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Civil Recovery Order

False statements in application

Recovery of tainted funds

Serious Organised Crime Agency v Pelekanos
[2009] EWHC 2307 (QB)

Summary

False statements in mortgage application forms can lead to civil recovery orders to recover tainted funds.

Facts

Police intelligence suggested that P was involved in drug trafficking and money laundering. The Serious Organised Crime Agency applied for civil recovery orders under Part 5 of the Proceeds of Crime Act 2002 in respect of a number of properties owned by P and purchased with the benefit of mortgages. It was contended that the mortgage application forms contained false information about P’s income and the sources of his income, which it was alleged constituted unlawful conduct and was itself a sufficient basis on which a recovery order could be made.

Held

In a number of cases it has been held that where a mortgage is obtained through a false statement dishonestly made on a mortgage application form then the property purchased with the assistance of the mortgage can be recoverable property under POCA. In those cases, all the funds provided for the purchase were found to be tainted funds and therefore no distinction fell to be drawn between purchase funds provided by way of the mortgage fraud and other purchase funds, and a 100% interest in the property was held to be recoverable (e.g. Serious Organised Crime Agency v Olden [2009] EWHC 610 (QB).

When property is purchased with tainted and untainted funds it is necessary to determine the portions of the value of the property derived from each at the time of the purchase. So, if half of the price comes from tainted money then half of the value of the property is to be regarded as derived therefrom. The object is to deprive the respondent of the portion of the value of the property which is attributable to his criminality. Any subsequent increase in the value of that half portion may be said to be attributable to the criminality, but no more. Conversely, it is not fair to deprive a respondent of the portion of the value of the property which derived from untainted funds. If so, it would be equally unfair to deprive him of the benefit of a subsequent increase in value of that half portion.

As to whether the mortgage has been obtained “by or in return for” the fraud, it is necessary to establish that the fraud “materially influenced” the decision to lend, but it is not necessary to call evidence directly from the mortgage provider in order to prove the requisite causal link.

On the facts, with one exception (there being no misrepresentation in respect of P’s ‘anticipated’ income on a self certification mortgage application form) SOCA had made out its case on mortgage fraud. The income figures and the sources of income amounted to dishonest false statements (and the fact that the forms had been filled out by an intermediary made no difference).

Citation

Significantly, in his conclusion, the judge said this:
    “[The case] illustrates the breadth of application of the civil recovery legislation. As the law stands, any person, however otherwise law abiding, may be the subject of a civil recovery order if he makes a deliberately false statement in a mortgage application form. It is important that this be more widely known, and it is desirable that mortgage providers spell out this possible consequence of a misstatement in their application forms.”
Comment

The significant point is the judge’s conclusion that a false statement made in a mortgage application form is treated as unlawful conduct, and will expose the applicant to a civil recovery order. The judge warned that mortgage providers should make this clear in their application forms. It follows that solicitors acting for mortgage applicants should also make this clear to their clients.

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