thereupon had a two-stage task to perform. First, he was required to assess the proceeds of the applicant’s drug trafficking under s4 of the Act, making where appropriate the required assumptions set out in that section. Having done so, he had then to make the confiscation order under s5, which had to be made in the full amount of those proceeds unless s5(3) applied to reduce that figure to the amount of his realisable assets.
10. In most cases, the realisable assets are found to fall far short of the assessed value of the proceeds. In such cases, by virtue of s5(3), the judge’s task is to make the confiscation order in the amount of the realisable assets. It is well established by decisions of this court, including particularly Ilsemann [1990] 12 CAR(S) 398, that the burden is upon the defendant to establish that his realisable assets fall below the value of the proceeds of drug trafficking. But in practice it is commonly accepted that the only realisable assets are those identified by the police or CPS confiscation unit’s investigators.
11. Thus it is that in many cases the Crown’s valuation of the proceeds of a particular offender’s drug trafficking is of little more than academic interest: what matters is the amount of his realisable assets. It remains open to the Crown to apply later to the High Court under s16 of the Act if the offender is found to have acquired further assets, as was done in Tivnan [1999] 1 CAR(S) 92, but this is a rare eventuality.
12. In the present case, on the other hand, the process of valuation of the proceeds of drug trafficking under s4 was of critical importance, since the appellant gave no evidence to displace the assessment of his realisable assets at over £245,000, whereas the value of the proceeds, or benefit, including the full £90,000 in respect of the house, was valued at £234,315.54. The confiscation order was made in the amount of those proceeds and any reduction in the assessed proceeds will go to reduce the confiscation sum itself.

We therefore turn to the essential issue before us.

13. The Drug Trafficking Act 1994 provides as follows:

“Assessing the proceeds of drug trafficking

4.-(1) For the purposes of this Act

(a) any payments or other rewards received by a person at any time (whether before or after the commencement of this Act) in connection with drug trafficking carried on by him or another person are his proceeds of drug trafficking; and

(b) the value of his proceeds of drug trafficking is the aggregate of the values of the payments or other rewards.

-(2) Subject to subsections (4) and (5) below, the Crown Court shall, for the purpose

(a) of determining whether the defendant has benefited from drug trafficking, and

(b) if he has, of assessing the value of his proceeds of drug trafficking, make the required assumptions.

-(3) The required assumptions are

(a) that any property appearing to the court:

(i) to have been held by the defendant at any time since his conviction, or

(ii) to have been transferred to him at any time since the beginning of the period of six years ending when the proceedings were instituted against him,

was received by him, at the earliest time at which he appears to the court to have held it, as a payment or reward in connection with drug trafficking carried on by him;

(b) that any expenditure of his since the beginning of that period was met out of payments received by him in connection with drug trafficking carried on by him; and

(c) that, for the purpose of valuing any property received or assumed to have been received by him at any time as such a reward, he received the property free of any other interests in it.

-(4) The court shall not make any required assumption in relation to any particular property or expenditure if

(a) that assumption is shown to be incorrect in the defendant’s case; or

(b) the court is satisfied that there would be a serious risk of injustice in the defendant’s case if the assumption were to be made;

and where, by virtue of this subsection, the court does not make one or more of the required assumptions, it shall state its reasons.”

14. Drug Trafficking Act 1994:

“Section 7. –(1) Subject to the following provisions of this section and to section 8 of this Act, for the purposes of this Act the value of property (other than cash) in relation to any person holding the property is the market value of the property, except that, where any other person holds an interest in the property, the value is

(a) the market value of the first-mentioned person’s beneficial interest in the property, less

(b) the amount required to discharge any incumbrance (other than a charging order) on that interest.”

15. The learned judge correctly directed himself as to the legislative intention of these provisions, their draconian nature and the very limited extent to which any judicial discretion can be exercised, strictly within s4(4). He had been urged to take into account wider interests such as those of the offenders’ families.
16. He said:

“Wider concepts of social justice, however, appear to this court to be completely beyond the scope of the second exception. The Crown rightly points out in this case that if a home occupied by a wife and children was held to be in some way inviolate, both as regards benefit and realisability, it could produce the ridiculous result that a drug trafficker could ensure that he invested all his drug proceeds in some palatial house and home with impunity. If a court was entitled to look at wide social issues, then really what is being said is that the court’s role is a discretionary one. This was clearly not the intention of those who drafted, and parliament that passed the Act. The earlier Drug Trafficking Law did contain an element of discretion. The proceeds relating to other forms of criminal offence – offences of dishonesty not covered by the Drug Act – also includes a general discretion. This Act contains no general discretion and it is quite clear that that was deliberate. The assumptions have been described in a number of cases as ‘hard’, as ‘draconian’, and indeed that may well be the position, but that appears, without doubt to this court, to be the intention of the Act which this court is bound to follow.

The court must therefore consider each case on the statutory basis and apply the assumptions subject to the exceptions in section 4(4).”

This passage in his ruling was entirely correct and has not been challenged in this court.

17. As to the inclusion of the house as an item of proceeds of drug trafficking, it clearly fell within the required assumption at s4(3)(a) of the Act. Not only was it property currently held by the appellant, but it was property which he had acquired within the preceding six years. In those circumstances it was for him to show that the required assumption was incorrect in his case, and this he made no attempt to do.
18. It seems to us that the judge was quite right on this part of the case. The mortgage advance was a loan which had to be repaid by instalments in the conventional way. The appellant is deemed, by virtue of the required assumptions, to have been paying those instalments from drug trafficking proceeds. He only obtained the loan, and thus the house, by virtue of binding himself to make those payments. There was nothing before the judge to displace the assumption.
19. The more difficult question is whether the judge was right to include in the proceeds of drug trafficking the gross valuation of the property, £90,000, or the net equity, £42,117.59. Though the appellant did not give evidence, the position was clear on the undisputed figures provided to the judge, showing that all but the 10% deposit was provided by the building society as a mortgage advance. Mr Fortson argues that this mortgage advance should be treated as clean rather than tainted money.
20. This requires the court to consider the relationship between s4 and the required assumptions, particularly that enshrined in s4(3), and s7(1) of the Act. Mr Dennison for the Crown contended in his written grounds that s7 is subservient to s4; Mr Fortson contends that whereas s4 sets out the required assumptions, it is to s7 that the Court must turn for the way in which the property should be valued.
21. There is no authority directly in point under the Drug Trafficking Act 1994. In the written Grounds of Appeal and supporting Advice, and indeed in Mr Fortson’s skeleton argument, no reference was made to any authority under the preceding legislation, the Drug Trafficking Offences Act 1986. We were however referred to two decisions in relation to confiscation proceedings under the Criminal Justice Act 1988, namely re K (McCullough J, unreported, 6 July 1990) and Layode (in this court, unreported, 12 March 1993). Though both unreported, we were told by counsel on both sides that they are well-known and have been generally followed in confiscation proceedings, not only under that Act but also under the Drug Trafficking Act 1994.
22. The first case, K, concerned a restraint order made in advance of a trial for alleged mortgage frauds, to secure the defendant’s property in anticipation of a confiscation order in the event of his conviction.
23. McCullough J concluded that the gross value of the defendant’s property should be included. He listed, at p4G of the transcript, the four requirements for making a restraint order:

“Pausing there, it will be noted that there are four requirements.

(1) concerns the chance of a defendant’s conviction.

(2) involves valuing the benefit he obtained.

(3) involves valuing his realisable assets.

(4) is whether it appears that a confiscation order may in fact be made.

Each capital sum advanced to K and his co-defendants was secured on the property purchased in consequence of the advance. So were the interest payments due each month. Mr Press on behalf of K submits that the value of the benefit obtained is the equity of redemption.

I do not accept this. We are concerned here with requirement (2), which is framed much more simply than (3). Requirement (3) necessitates a consideration of whether any other person (a building society, for example) has an interest in the property, but (2) does not. The questions at (2) are simply: (a) what property did he obtain as a result of or in connection with the commission of the offence, and (b) what was its value?

“Property” is defined in section 102(1) as including “money and all other property, real or personal, heritable or moveable, including things in action and other intangible or incorporeal property”. If, as a result of, or in connection with, one of the offences with which he stands charged the title in a house was conveyed to a defendant then, in my judgment, the ‘property’ he thereby obtained was the house. So his benefit was the value of the house and not the value of the equity of redemption.

Were Mr Press’ submission right, in a case where the monthly payments of interest fell into arrear, the value of the benefit obtained would steadily decrease. At stage (2) the court is concerned with what the defendant received and not with any later diminution in what he received. If, for example, a bank robber steals £20,000, then £20,000 is the benefit he received from the crime. The fact that some or all of the £20,000 is later dissipated is immaterial, even if he uses some of the money to repay his overdraft at the same bank.

I accept that Mr Press’ contention that the capital sum secured by the advance should be deducted is stronger on account of the facts that the conveyance from purchaser to vendor, and the mortgage by the purchaser, take place almost coincidentally, and that the mortgagee only lends on the security of the house. But I nevertheless think that the answer to the simple question required by the statute, ‘What property did he obtain?’ must be ‘The house’.

There is nothing unfair to a defendant in this construction, since both capital and interest secured on the house will be taken into account at stage (3), which adequately protects a defendant without other assets, and in any event, as I will come to presently, I would expect the judge to do so when arriving at a fair figure at stage (4).”

24. That decision in K was followed by this Court three years later in Layode, which concerned a confiscation order under the 1988 Act made after conviction for mortgage frauds. Giving the judgment of the Court, Macpherson J made trenchant comments about the appellant’s absence from the witness box and went on:

“This is another case in the developing body of law arising both from the Drug Trafficking Offences Act 1986 and the 1988 Act. Both have the objective of clawing back the benefits derived from offences. In some respects these two Acts are closely comparable. In other respects there are significant differences (for example, as to assumptions which can be made, onus of proof, etc). Each case under each Act has to be considered upon its own facts….

In our judgment £80,000 was the correct figure to include in this case as benefit in respect of counts 2 and 4.

Section 71(4) of the 1988 Act reads as follows:

‘For the purposes of this Part of this Act a person benefits from an offence if he obtains property as a result of or in connection with its commission and his benefit is the value of the property so obtained.’

Nothing in that section suggests that anything other than the actual value of the property when it is obtained should be included as benefit. Where another person holds an interest in the property the amount required to discharge any encumbrance (other than a charging order) shall be taken into account. But otherwise the Act states (section 74(4)) that the ‘value of the property’ is its market value, and ‘the value of the property when he obtained it’ (see section 74(5)). In our judgment none of the somewhat intricate provisions of the relevant sections of the Act made it necessary or right to consider any figure other than £80,000 (the purchase price) in respect of counts 2 and 4. The words of section 74(4) are in our judgment conspicuously clear.”

25. Thus Layode, approving and following K, is binding authority in this Court, for the purposes of confiscation proceedings under the 1988 Act, that s74(4) falls to be applied only at stage 3 (as enumerated by McCullough J), i.e. when the judge is making his valuation of the offender’s realisable assets. It may be pertinent to note that the preceding subsections of s74 relate specifically to the issue of realisable assets. In the Drug Trafficking Act 1994, on the other hand, s7(1) is not placed in that specific context.
26. It was argued before us that the Drug Trafficking Act provisions differ in a number of respects from those in the 1988 Act. Though s7(1) is in virtually identical terms to s74(4) of the 1988 Act, not only is it placed in a different context but it falls to be applied in a different way. Furthermore, in so far as its operation may conflict with the required assumption at s4(3), that the property was received free of any other interests in it, that assumption is itself rebuttable (by virtue of s4(4)(a)) if it is shown to be incorrect in the particular case. In the present case it was incorrect, since the house was in fact acquired subject to the building society’s interest in it. Thus, though the intention behind both legislative schemes is harsh and draconian, they in fact operate differently on this particular issue.
27. Before us Mr Fortson relied on the decision of this Court in Johnson [1991] 2 QB 249. Though this is a reported decision, and though Mr Fortson is an acknowledged expert in this branch of the law, he frankly told us that he only recently became aware of its relevance to the present problem; as the headnote shows, it was reported principally on another point. It is a decision under the Drug Trafficking Offences Act 1986, but it was conceded before us on behalf of the Crown that there is no distinction between the 1986 and 1994 Acts for present purposes. In particular, s7(4) of the 1994 Act is in similar terms to s5(4) of the 1986 Act which was under consideration in Johnson.
28. The relevant issue in Johnson concerned a motor car which the appellant had bought for £6,000 with the assistance of a loan from Forward Trust. She had, by the time of the order, paid instalments totalling £1,300 as well as the initial deposit of £400. At the time of the order the car was worth £5,000. Forward Trust had no title or interest in the car itself; they had made a simple loan advance, no hire-purchase arrangement being involved.
29. The reserved judgment of the Court was given by Neill LJ:

“We come next to the car. The judge was clearly entitled prima facie to make the assumption that the car in the ownership and possession of the appellant at the time of her arrest was received by her as payment or reward in connection with drug trafficking carried on by her. But here again the judge had evidence as to how the purchase price of the car was in fact provided. The appellant paid the deposit of £400 and the balance was provided by a loan from Forward Trust. In the following months the appellant was able to repay the loan to the extent of a further £900. In these circumstances the judge was certainly entitled to assume that the £1,300 represented monies received by the appellant as a reward. The question is, whether he was entitled to assume that the whole purchase of the car, that is, £6,000, was a payment or reward received by the appellant.

It was argued on behalf of the Crown that it was important to bear in mind that the agreement with Forward Trust was not a hire purchase agreement. Had the car been bought on hire purchase, Forward Trust would have held an interest in the property and the value of the appellant’s interest in the car would have been calculated in accordance with section 5(4)(a). In the present case, however, the car was owned by the appellant and the right of Forward Trust was merely a right to repayment of a loan. They had, and have, no interest in the car. Accordingly it was argued that the car directly or indirectly represented the £400 (and the subsequent £900) which, having regard to the statutory assumptions, the appellant could be shown to have received.

We have come to the conclusion, however, that the car cannot be regarded as directly or indirectly representing the sums of money which the appellant received.

But there is a further argument which also requires consideration. It can be developed along the following lines: (a) the car was held by the appellant at the time of her arrest; (b) by reason of the assumption in section 2(3) (a) of the Act of 1986 it could therefore be assumed to have been received by her as a payment or reward in connection with drug trafficking carried on by her; and (c) the value of the car had to be calculated in according with section 5(6)(a) of the Act of 1986 and was therefore the total value of the car. The appellant was free to sell it.

It is to be remembered, however, that all statutory assumptions are subject to the concluding words in section 2(2): ‘except to the extent that any of the assumptions are shown to be incorrect in the defendant’s case’. It seems to us that, where it is possible for a defendant to demonstrate the actual source of the funds used to purchase an asset held by him at a material time, the statutory assumptions cannot be made if the court is satisfied that the source of the sums is not from drug trafficking and does not represent a payment or reward. In the present case there is no suggestion whatever that the loan provided by Forward Trust represented tainted money. It follows, therefore, in our view, that the car cannot be assumed to have been received as a payment or reward in connection with drug trafficking.”

30. Mr Fortson argues that the decision in Johnson, being binding in this court, is indistinguishable and determinative of this appeal in his favour. He argues, further, that the result reached by the judge below produces unfairness to the appellant in that he is required to pay the same sums twice, both to the building society and under the confiscation order. This, he contends, is more than merely the draconian result intended by the legislature; it requires him to pay more than the true amount of his proceeds of drug trafficking.
31. Mr Dennison argued that the two legislative provisions strive to reach the same result and are similarly harsh and draconian in their nature. This, in principle, we accept. He sought to distinguish Johnson on the ground that the asset was of a different nature, a car rather than a house, a depreciating asset rather than an appreciating one. He pointed out that the car remains the owner’s property, whether or not the repayments of the loan repayments were made: in the case of a mortgage, a failure to make the payments would increase the mortgage debt. Thus, on Mr Fortson’s construction, the offender would be able to reduce the confiscation order by reneging on his mortgage payments.
32. We have concluded that Johnson is indistinguishable from the present case and that we are bound by it. The distinction between the car and bank loan on the one hand, and the house and mortgage on the other, is one which works against rather than in favour of Mr Dennison’s argument. It appears to have been conceded by the Crown in Johnson that if the lender had held an interest in the car, for example through a hire purchase agreement, the value of the appellant’s interest in it would been calculated in accordance with s5(4)(a), the equivalent of s7(1)(a) of the 1994 Act. In Johnson the lenders had no legal interest in the car, but despite this the court held that it could not be regarded as directly or indirectly representing the sums of money which the appellant received for drug trafficking.
33. In the present case the mortgage lender undoubtedly had an interest in the house and s7(1)(a) must therefore be applied to the court’s valuation of the offender’s interest, which is represented by the equity of redemption. The other component of its gross value, the remaining mortgage debt, comprises the residue of the original “clean” money advanced by the building society. It should be remembered, of course, that the valuation of the equity, £42,117.59, essentially represents the property’s appreciation in value in the years since it was purchased, and that the effect of the reduced order will still be to strip the offender of that benefit. What it will not do is to require him to pay more than the benefit which, applying the required assumptions, he is deemed to have received.
34. We do not overlook the required assumption enshrined in s4(3)(c) of the Act. But, as in Johnson at p259D-F, we apply s4(4)(a) and hold that to the extent that the house was purchased with money provided by the building society, the required assumption is shown to be incorrect in the appellant’s case.
35. Though we have little sympathy for the appellant, this result does, in our judgment, do justice to his case. It is a matter of regret, however, to find that in this particular respect the Drug Trafficking Act 1994 operates differently from the Criminal Justice Act 1988, especially when that difference had not previously been recognised and when K and Layode had been applied without argument for many years.
36. In the result, the confiscation order must be reduced by the difference between £90,000 and £42,117.59, namely by £47,882.41. The resulting sum is £186,533.13 and the appeal will be allowed to that limited extent.
37. (Our provisional view is that the judge’s orders as to time for payment and imprisonment in default should stand unaltered.)

LORD JUSTICE JUDGE: Our present view is, as the paper indicates, that the orders as to time for payment and imprisonment in default should stand unaltered. Have you any submissions?

MR IRWIN: My Lord, I do. They can be taken very briefly. I do ask for a further six months on Mr Walls' behalf and the variation of the order to that extent. A certain part of the order has been met, as I understand it. Your Lordships are, of course, aware that Mr Fortson has been dealing with this appeal up to now but I was his junior at trial. It is my understanding that something in the region of £75,000 has been paid towards the order and Mr Walls, who attends court and from whom I have taken instructions this morning, has moved out of what was the family home, 66 Constable Court, the property around which this -- to which this appeal relates, moved out knowing that at some point in the future he may have to sell it.

He has effectively put the sale on hold pending the outcome of this appeal. It is perfectly apparent to him this morning that he will have to sell and he would rather do that himself than have the Official Receiver do it for him. For that reason only I ask for a further six months for Mr Walls to realise the property himself rather than another on his part.

LORD JUSTICE JUDGE: Mr Dennison?

MR DENNISON: My Lord, so far as I am aware there is no receiver currently in place. When one looks at the assets which were available in 1999, it appears that there was a sum in the region of £70,000 in cash. Cash and bank drafts held, one presumes, by the prosecution. It therefore seems that the defendant has made no effort of his own to pay any of the sums that he must have known would have been outstanding. On any view, his appeal would only have been successful, at best, to reduce the sum by the £90,000. I would, my Lord, say that, as the provisional indication was, that the time to pay should remain the same.

MR JUSTICE BUTTERFIELD: 12 months from when?

MR DENNISON: My Lord, it would have been 12 months from the date of the judgment.

MR JUSTICE BUTTERFIELD: From today?

MR DENNISON: My Lord, no. It would 12 months from the original sentence.

MR JUSTICE BUTTERFIELD: So it has already expired?

MR DENNISON: Yes.

MR JUSTICE BUTTERFIELD: Yes, I see.

MR DENNISON: Yes. One must bear in mind, of course, that although my Lord has reduced the order, we still look at the valuation figures as of three years ago effectively.

LORD JUSTICE JUDGE: Yes. Mr Irwin, is it not open to your client to make an application to the Magistrates' Court.

MR IRWIN: Yes, enforcement proceedings have not yet begun. They well do, in the normal course of things, be instigated by the Crown, or the appointment of a receiver. I simply ask, and I can't add anything more to that which I have already said, for a variation of the order for a further six months.

LORD JUSTICE JUDGE: Thank you. (Pause). No, we will not vary the remaining orders related to time for payment and imprisonment in default, Mr Irwin. Of course, your client may exercise the rights that are available to him if and when the issue arises.

MR IRWIN: I am grateful.

LORD JUSTICE JUDGE: But for the purposes of the appeal we can see no justification to vary the judge's decision.

For the purposes of the shorthand writer, paragraph 11 it is Crown, and paragraph 19 it is Fortson.

MR DENNISON: My Lords, there was one other typing error. It is in paragraph 10. It is in fact Ilsemann, I-L-S-E-M-A-N-N.

MR IRWIN: My Lord, there is one further matter. It is my understanding that there is no representation order in place for this proceedings. I do ask for a representation order.

LORD JUSTICE JUDGE: Yes, once leave was given to appeal we will make the representation order. Thank you very much.