Accounting for forensics
25 November 1997
Drug trafficking, commercial fraud, white-collar crime these are murky areas of the law in which forensic accountants increasingly find themselves acting as expert witnesses.
With a worldwide drug trade worth more than $500bn a year, the profit generated by criminals from this one activity is greater than the domestic product of many nation states.
The UK has introduced legislation aimed at confiscating the proceeds of crime. The first anti-laundering legislation came into force with the Drug Trafficking Offences Act 1986 (DTOA), which became law in 1989. Under s.3 the court is obliged to make a confiscation order of the amount it assesses to be the defendant's benefit from drug trafficking.
The Criminal Justice Act 1988 extended the power of confiscation to other categories of crime where the defendant could be found to have profited by more than £10,000, and it was also incorporated in the Prevention of Terrorism Act.
The rationale for recovering criminal assets is to deprive criminals of their ill-gotten gains, to discourage criminal activity, and to attack organised crime by destroying its economic power base. But is the Crown competing with the criminal on a level playing field? Under current legislation, law enforcement agencies can apply to the courts for authority to investigate bank and other accounts, provided they can establish reasonable grounds for suspecting they contain money or other assets obtained by criminal activity.
If these suspicions are confirmed, the assets may be frozen pending further investigation, charges and, in some cases, trial. If the owner of the assets is then found guilty, the assets can be confiscated. But before a confiscation order is granted the Crown must prove beyond all reasonable doubt that the defendant is guilty of drug trafficking or some other criminal offence.
Under British law, all assets acquired during the six years prior to conviction for drug trafficking offences can be regarded as the proceeds from drug trafficking, unless the accused can prove otherwise.
The task of collating and presenting the evidence that the defendant is guilty of a criminal offence, and assessing the amount by which he has benefited, is usually the responsibility of the local police force's commercial fraud squad.
The investigating officer will, in most cases, have attended a financial investigations training course, and will usually be capable of tracing payments into and out of one or two accounts. But this falls short of the financial and accounting skills necessary to substantiate the cri minal assets to be confiscated.
The problems caused by the lack of accounting expertise available to the police were demonstrated in a recent case, in which Kidsons Impey were instructed as expert accountants on behalf of an individual accused under the drug trafficking legislation.
The police financial investigations unit presented a simple income and expenditure statement suggesting that the defendant's legitimate income did not meet his expenditure. The difference was taken to be the proceeds of drug trafficking. But a simple examination of the evidence identified a catalogue of errors, including double-counting of expenses, mistiming of income and expenditure, and simple arithmetical errors.
Following the disclosure of our preliminary findings, the case was adjourned to enable the police to instruct an 'accountant' to act as expert on behalf of the Crown. The accountant's report was an improvement, but remained too simplistic. It lacked credibility and failed to demonstrate that the evidence put forward by the accused was unreliable. Nevertheless, the Crown took the matter to trial.
In court it became obvious that, owing to a lack of financial resources, the Crown's expert 'accountant' was a retired bank manager with little accounting experience and no accounting qualifications. The Crown's confiscation order case failed.
This case clearly illustrated the Crown's determination to take advantage of the confiscation legislation. If the UK follows the example set by the US and Commonwealth countries, this trend will continue.
This will mean an increasing demand for forensic accountants to give expert evidence in crime-related matters. But unless there is a radical change in the way the Crown funds its cases, the accused will have access to expertise unavailable to the prosecution.
Is the Crown competing with criminals on a level playing field? In my experience the answer is no. The police have the legislation they require, but are denied the resources they need to prosecute effectively.