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Edwards, Steve; Tierney, Alison --- "Criminal proceeds: a finance industry view" [1998] ALRCRefJl 32; (1998) 73 Australian Law Reform Commission Reform Journal 62


Reform Issue 73 Spring 1998

This article appeared on pages 62 – 66 of the original journal.

Criminal proceeds: a finance industry view

By Steve Edwards & Alison Tierney *

The Australian Finance Conference (AFC) - representing a diverse range of finance companies, banks, general financiers and buildings societies - seeks to influence the shape of the regulatory environment in which its members operate. Its goal is to ensure government policy strikes an appropriate balance and is implemented in ways that do not impose unnecessary costs.

From a business perspective, regulatory laws are those that bring a cost to business operations. Law enforcement legislation often has regulatory implications. It is therefore promising to note that the terms of reference for the Australian Law Reform Commission’s review of the proceeds of crime regime specifically direct the ALRC to consider the legislation’s impact on business.1

The ALRC review raises as issues: the harshness of forfeiture laws and their effect on innocent third parties; the lack of uniformity in Commonwealth and State forfeiture regimes; and the impact of inconsistent evidence requirements and record retention laws on business.

Forfeiture

The main danger for financiers created by proceeds of crime legislation is the potential for forfeiture orders to result in loss of a secured or unsecured interest in property, or loss of a loan repayment.2 It is a real risk. Financiers have on occasions lost entitlements to assets used in the commission of major crimes. The difficulty for financiers is that little if anything can be done to avoid the forfeiture risk because it can occur without warning and in any number of circumstances.

As vehicle finance accounts for just over half - or $9.3 billion3- of the equipment finance business written in Australia, by volume that section of the finance market may be most exposed to forfeiture actions (although we have no statistics to support such a conclusion). Anecdotal evidence would also suggest the financing of fishing vessels is another higher risk area in terms of potential exposure to forfeiture under customs and fisheries management legislation.

That being so, it should be noted that the incidence of forfeiture to the exclusion of the interests of financiers would not appear to be great, even where confiscation legislation may not expressly recognise third party interests. Confiscation or forfeiture of assets is not a frequent occurrence for AFC member companies. However, when an asset in relation to which a financier has an interest is forfeited without the benefit of legislation preserving the financier’s interest, the financier can suffer substantial loss.

The legal context

Proceeds of crime legislation has been enacted in all Australian jurisdictions. The legislation makes provision for restraining orders, forfeiture orders, pecuniary penalties and investigative powers in relation to dealings in property derived from or connected with a wide range of offences. These include tax offences, theft, some environmental offences and offences under the Corporations Law; Financial Transactions Reports Act 1988; and fishing management legislation.

To illustrate areas of commercial risk exposure and management, the table opposite sets out a selection of different types of forfeiture laws, the sorts of financial products affected, how the risk arises and how a financier can minimise the risk, if at all.

Legislation

Finance Product
How Asset at Risk
How Financier Can Manage Risk
All asset-based finance products eg. lease, hire-purchase, mortgage products.
Asset at risk of forfeiture if used in, or in connection with, the commission of an offence.
No protection for 3rd party (financier) interests on forfeiture. Property forfeited vests absolutely in the Commonwealth to exclusion of 3rd party interest. But in practice, account is taken of 3rd party interest. Recording an interest on public registers may notify law enforcement authorities of existence of a 3rd party interest.
Customs Act 1901 (Cth)
All asset-based finance products eg. lease, hire-purchase, mortgage products.
Asset at risk of forfeiture if, for example, used for importation of narcotics.
Owner of the goods notified of seizure and given 30 days to redeem the goods, failing which they are forfeited. Title vests in Commonwealth to exclusion of 3rd party. Recording an interest on public registers may notify authorities of a 3rd party interest.
All asset-based finance products eg. lease, hire-purchase, mortgage products.
Asset at risk of forfeiture if:
• used in connection with an offence
• derived from property used in connection with an offence.
Act protects 3rd party. Financier has 60 days from forfeiture order to have its interest excluded. On forfeiture, property vests in State, subject to mortgage charge or encumbrance.
• For land, registered under Transfer of Land Act 1958 and Property Act 1958
• For vehicles, registered under Chattel Securities Act 1987
Environment
Protection Act
1997 (ACT)
All asset-based finance products eg. lease, hire-purchase, mortgage products
Asset at risk of seizure and disposal if connected with a pollution offence resulting in environmental harm or damage
Act protects 3rd party. Procedures to advertise intention to dispose of asset and allow 3rd party to show why it should not be done. If satisfied, EPA returns asset to owner. If asset disposed of, owner has right to compensation. Recording an interest on public registers may notify authorities of 3rd party interest.
All financing products, in particular commercial fishing boats (motor vehicles included from 1/7/98). General right to seize anything connected with a fisheries offence.
Assets at risk if connected with a fisheries offence. Boats and motor vehicles at risk if used in commission of serious fishing offences.
No protection for 3rd parties. Procedure in place for forfeiture of things other than boats (and motor vehicles), which entitles the owner of the boat to be notified of and dispute the seizure within 28 days.
Applies to financing of commercial fishing boats, motor vehicles, and other fishing equipment.
Assets at risk if in possession of a person who has committed or suspected of having committed an offence.
No protection for 3rd parties. Procedure allowing return of boats, motor vehicles and fishing equipment to owner if legal proceedings not commenced within 60 days of seizure. Registration of security taken over a fishing licence may help notify authorities of financier interest.

The object of this type of legislation is to deprive the offender of the benefits of criminal activity. The effect of a forfeiture order is to entitle the State or Commonwealth to take possession of the property and to dispose of it, with its rights to the property prevailing over those of the defendant and any other person with an interest in the property.

Across the nation, the statutes are far from uniform. The absence of uniformity militates against the ability of financiers to put in place effective contingency plans should financed equipment be forfeited. Some legislation such as the Commonwealth Proceeds of Crime Act, does not provide statutory protection for third party interests in forfeited assets. Other laws provide a statutory mechanism for the protection of certain third party interests, but the rules apply differently from jurisdiction to jurisdiction.

Only the laws of NSW, Victoria and the Northern Territory include specific provisions to preserve the interests of third parties on forfeiture. Although there is a degree of commonality between the provisions, they are worded differently. For example, Victoria is alone in specifically recognising third party rights in motor vehicles registered under that State’s Chattel Securities Act.

Of those laws which do not specifically recognise the rights of third parties, some make provision for the protection of third party interests by enabling third parties to apply to have their interest recognised. Rights of application are often provided in the absence of other specific legislative protection for third parties. The provision of application rights alone presents third parties with particular difficulties. Before an application can be made, the third party needs to be aware that the property has been seized, and applications must be made within a particular time frame. In some jurisdictions this is before forfeiture, in others the application is to be made after forfeiture.

Finally, third parties usually need to establish that they were not involved in the commission of the offence. For these reasons, the AFC believes that application rights alone provide an inadequate and inefficient mechanism for the protection of third party interests.

AFC member experience

It has been AFC member experience that forfeiture proceeds laws are in themselves harsh, but because of the way they are administered, they are often not as harsh as a strict enforcement of the law would allow. The many Australian and English cases on this topic point out that parliament intended the legislation to have a harsh result.

As noted earlier, the forfeiture of financed assets under proceeds of crime laws is an infrequent but not unusual occurrence for AFC members. Some of our members have acknowledged the co-operation of law enforcement agencies when making a claim for restrained property. This has occurred even when the legislation does not specifically protect the interests of creditors. It is this intervention by law enforcement officers that makes the legislation operate in a more equitable way then it would otherwise.

However, where the co-operation of law enforcement authorities is not forthcoming, financiers find it even more difficult to protect their interests. In some jurisdictions where there is no legislative protection for third party interests, the financier is left without any recourse once the asset has been forfeited.

It is inappropriate and unsatisfactory to rely on the co-operation and goodwill of law enforcement agencies in this context. The sums of money at stake are frequently large, as are the ramifications.

Document retention

Document retention is emerging as a significant business issue, brought about by increased drives for business efficiency and advances in technology. It is an area in need of reform and one that, compared to asset forfeiture, is more pervasive in its impact on business.

There would appear to be a need for consistent rules for document retention across all legislation, regardless of jurisdiction. Not only would implementation be easier for financial institutions, there may be advantages for law enforcement authorities in terms of improved access to documents.

Improvements in record management are being sought by financial institutions. The objective is to improve efficiency and reduce costs. Technological advances now allow large amounts of information to be stored in compressed form. However, the acceptance of electronically stored information for use as evidence in legal proceedings is restricted. Financial institutions would like the flexibility to keep documents in a form that best suits their organisational needs. This could vary according to the size and structure of the organisation. Small financial institutions may wish to keep records in paper form. Larger organisations may consider digital imaging more appropriate. The acceptance of electronic methods for storing information is being propelled by the emergence of electronic forms of commerce.

Unnecessary confusion

The rules of document retention, record production, archiving and evidence are sourced in a number of pieces of legislation, including the federal Proceeds of Crime Act, Evidence Acts (both State and Commonwealth) and the Financial Transaction Reports Act 1988 (Cth). Each treat document retention in slightly different ways. Documents to which they apply, although essentially the same, are defined differently, causing unnecessary confusion.

In particular, the Proceeds of Crime Act requires “essential customer-generated financial transaction documents” to be kept in original form. Similar documents need to be kept under the Financial Transactions Reports Act, but may be kept in copy form. The Commonwealth Evidence Act and its NSW equivalent have both removed the requirement for documents to be kept in original form.

Based on responses to a survey conducted by the AFC, it is the experience of AFC member companies that few requests are actually made by law enforcement officers for original documents. There are also additional costs associated with the storage of original documents, primarily because they require more storage space and storage maintenance. Further, the ability to store some documents in copy form, but not others, does not improve business efficiency or create opportunities for cost savings.

AFC recommendations

The Commonwealth Proceeds of Crime and Customs Acts should make legislative provision for the recognition of third party property rights in relation to assets that may be forfeited under the legislation. At the very least, the federal proceeds of crime regime should recognise property rights of third parties registered in relation to land, motor vehicles and shipping vessels.

Commonwealth proceeds of crime legislation should be developed as a model for similar state-based regimes to promote national uniformity, discourage forum shopping by law enforcement agencies and introduce some operating efficiencies for business. The development of such a model could also form the basis for other forfeiture legislation in areas such as the environment and fisheries management.

The AFC would recommend that issues of document retention for the purposes of criminal investigations and prosecutions are more appropriately dealt with in the context of financial transaction reporting and evidence laws. It is not necessary to deal with these issues within proceeds of crime legislation. To do so increases the complexity of the law, confuses business as to its responsibilities and results in additional business administration and costs.

Proceeds of crime laws should not require documents to be stored in original form. The storage of documents by electronic means should be permitted as an acceptable alternative to paper storage as long as the information and method of storage can be readily retrieved and identified. As well, the AFC would suggest consideration be given to reducing the time requirement for storage of documents from seven years to a period of five years.

Conclusion

Law enforcement legislation can have an impact on business operations and impose costs which would not otherwise apply. The cost of complying with irregular document retention rules with a paper storage emphasis is increasingly becoming a business efficiency issue. Less pervasive, but often having a more obvious impact on a financier’s business is the loss of a secured asset as the result of the forfeiture. The opportunity exists within the context of the current ALRC review, to reduce those business costs without detracting from the primary law enforcement objectives.

* Steve Edwards is the Associate Director Legal of the Australian Finance Conference and an honorary consultant to the ALRC proceeds of crime reference.

Alison Tierney is Corporate Lawyer with the Australian Finance Conference and a member of the Commercial Tribunal of NSW.

This article is based on the AFC submission to the ALRC inquiry.

Endnotes

1. ALRC, Commonwealth legislation relating to forfeiture of the proceeds of crime: An introduction to the inquiry, ALRC Pamphlet No. 1, 1998.

2. Fisse, B., Proceeds of Crime Legislation: A Compliance Package for Finance Companies, AFC, 1992, p. 6.

3. Australian Bureau of Statistics, PC AUSSTATS.


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