RiskTech Forum

Wolters Kluwer: Why Crime Pays For Most Criminals Most Of The Time

Posted: 3 October 2016  |  Author: Nick Kochan  |  Source: Wolters Kluwer Financial Services


Law enforcement agencies seize less than 10% of criminal proceeds each year. This enables criminals to hold onto the great majority of their wealth and reinvest it in criminal activity.

Now governments across the EU are exploring ways to raise the amounts of frozen assets seized from criminals. Two UK parliamentary committees and Europol have called in recent weeks for a more aggressive approach to the investigation, seizure and collection of criminal proceeds.

They are calling for better resourced training of investigators, fewer loopholes for criminals prepared to go to great lengths to protect their wealth and greater incentivisation for police to follow and seize wealth. The UK Government’s current review of the Proceeds of Crime Act (POCA) is expected to reflect these views and recommendations.

Current levels of recoveries of criminal assets remain stubbornly low. For example, in a recent report from the UK’s House of Commons Committee of Public Accounts, ‘ Confiscation orders: progress review’, it was disclosed that the UK confiscated £175m in 2016 out of a stated total of £1.9 billion of criminal debt. A study just published by Europol, entitled ‘Does crime still pay? Criminal Asset recovery in the EU’ demonstrates that all 28 EU member countries confiscated in aggregate €1.2 billion of the estimated €110 billion of assets accumulated annually by criminals. According to the Europol report, 2.2% of the estimated proceeds of crime are seized or frozen, however only 1.1% of criminal profits are finally confiscated at EU level.

Countries’ performance in confiscating assets will be highlighted next year, when the European Commission requires national police forces to submit data about their confiscation levels. Systems for targeting, freezing, seizing and confiscating assets are being revised across the EU as the requirement for greater disclosure is enhanced.

In fact, criminal confiscation is the most successful element in a fourfold regime to recover criminal assets using the Proceeds of Crime Act. Other means of using the Act include civil recovery, cash forfeiture and criminal taxation.

The management of financial investigations is partly to blame for the low level of recoveries says Jane Bewsey QC, the lawyer who assisted the recently published Home Office review entitled ‘ Proceeds of Crime’. She warns that many police forces are excessively cautious about targeting criminal assets until a conviction has been obtained, by which stage criminal assets have most likely either been spent or dissipated. According to a lawyer from Pinsent Masons (speaking to the Home Affairs Committee), its investigators saw that ‘the recovery of criminal assets was only an afterthought only considered after conviction.’ The lawyers argued to the Home Affairs Committee that the ‘proceeds should be effectively frozen from the beginning of the investigation so that they were available to be confiscated upon conviction.’

Bewsey says that police forces need to identify and freeze the assets earlier. ‘But this is a labour intensive activity, and forces investigating smaller frauds will be loath to set aside the resources. The problem is that gangs are getting more sophisticated at moving their assets out of our reach.’ Jonathan Fisher QC, a leading lawyer in the field, says, ‘Financial investigators should be working alongside criminal investigators...there has to be a culture shift. They have to understand that just as it is important to prove the criminal case, they also need at the same time the evidence to prove the existence of the assets.’

Large frauds are most likely to be targeted by lawyers from the Serious Fraud Office (SFO) and HM Revenue & Customs (HMRC) who will aggressively use both criminal and civil means in the pursuit of a financial recovery.

A tougher approach to ‘default orders’ is another proposition from the Home Office Committee. At the moment, criminals who fail to pay up on confiscation orders may have to spend longer in prison. But when they have served their term, they can access the criminal proceeds. These criminals could now be required to surrender their passports on completion of their sentence, so making access to the secret assets harder to obtain. The Public Accounts Committee report says ‘serious criminals care more about losing their assets than going to prison.’

Better qualified financial investigators are also required to net the criminal funds. Investigation is a necessary prerequisite for the tracing and identification of criminal assets. Burkhard Muhl, a senior manager at Europol’s Criminal Assets Bureau, says that ‘Financial investigations should be conducted in parallel in all serious and organised crime investigations. This doesn’t happen as a standard yet across the EU. If all 28 countries applied financial investigations in their pursuit of criminal assets as a standard, things would be improved significantly.’ The diversion of policing resources to terrorism is impeding the pursuit of criminal assets, says Muhl. ‘Financial investigations are not a priority.’

Budget cuts are hitting numbers of financial investigators employed by the police and other agencies says the House of Commons Committee of Public Accounts, ‘The fall in the number of experienced financial investigators risks weakening the enforcement of orders. Financial investigators are key to successful enforcement, especially those with the experience to tackle complex cases. However the number of financial investigators has fallen by 6% between September 2013 and September 2015, to 1,358, due to budget cuts and increased private sector demand for their skills.’

Retention of investigators is hit by low public sector salaries. Financial investigators are likely to be paid 20% more in the private sector than in the public sector, observed a spokesman for the National Crime Agency. Police face competition from other public sector agencies, in recruiting and retaining financial investigators. The UK committee observed, ‘law enforcement agencies look to obtain expertise from the private sector but we are concerned that agencies are not addressing the problem of retention adequately.’

Government efforts to encourage police forces to pursue criminal financial assets include the development of incentivisation schemes. These allow forces to retain part of any proceeds they obtain, to fund their overheads. The City of London Police and HMRC both make use of this schemes although there are mixed views about their value.

The prime concern is that the scheme will allow criminals to claim that the authorities are motivated by profit rather than justice in confiscating assets. This was broadly the case used by the SFO to negotiate a better settlement on its funding, in return for withdrawal in 2014 from the incentivisation scheme says SFO Director, David Green QC. Green said the scheme may be seen to compromise the SFO’s efforts to confiscate the proceeds of crime. ‘I wanted out of ARIS (Asset Recovery Incentivisation Scheme) where money goes direct to Treasury because I never want it said or suggested by a senior member of the judiciary that somehow we are skewed towards cash rich cases. That is real danger. I said to the Treasury that the £2.5m that we get annually from ARIS should be consolidated into our budget’.

Many forces shares this concern, says Bewsey. ‘Most of the agencies don’t want too much of an incentive, they want a bit but not a huge amount, because they don’t want it to be suggested that they are only in it for the money. If you are a criminal whose assets are about to be confiscated, you might want to suggest that the agency was motivated by profit rather than justice.’

The Public Accounts Committee report describes the ARIS funding scheme as ‘short-termist’ as the funds have to be spent within the year that they are seized. Moreover, it suggests that the Home Office share of 50% of confiscated assets is excessive, given that it has no operational role in their confiscation. Proceeds are shared between the prosecutor which receives 18.75%, the investigating authority receives 18.75% and 12.5% goes to HM Courts and Tribunals Service.

The same dilemmas affect the issuing of confiscation orders, says the Public Accounts Committee. It notes, ‘it is not clear whether disrupting crime or collecting criminal assets is the primary objective of confiscation orders.’ The report goes on to observe, ‘The Home Office and police both indicated that crime disruption was most important, yet they use the amount of income confiscated as the sole measure of success for confiscation orders.’

While the challenge to law enforcement in confiscation criminal wealth is steep, calculations of the scale of the criminal debt mountain need to be regarded with some caution. For example, the calculation of outstanding criminal debt is based on an assessment of the ‘benefit’ that the criminal has obtained from the proceeds of his crime, as opposed to what the authorities can realise from a confiscation. So while a criminal who stole a piece of jewellery would only obtain a fraction of its value on the criminal market, the authorities would assess its benefit at the value obtainable on the legitimate market. That figure would be basis for establishing the size of a criminal’s debt.

This can be a highly complex equation, says Bewsey. ‘It is one that tends to ratchet up the financial gain to the criminal.’ The second factor is that the authorities add 8% interest annually to the criminal debt. This amounts to £470m. ‘You come up with a very unrealistic amount of criminal debt, most of which will never be recovered,’ she says.