Other people’s money

  • Author : Jonathan Fisher QC
  • Date : August/September
ABOUT THE AUTHOR: Jonathan Fisher QC TEP is a practising barrister at Devereux Chambers, Temple, London

Although trusts have been used perfectly legitimately for many centuries, it is fair to say that (in common with many other forms of ownership structure) criminals have also used trusts to hide their ill-gotten gains. A discretionary trust, preferably based offshore, is an attractive mechanism. Legal title to the monies is held by a fiduciary acting as trustee. Meanwhile, the criminal’s identity remains shrouded in obscurity, with trust income payable by the trustee to the beneficiaries in accordance with a letter of wishes that sits alongside the trust into which the proceeds of crime have been settled. Invariably, the beneficiaries are the criminal, the criminal’s family, and perhaps one or two trusted associates.

Until the Proceeds of Crime Act was passed in 2002, UK courts had been largely impotent when it came to recovering the proceeds of crime held in trust. Although the courts had developed rules for determining when it was appropriate to lift the veil of incorporation from a limited company used to conceal the proceeds of crime, the judges had been reluctant to apply the same rules to a trust. It remains more difficult for a court to confiscate property held in trust than to confiscate property held by a limited company. However, there are signs that the courts are slowly becoming more robust, using the ‘tainted gift’ provisions in the Proceeds of Crime Act 2002 to recover criminal monies paid into a trust whenever the circumstances allow.

Company assets versus trust assets

Where a limited company is the alter ego of a person using the company as a vehicle for criminal activity or concealing proceeds of crime, the courts have little hesitation in declaring receipt of monies by the company as receipt by the individual in control of the company. Moreover, it is not necessary for a prosecuting authority to show that the company was an alter ego at the time of its incorporation. The Court of Appeal made clear in R v Omar [2004] EWCA Crim 2320 that it makes no difference whether a company is set up for a criminal purpose or is an existing legitimate company subsequently deployed for the purposes of fraud. ‘The important point… is that the company… was the appellant’s alter ego, with the appellant running it and making all the decisions, including decisions on the purchase of the properties’ (Richards J, paragraph 18). Lifting the veil of incorporation reveals the true situation by stripping away the corporate façade and exposing the beneficial owners of the shares.

The position is more complicated for a discretionary trust. Unlike a limited company, third-party interests are always involved. Trustees are third parties between the settlor and the beneficiaries, and if the veil of a trust were lifted, it would extinguish the trustees’ obligations and render them redundant.

Traditionally, a court can look through a trust only where it concludes the trust was a sham at the time of its creation. The problem is that the hurdle for establishing a sham trust is a high one. The leading case is Snook v London & West Riding Investments [1967] 2 QB 786, where Diplock J defined a sham as ‘acts done or documents executed by the parties to the “sham” which are intended by them to give to third parties or to the court the appearance of creating between the parties legal rights and obligations different from the actual legal rights and obligations (if any) which the parties intend to create’. Put shortly, a sham exists where the parties say one thing and intend another, with all parties to the documentation aware of the sham.

In most cases where proceeds of crime are settled into a trust, there will not be anything sham about the arrangement. The criminal as settlor intends to create actual legal rights and obligations in favour of the trustee and beneficiaries, and the trustee is not aware that the criminal is seeking to use the trust as a façade to conceal the illicit origin of the funds. Fraudulent conduct by the settlor years later will not convert the trust into a sham. Subsequent fraudulent conduct is admissible only to show that the trust was a sham when it was created.

With utmost regret

An illustration of the egregious effect of the strict application of this principle occurred in R v Vickers [2010] EWCA Crim 324, where a defendant convicted of producing cannabis transferred two properties into trust for the benefit of his wife more than six years before criminal proceedings were instituted. Although the Court of Appeal was satisfied that the defendant had established the trust in an effort to defeat any attempt by the prosecuting authorities to realise benefit from the properties if he was convicted of cannabis production, the trust arrangement could not be set aside. This was because the trial judge found on the facts that the trust arrangement had been lawfully established and was effective to terminate the defendant’s beneficial interest in the two properties. Moses LJ said that ‘in a case dripping with merit’ for the prosecution, he had no alternative but to uphold the trust arrangement ‘with the utmost regret’.

“A court can look through a trust only where it concludes the trust was a sham at the time of its creation”

A few months earlier, in LarkfieldLtd v Revenue and Customs Prosecution Office [2010] EWCA Civ 521, the Court of Appeal overturned a decision by a trial judge to rule that a property held in trust could be regarded as an offender’s realisable assets for the purposes of making a confiscation order under the Proceeds of Crime Act 2002. The Court was satisfied that the monies provided to the appellant company for the purchase of the flat were provided by a loan. While it was possible that the offender had an interest in the money recovered from the appellant company in respect of the loan, such rights were between the offender and the appellant company and had nothing to do with securing any beneficial interest held by the offender in the property itself. Accordingly, the trial judge’s conclusion that the flat was the offender’s realisable property was unsustainable. The appellant company had executed declarations of trust under which its shares were held on trust for a settlement, and there was no evidence to sustain a finding that the offender was directly or indirectly the beneficial owner of shares in the appellant company.

A more robust approach

However, encouraged by the statutory purpose underlying the Proceeds of Crime Act 2002, the courts have adopted a more robust approach to criminal property held in trust where the property can be treated as a tainted gift. When determining the value of an offender’s assets for the purposes of confiscation, the courts take into account the total value of all tainted gifts the offender has made in the six years preceding the date on which criminal proceedings for the offence were instituted (Proceeds of Crime Act 2002, sections 9 and 77).

This scenario arises most frequently where an offender has used criminal property to finance the purchase of a family home in which both the offender and their spouse hold the beneficial interest in equal shares. The court determines the proportion of the spouse’s share that has been funded by criminal activity, taking this sum into account when assessing the total value of the offender’s assets. The courts will also treat an offender’s disposal of a beneficial interest as a gift into account in a more commercial context. This occurred in Revenue and Customs Prosecution Office v Johnson [2011] EWHC 1950 (Admin), where an offender released his contractual entitlement to 50 per cent use of an agreement pursuant to a joint operating agreement made with a business partner.

In most of these cases, the nature of the trust relationship tends to be implied rather than express. Furthermore, strictly speaking, the tainted gift provisions do not set aside or look through a trust, but rather claw back monies settled into the trust in the manner of a tracing exercise.

In R v Stannard [2005] EWCA Crim 2717, the Court of Appeal decided to look through the trust arrangement, treating the trust as if it did not exist. However, the circumstances were unusual. The offender contended that he had placed his assets into a discretionary trust under which he was the only beneficiary. But no trust deed was produced, and the trustee was not perceived to be acting at arm’s length. In cross-examination, prosecuting counsel elicited from the offender that when he wanted to contact the trustee he would write to himself at an address in Gibraltar. This led the Court to make a critical finding of fact that the trust assets had remained under the offender’s control throughout. The offender’s retention of control of the assets was inconsistent with the concept of trust. As far as the Court was concerned, the trust could not even be regarded as a sham. Rather, it had never existed at all.


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