Legal Expenses in Account Freezing Orders
Paying for it – Legal Expenses from Frozen Assets
Jonathan Lennon provides a practical perspective for those advising clients on the wrong end of an Account Freezing Order.
The Criminal Finances Act 2017 grabbed the headlines when it was first introduced as a Bill and when it came into force. Unexplained Wealth Orders were heralded as a great new tool in the battle to seize the proceeds of crime. The new corporate offence of failing to prevent tax evasion was welcomed as a refreshing change of tact to focus on greedy corporates. In reality however, like many shiny new criminal offences or investigative tools, they have ended up as a bit of a damp squib; they have hardly been used. Disappointing but not surprising.
However, the same cannot be said for another change that the 2017 Act made to the Proceeds of Crime Act 2002 (POCA). Section 16 inserted Chapter 3B into Part 5 of POCA – the civil part of POCA; ‘Forfeiture of Money Held in Bank and Building Society Accounts.’ This is modelled on the cash forfeiture provisions, also in Part 5. Unlike cash cases however it is not uncommon for Account Freezing Orders to freeze hundreds of thousands if not millions of pounds.
Whether this money represents the proceeds of crime will never be an easy assessment when complicated corporate money transactions, often going back many years are involved. Quite what Parliament was thinking when it decided that the right Court to deal with such complex financial cases was the Magistrates’ Court is a legitimate question.
What is often not understood by Applicants, at least initially, is that there is a whole body of pre-existing case law in Account Freezing Order (AFO) and cash cases; it is the case law on High Court civil recovery actions under POCA. For example, the notion that the carrying of cash was inherently suspicious and therefore the Applicant did not have to prove any background offending (per Moses J in Muneka v HMRC [2005] EWCA 3168 (Admin)) – as was required in other civil recovery cases - was specifically rejected in a the leading cash forfeiture case of Angus v UKBA [2011] EWHC 461 (Admin). The provisions are the same – Part 5 of POCA - thus the case law is all there but is frequently overlooked. For example, cash or bank account cases alleging money laundering and/or tax evasion can all be positively attacked by the defence at an early stage with specific Part 5 High Court case law – but only where the defence at least are aware of the case law in this area.
But this article will not deal with any of those possible challenges, or the tactical options available in defending AFO cases. First of all, the solicitor needs to know how the case is to be funded if the client’s money is in fact all tied up by the AFO.
Section 303Z5
There is an express power to grant an exclusion from the AFO for purpose of reasonable legal expenses (s303Z5)). This provides that such an exclusion specifies the total amount and ‘is made subject to the same conditions as would be the required conditions under s286A’ (s303Z5(5)(c), my emphasis).
Section 286A is the part that deals with variations to Property Freezing Orders (PFO) in High Court civil recovery claims. In High Court civil recovery cases there is an established procedure for ensuring that Respondents do not spend the frozen money (frozen under the PFO) defending the action unless they have no other available means. A sophisticated and detailed process is now well established in such cases. But care needs to be taken here.
Section 303Z5 is confusing, as all s286A does is give the Lord Chancellor the power to make rules to specify the ‘required conditions’ in civil recovery proceedings – i.e. to achieve a variation for legal expenses in such cases – per s286A(1). Section 286A(2) qualifies s286A(1) by setting out that the ‘required conditions’ may e.g. restrict who receives payment, assess expenses etc. Section 286A does not actually create any ‘required conditions’. But s303Z5(5)(c) helps – any exclusion from a AFO for reasonable legal expenses is to be made subject to the same conditions as if the exclusion was from a PFO rather than an AFO.
The 2005 Regulations
As explained the ‘conditions’ are not contained in s286A, but in the regulations made under the section. Those regulations are the Proceeds of Crime Act 2002 (Legal Expenses in Civil Recovery Regulations) 2005. Also, as any exclusion for legal expenses from an AFO is to be the same as is from an PFO the CPR Practice Direction on Civil Recovery will apply; see below.
The regulations deal with a number of practical matters, including the rates that may be charged by solicitors and counsel; e.g. a ‘standard case’ is one where a solicitor of at least 8 years standing may charge £187.50 + 20% London uplift, or £225 ph + 20% uplift for London weighting for a so called ‘higher hourly rate’ case. There is no guidance on how to decide if the case is ‘standard’ or ‘higher’ – that issue alone could be the subject of an article.
The ‘required conditions’ in the regulations require that each variation (to a PFO) must deal with the legal costs by ‘stage’ – i.e. from X date to Y date, and set out what the maximum cost will be. That is then part of the Order itself – at least in a PFO case.
Then there are further ‘required conditions’ which relate to the release of the money to the lawyer. This is to the effect that the lawyer may bill every two months and if the bill is not agreed as reasonable then at least 65% must be released and the rest can be argued by assessment. Having one’s own legal costs assessed by a Magistrates’ Court, before the conclusion of the case, is a novel proposition for the Magistrates’ Court.
Statement of Assets
This may be the first preliminary issue. The police/HMRC etc may take the view that the AFO should not be varied for legal expenses unless and until the Respondent has shown that he/she has no other free assets in which to pay for the legal advice.
This would be entirely consistent with the approach in the civil courts. In purely civil cases it has long been the case that it is for the defence to show that there are no funds available to him/her to defend the claim, other than those frozen by the Court; see e.g. the Court of Appeal in The Ostrich Farming Corporation Limited v Ketchell [1997] EWCA Civ 2953. This has been followed in the criminal sphere in the case of e.g. Restraint Orders; Serious Fraud Office v X [2005] EWCA Civ 1564.
This will mean that the solicitor then has first of all to prepare a Statement of Assets in order to get access to the frozen monies. That could be complicated and time consuming. Even though this is no part of the requirements under the 2005 Regulations, if this hurdle is raised, it would have to be complied with.
Initial £3,000
The initial work, and how it is paid for, has already been settled in PFO cases – and by s303Z(5)(c) – the same conditions apply in AFO cases. This is where the CPR Practice Direction on Civil Recovery (para 7A) becomes useful. The Practice Direction provides that in the case of a PFO before any exclusion for reasonable legal expenses can be made there should be a statement of assets confirming that there are no other available assets to pay for the legal work – other than that which is frozen by the order (7A.2 and 5B.1). The effect should be that the work for the initial advice about the order itself and the preparation of the statement of assets for the client is covered by an automatic exclusion of up to £3,000.
So, if the Applicant refuses to release monies from an AFO, until it is proven that the Respondent has no free assets to pay for legal advice, then it would very difficult for them to argue that £3000 should be released to fund that process, given that the whole AFO variation regime ‘leans’ on the civil recovery processes.
Once completed the police of course might suggest that the Statement of Assets is not accepted – they do not believe that your client has no other funds available to him outside of the AFO. What then? That attitude may pose a problem, not for the Respondent, but for the Applicant. In PFO cases there is effectively a presumption in favour of an exclusion in cases where there is some doubt that the Respondent may be lying and have other free assets available; see e.g. SOCA v Azam [2013] 1 WLR 3800. Suspicion is not enough, and the Respondent cannot be asked to prove a negative.
NCA v Simkus [2016] EWHC 728 (Admin) is another case in point. It demonstrates that it is always sensible for the solicitor to try and get ‘approval’ from the police/HMRC etc before undertaking the work. In PFO cases that happens frequently with the NCA who are quite used to the process of ‘haggling’ with defence solicitors over legal costs – not so the average police Financial Investigator. The Court set out the proper approach to applications to vary exclusions in PFO cases, both for predicted and already incurred legal costs. Where dealing with predicted costs, the Court should perform an exercise similar to costs budgeting. When dealing with costs already incurred, the Court should consider why no advance approval of the costs was sought or granted. It was held that s245C was a method of controlling interim payments and required the Court to consider the amount of costs on which an exclusion was to be based, but did not require a detailed, or even a summary, assessment. The Court was required to consider three things: (i) the need to limit any exclusion – but this related only to the hours spent on a task as the hourly rate was already ‘reasonable’ (and has not changed since 2005!); (ii) the desirability of the Respondent being represented; (iii) balanced with the need to ensure the enforcement authority’s right to recover was not unduly prejudiced.
The solicitor may not be dealing with the NCA, but instead dealing with a police force that makes no mention of the Civil Recovery Practice Direction and may never have heard of it. This may be fine, depending on what the Applicant’s attitude is to the release of funds for legal expenses. Different forces appear to be taking different approaches – there certainly seems to be a lack of consistency.
Conclusion
It maybe that the solicitor has it easy, if the Applicant is relaxed about a variation to the AFO for legal fees and matters may be agreed even in a disputed case. But if that is not the case, then there are a number of options available to the solicitor which would require some grappling with the intricacies of the similar processes in High Court civil recovery. The upside is that engaging the Applicant with those arguments, at the very earliest stage, lets the opposition know that digging in their heels will simply lead to more and more costs being lost from the ‘pot’ - as long as the solicitor and client are prepared to seek orders from the Court.
Jonathan Lennon of Doughty Street Chambers is one of the most experienced juniors in POCA High Court civil actions in the country and acted in the first civil recovery case to reach the Supreme Court; Gale v SOCA [2001]. He was counsel for the successful applicant in the leading cash forfeiture case of Angus v UKBA. He has appeared and advised in a number of AFO cases and is regularly instructed to act in complex fraud and money laundering trials as well as High Court POCA actions. Jonathan is an Executive Committee member of the Proceeds of Crime Lawyers Association.
Attend Webinar; Account Freezing Orders & High Court Civil Recovery; Criminal Practice in a Civil Age - by Jonathan with Nicola Sharp of Rahman Ravelli Solicitors - 4pm on 10th December 2020;
Click here for more information on the event and to register.
