Karl Masi examines the recent judgment and the impact of breaches in disclosure in cases involving production 0rders and detention orders.

Background

The case involved two claims for judicial review arising out of the same facts. In summary, Merida Oil Traders Ltd, Bunnvale Limited and TICOM Management LLC (the “Claimants”) were companies that traded in energy derivative contracts on the Intercontinental Exchange (“ICE”). The trading was conducted through a broker, ADM. In May 2015, ICE made a suspicious transaction report to the FCA concerning the Claimants’ trading activities. Whilst no action was taken by the FCA, in February 2016 the City of London Police (“CoLP”) began an investigation into the activities of two employees of ADM who undertook trading on behalf of one of the Claimants. In March 2016, ADM suspended the two employees and froze the Claimants’ client accounts, together containing approximately US$150m.

ADM (with the consent of the appropriate authorities) terminated its relationship with the Claimants and liquidated their trading positions. Subsequent requests from the Claimants for their funds to be returned were denied by ADM after consent was refused by the NCA and CoLP. At the suggestion of the CoLP, ADM created cheques for the closing balances made payable to each Claimant. The CoLP then made an ex parte application for production orders (“PO”) pursuant to section 345 of POCA. The PO were granted and officers of CoLP subsequently attend the offices of ADM and took possession of the cheques. Cash detention proceedings then followed pursuant to section 295 of POCA in which further orders for the detention of the funds were made.

The Claimants challenged the entire procedure by which cheques representing the funds in their accounts with ADM were ordered to be produced by the CoLP and were subsequently seized and detained.

The Court, in a detailed and lengthy judgment, approached the various issues in turn. Below is a summary of the most pertinent aspects of the judgment.

Were the statutory requirements for making production orders met?

The Claimants challenged the PO on both procedural and substantive grounds. Procedurally, the Court held that the CoLP’s “muddled” description of their money laundering investigation in the PO application form (where the particulars provided did not constitute an offence of “money laundering”), did not negate or retract from a clear statement made earlier in that application that it was a, “money laundering investigation”. However, the Court noted that the statement “the investigation” was also for a “cash detention investigation” could not be correct as such an investigation could only take place after cash had been detained under Chapter 3 of Part 5 of POCA. Overall, there had been no procedural failure to comply with section 345(2) of POCA.

The Court then noted the substantive requirements of making a PO were contained in section 346 of POCA. The Claimants argued that section 346(4) of POCA was not satisfied as it could not be said there were reasonable grounds for believing the cheques were likely to be of substantial value to the investigation for the purposes of which the PO were sought: the cheques could have been of no assistance in investigating whether a money laundering offence had been committed. The Court, whilst accepting the contention of the Defendants that section 346(4) of POCA is not restricted to material that is of evidential value (in contrast to the power to make a PO under section 9 and schedule 1 of PACE 1984 and the power to issue a search warrant under section 8 of PACE), the Court disagreed that in these circumstances the cheques could be considered such material. In reality, the only purpose for which production of the cheques was sought was so that they could be seized and detained as cash under the provisions of Chapter 3, part 5 of POCA. This was not a purpose consistent with obtaining information and served no investigatory purpose. The Court found, therefore, there was no power to make the PO in this case.

Were the Cheques lawfully seized?

The Court accepted the Defendants’ argument that the power of seizure under section 294 of POCA was not contingent on access to the cash having been lawfully obtained as it is a freestanding power that could have been exercised without obtaining the PO.

However, the Claimants argued more generally that to seize cash which had been brought into existence at the request of the police themselves in order to seize it was unlawful: it was contrary to the intent and scheme of the legislation and a misuse of the power under section 294 of POCA. They pointed out that the Claimants did not choose to hold their money in cash and but for the arrangements made between the CoLP and ADM, the Claimants’ money could not have been seized. Parliament had intended those who held funds in bank accounts to have the protections afforded by legislation relating to restraint and property freezing orders and the CoLP had sought to circumnavigate these provisions by acting the way it did.

The Court held that, whilst law enforcement agencies should be able to choose alternative powers available to it, the procedure adopted by the CoLP was not one which in the circumstances was lawfully available. The Court found the cheques had not been seized lawfully as the decision by the CoLP to engineer the situation to try and take advantage of the statutory provisions amounted to a clear abuse of statutory power.

Were the Production Orders sought for a lawful purpose?

As the Court found the power in section 294 could not lawfully be used to seize the cheques in the circumstances of this case, it followed that it had been unlawful to seek a PO under section 345 and 346 of POCA for the purposes of seeking access to the cash in order to seize it.

Were the detention orders lawful?

Not surprisingly, the subsequent orders of the Magistrates’ Court authorising the continued detention of the cash seized under section 295 of POCA were found to be unlawful. The Court stated that, (i) section 295 must reasonably refer to cash seized lawfully under section 294, and (ii) it followed that a finding that the power to seize the cash under section 294 was unlawful applied equally to any other use of the provisions under Chapter 3, Part 5 of POCA.

Was there procedural impropriety?

Notice

The CoLP had sought in the PO application to justify the ex parte application on the basis that they believed the Claimants would take action to, “conceal their activity, alter or destroy evidence and dissipate the proceeds of crime”. The Court criticised the rather “standard form of wording” in the application and expressed doubt as to whether proper thought had been given to whether it applied to the facts of the present case. The Court found there was no proper basis for making the application without notice to the Claimants as, (i) the Claimants were already aware their accounts with ADM had been frozen and at least Bunnvale was aware of some form of police investigation; and (ii) there was no risk of dissipation of the assets as their accounts had been frozen for six weeks by ADM (who had been refused consent by the CoLP and the NCA to pay over the money).

The Court dismissed as untenable the suggestion that the Claimants may have sought to destroy evidence on the basis that they were going to be notified of the cash detention application a few days later - there was indeed no rational basis for believing the investigation would be prejudiced by giving notice of the immediately prior application for PO.

Non-Disclosure

The Court found the Defendants to be in serious breach of their duty of disclosure. Bearing in mind the importance of full disclosure of all material facts in ex parte hearings, the Court concluded the breach was of such seriousness it would have justified quashing the PO even if they had been lawfully obtained. The non-disclosure consisted of the following misrepresentations and omissions:

i.It was not made clear to the Judge during the ex parte hearing that there was no imminent risk of dissipation as the Claimants’ accounts were frozen and ADM had made it plain they would not release any funds without the consent of CoLP;

ii.The basis of the CoLP’s suspicions about the Claimants were founded on the ICE report. This report was not provided to the Judge, but rather a summary was. This summary was found not to be fair or accurate in several material aspects; and

iii.The Judge was not told that the cheques had been created by ADM at the request of the CoLP without their client’s knowledge and for the purpose of invoking the favourable summary process for civil recovery which otherwise could not have been relied on.

The Court also found there was no legitimate excuse for notice of the application for a detention order being delayed and for a subsequent refusal to disclose the PO to solicitors acting for Bunnvale and TICOM. A PO was clearly not “unused” material.

Relief Obtained

The PO and detention orders were quashed. The Court held that the effect of this was that the CoLP would be required to release the Claimants’ funds. However, the Court allowed the CoLP time (to be agreed between the parties) to consider whether to pursue civil recovery proceedings in the High Court (incidentally something only the NCA, DPP or SFO can do) or apply for a restraint order in connection with the money laundering investigation.

Conclusion

Whilst the authorities must continually look at new and innovative ways to combat modern, technologically advanced criminal networks, this judgment is a strong reminder that they must be careful not to outreach themselves so they are outside of what are carefully set out legal parameters when it comes to dealing with financial crime. The Court was keen to emphasise the importance to the City of London that its financial markets retain the confidence of investors. In this instance, investors must be reassured that assets will not be seized or confiscated other than through the due process of law.

Of real practical concern is the Court’s findings on non-disclosure in the PO application. The necessity of full disclosure in ex parte hearings is far from new and it is surprising that such omissions and representations were allowed to take place. This is something CoLP should ensure they are fully aware in the future.

Going forward, the weakness of the underlying case against the Claimants as set out by the Court (based as it was on the ICE report) may make any immediate application for a restraint order unlikely, short of further evidence coming to light. To this extent, the pending Criminal Finances Bill 2016/17 may prove useful as it seeks to extend the use of disclosure orders, currently available only in respect of certain types of investigations (such as civil recovery and exploitation proceeds investigations), to also be available in money laundering investigations and to be available to a broader range of investigators.

Karl Masi is a barrister who accepts instructions in both criminal and civil law. He is developing a practice with a particular focus on business crime and civil based asset recovery work. 

Andrew Bird appeared for the second defendant and interested party in the above case. Andrew is a specialist in white collar crime, civil and criminal asset forfeiture, civil and public law proceedings regarding the criminal process.