Summary

The English Court of Appeal has decided that the National Crime Agency is entitled, in civil recovery proceedings, to all of the profits made on investments funded in part by the proceeds of crime and in part by loans made by a bank. That decision was reached because the loans had been obtained by fraudulent misrepresentations as to the source of the borrower’s wealth and funds, meaning the loans themselves were also the proceeds of crime.

Introduction

The United Kingdom has comprehensive proceeds of crime legislation contained in the Proceeds of Crime Act 2002. That legislation granted law enforcement agencies the power to bring “civil recovery” proceedings to recover the proceeds of crime in the absence of a criminal conviction. This mechanism is known in other countries as civil forfeiture or non-conviction based forfeiture or confiscation. Civil recovery proceedings can be brought using evidence obtained during a criminal investigation.

For the purposes of this case, and in broad terms, the following matters are relevant:

  • UK law enforcement agencies can bring a civil recovery case in relation to “recoverable property
  • recoverable property” is “property obtained through unlawful conduct
  • unlawful conduct” is criminal conduct in the UK or, provided the conduct would also be a criminal offence in the UK, criminal conduct overseas
  • where an asset has been acquired using both criminal money and legitimate money, it is “mixed property”, and only that portion of the property attributable to the proceeds of crime is “recoverable property
  • profits made from a criminal asset are also recoverable property, such as interest on a bank account containing the proceeds of crime

The case

Hakki Yaman Namli is a Turkish businessman. He owned and controlled a company called Topinvest Holding International Limited, incorporated in the British Virgin Islands. Between March 1999 and February 2005 about US$7 million was paid into an account maintained by Topinvest with Coutts & Co in London.

The National Crime Agency[1] (NCA) sought a civil recovery order against those funds on the basis that they were the proceeds of various frauds, or the laundering of the funds obtained from those frauds. Those proceedings were largely successful, save in relation to loans made by Coutts to Topinvest, and the profits made by Topinvest using those loans. The NCA appealed that aspect of the judgment.

The background was as follows. In June 2004, Coutts and Mr Namli agreed that US$4.5 million would be paid into an investment fund operated by Coutts called “Orbita Strategies”. Of this, US$1.8 million (40%) was paid from funds in Topinvest’s account that proved to be the proceeds of crime. The remaining 60% of the investment, US$2.7 million, was loaned by Coutts to Mr Namli.

The fund performed well. Within two years it had grown to US$5,605,570, a profit of $1,105,750. The fund was redeemed, the loan was repaid to Coutts, and the profits were credited to one of Topinvest’s accounts. In addition, Topinvest made a further profitable investment, which this time was wholly made using funds borrowed from Coutts. The profit was again paid into one of Topinvest’s accounts. Interest accrued on these profits.

The issues for the Court of Appeal was whether the National Crime Agency could recover all of the profits on the Orbita fund, or only the 40% attributable to the original criminal funds; and also whether the NCA could recover any of the profits on the second investment.

The High Court Judge decided that the National Crime Agency could recover profits only from the investments that derived from tainted funds, being 40% of the profits on the Orbiat investment. The Judge reached this conclusion based on an earlier decision of the Court of Appeal called Olupitan v Director of the Assets Recovery Agency.[2] There it had been decided, on the basis of the Proceeds of Crime Act, that:

  • a loan obtained as a result of a fraud on a lender did constitute recoverable property;
  • but that if there was no fraud on the lender, a property purchased partly with tainted funds and partly with an untainted loan comprised “mixed property”
  • in those circumstances law enforcement could recover only the proportion of the property (or profits) relating to the tainted funds;
  • and this was so even if the property could not have been purchased unless the tainted funds had been used.

The Court of Appeal decision

Two questions arose for the Court of Appeal. The first was whether the Judge ought to have decided that the loans from Coutts had been obtained by Topinvest by fraudulent misrepresentations made by Mr Namli. The second, of less general interest, was whether the Judge was entitled to reach that decision based on the manner in which the claim had been put by the NCA.

The Court of Appeal stated that: “a bank like Coutts lending to a customer like Topinvest which is seeking to make a leveraged investment may well be concerned about the source of any funds of the borrower’s own, especially if they are to stand as security, and may seek and be given information about their source. If what is said amounts to a representation that the funds are from an untainted source a bank claiming to have been deceived will, classically, say that without (but for) such representation it would not have lent at all”.

And added: “For such a lender the representation about the source of the monies may be the (or a) cause of his preparedness to have the borrower as a customer and to lend to him”.

Here, Coutts’ file was available in evidence. That file demonstrated that:

  • Coutts had concerns about the source of Mr Namli’s wealth, largely as a result of discussions with the Serious Fraud Office following the service of a production order requiring disclosure of information about the accounts to assist a criminal investigation.
  • Those concerns were allayed by what they were told by Mr Namli about the source of his wealth, and of the source of the funds being paid into the accounts.
  • Coutts relied on what they were told in deciding to continue maintaining the account and in making the loans for the investments.
  • Coutts’ standard borrowing terms required repayment of the loans if they became illegal: as they would have done, for example, if the loans were part of a money laundering exercise to the knowledge of the bank.

The Court of Appeal therefore decided that it was clear that a number of individuals within Coutts addressed their mind to the question of whether Mr Namli was an honest businessman and concluded that he was based on the information he had provided about the source of his wealth and the funds being paid into the account.

In fact, all of the funds paid into Topinvest’s accounts, apart from the loans made by Coutts, came from criminal activity. The representations made by Mr Namli were therefore false, and dishonestly so. The making of false statements about the source of funds, particularly to a bank with concerns about the integrity of the customer, are inherently likely to be relied upon by a bank in relation to all of its subsequent dealings with the customer.

The Court of Appeal was therefore comfortable concluding that the loans were the proceeds of crime, because they had been induced by “unlawful conduct”, namely fraudulent misrepresentations as to their source. They were comfortable reaching that decision despite the fact that no-one from Coutts appeared as a witness, given the bank’s file was available. This conclusion meant that the NCA was entitled to recover all of the profits made on the investments and the appeal was allowed.

In reaching their decision, the Court of Appeal drew a distinction between a lender about whom all that can be said is that he would not have lent if the tainted monies were not in the account and one would not have lent but for what he was told about the source. That distinction may not exist in many cases, at least in the regulated sector: money laundering legislation and commercial due diligence mean that lenders will make at least some enquiries about the source of the borrowers own funds used in a transaction.

Finally, the Court of Appeal decided that the claim had been adequately put by the NCA, and Topinvest had been able to deal with it at the trial.

Comments

This decision does not change the law, but is nonetheless interesting. It would be relevant to corruption cases where the proceeds of corruption had been put into profitable investments which had also been part funded by loans. It would be a rare case where fraudulent misrepresentations had not been made to a bank providing loans or services to a corrupt public official.

Citation

The case is the National Crime Agency (previously known as the Serious Organised Crime Agency) v Hakki Yaman Namli and another [2014] EWCA Civ 411.