Proceeds of crime - Benefit from criminal conduct - Defendants being involved in MTIC carousel fraud

R v Ahmad and another: Court of Appeal, Criminal Division (Lord Justice Hooper, Sir Christopher Holland and Recorder of Nottingham): 2 March 2012

Section 71(4) of the Criminal Justice Act 1988 provides, so far as material: ' ... a person benefits from an offence if he obtains property as a result of or in connection with its commission'. The defendants were directors and shareholders of a company, MST, which operated as a computer parts broker dealing mainly with central processing units (CPUs). They were involved an a missing trader intra-community (MTIC) carousel fraud involving five companies in Ireland purporting to export large quantities of CPUs to a 'missing trader' in the UK (the fraud).

The goods were zero rated on import to the UK. The missing trader then ostensibly sold the goods to another company, G, which subsequently sold the goods to MST. On paper, the missing trader sold the goods to G at a loss enabling everyone else in the supply chain ostensibly to sell on at a profit. The missing trader issued a VAT invoice to G, enabling it to deduct the amount shown as VAT as input tax from the amount due from G to the Revenue and Customs Commissioners (Revenue) in respect of output tax on the onwards sale to MST, a second line buffer company. MST then sold the goods on to an exporting company for an amount including VAT.

That exporting company exported the goods back to the company in Ireland which had originally sold that goods. No VAT was payable on the export, but the exporter then reclaimed the VAT which it had paid to MST. Also involved in the fraud was another company, A, in which the defendants were also directors and shareholders. The profits of A and MST together were over £30m. The total amount of the VAT loss to the Revenue was £12,662,822. That sum was used to fuel the fraud, or was laundered through various accounts and withdrawn in cash or used to buy gold bullion, none of which could be traced. In March 2007, the defendants were convicted of conspiracy to cheat the public revenue. They were each sentenced to seven years' imprisonment and were both disqualified from acting as a company director for 12 years.

In July 2010, two confiscation orders were made (the orders) under the Criminal Justice Act 1988 (the act). The statutory assumptions in section 72AA of the act did not apply. The judge held, inter alia, that the benefit for each defendant was the amount of the benefit obtained by MST. He further held that the benefit was not only the VAT which the Revenue had paid out as a result of the fraud, but was the total amount of money which had passed through the MST bank accounts in furtherance of the fraud, concluding that it was property obtained in connection with the commission of the offence.

The judge found that, in order to commit an MTIC fraud, it was a necessary part of the deception on the Revenue that an amount representing the value of the goods and the VAT thereon should pass through the accounts of the buffer companies. Each defendant had accordingly benefited in the amount of £72m before uplift, being £92,333,667 after uplift (the sum), and the orders were each made in the sum, to be paid within two months. In the event of non-payment of the total amount within two months, the defendants would be required to serve 10 years' imprisonment consecutive to the sentence for the substantive offence.

The judge further found that the defendants had hidden assets and had not proved that they did not have realisable assets in the sum. The judge concluded that the court had to make a confiscation order for the full value of the benefit and that it had no discretion to order confiscation of a lesser sum. The money remained unpaid. The defendants appealed, inter alia, against the orders.

The issues that fell to be determined were: (i) the benefit obtained by the defendants and accordingly, the meaning of the words 'in connection with its commission' in section 71(4) of the act; and (ii) the consequence of a conclusion that a defendant had hidden assets. As to (ii), consideration was given, inter alia, to R v McIntosh [2011] 4 All ER 917 (McIntosh). The appeal would be allowed in part.

(1) It was established law that the rationale of the confiscation regime was that the defendant was deprived of what he had gained or its equivalent. He could not and should not be deprived of what he had never obtained or its equivalent because that was a fine. Section 71 of the act was not to be construed so that a person might be held to have obtained property or derived a pecuniary advantage when a proper view of the evidence demonstrated that he had not in fact done so (see [33] and [34] of the judgment).

To make a confiscation order which included within the benefit the costs of committing a crime appeared to be contrary to the object of the legislation (see [35] of the judgment). On the facts, the benefit for each defendant should have been set in the sum of £12,662,822, to which would be added the necessary uplift to reflect the changes in the value of money as at the date of the orders. The mere fact that a loss to the Revenue of £12,662,822 had led to two confiscation orders in the sum of twice £72m before uplift showed that something had gone wrong. On the assumption that the goods in the instant case had existed, then if the defendants had obtained the goods by theft or fraud and sold them on, the resulting sale price would have been a benefit.

However, in the instant case, the offence had been cheating the revenue of the VAT; the selling or purported selling of the goods had been a mechanism by which the fraud had been committed and the necessary costs involved in the selling or purported selling had been the costs of committing the offence. If any statutory assumptions had applied, then the expenditure on committing the fraud would have been assumed to have been a benefit, having been property obtained as a result of general criminal conduct (see [56], [59], [60] of the judgment). R v Waller [2009] All ER (D) 16 (Jan) criticised; R v Olubitan [2003] All ER (D) 98 (Nov) applied; Jennings v Crown Prosecution Service [2008] 4 All ER 113 applied; R v Smith (David) [2002] 1 All ER 366 considered; R v Rowe [2007] 3 All ER 36 considered; R v Sangha [2008] All ER (D) 161 (Nov) considered; R v James [2011] EWCA Crim 2991 considered.

(2) It was established law that, in a hidden assets case, it was open to the court to conclude that a defendant's realisable assets were less than the full value of the benefit on the basis of the facts as a whole (see [63] of the judgment). On the facts, given the conclusion that the benefit figure for each defendant should have been £12,662,822 uplifted to reflect changes in the value of money as at the date of the orders, there was no doubt, given in particular the profits made by the defendants through the two companies, that the confiscation figures ought to have been in the same amount. If McIntosh had been available to the judge, it was unlikely that he would have reached the conclusion that the order should have been in the sum of the total benefit as found by him (see [65], [67] of the judgment).

The orders of £92,333,667 would each be quashed and confiscation orders for each defendant in the sum of £16,145,098 would be substituted (see [72] of the judgment). R v McIntosh [2011] 4 All ER 917 applied.

(3) Leave to appeal to the Supreme Court was refused. However, the court certified that a point of law of general public importance was involved in the decision, namely, whether the total amount of money received into a bank account controlled by a defendant, as a result of the sale or purported sale of goods by a buffer company in the furtherance of an MT
IC carousel fraud, was property obtained by him as a result of or in connection with the commission of the offence, as defined by section 71(4) of the act, so as to constitute his, or part of his, benefit (see [74], [75] of the judgment).

Rex Tedd QC (instructed by Frisby Solicitors Ltd) for the defendants; Derek Spencer QC and Jonathan Kinnear (instructed by the Crown Prosecution Service) for the Crown.