What happens to marital assets if they are subject to criminal proceedings?

On occasion, family law and criminal law interlock outside the realms of domestic violence. It is possible that marital assets can become involved in criminal proceedings, especially if there has been a conviction for drug trafficking or money laundering.

What happens if marital assets are subject to criminal proceedings?

If the criminal offence took place after March 2003, the court will be concerned with the provisions of the Proceeds of Crime Act 2002 (POCA). Any offences pre-dating this will be governed by the Criminal Justice Act 1988.

On the basis that any new confiscations orders will be made under Part II of POCA, the court will look at both the defendant’s benefit from the offending and the available amount. The defendant’s available amount is the aggregate of all their free property and the value of any ‘tainted’ gifts made by them. The court is not limited to assets acquired through the offence. Any assets held by the defendant, no matter when or how acquired, will be included in the ‘available amount’ and considered for inclusion in the confiscation.

In order to enforce the confiscation order the court appoints a receiver. It is at this stage that third party propriety interests, often in property, are at risk. The court decides what assets may be used to enforce the order and it is essential that at this point third parties establish their interest by way of constructive or resulting trust. If the third party is a spouse, an application can be made under the Matrimonial Causes Act 1973 (MCA) to acquire an interest via a property adjustment order.

Unsurprisingly, there is a tension in POCA as to the exercise of the enforcement receiver’s powers. The receiver’s powers must be exercised in a manner which enables a person other than the defendant or a recipient of a ‘tainted gift’ to recover their interest. The case of Re Norris UKHL 34 it was established that a third party had a right to be heard at this stage of enforcement and that it is not an abuse of process to assert an interest even if that third party gave evidence at the Crown Court and was disbelieved.

How does the court strike the balance?

Put simply, the ordinary principles of property law apply. If the court can establish a beneficial interest on behalf of the defendant then the order has something on which it can ‘bite’. If there is not, it’s clear. In H v CPS EWHC 1291 a husband and his wife separated. As a result they decided the sell the FMH. They received £133,562 in sale proceeds which the wife used to purchase a new house for her and the children. The husband had no involvement in this new purchase but it was purchased in joint names, with a joint mortgage, because the wife did not have sufficient mortgage raising capacity. The following year, the husband was arrested for drug trafficking offences. A restraint order was made in October 2004 and he was convicted in 2005. Confiscation proceedings took place which listed the husband’s equity in the new property at £45,000. The wife sought a variation of the restraint order. Holman J found that the wife was the sole owner of the property. In his judgment he explained that whilst the husband had contributed to its purchase, that contribution was by way of gift to, and for the benefit of, the wife and/or the children on the basis of a clean break. The court therefore found that the husband had no beneficial interest in the property and thus nothing upon which the confiscation order could “bite”.

The more recent case of Gibson v Revenue and Customs Prosecutions Office QB 348 reinforced this approach. The court cannot confiscate an asset that belongs to a third party so all a spouse needs to do is establish their beneficial interest using the principles of property law.

The Crown Court can make orders as to beneficial interests in assets, provided the relevant persons are given an opportunity to make representations. Those representations can be made to the Crown Court or be dealt with at the same time as any application for a financial remedy under the Matrimonial Causes Act 1973 (“MCA”). It would be preferable to deal with the matter as part of the matrimonial proceedings but either way they must put forward their argument to have any chance of securing their beneficial interest.

What happens if a beneficial interest is not established?

In circumstances where a beneficial interest is not established, the spouse will need to look to obtain a property adjustment order. Here the court must disregard what a spouse may obtain in other proceedings over and above any interest she holds at the time the confiscation order is made. The right of a spouse to apply for relief under MCA does not amount to an interest within the terms of s. 69(3((a) of POCA as per Webber v Webber WHC 2893.

The key case to consider when balancing the MCA and POCA is HM Customs and Excise & ANR v MCA & ANR, A v A EWCA Civ 1039 in which Schiemann LJ stated “In my judgment, there is nothing in the provisions of either the 1973 Act or the 1994 Act which requires the court to hold that either statute takes priority over the other when the provisions of each are invoked in relation to the same property. Both statutes confer discretion on the court, which the court may or may not choose to exercise, to make orders. The terms of those orders will depend on the facts of the individual case”

The reality is, the more closely a wife can align the assets she seeks to her needs, the more likely she is to succeed. In circumstances where there is a conflict between the MCA and POCA, the court will be less interested in principles such as “sharing” of the assets. It will, however, consider need in light of the lifestyle enjoyed by the parties and, in particular, the lifestyle enjoyed by them prior to the period of the offending.

How will the court exercise its discretion?

The court needs to perform a balancing act. Much of the case law will assist but exercises of discretion are fact-specific. Nonetheless the following principles, distilled from key case law, provide some guidance:

• The court should be careful to ensure that the applicant is genuinely innocent and the injustice is real
• Whether the applicant had knowledge of the defendant’s criminal activities
• Whether the property was purchased with the proceeds of crime or is tainted
• Whether the property was preserved by the defendant’s criminal conduct
• Where assets are tainted, the court should not ordinarily be distributed as a matter of public policy but the court is not deprived of its jurisdiction to make a distribution and there may be circumstances in which it is justified.

What happens if the property adjustment order is made?

If a confiscation order is in place, the defendant is not relieved of their personal obligation to satisfy it, and if it cannot be achieved, the defendant becomes liable to serve an additional period in prison. If there is no confiscation order, the Crown Court must have regard to the property adjustment order when determining the amount available.

However, the Crown Court must have regard to the property adjustment order on adjusting the available amount under the confiscation order, if such application is made by the defendant or the prosecutor pursuant to s.23 POCA.

It is worth noting that the claimant spouse in related financial order and POCA proceedings appears to stand on a more favourable, footing to “commercial” third parties. In SFO v Lexi Holdings plc (in administration) and M EWCA Crim 1443 it was held that a restraint order could not be varied prior to the making of a confiscation order unless this did not conflict with the satisfying of the confiscation order. This meant that commercial third party creditors would have to wait and see if the defendant retained any assets after the order was satisfied.

Conclusion

The balancing of the MCA and the POCA is likely to result in many matrimonial cases being heard with the Crown as an intervener. The Crown will generally look to sensibly negotiate claims and if the spouse can present their claims in terms of needs it is far more likely that they will succeed in establishing a claim to assets subject to a confiscation order.