The Law Commission

OFFENCES OF DISHONESTY:
MONEY TRANSFERS

TO THE RIGHT HONOURABLE THE LORD MACKAY OF CLASHFERN, LORD HIGH CHANCELLOR OF GREAT BRITAIN

PART I
INTRODUCTION

1.1 In this report, we are looking at the problem of prosecuting those who commit mortgage fraud(1) or otherwise obtain a transfer of funds dishonestly and by deception. As we shall show, the very recent decision of the House of Lords in Preddy(2) has radically changed the law, creating important lacunae in the law.

1.2 As we have previously announced,(3) we are just starting a major review of the law of dishonesty. However, we have decided to report on the problems caused by Preddy as a matter of urgency, although logically we would have proposed to look at it as part of our co-ordinated revision of the law. On account of the urgency of this project we have limited it to the more immediate problems raised by Preddy and have not looked at other complaints about the Theft Acts.

THE PROBLEM

1.3 Prosecutors have traditionally charged those who commit mortgage frauds with dishonestly obtaining property by deception, contrary to section 15(1) of the Theft Act 1968; this provides that

A person who by deception dishonestly obtains property belonging to another, with the intention of permanently depriving the other of it, shall on conviction on indictment be liable to imprisonment for a term not exceeding ten years.

1.4 On 10 July 1996, the House of Lords unanimously allowed the appeals of Preddy and others. They were alleged to have committed mortgage fraud and had been charged under section 15(1) of the Theft Act 1968. The basis of the House of Lords decision was that the borrowers, the alleged mortgage fraudsters, had not obtained "property belonging to another" as required by section 15.(4)

1.5 Essentially, the House of Lords did not accept that when the bank accounts of the appellants or their solicitors were credited they had obtained any property belonging to the lending institution. According to the House of Lords, the proper analysis was that the lending institutions credit balance was a chose in action (the debt owed to the institution by the bank) which was extinguished and subsequently the defendant obtained something different, namely the chose in action constituted by the debt owed to him by his bank as represented by a credit in his own bank account. This asset was created for him and had therefore never belonged to anybody else. Thus the prosecution could not show that the borrower defendant had obtained property "belonging to another".

1.6 Prosecutors had felt compelled to use section 15 to prosecute mortgage frauds because the Court of Appeal had previously held in Halai(5) that it was not possible to prosecute mortgage fraudsters for obtaining or attempting to obtain services by deception(6) because no service had been obtained. In that case, the services which the defendant was alleged to have obtained, or to have attempted to obtain, were the opening of a savings account, a mortgage advance, and the increase of an apparent credit balance in a savings account. The decision in Halai has been heavily criticised.(7) This Commission has recommended its reversal and put forward a draft Bill which would achieve that purpose:(8) this recommendation has been accepted by Government but has not yet been implemented.

1.7 As a result of the decision in Preddy,(9) it is now difficult to prosecute an individual(10) who obtains by deception any form of payment by any form of banking transfer. Banking and other institutions were justifiably deeply concerned about this.(11) There are possible alternative offences.(12) As we shall show, such alternative offences include theft contrary to section 1 of the 1968 Act,(13) false accounting contrary to section 17 of the Theft Act 1968,(14) procuring the execution of valuable securities by deception contrary to section 20(2) of the Theft Act 1968(15) and evasion of liability by deception contrary to section 2 of the Theft Act 1978;(16) in the case of each offence we explain the difficulties in pursuing a successful prosecution. Of course, if there is an agreement by two or more conspirators, the mortgage fraudsters could be prosecuted for conspiracy to defraud.(17)

1.8 We are also very aware that our recommendation to reverse Halai(18)would not deal with many problems caused by Preddy, which go wider than mortgage fraud and cover any transaction involving the transfer of funds between accounts.(19)

1.9 We also appreciate that Preddy would present serious difficulties when prosecuting people who had dishonestly received funds which had originally been dishonestly obtained or had been stolen.(20)

1.10 This Commission is given the statutory task of keeping the law under review and making recommendations for its reform.(21) We believe that we would be failing in our duty if we did not review this topic as a matter of great urgency and we decided to do so on 31 July. In light of the urgency of this project we felt obliged to adopt slightly different procedures from our usual ones. We now turn to consider those.

THE PROCEDURE ADOPTED BY US FOR THIS PROJECT

1.11 As is widely known, the Commission invariably carries out some form of preliminary consultation in order to decide the full extent of the problem; thereafter it issues a consultation paper giving a lengthy consultation period and decides on its policy in the light of the responses to this. Such procedures require a great deal of time. We were very conscious from the initial responses to the decision in Preddy(22)that there was a unanimous demand for urgent legislation to ensure that it would be possible to prosecute in cases of fraud involving the transfer of funds between accounts (whether electronically or by way of cheque).(23) We therefore decided to endeavour to produce proposals for such an offence without a consultation paper and relying instead on informal consultation carried out over a period of only one month.

1.12 Our difficulties were increased by the fact that this entailed consultation during the month of August. We were and are very conscious of the limitations of this consultation process. Views were being sought at great speed and policy decisions would have to be reached much more quickly than we would have wished. For example, if this were a project conducted in the conventional way, we would have wanted to examine in detail all the different ways in which funds could be transferred electronically so as to ensure that we were covering all of them.

1.13 We regret that it has not been possible to carry out such work on this project but we believe that our recommendations, if implemented, would restore the pre-Preddy position even though there might be certain forms of transfer which might fall outside our proposed new offence. As we have said, we are about to undertake a major review of the law of dishonesty and if it becomes clear that our proposed new offence does not encompass all the types of transfer, we will reconsider it.

THE CONSULTATION PROCESS

1.14 In early August, we circulated a consultation letter together with a draft Bill which we hoped would overcome the problems caused by Preddy.(24) We received a large number of very helpful responses and we are grateful to those who took the time and trouble to respond especially during August. A list of those who responded appears in Appendix C below. We are particularly grateful to the continuing assistance that we received from Professor Edward Griew, Mr Justice Mitchell, Judge Geoffrey Rivlin QC and Professor Sir John Smith QC, FBA. Mr William Blair QC has also helped on various banking matters.

OUR RECOMMENDATIONS

1.15 As we have said, we were very conscious that we should produce a simple but comprehensive offence that can be easily understood and applied. We soon came to the conclusion that it would be desirable to create a new offence and this is what we have done.

1.16 Our recommendations are as follows:

(1) We recommend the insertion into the Theft Act 1968 of a new section 15A, creating an offence of dishonestly obtaining a money transfer by deception.(25)

(2) We recommend that, for the purposes of the new offence, it should be immaterial whether either of the accounts is overdrawn before or after the money transfer is effected.(26)

(3) We recommend that the new offence should extend to payments made by cheque as well as those made electronically.(27)

(4) We recommend that the offence of obtaining a money transfer by deception should be included among the Group A offences listed in Part I of the Criminal Justice Act 1993.(28)

(5) We recommend that nothing done before the new section 15A comes into force, which would not have been an offence had that section not been enacted, should amount to an offence by virtue of that section.(29)

(6) We recommend the insertion into the Theft Act 1968 of a new section 24A, creating an offence of retaining a credit from a dishonest source, which would be committed where a credit made to an account

(a) is the credit side of a money transfer obtained by deception, contrary to the new section 15A, or

(b) derives from theft, blackmail or an offence under the new section 15A, or from stolen goods,

and the keeper of the account, knowing or believing that the credit is wrongful, dishonestly fails to take reasonable steps to cancel it.(30)

(7) We recommend that any money dishonestly withdrawn from an account to which a wrongful credit has been made should, to the extent that it derives from that credit, be regarded as stolen goods.(31)

(8) We recommend that the offence under section 24A should be included among the Group A offences listed in Part I of the Criminal Justice Act 1993.(32)

(9) We recommend that the new section 24A should apply only to wrongful credits made after it comes into force.(33)

Footnotes to Part I

(1) That is, the obtaining of mortgage advances on properties by making fraudulent statements.

(2) [1996] 3 WLR 255.

(3) Conspiracy to Defraud (1994) Law Com No 228, paras 1.16 1.19.

(4) For full details of this case, see paras 2.3 2.12 below.

(5) [1983] Crim LR 624.

(6) Contrary to the Theft Act 1978, s 1.

(7) See Law Com No 228, para 4.31.

(8) Law Com No 228, paras 4.30 4.33 and Appendix A.

(9) [1996] 3 WLR 255; see paras 2.3 2.12 below.

(10) A defendant who acts in concert with another can be prosecuted for conspiracy to defraud: see paras 3.38 3.40 below.

(11) See J Mason, "Lords ruling may hinder fight against fraud", Financial Times 25 July 1996; R Newton, "Bank vaults wide open to fraudsters", Sunday Telegraph 4 August 1996; F Gibb, "Fraud loophole worries officials", The Times 10 September 1996.

(12) In a case indistinguishable from Preddy, the Lord Chief Justice observed that the submission that the applicant could have been convicted of alternative offences was argued: Hawkins, 31 July 1996, CA No 96/0255/X2. See Part III below.

(13) See paras 3.12 3.23 below.

(14) See paras 3.24 3.27 below.

(15) See paras 3.28 3.34 below.

(16) See paras 3.35 3.37 below.

(17) See paras 3.38 3.40 below.

(18) See paras 1.6 above and 3.47 below.

(19) See paras 2.13 2.15 below.

(20) Under the Theft Act 1968, s 22, which is set out in Appendix B below.

(21) See the Law Commissions Act 1965, s 3 (1).

(22) See para 1.2 above and Part II below.

(23) See n 11 above.

(24) See Part V below for details of the offence we recommend.

(25) Para 4.11 below.

(26) Para 5.11 below.

(27) Para 5.14 below.

(28) Para 5.19 below.

(29) Para 5.36 below.

(30) Para 6.18 below.

(31) Para 6.19 below.

(32) Para 6.21 below.

(33) Para 6.23 below.