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11 September 2014

Contra Trading, Bases of Plea, Hidden Assets and Confiscation in MTIC Fraud

Contra Trading, Bases of Plea, Hidden Assets and Confiscation in MTIC Fraud
11 September 2014

Contra Trading, Bases of Plea, Hidden Assets and Confiscation in MTIC Fraud

Contra Trading, Bases of Plea, Hidden Assets and Confiscation in MTIC Fraud

JC was involved in the running of Company A, which dealt in mobile phones. He was charged with conspiracy to cheat the revenue and, in the alternative, fraudulent trading.

Company A was involved in trades with Company B, which also dealt in mobile phones. Company B was involved in long chain sales and purchases where one of the dealers in the chain was always missing and therefore did not pay its VAT; thus repayments of £170m over a 5 month period were made by the Revenue to Company B which should never have been paid. However, because Company B was involved in contra trades with a number of companies including Company A, its net position in relation to VAT over the period was a liability of £4 (four pounds).

The prosecutions first attempt to quantify benefit for Company A was to assess the monthly credits it received from companies involved in the short chain transactions. This gave a sum over just four months of  £90,319,284.75. Perhaps unsurprisingly the prosecution did not feel it necessary to use the figures of trade with other companies, increase the figures for inflation or invoke the lifestyle provisions. The defendant had business interests in Spain, Switzerland, Belize and Panama, and it was alleged that he had significant hidden assets.

The first reassessment happened when the prosecutions attention was drawn to the case of Ahmad and Ahmed [2012] 1 WLR 2335. In that case at first instance, Mr Justice Flaux found that  the benefit to each of the defendants was not to be restricted to the £12,662,822 paid out by the revenue but comprised the total amount of money which had passed through the bank accounts of the company in furtherance of the frauds, meaning benefit after inflation of £92,333,667. The Court of Appeal disagreed, holding that the sums banked as the result of the sale or purported sale of goods by a buffer company in the course of a carousel fraud generating false claims for the repayment of VAT were not property “obtained in connection with the commission of the offence” and decided that the benefit should be, for each defendant, the £12,662,822 paid out by the revenue (which was subsequently upwardly adjusted for inflation).

The next assessment in JCs case proceeded on a different basis. This time the prosecution assessed the benefit by calculating the input tax paid by Company A over the period of the conspiracy. The VAT that had been paid on purchases from Company B was calculated to be £55,397,686.40 and said to represent Company As pecuniary advantage. The corporate veil should be pierced, it was said, on a number of bases, not least because JC was a secret investor in the company. It was also said, by reference to other consultancy work that the defendant had done, that the thought that he would have worked for free was a nonsense.

However, a number of objections to that figure were raised. JC had pleaded guilty to fraudulent trading rather than conspiracy to cheat, and on a basis which the prosecution did not accept but allowed the Judge to sentence upon. The defendant accepted that he had acted as a shadow director, being in regular communication with the officers of Company B and providing advice and direction in relation to the trading activities of Company A. He said that he acted with a view to being able in the long term to buy Company A, but that he received no benefit for his work. As to benefit, the prosecution and the Judge expressly reserved their positions. The Judge did, however, sentence on the basis that the defendant was not an investor in the company.

Thus JCs position was as follows:

(i)            The Basis of Plea did not preclude, as of right, any confiscation enquiry but does prescribe the factual basis upon which benefit should be approached. Some assistance was gained from the decision of Sangha [2009] 2 Cr App R (S) 17. It was argued that in the absence of any new information, particularly because this was not a lifestyle case, the secret investor allegation in particular should not be allowed to be pursued.

(ii)          The prosecution approach was incompatible with the European Convention on Human Rights. Renewing the secret investor allegation was argued to be in reality a new charge, which would have to be tried according to the criminal standard. Help here came from Geerings v The Netherlands (ECHR 1.3.2007) and Briggs-Price [2009] 1 AC 1026.

(iii)        On the facts, since the prosecution alleged that Companies A and B were owned by the same people, it would be wrong to suggest that JCs role was stuffiest to make Company As benefit his benefit. Here it was argued, following CPS v Jennings [2008] 1 AC 1046, that A persons acts may contribute significantly to property (as defined in the Act) being obtained without his obtaining it and that, following Clark and Severn [2011] 2 Cr App R (S) 55, as a matter of principle É persons who are paid a fee or salary for their involvement are not conspirators or participants of such a nature as to make it likely, or to suggest the inference, that the property concerned is in their joint ownership.

(iv)          If JC was wrong about matters (i) to (iii) above the prosecution calculation method was wrong. The better and correct method of calculation was to assess how much money was actually paid to Company A following reclaims for VAT (here actually £5.3m). This was because:

(a)           The defendant has been convicted of fraudulently trading with Company A, not Company B;

(b)           The money that Company A obtained on its sales abroad did not contain any VAT element, it did not obtain property as a result of or in connection to the offences commission so far as purchases from Future were concerned;

(c)            Company A was not responsible for the payment of any money to the missing trader or of the bypassing altogether of the missing trader to Europe;

(d)           The cheat only arose when Company B submitted its returns;

(e)           Company A did reclaim VAT when it sold on to Europe; the money that it reclaimed is the property which it obtained in its part of the commission of the offence.

(v)            Further, the benefit figure and the actual order made needs to be proportionate to the conduct that was found to exist in accordance with Waya [2013] 1 AC 294. The main defendant in the case overall had been sentenced to 17 years imprisonment, JC to just 3 years. To attach a benefit figure of £55m to him in those circumstances would obviously not be right.

So what did the Court decide? The prosecution were persuaded to proceed only on the basis that some modest payment was made to JC for his role in the offending. They told the Judge that JCs skeleton argument made a number of valid points. The Judge said that the skeleton argument took a tough line which proved to be the right approach. He assessed JCs benefit at £200,000 and made an order in that sum, declaring the assets to be in excess of that figure.

The arguments resulted in the defendants liability being reduced from £90m to £200,000.

In this case Nigel Power QC was instructed by Mark Davies and Katie McCreath from Frisbys.


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