‘Good arguable case’ for proceeds of crime recovery does not require ‘good prospect of success’

A “good arguable case” for the purposes of proceeds of crime proceedings in which an enforcement authority is seeking the civil recovery of property obtained through “unlawful conduct” is not necessarily one which has a “good prospect of succeeding”, appeal judges have ruled.

The Inner House of the Court of Session held that the test is whether the case is a “good arguable” one - the focus being on “arguability, not proof” - in allowing an appeal against a decision of an Outer House judge who recalled two prohibitory property orders made in terms of the Proceeds of Crime Act 2002.

Before the Lord President Lord Carloway, Lord Bracadale and Lord Drummond Young, the petitioners, the Scottish Minsters, maintained that the judge erred in that there was a “good arguable case” that property belonging to the respondent Steven Macdonald was obtained by “unlawful conduct”.

The petitioners lodged a reclaiming motion from the judge’s interlocutor dated 22 April 2015, recalling two PPOs which covered heritable and moveable property.

In the first of the two petitions, the petitioners stated that they had police intelligence that the respondent had been involved in organised crime, including drug supply, human trafficking, money laundering, violence, firearms and pornography.

The court was told that in his tax returns for the years 1997 to 2000 he declared no income, but in 1998 he bought an area of land for £42,000 and obtained a warrant to build a house on it.

Then, in 2008 he obtained a bank loan of £552,000 secured over the property, although the funds were required for commercial purpose.

In his loan application, the respondent stated that he had been self-employed in “retail sales” earning net profits of £193,000 in 2004/05, £251,000 in 2005/06 and £272,000 in 2006/07.

It was averred by the petitioners that, having regard to the figures declared in his tax returns, the loan funds received were obtained by fraud, namely by “overstatements of his legitimate income”.

The court was also told that the respondent then bought 33 and 39 Mitchell Street, Glasgow for respectively £150,000 and £625,000, financed by a bank transfer from the account into which the loan funds had been paid, and the petitioners claimed accordingly that these properties were “recoverable”.

In the second petition, it was averred that in November 2013 the respondent bought Club Earth in Livingston for £225,000 with money from his bank account, into which money had been paid by, among others, a company he part controlled.

The balance, in part, came from rental income from a business which operated from 33 Mitchell Street, on which basis the petitioners also averred that they had a “good arguable case” that Club Earth was recoverable property.

The Outer House judge held, following the approach by Lord Glennie in the 2008 case of Scottish Ministers v Stirton, that he could not categorise the case as a good arguable one with a good prospect of succeeding, with the strength and quality required to prove fraud, as he did not think that the documentation demonstrated a fraud.

He considered that there was an “inevitable lacuna” in the petitioners’ case because they had proceeded upon the basis that the respondent required to explain the discrepancies in the figures.

The judge did not consider that this was the correct approach and once that was recognised, there was no basis upon which to found a good arguable case.

However, the petitioners argued, first, that the judge had erred by “placing a gloss on the statutory test of good arguability”.

The petitioners did not need to demonstrate that they would be able to prove the averments - it was sufficient for the applicant to show that there was “a good prospect of succeeding at a proof” and therefore test was similar to that for diligence on the dependence, i.e. a prima facie, meaning “a good arguable”, case.

Secondly, it was submitted that the judge had erred in considering that there was an “onus” on the petitioners.

It was accepted that the petitioners had to satisfy the court that the PPOs ought to remain in force, but it did not follow that the court should examine the material produced critically.

The judge had erred in identifying a lacuna and in not recognising the support which the material gave to the averments, as the material “called for an explanation” and the judge should have looked to the respondent for that.

Thirdly, it was argued that the judge had failed to regard the material produced as supporting the averments, and that he did not address the respondent’s explanation or scrutinise his material.

Allowing the appeal, the court held that the judge in this case “applied the wrong test”, following the same error in Scottish Ministers v Stirton.

Delivering the opinion of the court, the Lord President said: “Subsections 255A(4) and (5) of the Proceeds of Crime Act 2002 provide that the court may make a Prohibitory Property Order if it is satisfied that “there is a good arguable case” that the property is recoverable or associated in terms of the legislation. It is important that the court focuses on these precise words and does not attempt to place a gloss upon them or to redefine them using different terms.

“The test is not whether the case has a ‘good prospect of succeeding, with the strength and quality required to prove fraud’. It is whether it is a ‘good arguable’ one; the focus being on arguability, not proof. As the judge has applied the wrong test, the matter falls to be re-assessed.”

Lord Carloway added: “In the application for the loan, the respondent states his income to be at least three, and in some years five, times higher than that declared to the tax authorities. The veracity of the new figures is supported by a letter from his accountants.

“One obvious inference which can be drawn from that is that the new figures contained in the application did not represent the extent of the respondent’s legitimate income. Rather, they are false and thus the application was fraudulent and the funds made available become recoverable property, as do any assets purchased by them.

“This is a good arguable case even if the inference may not ultimately be drawn. In all these circumstances, the reclaiming motion will be allowed, the interlocutors of 22 April 2015 will be recalled and the motions for recall of the PPOs will be refused.”

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