England and Wales Court of Appeal (Criminal Division) Decisions

IN THE COURT OF APPEAL
CRIMINAL DIVISION

		Royal Courts of Justice Strand London, WC2
		13 June 2007

1. LORD JUSTICE TOULSON: This is an appeal brought by leave of the single judge against a confiscation order. On 19th June 2006 at Warwick Crown Court, Leslie Dennis Pattison was convicted of offences of entering into a money laundering arrangement contrary to section 328(1) of the Proceeds of Crime Act 2002 and acquiring criminal property contrary to section 329(1) of the same Act. The second of those counts added nothing to the first, the particulars of which were as follows:

"Leslie Dennis Pattison on a day between the 1st day of January 2004 and the 30th day of June 2004 entered into an arrangement, namely the purchase of 77 Bryn Arden Road, Yardley, Birmingham, knowing or suspecting that the arrangement would facilitate the acquisition, retention, use or control of criminal property by another, namely Peter Duncan Davis and/or Donna Louise Davis."

The appellant received a sentence of three years' imprisonment concurrent on each count, subsequently reduced on appeal to 27 months.

2. For present purposes the relevant facts can be shortly summarised. The Davises were drug dealers. The appellant was an estate agent of previous good character. He also provided financial services. In December 2001 the Davises brought the property at 77 Bryn Arden Road for £83,000. £43,000 was borrowed on a mortgage which the appellant helped them to arrange. The balance of £40,000 came from drug dealing. Three months later Mr Davis was arrested for drug trafficking offences.
3. In June 2004 Mr Davis was rightly expecting that he was about to be sent to prison and that a confiscation order would be made against him. He approached the appellant with an offer to transfer the property to the appellant for the amount of the mortgage, ie £43,000. The market value had by now risen to £150,000. He further proposed that if the court should take the value of the property into account in making a confiscation order against Mr Davis, the appellant would provide the necessary funds to discharge the order or relevant part of it. The appellant agreed to the proposal and the property was transferred to him. This conduct constituted the offences of which he was convicted.
4. The appellant borrowed £44,000 from a business associate, Mr Morsley, to buy the property from the Davises but the loan was unsecured. So the appellant received an unencumbered freehold title to the property. On the appellant's conviction in November 2006, the prosecution applied to the court under section 6 of the Act for a confiscation order to be made against him. Fairly, the prosecution did not invite the court to embark on an enquiry under section 6(4)(b) whether the appellant had benefited from general criminal conduct. Given that he was of previous good character, the prosecution asked the court under section 6(4)(c) whether and to what extent he had benefited from the particular criminal conduct of which he had been convicted.
5. To understand the issues, it is now necessary to refer to what had happened to the property since its acquisition by the appellant in June 2004. In October 2004 a confiscation order was made against Mr Davis in the sum of approximately £106,000. This took account of the property. In November 2004 the appellant visited Mr Davis in prison. It was the prosecution's case, which the judge accepted as a fact, that the appellant agreed in accordance with the previous arrangement that he would discharge the order. For this purpose he applied to UCB Homeloans to arrange a loan of £112,500 secured on the property by way of legal mortgage.
6. The documentation before this court is not complete but we understand the facts to be as follows. UCB agreed to the loan facility requested. The appellant charged the property to UCB by way of legal mortgage. On 9th March 2005 the appellant was arrested. It would not have been appropriate, he no doubt thought, in those circumstances for him to go ahead and discharge Mr Davis' confiscation order. Such course of conduct would hardly assist him in the defence of the charges which were likely to be brought against him. However, the loan arrangements were in the process of going through. The appellant's case is that he initially sought to draw down only £60,000. This was used to repay Mr Morsley and carry out some improvements to the property. No doubt it would have been important to the appellant's defence to show that this mortgage had nothing whatever to do with the circumstances in which he had acquired the property at an undervalue.
7. As events turned out, on 15th March 2005 UCB advanced the whole amount of the loan, but £52,000 was repaid to UCB as advanced in error. In May 2005 the appellant was charged. On 28th July 2005 an investigating police officer, DS Turner, made a witness statement in support of an application by the prosecution for a restraint order against the appellant under section 41 of the Act. In paragraph 7 of his statement he said:

"(v) Pattison also owns a property known as 77 Bryn Arden Road, Yardley, Birmingham, B26 1YJ title number WK 88939. It is subject to a mortgage obtained from UCB Homeloans in the sum of £61,183.78, and the current value of the property is approximately £165,000. This valuation has also been taken from the mortgage application form completed in February 2005, signed by Pattison, referred to above.

(vi) Further to (v) above, I have established that as a result of his securing a mortgage against 77 Bryn Arden Road ... Pattison has approximately £52,500 at his disposal, currently credited to his mortgage account with UCB Homeloans; account number 850050440055."

On 3rd August 2005 the court made a restraint order which had the effect of prohibiting the appellant from dealing with the property or from drawing down the balance of the agreed loan. During the year 2005 the property was occupied by the appellant's daughter and she paid him rent.

8. The confiscation hearing took place before His Honour Judge Coates on 27th October 2006. The prosecution submitted that the benefit received by the appellant from the particular offences to which he had pleaded guilty comprised the following:

1. Current market value of the property: £152,500.

2. Monies raised on mortgage with UCB: £112,500.

3. Rental income between January 2005 and January 2006: £7,927.64. This made a total of £272,927.64.

9. As to the first item, at the hearing it was agreed that the current freehold value of the property was £150,000, as it had been at the time of its acquisition by the appellant in 2004. That brought down the benefit figure put forward by the prosecution to £270,427.64. The appellant submitted that various sums should be deducted from the freehold value of the property in assessing the benefit to him from its acquisition. He argued that there should be deductions in respect of the £44,000 he had borrowed from Mr Morsley in order to acquire the property, various sums spent on its improvement, and legal and other expenses associated with its acquisition and its intended sale.
10. As to the second item, the appellant submitted that neither the amount which he had borrowed from UCB on mortgage nor the amount which had remained available to him to draw down should be included in the value of the benefits received by him. There was no contest in relation to the third item, the rental income.
11. The judge delivered a very brief judgment on 20th November 2006. He found that the appellant had benefited to the extent suggested by the prosecution, ie £270,427.64 and that he had realisable assets to satisfy that sum. He therefore made a confiscation order in that amount.
12. He identified the four questions before him as being:

1. What is the value of the property?

2. In assessing the benefit thereby received should he make the deductions claimed by the appellant?

3. Should the mortgage from UCB be counted as a benefit in whole or in part?

4. Should the rental income be treated as a benefit?

13. He noted that the first question was agreed. He said nothing more about the fourth question, no doubt because that was also not in contention before him. His answer to question 2 was nothing if not succinct. The judgment read:

"My answer to Question 2 is 'no'. Sections 76 and 79 are unequivocal on this point and my attention has not been drawn to any authority to the contrary."

We agree. Section 7 provides that the recoverable amount for the purposes of section 6 is an amount equal to the defendant's benefit from the conduct concerned -- here, the acquisition of the property -- unless the defendant can show that the amount available to him is less. Section 76(4) provides that a person benefits from conduct if he obtains property as a result of or in connection with the conduct. Section 76(5) provides that if a person obtains a pecuniary advantage as a result of or in connection with the conduct, he is to be taken to obtain as a result of or in connection with the conduct a sum of money equal to the value of the pecuniary advantage. Section 76(7) provides that if a person benefits from conduct his benefit is the value of the property obtained.

14. Section 79 sets out the rules for deciding the value at any time of property then held by the defendant. It states:

"(2) Its value is the market value of the property at that time.

(3)But if at that time another person holds an interest in the property its value, in relation to the person mentioned in subsection (1), is the market value of his interest at that time, ignoring any charging order under a provision listed in subsection (4)."

The charging provisions under subsection (4) are provisions of the Drug Trafficking Offences Act 1986 and similar Acts by which charging orders can be made in favour of enforcement authorities.

15. A long line of authorities on this section and its predecessors establishes that under these provisions the cost to a defendant of acquiring property is irrelevant. It has been recognised that this can be draconian but there are policy and pragmatic reasons for it. In R v Smith [2002] 2 CrAppR (S) 37, at paragraph 23, Lord Rodger of Earlsferry said:

"If in some circumstances it can operate in a penal or even a draconian manner, then that may not be out of place in a scheme for stripping criminals of the benefits of their crimes. That is a matter for the judgment of the legislature, which has adopted a similar approach in enacting legislation for the confiscation of the proceeds of drug trafficking. In that context the courts have consistently held that 'payments' received in connection with drug trafficking mean gross payments rather than net profit and that the 'proceeds' of drug trafficking mean the gross sale proceeds, rather than the net profit after deducting the cost of the drug trafficking operation."

He proceeded to give two examples. The first was the judgment of Lord Lane, CJ, in R v Smith (Ian) [1989] 1 WLR 765, where the court had to consider the meaning of "payments or other rewards" in the Drug Trafficking Offences Act 1986. Lord Lane drew attention to the problems which would be involved in the court having to carry out some kind of accountancy exercise in order to find out what a drug dealer's profits had been. The second case to which he referred was the judgment of Lord Bingham, CJ, in R v Banks [1997] 2 CrAppR (S) 110. Lord Rodger quoted the following passage from that judgment at page 116:

"All these provisions are in our judgment directed to trying to stamp on the transfer of funds which have been used for the purposes of financing drug trafficking. It would in our judgment reduce those provisions to absurdity if the expression 'proceeds' were to be read as applying only to profits made from drug trafficking and to leave parties free to bank or transfer or conceal or disguise sums which are the product of drug trafficking but which do not represent profits."

The language of the present Act is slightly different from the language of the previous Act, but, if anything, it is plainer, because it talks about the value of the property and that admits no room for deduction of expenses in obtaining it.

16. Mr Gloag on behalf of the appellant sought to build an argument that the amount borrowed from Mr Morsley should be taken into account on the decision of this court in Walls [2002] EWCA Crim 2456. But the reliance sought to be placed on that case is fallacious. The court was there concerned with a defendant who had only a limited interest in property, not an unencumbered freehold, and it held that the value of the property was the value of the equity of the property. Had this appellant only ever had a limited interest in the property, then the value to be assessed against him would have been the value of his interest in the property as section 79(3) expressly provides. However, in this case the loan advanced by Mr Morsley was an unsecured loan, and the appellant had an unfettered title to the property. Accordingly, that was the relevant value. In his skeleton argument Mr Gloag also referred to various cases where the court has taken into account the costs of realising the sale of a property as deductible items, but it has done so for an entirely separate purpose. Those are cases where the court has been looking at the question of what are a defendant's realisable assets, rather than the question of what benefit he received. In considering what are a defendant's realisable assets, it may be relevant to take into account the costs inherently involved in the realisation of those assets, but the cost involved in their potential realisation has no relevance to the assessment of the original benefit received.
17. There are further authorities which support the judge's ruling on question 2, but it is unnecessary to lengthen this judgment by citing them.
18. The judge's answer to question 3 was almost equally succinct. He said:

"My answer to Question 3 is that the whole amount should be counted as a benefit. The whole amount was received by Mr Pattison and the purpose of raising it was to discharge the confiscation order made against Mr Davis. The fact that some has been repaid is irrelevant. It is no longer within reach of Mr Pattison because of the restraining order made on 3rd August 2005. Again section 76(5) is unequivocal on this point and my attention has not been drawn to any authority to the contrary."

19. Section 76(5) is the provision, to which reference has already been made, that if a person obtains a pecuniary advantage as a result of or in connection with conduct, he is to be taken to obtain as a result of or in connection with the conduct a sum of money equal to the value of the pecuniary advantage. The judge's reasoning concentrated on the question whether the purpose of the UCB loan was connected with the original conduct giving rise to the charges on which the appellant was convicted. It was the prosecution's case that the mortgage loan was originally arranged in order to be able to fulfil the appellant's side of the bargain with Davis at the time when the property was transferred into the appellant's name. The appellant maintained that he had a quite innocent reason for raising the money from UCB on mortgage. The judge clearly decided that issue of fact against the appellant. But we think that this misses the central point. Taking it as established that the purpose of the mortgage loan was to enable the appellant to fulfil his criminal bargain with Mr Davis, how did it follow that the amount of the loan facility was to be aggregated with the value of the property prior to the mortgage in assessing the amount of the appellant's benefit resulting from his criminal conduct? Mr Butterfield in his skeleton argument put his argument very shortly. He said:

"Mr Pattison could only obtain a mortgage on a house because he obtained that house by criminal means. To then suggest that the mortgage is not property obtained 'as a result of or in connection with' the criminal conduct is baffling."

He submitted that the taking out of the loan was to be regarded as a pecuniary advantage, that it was a pecuniary advantage which resulted from his criminal conduct and therefore fell to be taken into account by reason of section 76(5). He could equally have argued that the money paid by UCB was property and on his approach would therefore value that money would have been fallen to be taken into account. In truth, it matters not whether the arrangement with UCB is regarded as resulting in the appellant having money in his hands, which would be property, or having a chose in action, which would be a pecuniary advantage.

20. The matter which does not appear to have been considered in the court below was whether the amount of the monies received from UCB, or amount available to be borrowed from UCB, was to be aggregated with the value of the property, when such monies or pecuniary advantage came from mortgaging that property.
21. It is the prosecution's argument that where a defendant acquires property through criminal conduct, and subsequently deals with that property, then any proceeds of that dealing must be benefits which result from the offending and are therefore to be added to the original value of the property. This overlooks the provisions of section 80 (to which the judge was not referred) but before coming to that section it is worth pausing to consider the implications of the argument. Suppose that after the appellant received the property worth £150,000 he had sold it for that sum and put the money in the bank. On the prosecution's argument, the benefit that he would then have received and for which he would be amenable to a confiscation order would be £300,000, representing the value of the property (£150,000) plus the sum for which he realised it (£150,000). If he then used the £150,000 to buy a yacht worth £150,000, the benefit would rise to £450,000. If he then tired of sailing and sold the yacht for the same price, the benefit which he would have received and for which he would be liable to a confiscation order would become £600,000. All the while, his true financial position would have remained identical. That offends commonsense. Every school child knows that you cannot have the penny and the sweet. If your mother gives you a penny and you buy a sweet with it, your benefit is a penny's worth and not two penny's worth. It is correct that the provisions of the legislation are draconian, but the effect of the prosecution's argument would not save any underlying sense. Fortunately, section 80 addresses the situation where a person subsequently deals with property which has been acquired by him through criminal conduct. The section provides as follows:

"(1) This section applies for the purpose of deciding the value of property obtained by a person as a result of or in connection with his criminal conduct; and the material time is the time the court makes its decision.

(2) The value of the property at the material time is the greater of the following—

(a)the value of the property (at the time the person obtained it) adjusted to take account of later changes in the value of money;

(b)the value (at the material time) of the property found under subsection (3).

(3)The property found under this subsection is as follows—

(a) if the person holds the property obtained, the property found under this subsection is that property;

(b) if he holds no part of the property obtained, the property found under this subsection is any property which directly or indirectly represents it in his hands;

(c) if he holds part of the property obtained, the property found under this subsection is that part and any property which directly or indirectly represents the other part in his hands.

(4)The references in subsection (2)(a) and (b) to the value are to the value found in accordance with section 79."

So if the appellant had sold the property for £150,000 and used the proceeds to acquire a yacht worth the same amount, and if the yacht was in his possession at the time of the assessment, section 80(3)(b) would be directly in point. The effect of section 82 is that the value of the property would be the higher of the value of the property at the time when the appellant received it, ie £150,000, or (in this example) the value of the yacht in his possession at the time of the assessment, also £150,000.

22. Mr Butterfield submitted that in that situation the true benefit should be assessed at £300,000. He was unable to provide any rational explanation for the provisions of section 80(3)(b) or to suggest that how they might apply. We are unable to accept his argument. The amount of the benefit from the criminal conduct in this example would be £150,000, not £300,000. This accords with the language of the statute as well as with justice and commonsense.
23. Section 80(3)(c) deals with a case where at the time of the assessment the defendant holds part of what he originally had. In this case the appellant originally held the unincumbent freehold interest in the property but, by the time of the assessment, in place of the freehold interest he had only an equitable interest. It does not seem that he had any other property in his hands at that stage representing the original property, unless it could be argued that the undrawn portion of the mortgage loan represented a continuing chose in action. Leaving aside any question whether such chose in action would be unenforceable for illegality, the effect in terms of benefit to the appellant of drawing down such money would be entirely neutral, because the equity in the property subject to the mortgage would be correspondingly reduced. At one stage Mr Butterfield sought to distinguish the case where somebody charges property from a situation where he dealt with it outright. His argument came to this. If the appellant had sold the property for £150,000 in order to pay off Mr Davis's confiscation order and if (contrary to his primary argument) in such a situation the appellant was not to be treated as having a benefit of £300,000, nevertheless by using the property to obtain a loan in return for a corresponding diminution in the value of the equity, his position should be different in law from that which it would have been if he had sold the property outright. Mr Butterfield was not able to put forward a reason why such a distinction should be drawn, beyond his reiteration that the appellant was only able to borrow money on the security of the property because he had originally obtained the property through criminal means, but at that point the argument goes full circle.
24. Our analysis of the legislation is not original. In R v Smith the House of Lords was concerned with Section 74(5) and (6) of the Criminal Justice Act 1988 (as amended). The language was different but its effect similar to that of section 80. Lord Rodger said at paragraph 23:

"These provisions show that, when considering the measure of the benefit obtained by an offender in terms of section 71(4), the court is concerned simply with the value of the property to him at the time when he obtained it or, if it is greater, at the material time. In particular, where the offender has property representing in his hands the property which he obtained, the value to be considered is the value of the substitute property 'but disregarding any charging order'."

Where property received by a defendant through his criminal activity generates an income without his interest in the property itself being diminished, for example, by money which represents the proceeds of crime being put on deposit and gaining interest, the scenario is different. Section 80 does not address that situation. We see the force of the argument that such proceeds should be regarded as property obtained as a result of the criminal conduct. That would apply in this case to the rental income, as to which it was conceded before the judge that an order should properly be made. At one stage in his argument Mr Gloag sought to withdraw that concession and sought to challenge out of time that part of the judge's assessment. We did not think it would be just to allow him to do so. If he wished to challenge such a point he should have done so at the appropriate time. In any event, as at present advised the point appears to us to be bereft of merit.

25. In the result we quash the confiscation order and substitute a confiscation order in the sum of £157,972.64. The period of imprisonment in default will therefore also fall to be changed. The appropriate period should be three years.
26. MR GLOAG: My Lord, one other matter. The six months expires when the judgment was handed down at Warwick Crown Court, I think it is going to expire this Sunday. We have written to the Crown Court, we have not had a response for the extension of the period because there is some difficulty in selling the houses at the moment. They are under offer at the moment, we simply ask if we could extend the period for another six months. That is the position.
27. LORD JUSTICE TOULSON: Yes. He is or was an estate agent.
28. MR GLOAG: Yes, the Office of Fair Trading I think have revoked his financial services.
29. LORD JUSTICE TOULSON: They may have done, but he is not unaware of how you sell properties. Six months sounds a long time to sell.
30. MR GLOAG: The difficulty was that there was actually -- it looked like Mr Davis had undertaken some work but had not got the --
31. LORD JUSTICE TOULSON: We will extend the time for three months. If he needs any further after that he will have to go to the court and make an appropriate application and set out the full facts.