Carnwath LJ :
Introduction
- This is an appeal from a decision of Langley J to make a recovery order under Part 5 of the Proceeds of Crime Act 2002 ("POCA 2002") made by the Director of the Assets Recovery Agency (the "Director"). The order as upheld by the judge related to two properties: 157 Wellington Drive, Dagenham and 23 Hazelmere Road, Northolt. He refused to make a recovery order in respect of a third property, 30 Wellstead Road, London. Also included in the order were two Abbey National accounts in Mr Olupitan's name, but they did not give rise to any separate issue in the appeal, the amounts in them currently being negligible.
- Mr Olupitan is Nigerian. He came to this country in October 1989, and was given leave to remain until June 1992. Thereafter he has been an illegal overstayer. His passport contained counterfeit stamps dating from 1992 and 1994. The judge rejected Mr Olupitan's evidence that he believed he was entitled to stay indefinitely. His attempted explanations were "close to absurd and certainly incoherent and incredible" (para 26). He had never paid any tax in this country. On this too, as the judge said, the burden of explaining his own inconsistent evidence "proved well beyond his invention and ingenuity" (para 27). He had also lied about two previous relatively minor convictions dating from 1992 and 1993.
- On 25th February 2002, Mr Olupitan was convicted of conspiracy to defraud and was sentenced to 18 months imprisonment. This related to his part in a conspiracy to defraud computer and mobile telephone companies, which had begun apparently in October 2000, and involved goods worth some £250,000. Mr Olupitan was arrested in December 2000, in the course of a "dummy" delivery organised by the police. The prosecution conceded for the purpose of sentence that Mr Olupitan had only joined the conspiracy on the day of his arrest. In the light of that concession, it was held in this court that a confiscation order could not be made against him (under what was then the Criminal Justice Act 1988), because there was no evidence that he had obtained any benefit from the conspiracy (see [2004] 2Crim App R(S) 70). One of the issues in the present appeal is whether the Director should have regarded himself as bound by that concession.
- 157 Wellington Drive was bought in the name of Mr Olupitan at auction in December 1998 for £25,500. The deposit was paid by way of a £2,550 cheque debited to his Abbey National account, and the balance paid by a Halifax counter cheque dated 21st December 1998 debited to a Halifax account in Mr Olupitan's name. The property is estimated to have a current value of about £100,000 and is let at a rental of £550 per month. The judge rejected Mr Olupitan's explanation of the source of the funds:
"In a context in which I am quite satisfied that Mr Olupitan is both capable of dishonesty and is readily prepared to lie when he thinks it suits him, I have no hesitation in rejecting his evidence that the monies to purchase Wellington Drive came from his family. I am therefore left with no evidence of a lawful source of those funds and an attempt to give one which is a lie." (para 50)
- 23 Hazelmere Road was bought on 26th October 2000 for £155,000. Title is registered in the names of Mr Olupitan and Ms Makinde and they live there with their two children. The purchase price was paid by way of a cash deposit of £31,000 and a mortgage from Bristol & West of £124,000. £15,500 of the deposit was paid from Mr Olupitan's Abbey National account and the balance plus fees was paid from an account in the name of Ms Makinde. 23 Hazelmere Road is estimated to have a current value of about £280,000. The mortgage interest payments have substantially been kept up to date.
- The judge found that Mr Olupitan had obtained the mortgage by fraud, as result of a number of material and deliberate misstatements in the application form (paras 31-4). He also rejected Mr Olupitan's explanations of the source of the deposit funds in his name (para 52). As to Ms Makinde's share, he noted that she had put forward a number of explanations, which changed during the proceedings. They included references to christening gifts, a pyramid savings scheme called "Righteous Purse", and money from the sale of land in Nigeria. The judge rejected them. He held that it was "more probable than not" that the source of her funds also was Mr Olupitan (para 58).
- The judge concluded, in respect of both properties that:
"
the Director has fully satisfied me on a balance of probabilities that Mr Olupitan is a dishonest man who has employed dishonesty to obtain or seek to obtain property (the mortgage fraud and his conviction for conspiracy) and to seek to secure an immigration status to which he knew and knows he was not entitled. The Director has also satisfied me that Mr Olupitan has had no significant legitimate source of income whilst living in this country and has lied again and again in his evidence about the sources of the money (in particular cash) which undoubtedly came into his bank accounts. On that basis and all the evidence, I conclude that any significant asset of Mr Olupitan was obtained by or was the proceeds of his dishonest acquisitive criminal conduct and is recoverable property. In the case of Hazelmere Road, the property was also obtained by the specific fraud on Bristol & West which I have found occurred. I do not think the Director is required by law or the burden of proof to establish more than that. As stated, in my judgment the Director has also made out her case of money laundering." (para 67)
The statute
- Part 5 of POCA 2002 created a new statutory scheme for the recovery in civil proceedings of property obtained through unlawful conduct. Unlike confiscation proceedings under Part 2, the powers are exercisable regardless of any criminal proceedings (s 240(2)). Examples are given in the Explanatory Notes[1]:
"
civil recovery and cash forfeiture proceedings may be brought whether or not proceedings have been brought for an offence in connection with the property. Cases where criminal proceedings have not been brought would include cases where there are insufficient grounds for prosecution, or where the person suspected of the offence is outside the jurisdiction or has died. Cases where criminal proceedings have been brought may include cases where a defendant has been acquitted, or where a conviction did not result in a confiscation order." (para 290)
Section 240(1) gives power to the Director to recover in civil proceedings property which "is, or represents, property obtained through conduct unlawful conduct" (s 240(1). Property so obtained is referred to as "recoverable property" (s 304(1)).
- Further explanation of unlawful conduct and property obtained thereby is given in sections 241-2:
"241 (1) Conduct occurring in any part of the United Kingdom is unlawful conduct if it is unlawful under the criminal law of that part.
(2)
.
(3) The court
must decide on a balance of probabilities whether it is proved
(a) that any matters alleged to constitute unlawful conduct have occurred,
.
242 Property obtained through unlawful conduct.
(1) A person obtains property through unlawful conduct (whether his own conduct or another's) if he obtains property by or in return for the conduct.
(2) (a)
.
(b) it is not necessary to show that the conduct was of a particular kind if it is shown that the property was obtained through conduct of one of a number of kinds, each of which would have been unlawful conduct."
- It is to be noted (under s 242(1)) that the property must be obtained "by or in return for" the unlawful conduct. The Explanatory Notes give examples:
"A person will obtain property through unlawful conduct if he obtains it:
- by the conduct - for example by stealing it, or by obtaining it by means of dealing in illicit drugs, or
- in return for the conduct - for example by being paid to commit murder or arson, or taking a bribe to give false evidence or corruptly award a contract." (para 294)
The Explanatory Notes also help to explain the reference to "kinds" of unlawful conduct (s 242(2)(b)):
"Subsection (2)(b) provides that it is not necessary to show that property was obtained though a particular kind of unlawful conduct, so long as it can be shown to have been obtained through unlawful conduct of one kind or another. So it will not matter, for example, that it cannot be established whether certain funds are attributable to drug dealing, money laundering, brothel-keeping or other unlawful activities, provided it can be shown that they are attributable to one or other of these in the alternative, or perhaps some combination." (para 296)
- Under s 240(1) the order may also relate to property which "represents" property obtained by unlawful conduct. This concept is explained by sections 305 to 307:
1) Under section 305 ("Tracing property etc"), if a person disposes of recoverable property, and obtains other property in place of it, the other property "represents" the original property.
2) By section 306 ("Mixing property"), where a person's recoverable property "is mixed with other property (either his property or another's)", only the portion of the mixed property which is "attributable to the recoverable property represents the property obtained through unlawful conduct" (s 360(1)), and can therefore be subject to a recovery order. "Mixed property" is defined by example (s 306(3). Recoverable property is "mixed" with other property it is used
"(a) to increase funds held in a bank account,
(b) in part payment for the acquisition of an asset,
(c) for the restoration or improvement of land,
(d) by a person holding a leasehold interest in the property to acquire the freehold."
The Explanatory Notes give an example:
"If cash which is the proceeds of drug dealing is paid into a bank account which is in credit through deposits of honest earnings, it becomes impossible to identify any individual withdrawals which may be made from that account as being the 'dirty' money rather than the clean. Subsection (2) therefore provides that in such circumstances so much of the 'mixed' property as is attributable to the recoverable property will be representative of the original property, and is therefore itself recoverable." (para 438)
3) Finally, by section 307 ("accruing profits"), where a person who has recoverable property obtains "further property consisting of profits accruing in respect of the recoverable property", that also is treated as "representing the property obtained through unlawful conduct". The Explanatory Notes give the example of money paid into a bank account, attracting interest; "the authority can recover it with any interest accrued" (para 429).
- Generally, if the court is satisfied that any property is "recoverable", it must make a recovery order (s 266(1)). However, there are certain exceptions and protections:
1) The order may not make any provision incompatible with rights under Human Rights Convention (s 266(3)(b)).
2) It may not include any provision in respect of any recoverable property if it would not be "just and equitable to do so", and each of four conditions is met: in summary, (a) the respondent obtained the recoverable property in good faith, (b) he took steps after obtaining it which he would not have taken if he had not obtained it, (c) when he had no notice that the property was recoverable; and (d) a recovery order "would, by reason of the steps, be detrimental to him" (s 266(3)(a),(4)).
3) Section 272 gives the court wide powers to protect owners of "associated property". This generally refers to interests acquired with legitimate funds, whether by the respondent or a third party. The categories of "associated property" are defined by s 245(1)(a) to (e). Examples are given by the Explanatory Notes:
"In paragraph (a) the associated property might be a tenancy in a recoverable freehold. In paragraph (b), where a lease in a freehold block of flats had been purchased with recoverable property, another lease in the same block bought with legitimate money would be associated property. In paragraphs (c) and (d) where two people buy a car together, one with recoverable cash and one with legitimate cash, the share of the person who bought with legitimate cash is the associated property. In paragraph (e), where a painting is recoverable property but it had been framed using legitimate money, the frame would be associated property." (para 302)
4) Section 278 enables the court to limit the scope of the recoverable property, where it is traceable through different owners and in different forms. Again the Explanatory Notes are helpful:
"
there is potential for a large family of related property to grow up as a result of such a series of transactions, comprising the original property and several items of representative property. Each of these items will potentially be recoverable. But if the enforcement authority were to recover the entire family of recoverable property, that would be disproportionate to its primary right to recover the original property. Section 278 addresses this situation by providing a series of rules designed to ensure that if the enforcement authority seeks to recover items of related property, rather than confining itself to the original property, the court is able to limit its recovery order to what it thinks is necessary to satisfy the enforcement authority's right to recover the original property." (para 377-8)
5) By section 308, if a person disposes of recoverable property, and the person who obtains it does so "in good faith, for value and without notice that it was recoverable property", the property ceases to be recoverable.
Previous authority
- There have been few cases on this part of the Act. There is a helpful discussion of their background by Sullivan J in R (Director of Assets Recovery Agency) v Green [2005] EWHC 3168 ("Green"). Sullivan J was asked to decide as a preliminary issue:
"Whether a claim for civil recovery can be determined on the basis of conduct in relation to property without the identification of any particular unlawful conduct, this first question to include whether the claimant can sustain a case for civil recovery in circumstances where a respondent has no identifiable lawful income to warrant the lifestyle and purchases of that respondent." (para 20, emphasis added)
- Although he did not accept the full width of the Director's submission, he accepted that it was not necessary to allege a specific criminal offence. His answer came in the form of two declarations:
"1. In civil proceedings for recovery under Part 5 of the Act the Director need not allege the commission of any specific criminal offence but must set out the matters that are alleged to constitute the particular kind or kinds of unlawful conduct by or in return for which the property was obtained.
2. A claim for civil recovery cannot be sustained solely on the basis that a respondent has no identifiable lawful income to warrant his lifestyle."(para 21)
- The Director did not appeal against that formulation, and does not seek to question it in this appeal.
- In my view this is the correct approach, and I would respectfully adopt Sullivan J's analysis and conclusions. However, I would emphasise the word "solely" in the second declaration. Lack of lawful income to support the respondent's lifestyle may be a very relevant factor in painting the overall picture.
- The same approach was in effect adopted by this court in Director of the Assets Recovery Agency v Szepietowski [2007] EWCA Civ 766. This was an appeal by the Director against a finding by the court below that he did not have "a good arguable case", justifying an interim recovery order (under s 246). The court allowed the appeal. In the leading judgment, Waller LJ said:
"In this case, in considering whether a good arguable case has been established, it will be necessary to examine first whether it is arguable on the evidence that unlawful conduct of the kind asserted by the ARA has taken place i.e. mortgage fraud. Next needs to be considered whether it is arguable that the property sought to be frozen represents property originally obtained through such unlawful conduct, but not necessarily through specific examples of that conduct; and finally, if there is some evidence that property was obtained though unlawful conduct, consideration needs to be given to any untruthful explanation or a lack of explanation where opportunity has been given to provide it. An untruthful explanation or a failure to offer an explanation may add strength to the arguability of the case." (para 28, emphasis added)
- Concurring, Moore-Bick LJ said that the judge had wrongly confined himself to looking at the consequences of the various mortgage frauds of which the Director had positive evidence, while failing to take account of "the broader picture" (para 112).
The issues in the appeal
- Mr Krolick, for the appellant, has advanced ten grounds of appeal, with a number of sub-grounds, which I shall attempt to summarise, without I hope distortion:
1) The judge, like Sullivan J in Green, erred in law in holding that there was no obligation on the Director to prove that the property was obtained through a specific criminal offence.
2) He erred in law in holding that the Director was not bound by the concession made by the prosecution in the criminal proceedings, and subsequently accepted by the Court of Appeal as governing the confiscation proceedings.
3) He wrongly reversed the burden of proof, in making findings of unlawful conduct without any direct evidence, other than that Mr Olupitan had lied about the sources of his income.
4) In relation to 157 Wellington Drive, he wrongly reversed the burden of proof, there being no evidence or finding as to unlawful conduct in relation to the funds used to acquire the property.
5) In relation to 23 Hazelmere Road:
i) He erred in law in holding that when a mortgage loan has been obtained by fraud to buy a property, the entire property is thereby recoverable property.
ii) In not excluding Ms Makinde's interest as joint owner, he failed to take into consideration the fact that she was neither party to nor aware of the fraud.
iii) There was no evidence or finding that the repayments of interest and capital (which had reduced the outstanding mortgage from £124,000 to £110,000) came from an unlawful sources. In particular, he failed to take account of the part of such repayments which came from Ms Makinde's earnings as a nurse and or her rental income from 30 Wellstead Road.
iv) He should have held that the respondents were entitled to a share of the increased value of the property, as attributable to repayments or improvements funded from lawful sources.
6) He wrongly rejected Ms Makinde's claim for protection under sections 266(3) and 308:
i) There was no evidence to support his finding that her contribution was funded by Mr Olupitan or that funds derived from him were unlawful;
ii) He was wrong to infer, from her lies about the source of the funds, that she had not acted in good faith at the time of the acquisition;
iii) In assessing her good faith, he failed to take account of her employment as a nurse, her contribution to the repayments from lawful sources, and the fact that she had occupied the property as a home with her children for many years, without knowledge of the fraud.
7) There was no evidence to support the finding that any property had been obtained by money laundering.
8) Langley J erred in law in finding that the two bank accounts were recoverable property. [For reasons already stated, this ground is no longer in issue.]
9) In ordering Ms Makinde to pay the entirety of the Director's costs, he exercised his discretion unreasonably.
10) He also exercised his discretion unreasonably in making an indemnity order for costs against Mr Olupitan. [This is no longer pursued]
- There seem to be many overlaps in the points so formulated. Indeed such multiple statements of grounds tend to obscure the better points. In my view the material grounds can be conveniently dealt with under five heads:
1) Was it necessary for the Director to allege and prove a specific criminal offence?
2) Was the Director bound by the concession in the criminal proceedings?
3) Was the recovery order properly made in respect of Wellington Drive?
4) Was the recovery order properly made in respect of Hazelmere Road?
5) Did he exercise his discretion unreasonably in respect of costs against Ms Makinde?
- As will be seen the principal area of difficulty relates to (4).
(1) Specific criminal offence?
- This question is answered by the authorities to which I have referred. I agree with Sullivan J (in Green), that the Director need not allege the commission of any specific criminal offence, provided there are set out the matters alleged to constitute "the particular kind or kinds of unlawful conduct" by or in return for which the property was obtained. This approach in my view follows from the wording of the Act. Use of the term "unlawful conduct", rather than reference to a criminal offence or offences, is a clear indication that the power is not so restricted. The Green approach was in effect endorsed by this court in Szepietowski.
- Mr Krolick argues for greater particularity. He seeks support in the requirements of the CPR (particularly, PD 16 para 8.2), relating to allegations of fraud in civil proceedings; and in the rule that: "those who make charges must state right at the beginning what they are and what facts they are based on
" (per Lawton LJ, Hydrac Conveyors v Conveyors International [1983] 1 WLR 44, 47). He also relies on the general principle that, even in relation to the civil standard of proof, serious allegations of fraud or illegality require appropriately cogent evidence. The first point is misconceived, in my view. The CPR requirements for allegations of fraud have no direct application. While it is important of course that a respondent should know the case against him, the nature of that case must depend on the particular statutory framework. On the second point, the statute itself provides that the court must decide "on the balance of probabilities" (s 141(3)), which is the test the judge applied.
- In the present case, the "kinds" of unlawful conduct alleged by the Director were set out in the claim form, which concluded:
"The claimant alleges that Olupitan has proven himself to have a propensity to commit crime for financial gain and to lie for person gain. Olupitan has committed immigration offences, acquisitive criminal offences, mortgage fraud and laundered the proceeds of these (and possible other offences) in addition to cheating the public revenue." (para 54)
In my view, that was sufficient indication of the alleged "kinds" of conduct to satisfy the requirements of the statute, and to give notice to Mr Olupitan of the case he had to meet.
(2) The concession in the criminal proceedings
- Mr Krolick submits that the concession by the CPS in the criminal proceedings should have been treated as binding on the Director; or, to put the same point another way, that it was an abuse of process to go behind it. He relies on the judgment of May LJ in the confiscation proceedings which followed:
"In our judgment, on the special facts of this case, there was no evidence on which the judge could properly be satisfied on the balance of probabilities that the appellant had not benefited at all from his relevant criminal conduct. He had not been involved before December 7, 2000. He was arrested on that day
It would have been pure speculation to suppose that he might have benefited by some form of payment in advance of the anticipated proceeds of the dummy delivery. The probability was that he had not. There was no proper evidential basis for supposing that he had benefited from earlier consignments received when he was not part of the conspiracy." ([2004] 2 Crim App R(S) 70, 74)
- To counter the argument that this was a different authority operating different statutory powers, he makes two points:
1) The Crown on a matter such as this should be regarded as "indivisible"; the concessions of one part of the Executive should be treated as binding on another:
2) The requirements of POCA Part 5 are if anything more stringent, than the test applied in the confiscation proceedings under the Criminal Justice Act 1988. The property has to be shown to have been obtained specifically "by or in return for" the unlawful conduct, rather than "as a result of, or in connection with" the commission of a criminal offence (CJA 1988 s 71(4)).
- The judge rejected this argument:
"The Director is not to be equated with the Crown as prosecutor. The Director is independent with a different role and powers. That role and those powers exist regardless of criminal proceedings: section 240(2) of POCA. The issue for the Court of Appeal was whether of not Mr Olupitan had benefited from the offence of which he was convicted. That offence was limited to the dummy run following the concession. That is not the issue which arises under POCA 2002." (para 39)
- That analysis is both succinct and, in my view, unanswerable. There may be contexts in which Mr Krolick's first proposition holds good. He referred us, for example, to the somewhat inconclusive discussion of the concept in Hunt v CCRC [2001] 2 WLR 319. But that establishes no more than that, in the words of Lord Woolf CJ, "the nature of the Crown differs according to its context" (para 27). Mr Krolick was unable to point to any authority where the principle of indivisibility, so far as it exists, has been held to limit the duties and powers conferred on a distinct statutory agency, acting under a specific statutory scheme. Further, comparisons between the different connecting words of the two statutes are not helpful, without taking account of the whole context. The broader language used for confiscation proceedings is in the quite different context of the requirement to show a benefit linked with the commission of a proven criminal offence.
(3) Wellington Drive
- This property was bought in 1998 with money provided solely by Mr Olupitan. Mr Krolick submits that this was well before the only criminal conduct of which specific evidence was provided. There was no basis for attributing it to criminal conduct of any kind. The judge was only able to hold otherwise by in effect reversing the burden of proof, and requiring Mr Olupitan to disprove the inferences drawn from his unexplained expenditure. He also relies on the admission by Miss Croft, who gave evidence for the Director, that there was no allegation that Mr Olupitan had laundered the proceeds of another person's criminal conduct
- In my view, once points (1) and (2) have been disposed of, this ground is without substance. Indeed, it is in reality the first ground in another guise. The judge was not required to find a direct link with any offence or offences, but rather a causal connection with criminal conduct of the kinds relied on by the Director. Apart from mortgage fraud, these were conspiracy to defraud and money laundering. As to the first he was entitled to find that that Mr Olupitan had been involved in the 2000 conspiracy to defraud "longer and more deeply" than the prosecution had conceded. He inferred this principally from his regular telephone links with the principal conspirator during the period of the conspiracy, and the large, unexplained sums paid between April and October 2000 into his account and that of Ms Makinde (para 40). It is true that Wellington Drive had been acquired two years before. But, in the absence of any other explanation or hint of a legal source, he was entitled to infer, on the balance of probabilities, that the substantial funds passing through his account in that period had a similar criminal explanation.
- The judge was fully aware of the burden of proof. Indeed, he applied it in the respondents' favour when holding that the Director had not established "on the balance of probabilities" the case for including 30 Wellstead Road in the order. On the other issues, he was entitled to draw inferences based on the totality of the material, of which the unexplained funds were but one part.
(4) 23 Hazelmere Road
- The issues here are complicated by the different interests involved. The property was bought in 2000 for £155,000, and is now worth £280,000. There are four elements to be considered:
1) The cash deposit of £31,000, of which were paid:
i) £15,500 from Mr Olupitan's account;
ii) The balance (plus fees) from Ms Makinde's account.
2) The mortgage loan from Bristol & West of £124,000;
3) Subsequent mortgage repayments, which, we were told, had reduced the outstanding loan from £124,000 to £110,000.
- Cash deposits The conclusions on the cash deposit were ones of fact. The judge was entitled to conclude that Mr Olupitan's own share was no less tainted than the funds used to buy Wellington Drive. Ms Makinde claimed to have provided some £17,000 towards the cost of Hazelmere Road from her own sources. The judge disbelieved her account of the sources of this money for reasons which appear unimpeachable, and held that it was "more probable than not" that the source of the money was Mr Olupitan (para 56-58). I see no basis for challenging this conclusion.
- Mortgage loan The mortgage loan raises a legal issue of more difficulty. The judge recorded Mr Krolick's argument that, whilst services or the money transfer might have been obtained by mortgage fraud, the same could not be said of the property itself (para 35). In rejecting it, he referred to the reasoning of Dobbs J in the preliminary proceedings ([2006] EWHC 1906). She had regarded the point as "totally without merit":
"The proposition can be tested in this way had [Mr Olupitan] not obtained the mortgage and consequently the mortgage funds, he would not have obtained the property. The evidence that the mortgage and funds were obtained by deception is overwhelming. Were it not for the deception, [Mr Olupitan] would not have acquired the property. The acquisition of the property was as a result of unlawful conduct." (para 56)
- Langley J agreed. Dealing with the mortgage fraud he concluded:
"The mortgage was obtained by Mr Olupitan by fraud. In ordinary language, therefore, so, too, was 23, Hazelmere Road when its purchase was completed in October 2000." (para 34)
Having quoted Dobbs J, he said:
" Mr Krolick was concerned to submit that if the court reached this conclusion, the result could be exorbitant so that in a case in which a mortgage had been redeemed nonetheless the entire property would still be "recoverable". But POCA 2002 contains (as I have sought to illustrate) a number of provisions to protect "the innocent". In this case Bristol & West is entitled to be repaid. So, too, would someone acting in good faith using lawful funds to redeem a mortgage." (para 36)
- Before us Mr Krolick argued that this approach is wrong for both practical and legal reasons. The true position, on the proper construction of the Act, is that a mortgage fraud of this kind does not result in any recoverable property, which can be subject of a recovery order. In support he submitted:
1) Dobbs J's approach, fixing on the property obtained with the loan, would mean that no distinction is made between the person who fraudulently borrows £200,000 to purchase a £250,000 house (the balance coming from lawful sources), and then makes full repayment; and one who fraudulently borrows the entire £250,000, and makes no repayment. On Dobbs J's analysis each property in its entirety would be "recoverable property", because it would not have been bought "but for" the loan. Langley J was wrong to think that the apparent absurdity of this result is mitigated by the provisions in the Act "to protect the innocent" (para 36). Sections 272 and 306 do not assist in this context. They give no room for the exercise of discretion in relation to the original recoverable property.
2) Nor does it help to direct attention at the mortgage advance, rather than the property. Under an ordinary mortgage transaction the mortgage advance is normally transferred by the lender to the conveyancing solicitor. He holds it on trust for the lender until completion, at which point it is transferred to the vendor. Thus, even if the advance is obtained by fraud, the fraudster himself never obtains any property in the purchase money as such. In any event, the advance would cease to be recoverable property on completion, when it passes to a vendor acting in good faith (s 304(2), 308).
- After some initial doubts, I have come to the conclusion that Mr Krolick's criticisms are justified. I agree that it is not enough to show, as Dobbs J suggested, that the property would not have been obtained "but for" the unlawful conduct. The Act requires a more specific causal connection: that the property was obtained "by or in return for" the unlawful conduct. The difference might not matter in many legal contexts. But this is a carefully constructed scheme in which the precise identification of the "original" recoverable property, as contrasted with property "representing" it, may be significant.
- To simplify Mr Krolick's example, if someone steals £100,000 cash and puts the whole sum to the acquisition of a house, it could be said in a broad sense that the house itself has been obtained by unlawful conduct. However, as I understand the scheme of the Act, the original "recoverable property" is the immediate product of the unlawful conduct, that is the £100,000 cash. The house only becomes recoverable property because it "represents" the £100,000 (s 305). The distinction is immaterial if the whole purchase price is funded from unlawful sources. However, it becomes important, if, say, only £75,000 of the purchase price comes from unlawful sources, and the other £25,000 is untainted. In such a case it could no doubt still be said that the £100,000 house would not have been acquired "but for" the theft, and possibly, in ordinary language, that it was "obtained" by theft. However, the Act seems to me to require a more precise analysis. The original recoverable property is the stolen £75,000, which is then "mixed" with the lawful £25,000. Under section 306, the recovery order can only bite on the "portion" of the mixed property which is attributable to the unlawful £75,000.
- If in that example one follows the judge's approach, one is forced to treat the whole house as "recoverable property". On that hypothesis sections 272 and 306 do not assist. The assumption underlying them is that the recoverable property is the product of unlawful conduct, and does not deserve or require protection. They provide protection respectively for "associated property", which by definition excludes property which is "itself the recoverable property" (s 245(1)); and "other property", that is, property other than the recoverable property which is mixed with it (s 306(1)).
- A possible alternative approach is to focus on the mortgage advance, which was the immediate product of the mortgage fraud. Again, in ordinary language, it might be said that the loan was "obtained" by Mr Olupitan by his unlawful conduct. However, as Mr Krolick rightly submits, this is not a correct analysis in law. In an ordinary mortgage transaction the purchaser never obtains actual title to the money representing the loan. It is held by his solicitor to the order of the mortgagee until the purchase is completed, when it passes to the vendor. Nor in my view does it assist to focus on the contractual right to a loan. That may be regarded as a "chose in action" and so within the statutory definition of property. But as such it is of negligible value, because it is balanced by an equivalent obligation to repay. Furthermore, I find it hard to see how it can be said that it was used "in part payment" for the house, or to fit it in to any of the other categories of mixed property under section 306.
- This may seem an over-technical approach. However, the Act represents a significant inroad into traditional property rights, not depending on proof of a criminal offence. It should not be extended beyond its natural scope, as indicated by the statutory language. The Explanatory Notes give obvious examples of the targets of Part 5: stolen money, profits of dealing in illicit drugs, or bribes to give false evidence. There is nothing to suggest that a mortgage loan was one of the categories of property in the minds of the legislature. If it had been, I would have expected detailed provisions to deal with the technicalities of such transactions, as there is for other categories of special interest.
- I conclude therefore, in respectful disagreement with the judge (and I understand with my colleagues) that, in so far as the property was funded by the mortgage loan, it should not have been treated as recoverable property.
- The mortgage repayments Mr Krolick criticises the judge's treatment of Ms Makinde's possible defences. He said:
"It was Ms Makinde's evidence (which I have rejected) that the funds came from her own lawful sources not that if they were provided by Mr Olupitan she believed he had legitimate sources of income to enable him to do so. Substantially for the same reasons that have led me to reject her case I am also satisfied that she was not acting in good faith and has not taken any relevant steps within section 266 of POCA. Nor did she act in good faith or give value within section 308 of the Act. I am also satisfied that it is 'just and equitable' to make a recovery order in the circumstances as I have found them to be that Mr Olupitan and to any extent she did, Ms Makinde, only obtained the property through a mortgage fraud and the use of funds dishonestly."
- Mr Krolick makes two main points:
1) The judge failed to take account of the lawful income available to her (her income as a nurse, and rents from Wellstead Road). The fair inference was that at least part of the repayments of the mortgage (reducing the capital balance from £124,000 to £110,000) would have come from this source.
2) The judge was wrong to infer, from the fact that Ms Makinde had lied in the witness box, that she had not acted in "good faith" at the time of the acquisition in 2000, or in respect of subsequent payments. There was no basis for the suggestion that she was aware at that time of the unlawful source of her partner's funds. There was independent evidence (from the mortgage broker, Mr Lartey) that she had dealt with the matter separately from him.
- Given the finding that her share of the deposit money came from Mr Olupitan's unlawful funds, the issue of her own "good faith" at that time does not seem to arise. I see some theoretical force in the point that the judge should have considered separately the status of the mortgage repayments. Use of partly tainted and partly untainted funds to make capital repayments on a mortgage may be capable of analysis under the "mixed property" provisions of section 306. However, it is unclear to me to what extent this point was an issue at trial, or what evidence was available on it. We were referred to a passage in Ms Makinde's oral evidence in which she said that the "mortgage (was) paid" from the rent of Wellstead Road, but it was not always enough, and the balance was usually paid by Mr Olupitan. It seems to me impossible to extract from this any basis for an inference as to the source of the capital repayments.
Costs against Ms Makinde
- Mr Krolick accepts that he cannot challenge the indemnity order made against Mr Olupitan. However, he argues that it was wrong in principle to make an order against Ms Makinde for all the Director's costs, where she had not herself been found to have been party to any fraud, and had succeeded on a substantial part of the case, in relation to Wellstead Road; and where it had been the examination of Mr Olupitan's income which had taken up the bulk of the time at trial.
- The judge's reasons for making the order against her (according to a note by Mr Krolick's pupil, which has not been approved by the judge) were:
"It was a close run thing, with late documents. She lost in relation to 23 Hazelmere Road. She won in relation to 30 Wellstead Road, with late documents. My order is that she should pay the costs of the claim but not on the same basis. In her case the costs will be on the usual standard basis and without interest."
Although one might have expected a more significant allowance for her substantial victory in respect of Wellstead Road, the judge was entitled to take account of the fact that the relevant material came late in the day, when most of the Director's costs had been incurred.
- This court is always reluctant to interfere with the judge's exercise of discretion on costs, and this is particularly difficult without a transcript, or at least an agreed note of the judge's reasons. It is the appellant's responsibility to ensure that this is before the court. In the circumstances I see no adequate reason to overturn the judge's order.
Conclusion
- For these reasons, and having regard to the majority's conclusion on the mortgage loan (ground 5(1)), the appeal will be dismissed.
Lord Justice Toulson :
- I agree with Carnwath LJ on the first three issues which he has identified in paragraph 20 and on the final issue. However, on issue four, I disagree with his conclusion that in so far as the Hazelmere Road property was funded by the mortgage loan, it should not have been treated as recoverable property.
- On this issue Carnwath LJ's reasoning falls into two parts. I agree with him on the first part but part company with him in relation to the second.
- As to the first part, I agree that if a property is acquired in part with untainted money and in part with the proceeds of a mortgage fraud, it was not Parliament's intention that the purchaser should be deprived of the portion of the value of the property derived from untainted money. The object of s 306 (mixing property) is the opposite.
- It is at the stage of examining the mortgage advance, which was obtained by fraud, that our views diverge. Carnwath LJ is persuaded by the argument of Mr Krolick summarised in paragraph 36(2), namely that a mortgage fraud does not result in any recoverable property which can be the subject of a recovery order because:
a. even if the advance is obtained by fraud, the fraudster himself never obtains any property in the purchase money as such; and/or
b. in any event, the advance would cease to be recoverable property on completion, when it passes to a vendor acting in good faith.
- Carnwath LJ recognises, at paragraph 40, that in ordinary language it might be said that the loan was obtained by Mr Olupitan by his unlawful conduct, but he does not consider this to be a correct legal analysis.
- As a matter of simple fact, the property was acquired in part with money loaned by the building society through the perpetration of a fraud by Mr Olupitan (and for the rest from tainted sources). If the mechanics had been that the building society had paid the amount of the loan to Mr Olupitan, who had used it in part payment of the purchase price, the money received by him would have been recoverable property while it remained in his hands. On its being used to purchase the property, the property would pro tanto have represented that property and would be recoverable. However, the building society's interest in the property as a chargee for value would fall within the definition of associated property in s 245, and in making any recovery order the court would have to have proper regard for the building society's rights (see, for example, s 272(4)).
- Mr Krolick argued that there is a significant difference under an ordinary mortgage transaction because the mortgage advance is paid, by cheque or electronic transfer, to the purchaser's solicitor to hold it for the lender until completion and then to transfer it to the vendor.
- Under such a mortgage loan agreement the purchaser does not receive a direct payment from the lender but obtains a contractual right to the payment of money by the lender for the acquisition of the property by the purchaser. I see no reason why that contractual right should not be classified as a thing in action, which falls within the definition of property in s 316(4). When the lender pays the money on the purchaser's behalf to the vendor, the property thereby acquired represents the money agreed to be loaned by the building society. Accordingly, I do not think that it makes a difference that the mortgage loan has not passed through the bank account of the borrower. So the answer to Mr Krolick's argument that "the fraudster himself never obtains any property in the purchase money as such" is that the fraudster obtains a contractual right to borrow money (which is a form of property), and the advance of the money for the acquisition of the property is in performance of the contractual obligation of the building society. So the property represents the money agreed to be loaned.
- Similarly the answer to his argument that "in any event, the advance would cease to be recoverable property on completion, when it passes to a vendor acting in good faith" is that the vendor is certainly entitled to retain the purchase price, but the property which he gives in exchange for it represents the money which the building society agreed to lend.
- However, it seems to me that all this is academic in the present case and makes no difference to the correctness of the civil recovery order made by the judge. He ordered as follows:
"1. There be a Civil Recovery Order in respect of the following recoverable property ("the Recoverable Property"):
a. The property situated at 23 Hazelmere Road, Northolt, UB5 6UJ and registered at HM Land Registry in the names of Ayodele Olusegun Oluiptan and Omotayo Abidemi Makinde, with title number NGL455548;
2, Katherine Jones of the asset recovery agency, PO Box 39992, London EC4M 7XQ is hereby appointed as the Trustee for Civil Recovery ("the Trustee"), within the meaning of section 267 of the Proceeds of Crime Act 2002. The Recoverable Property shall vest in the Trustee forthwith upon the making of this Order.
3. For the avoidance of doubt, on a sale of the property at 23 Hazelmere Road, the Trustee shall discharge any outstanding indebtedness to Bristol and West plc secured by the mortgage dated 26 October 2000 over that property."
- Since we are agreed that the judge was entitled to find that the entirety of the deposit money came from Mr Olupitan's unlawful funds, and that the judge is not to be criticised for failing to find that there were capital repayments from an untainted source, it seems to me that this was a proper form of order to make even if as a matter of abstract law Mr Krolick's argument in relation to the mortgage advance is correct.
- If the case had been one in which capital repayments had been made from an untainted source, I agree with Carnwath LJ that the "mixed property" provisions of s 306 would have been relevant.
President of the Queen's Bench Division :
- Langley J's findings of fact are unassailable. The relevant provisions of the Proceeds of Crime Act 2002 are fully set out in Carnwath LJ's judgment. Save in respect of 23 Hazelmere Road, Carnwath and Toulson LJJs are agreed on every issue which arises in this appeal, and where they are agreed, I, too agree and cannot usefully add anything.
- The Proceeds of Crime Act 2002 created a process by which the Assets Recovery Agency was vested with power in civil proceedings to recovery property which was or which represented property obtained "by or in return" for unlawful conduct. Unsurprisingly, property not so obtained was excluded from the ambit of the legislation, and where property was obtained in part by unlawful conduct and in part from innocent sources, the property obtained from innocent sources, too, was excluded from the recovery process. The legislative purpose was plain: so far as possible those whose conduct was unlawful, as defined in the Act, should be deprived of its fruits.
- 23 Hazelmere Road was bought for £155,000.00 and registered in the joint names of Mr Olupitan and Ms Makinde. The purchase price was paid by a cash deposit of £31,000.00 and a mortgage from the Bristol and West Building Society of £124,000.00. The judge found that the deposit was funded from Mr Olupitan's unlawful conduct and that the mortgage itself was obtained by his deception of the building society. Subsequent repayments also from tainted sources reduced the mortgage loan from £124,000.00 to £110,000.00, and in the meantime the value of the property increased to £280,000.00.
- I have, of course, reflected on the subtlety and refinement of Mr Krolick's submissions on this issue. True it is that the building society did not hand any cash directly over to either appellant personally to enable the purchase of the property to proceed. Instead Mr Olupitan's dishonesty led the building society to make contractual arrangements by which the necessary funds for the purpose were transferred to the solicitors for the appellants to hold on trust for the building society, but in due course on completion, for their transfer to the vendor of the property. This is what the solicitors did. Neither appellant ever touched a single penny of the money held by their solicitors, but, as a matter of reality, the property in which they obtained their registered interest (and which is the subject of these recovery proceedings) was purchased in its entirety as a direct result of Mr Olupitan's unlawful conduct. It would be most surprising if the proceeds of this particular form of dishonesty (purchasing an interest in a house as a result of obtaining a mortgage by deception) were excluded from the ambit of the 2002 Act. In my judgment, as a matter of fact, the property registered in the name of the appellants and their entire interest in it was obtained by unlawful, dishonest conduct. This conclusion does not disadvantage the building society, whose interests are fully protected.
- In these circumstances I agree with Toulson LJ that the order made in relation to 23 Hazelmere Road by Langley J was appropriate, and like him I would dismiss the appeal on this issue.
