Bar for compensation confirmed as a high one in first test of AFO provisions

Introduction

When the Criminal Finances Act 2017 became law, the Account Freezing Order (“AFO”), gave significant new powers to law enforcement to “freeze” bank accounts that they suspected to contain funds obtained through unlawful conduct or funds which were intended for use by any person in unlawful conduct.  No need to establish that the account holder had committed any crime, all that was required was that the funds were suspected of being obtained through unlawful conduct or were intended for use in unlawful conduct by any person (i.e. not necessarily the account holder).  An AFO could see funds frozen for up to 2 years whilst law enforcement investigated their provenance and/or intended use.

AFO powers were recently replicated specifically for cryptoassets held in crypto-wallets by the Economic Crime and Corporate Transparency Act 2023.  The same test, the same ability to freeze funds in situ whilst their provenance is investigated, the same 2-year period for investigation (sometimes up to 3 years where cross-border enquiries are required).

What if accounts are frozen via an AFO, but it turns out the money has no connection to unlawful conduct – what remedies might be available to the account-holder?

Rights of the account holder “frozen out”

The AFO provisions enable those whose account has been frozen to seek various remedies in the face of such restrictions, including variations to the AFO, to enable withdrawals to meet reasonable living expenses and to seek to have the AFO recalled (aka set aside). 

Another remedy that can be sought is compensation. If, once an AFO has been made, none of the money in that account is then forfeited, the account holder may apply to the court for compensation – where the court considers that the account holder has suffered loss as a result of the AFO being made and the circumstances are exceptional, compensation may be awarded.  The amount of any compensation is for the court to determine, taking into account the loss suffered and any other relevant circumstances.

Yesterday, the Court of Session offered some clarity on the interpretation of this section, the first time these compensation provisions have been tested^[1].

Chronology

Following a series of cash deposits to two accounts held by Mr McCartney, His Majesty’s Revenue and Customs (“HMRC”) sought an AFO.  It was alleged these were suspicious, involving substantial sums of over £1,000 000, for which there was no obvious source and in respect of which Mr McCartney had made no tax declarations.  Mr McCartney’s only declared income in the 6 years preceding the granting of the AFO was a state pension of £9,900 per year.  The unlawful conduct suspected was tax evasion or money laundering.

As is customary in Scotland, following the granting of the AFO, the investigation passed to the Civil Recovery Unit (“CRU”).  The AFO was granted on 11 April 2023.  Mr McCartney sought to vary the AFO to release £280,000 to buy a house for his daughter.  He was asked to provide the CRU with material and information to support this application.  This material was received late on the evening preceding the hearing on that application and was heavily redacted.  The application was refused.  Explanations had been offered for the 2 largest payments to Mr McCartney’s account, together with apparent vouching by way of heavily redacted bank statements, were found not to be satisfactory to support the application. 

There followed further requests for information and vouching by the CRU, which either required chasing by them or the responses never quite answered all of the points raised or opened further questions.  Ultimately, material relating to property transactions dating back to 2007 had required to be considered.  Following consideration of all of this, the CRU advised that it would not be seeking forfeiture.  Almost a year after it was initially granted, the AFO was recalled.

Pleadings

Mr McCartney sought to invoke the compensation provisions, arguing that he had suffered both patrimonial loss from the fact that he was deprived of the opportunity of investing these funds while they were frozen and for distress, inconvenience and upset as a result of them being frozen (known as “solatium”).  He submitted that the circumstances were exceptional.

Court’s conclusions and steer on how enforcement authorities should approach

The court found that Mr McCartney had not made out either patrimonial loss or a claim for solatium.  In respect of the patrimonial loss, the appellant’s pleadings were found wanting due to lack of specification.  His claim for solatium for distress and inconvenience would have been suitable for enquiry.

Turning to whether exceptional circumstances were made out, the court gave the word “exceptional” its ordinary meaning and found that these circumstances did not meet that definition;  the large credits to Mr McCartney’s accounts gave rise to the suspicions which led to the AFO, these large credits cried out for an explanation, that explanation took a long time to come from the appellant.  There was nothing exceptional in the way that this investigation played out.  The time it took to obtain explanations/vouching for these transactions was not the fault of the CRU or HMRC

Reading between the lines, if explanations/vouching had been forthcoming sooner, the AFO may not have been in place as long as it was in fact before it was recalled.

Points to note

The court made some interesting observations on the extent to which HMRC (and it can be assumed other law enforcement authorities) is required to make enquiries.  It was not for HMRC to recover and/or examine more records than they had to see if they could find some very historic source of the funds.  Rather the duty lay with the account holder to explain so that their explanations could be explored and vouched.

In addition, the principles set out in the Perinpanathan case^[2] were reaffirmed – the court reiterated that it is in the public interest that enforcement officers are not deterred from applying for an AFO when there is a reasonable basis for doing so by fear of liability for compensation.  Broadly speaking, there should be no liability for compensation where an enforcement officer has acted honestly, reasonably, properly and on grounds that reasonably appeared to be sound.  This principle is maintained by the current AFO provisions – compensation is only awarded exceptionally.  The circumstances of this case also did not make out that the investigation by CRU or the actions of HMRC in seeking the AFO in the first place had not been in keeping with these principles.

How CMS can help

This decision is perhaps not groundbreaking given the circumstances of the case.  The case serves to highlight the extensive powers which can law enforcement can use to investigate funds held in accounts and the length of time such investigations can take.  CMS is able to assist in advising on the exercise of these powers and advise on how to respond to the same.
 

^[1] 2026csih5-the-advocate-general-for-scotland-against-alexander-watt-mccartney-and-others.pdf

^[2] R (Perinpanathan) v. City of Westminster Magistrates Court [2010] EWCA Civ 40