Accounting Evidence Case Studies

Accounting Evidence Ltd are chartered accountants and director, David Winch, is an experienced expert witness and well respected speaker and writer, noted for his depth of accounting and legal knowledge of proceeds of crime and money laundering issues. He and his team have many years experience as a Forensic Accountant.

Detailed in this article are case studies highlighting some of their proceeds of crime cases. In order to preserve client confidentiality names and locations in these case studies have been changed

Confiscation - drug trafficking - Proceeds of Crime Act 2002

Arthur ran a cafe in Rotherham. One day in January 2004, whilst in his cafe, he sold half a kilogramme of cocaine to Peter - not realising that Peter was an undercover police officer. Arthur was subsequently convicted of an offence under the Misuse of Drugs Act 1971. In the confiscation proceedings that followed the Regional Asset Recovery Team calculated Arthur's benefit of his 'criminal lifestyle' as nearly £400,000. We were instructed by the defence to critically examine the RART report.

We undertook an extremely detailed examination of Arthur's income and expenditure covering the period from a date 6 years prior to his arrest up to the date of our report, and his assets held since conviction.

Our examination confirmed some of the allegations in the RART report (particularly in relation to previous mortgage applications having been made on the basis of false income details), but enabled other previously unexplained items to be satisfactorily resolved.

Immediately prior to the scheduled court hearing the RART and Arthur agreed a benefit figure of just over £100,000 based on our report.

Thefts of cash by an employee - Theft Act 1968
In April 2004 Brian was offered a job as manager of a public house in Solihull. He had many years experience in the pub trade but had never managed a pub before. He explained to the pub owner that he would need some help with book-keeping. The owner explained a system of record keeping and banking which he had himself devised. When the quarterly VAT return was due in July the owner checked the records and found the there appeared to be a substantial shortfall in the bankings. He complained to the police and Brian was charged with theft of the shortfall and false accounting. We were instructed to review the accounting records and bankings on behalf of the defence.

We gave our opinion of the elements required in a properly designed accounting system for a pub and highlighted the many serious deficiencies in the system devised by the pub owner and the difficulties that Brian would have experienced in attempting to operate it.

We also pointed to a number of possible causes of the cash shortfall, other than theft by Brian.

When the case came to court many of the points in our report were put to the prosecution witnesses in cross-examination.

At the close of the prosecution evidence the judge agreed that Brian had no case to answer and he was acquitted.

Fraudulent trading - Serious Fraud Office prosecution - Companies Act 1985

Charles had a brilliant business idea and, in 2000, set up a company with two friends to exploit it - initially in the UK but also in Australia, Canada America and other countries. The plan was to sell to the public for just over £100 computers worth £600, but in return retain a link with the customers so that they became virtually a captive market for the sale of other goods, such as cars and kitchen equipment, at discounted prices. Charles could buy the computers for £450 and, once he had sufficient customers, planned to agree bulk purchase deals enabling him to make significant profits on the subsequent sales of the cars and other goods while still offering a substantial discount on retail prices.

At the same time, once the operation had gathered momentum the price of the computers would be steadily increased until it exceeded the £450 cost. Charles planned to sell only the first 250,000 computers at below cost price.

Unfortunately start up funds were very limited and the computer manufacturers would give no credit to Charles' new company. However he considered that by taking payment in advance from customers and growing the business exponentially he would manage to supply each customer with a computer 8 weeks after receiving their payment (by using funds received from later customers to pay for the earlier customers' computers).

Sadly the company ceased trading after 8 months when the Department of Trade and Industry intervened following complaints from the public. By this time approximately 18,000 customers had paid in advance for a computer but only just over 1,000 of these had actually received one. However the company had been able to pay Charles £150,000 for the intellectual rights to his brilliant business idea and had met the costs of overseas business trips by Charles and his family in preparation for opening in foreign markets. Charles and his friends were arrested and charged with fraudulent trading.

We were instructed by the defence to give an opinion on the viability of Charles' brilliant business idea.

Charles and his friends had produced a business plan which showed an anticipated borrowing requirement of nearly £100 million. We formed the opinion that this business plan, and particularly the supporting cash flow projections, had not been competently prepared and would not have provided an appropriate basis upon which to enter into negotiations with a potential lender or investor. In the event the company had been unable to secure any significant funds either by way of
borrowings or investments.

Furthermore the company not only required to find new customers and expand continuously to survive, but also it needed to expand at a particular rate of growth. Too slow an expansion would not bring in funds quickly enough to meet the costs of computers already required for existing customers, too rapid an expansion would accelerate the need to find yet more customers to fund the purchase of computers for which orders and payments were being taken.

We concluded that in our opinion these arrangements went well beyond the range of normal and acceptable business practices and risks.

In the event, Charles' legal team decided not to rely upon our report and it was not used in evidence.

Charles was later convicted of fraudulent trading and sentenced to four years imprisonment.

Confiscation - statutory assumptions - Criminal Justice Act 1988 as amended by Proceeds of Crime Act 1995
In 2002 Daniel met a man in a pub in Norwich who offered to sell him a nearly new Mercedes car, worth approximately £30,000, for £4,000 cash in hand. Daniel bought the car. Later the same year Daniel traded-in the Mercedes with the same man and, on payment of a further £1,000 in cash, acquired a nearly new BMW worth approximately £35,000.

Some months later Daniel was stopped whilst speeding on Norwich by-pass in his BMW. Police enquiries revealed the car had been stolen and, by checking Daniel's motor insurance history, the police also uncovered his previous ownership of the Mercedes (which also proved to have been stolen). Daniel was convicted on two counts of handling stolen property.

Confiscation proceedings were initiated. A report from the local Regional Asset Recovery Team, relying upon the statutory assumptions contained in section 72AA (4) Criminal Justice Act 1988 (as inserted by the Proceeds of Crime Act 1995) was prepared. This calculated Daniel's benefit from crime as just over £250,000.

We were instructed by the defence to give an opinion on the validity of this benefit figure.

There was evidence that Daniel was engaged in legitimate gambling on a substantial scale. He had accounts with national firms of bookmakers and monies were paid to these firms by direct debit from his bank accounts. Winnings were similarly received by direct credit into his bank accounts. Indeed Daniel had several bank and building society accounts in which there had been numerous deposits and withdrawals over the six year period prior to his arrest and charge in connection with thestolen cars.

Daniel also informed his solicitors that he was an active gambler in cash at local bookmakers and that he made a substantial income from his cash betting (although the evidence showed that he had lost money overall on the betting conducted through his bank accounts). He had not retained any records or evidence in relation to the cash betting.

We were able to show that the RART calculations were flawed in a number of respects. In particular where Daniel had transferred money between his various bank and building society accounts the RART had treated the deposits as assumed additional proceeds of crime.

Also the RART calculations had included one of Daniel's bank accounts twice, describing it as a Barclays account on the first occasion and, erroneously, as an HSBC account on the other.

The RART report had not considered transactions on an Abbey National account because this was used primarily for legitimate gambling payments and receipts.
However the RART had failed to recognise that cash withdrawals from the Abbey National account could explain some of the 'unidentified' deposits in Daniel's other bank accounts.

On the basis of our report Daniel's legal team were able to agree a substantially reduced benefit figure with the prosecution.

Thefts by care home employee from elderly residents - Theft Act 1968
Edith was the manager of a care home near Newcastle. She was responsible not only for the care of the residents but also for custody of their money, which was kept in her office under an arrangement referred to as "residents' purses". However the proprietors, rather than Edith, were responsible for the accounting records and financial management of the care home.

Edith became close to many of the elderly residents in the home, some of whom suffered from senile dementia. She accompanied one resident, Martin, to his branch of the Newcastle Building Society where, at her suggestion, he drew a cheque from his savings account in favour of Acme Used Car Co which Edith then used to purchase a car for herself.

A few months later Martin died and when his family discovered that most of his savings had been spent, and in particular learned about the cheque to Acme
Used Car Co, they alleged that Edith had taken advantage of Martin's mental weakness to steal from him.

Edith accepted that she had told Martin that the cheque was required in payment of his care home fees but asserted that:-
(i) she had been told by the proprietors that Martin did owe fees to the care home,
(ii) Edith was herself owed money by the care home, and
(iii) the proprietors had suggested that to Edith that she should obtain a cheque from Martin's building society account so that the amount of the cheque could be deducted from both the amount Martin owed to the care home and the amount the care home owed to Edith. The proprietors of the care home were in dispute with Edith regarding the sums due to her, and this dispute had led to civil litigation which was ongoing. The proprietors could not confirm that they had made any arrangement with Edith regarding Martin's outstanding fees.

There were also other allegations of thefts by Edith from residents' cash held under the "residents' purses" arrangements in the care home office.

We were instructed by the defence to critically examine the accounting records of the care home in respect of fees owed by Martin and sums due to Edith, and to comment upon the "residents' purses" arrangements.

We formed the opinion that there were serious deficiencies in the accounting records of the care home in respect of fee income, purchases, wages and petty cash.

There were no accounting records which identified fees charged to every resident. Invoices for fees due were not issued unless a resident, or a person responsible for paying the resident's fees (such as a local authority), specifically requested them. Most residents apparently did not request invoices.

Essentially the care home's principal records of fees were the bank statements and paying-in books. Since a significant proportion of fees appeared to be received in cash the amounts actually received from many of the individual residents (including Martin) could not be ascertained. There was therefore no basis of determining whether these residents had over-paid, under-paid or correctly paid the fees due from them.

It appeared to be the case that some cash received in respect of fees was used to make purchases or fund petty cash expenditure for the care home (and so was never banked). This fee income was therefore not reflected at all in the accounting records of the care home.

Wages cheques had been issued to Edith with irregular frequency and these could not always be agreed to the care home's PAYE records. The accountants acting for the care home had written to the proprietors expressing their concern that the wages records were "very messy and payments were unclear".

It was not possible to reliably determine what sums, if any, were owed to Edith by the care home.

The records of "residents' purses" were not made available to us, but the reports of the local authority Inspection Unit indicated that records of "residents' purses" and control of the monies in them were also inadequate. The Inspection Unit reported that monies from "residents' purses" were routinely used, by a variety of staff, to meet petty cash expenditure of the home, and monies belonging to one resident would frequently be used for the benefit of another resident in an informal manner. The Inspection Unit described the accounting records for the "residents' purses" as "misleading"

In short, in our opinion, the accounting records were not adequate to establish whether or not Martin had owed fees to the home, or whether or not the home had owed money to Edith, or whether the alleged thefts from "residents' purses" had taken place.

When the matter came to trial, with the agreement of the prosecution, Edith was formally acquitted of certain allegations whilst the remaining allegations were allowed to 'lie on the file'. As a result the allegations were not put before a jury and Edith was not convicted of any offence.

Civil recovery - Part 5, Proceeds of Crime Act 2002
A few days after an armed robbery in which a gang had made off with cash of over £1 million, Frank was arrested and his home was searched. Cash of over £100,000 was found in Frank's house and this was seized by the police. Frank offered no explanation to the police for the presence of this cash. But the police could find no evidence of any involvement by Frank in the armed robbery, although he was a prime suspect.

However during the search of his house the police had found documents that suggested that Frank owned various residential properties, or at least had received rent from them, and that he had purchased a villa on a Mediterranean holiday island. They also found various bank statements and vehicle registration documents.

Frank was charged with conspiracy to commit armed robbery, a charge of which he was acquitted when the matter came to court the following year.

The file was then passed to the Assets Recovery Agency. They obtained a Court Order restraining Frank's assets and appointing an interim receiver under civil recovery powers contained in Chapter 2 of Part 5 of the Proceeds of Crime Act 2002. The Court Order referred, in particular, to the cash seized from Frank's home, to the various residential properties and the Mediterranean villa which the police had identified, and to certain other assets including bank accounts and motor vehicles.

The interim receiver was obliged, under the terms of the Court Order, to establish whether these assets were 'recoverable property', in other words whether they were assets that had been obtained by unlawful conduct (in effect, proceeds of crime) or assets that represented such proceeds.

Ten months later the interim receiver reported to the Court that he had indeed established to his own satisfaction that the residential properties (including the Mediterranean villa) and other assets itemised in the Court Order had been acquired by Frank, and that Frank had no legitimate income which would have enabled his purchase of them. In short, the interim receiver concluded that all the itemised residential properties and assets were 'recoverable property'.

In reaching this conclusion the interim receiver had considered all the information he had been able to obtain concerning Frank's financial affairs in the 12 year period up to the date upon which the Court Order had been made.

The interim receiver alluded to Frank's receipt of state benefits, including income support, in earlier years at a time when he clearly had assets of an amount which made him ineligible for those benefits, and to the armed robbery which had occurred 18 months prior to his appointment under the Court Order.

Frank did not wish to contest the interim receiver's conclusion regarding the cash seized at his home, nor in respect of certain other assets which were not of significant value.

However Frank did wish to challenge the interim receiver's conclusion that the residential properties, including the Mediterranean villa, were 'recoverable property'.

We were instructed to critically review the interim receiver's report and conclusions in respect of the residential properties.

We had a number of criticisms of the interimreceiver's conclusions.

The residential properties, including the Mediterranean villa, had been purchased by Frank on various dates, but all of these property purchases were made prior to the date of the armed robbery in relation to which Frank had been charged. Therefore the armed robbery could not, in any event, have been the source of the funds used to purchase these properties. The sums alleged to have been received in income support and other state benefits were relatively trivial when compared with the purchase costs of the residential properties. Therefore this source, even if unlawful, could not have contributed significantly to the purchase of these properties.

The Mediterranean villa had been purchased with monies drawn from a bank account in Spain. Monies deposited in that account had been in relatively large lump sums. It appeared inherently unlikely that these lump sums represented monies originally received as income support or other payments of state benefits. Whilst the interim receiver had shown that the source of the purchase monies was unexplained it could be argued as a point of law that he had not satisfied the test in section 242(2) Proceeds of Crime Act 2002 that it be shown that "the property was obtained through conduct of one of a number of kinds, each of which would have been unlawful conduct". We referred Frank's solicitor to the decided case of Director of Assets Recovery Agency - v - Green [2005] EWHC 3168 (Admin). We also drew the solicitor's attention to the policy of the Assets Recovery Agency with regard to negotiated settlements.

Following our report Frank entered into negotiations with the Assets Recovery Agency to agree a lump sum payment to bring matters to an acceptable conclusion.