On 7 February 2018, the High Court delivered its decision in Commissioner of the Australian Federal Police v Hart [2018] HCA 1. The decision is of particular importance to practitioners since it provides substantial guidance on the proper construction of the exclusion (and similar) tests under the Proceeds of Crime Act 2002 (POCA).
Facts
Mr Hart, an accountant, operated fraudulent tax minimisation schemes. He was convicted of defrauding the Commonwealth. Property belonging to companies with which Mr Hart was associated was forfeited to the Commonwealth under section 92 of the Proceeds of Crime Act 2002 (POCA).
Subsequently, the companies whose property had been forfeited filed an application under section 102 of the POCA, seeking orders for the recovery of their interests in certain forfeited property or a payment by the Commonwealth of equivalent value. Concurrently, the Commonwealth DPP applied for orders under section 141 of the POCA for a declaration that the property which the companies sought to retrieve from forfeiture was available to satisfy any pecuniary penalty order made against Mr Hart. Mr Hart had been ordered to pay in excess of $14 million by way of pecuniary penalty order.
In order for the companies to succeed, they needed to demonstrate the following, namely that:
- the property was not used in, or in connection with, any unlawful activity and was not derived or realised, directly or indirectly, by any person from any unlawful activity; and
- the applicant acquired the property lawfully; and
- the applicant is not the person convicted of the offence to which the forfeiture relates.
Significance of the decision
The decision is of particular significance having regard to the Court’s analysis of the following concepts which operate within the framework of the POCA:
- “the property was not used in, or in connection with, any unlawful activity”, referred to by the Court as the “use condition”;
- “the property … was not derived or realised, directly or indirectly, by any person from any unlawful to be”, referred to by the Court as the “derivation condition”;
- “the applicant acquired the property lawfully”, referred to by the Court as the “acquisition condition”.
As to the separate limbs, Gordon J noted (at [51]) that: “In each case, whether the criteria of the relevant limb are established will be a matter of fact and degree.”
Use Condition
In observing what must be demonstrated in order to meet the use condition, the plurality of the Court (Kiefel CJ, Bell, Gageler and Edelman JJ) observed (at [10]):
Satisfaction of the use condition requires proof by an applicant on the balance of probabilities that the thing forfeited was not used in, or in connection with, an act or omission that constituted a relevant offence, and that no legal or equitable estate or interest in that thing and no right, power or privilege in connection with that thing was used in, or in connection with, an act or omission that constituted a relevant offence. Consistently with the construction of equivalent language adopted by the Full Court of the Supreme Court of South Australia in Director of Public Prosecutions v George[1], use in or in connection with an act or omission that constituted a relevant offence is a broad conception involving practical considerations which do not readily admit of detailed exposition in the abstract. The conception requires neither a causal link between the property and the offence nor that the property was necessary for the commission of the offence or made a unique contribution to the commission of the offence. Implicit in the expression of the condition is that the use can be by any person. Implicit also is that the degree of use need not be proportionate to the forfeiture that has occurred.
Gordon J (who referred to the “use condition” as the “use limb”) stated (at [52(1)]:
the use limb seeks to identify a connection between the use of the property and unlawful activity. It may, and commonly will, require consideration of one or more of the following questions: how the property was used in or in connection with unlawful activity; the extent to which the property was so used; and how much or what part of the property was used in that unlawful activity;
Gordon J stated (from [81]):
Under this limb, “the property” is not expressed to be limited to the applicant’s interest in the forfeited property. It refers to the property itself, including any interest in the property[2]. Moreover, not only does the use limb extend to any unlawful activity – not just the unlawful activity giving rise to the restraining order and the forfeiture – but the addition of the words “in connection with” reinforces the breadth of the inquiry. It is an inquiry which seeks to identify a connection between the use of the property and unlawful activity.
Identifying that relationship or connection may, and commonly will, direct attention to, and require consideration of, one or more of the following questions: how the property was used in or in connection with unlawful activity; the extent to which the property was so used; and how much or what part of the property was used in that unlawful activity[3].
Further, because the use limb is cast in negative and broad terms, it is not necessarily decisive for an applicant to show that:
(a) there is no causal link between the property and unlawful activity – something less than a causal link may result in the use limb not being established;
(b) the property was not essential or necessary for the commission of an offence;
(c) the property did not make a unique contribution to the commission of an offence; or
(d) the use in the unlawful activity was not the sole or dominant use of the property.
Some facts and circumstances will be more straightforward. If a house is used as the place to manufacture drugs, or a car is used to distribute drugs, the asset will be caught by s 102(3)(a) and the applicant will not be entitled to an order under s 102(3). Other facts and circumstances will be more complicated. If, for example, the unlawful activity is money laundering proceeds of crime through the sale or purchase of assets (or both), a question may arise whether a particular asset in that series of transactions was used in, or in connection with, the unlawful activity of money laundering. That conduct may, in certain circumstances, support a finding that a court cannot be satisfied that the property was not used in, or in connection with, any unlawful activity.
Derivation condition
In observing what must be demonstrated in order to meet the derivation condition, the plurality of the Court observed (at [11]):
Satisfaction of the derivation condition requires proof by an applicant on the balance of probabilities that the thing forfeited (and every legal or equitable estate or interest in that thing, and every right, power or privilege in connection with that thing) was not “derived or realised”, directly or indirectly, by any person from an act or omission that constituted a relevant offence. The term “realised” in this context adds nothing of significance to the term “derived”. There is a definition of “derived” in s 336, but because that definition is limited to “[a] reference to a person having derived proceeds, a benefit or literary proceeds”, that definition has no application to the derivation condition. The definition, in any event, is inclusive rather than explicatory.
There has for a long time been some controversy about the threshold at which property is regarded as having been wholly or partly derived or realised from unlawful to. As to that, the plurality of the Court observed (at [14]):
Property would not answer the description of being “partly derived” from an act or omission if the degree of derivation were no more than trivial[4]. Beyond that, however, there is no requirement that the degree of derivation must be substantial. And there is no requirement that the degree of derivation must be proportionate to the forfeiture that has occurred.
(and at [16])
Conformably with the question of whether property has been used in or in connection with a relevant offence, the question of whether property has been derived by a person from an act or omission that constitutes a relevant offence turns on considerations of substance and economic reality which can be expected to vary in different factual settings. Derivation might in one factual setting be constituted by a non-trivial causal connection between the relevant act or omission and the acquisition or continued holding by the person of the thing forfeited (or a legal or equitable estate or interest in that thing, or a right, power or privilege in connection with that thing). Derivation might in another factual setting be constituted by the act or omission resulting in money or some other property being disposed of or otherwise dealt with so as to make a non-trivial contribution to payment for the thing forfeited (or a legal or equitable estate or interest in that thing, or a right, power or privilege in connection with that thing). Those examples are not exhaustive. As with the use condition, the derivation condition does not lend itself to detailed exposition in the abstract.
Gordon J (who referred to the “derivation condition” as the “source limb”) stated (at [52(2)]):
the source limb seeks to identify a connection between the derivation of the property and unlawful activity. The inquiry may differ depending on the relevant derivation; but it may be appropriate to ask whether the extent and nature of the connection between the unlawful activity and the derivation is not insubstantial;
Gordon J stated (from [86]):
Under the source limb the applicant must establish, on the balance of probabilities[5], that the property was not derived or realised, directly or indirectly, by any person from any unlawful activity. As with the use limb, “the property” to which the source limb refers is not limited to the applicant’s interest in the forfeited property. The focus is on how the property, including any interest in the property, was derived or realised. Further, the inclusion of the phrases “directly or indirectly”, “by any person” (not limited to the applicant or the person convicted of the offence to which the forfeiture relates) and “from any unlawful activity” (not limited to the offence to which the forfeiture relates) is intended to, and does, broaden the circumstances which are excluded from s 102(3).
Put in different terms, the source limb significantly narrows the scope of the property that can be the subject of an exclusion order under s 102(3). Together with the other limbs, it sets a high bar for recovery of forfeited property: a higher bar than that in s 102(2).
And (from [92]):
The extent and nature of the connection is not unimportant: if the overall assessment is that the extent and nature of the connection is de minimis, then there is no relevant connection that could lead to a finding of derivation. Putting the matter in different terms, it may be appropriate to ask whether the extent and nature of the connection between the unlawful activity and the derivation is not insubstantial.
Where the unlawful activity in issue is a cause (not the cause) of the derivation – as it will be when a not insignificant part of the funds for acquisition directly or indirectly comes from unlawful activity – the property will be derived directly or indirectly from the unlawful activity.
Acquisition condition
As to the acquisition condition, the plurality of the Court stated (at [17]) that its focus was “on the process by which the applicant came to hold” the interest. The Court stated that “the applicant must prove that each step in that process was lawful. Where the applicant purchase the property, to prove that the applicant acquired the property lawfully the applicant must prove that all of the consideration for the acquisition was lawfully acquired.”
Gordon J (who referred to the “acquisition condition” as the “lawfully acquired limb”) stated (at [52(3)]):
the lawfully acquired limb asks whether there was unlawful activity in the process of acquisition of the applicant’s interest in the property or whether the funds used to acquire that interest in the property were unlawfully acquired. The question, simply, is whether the applicant acquired the property (or the applicant’s interest in the property) lawfully, other than in respects which would be considered de minimis.
And (from [100]):
Finally, the lawfully acquired limb requires the applicant to establish, on the balance of probabilities[6], that they acquired the property lawfully[7]. Unlike the other limbs, it is framed in positive terms. Moreover, given that the focus is on acquisition by the applicant, the reference to “the property” in this limb must be read as a reference to the applicant’s interest in the property[8]. But, as with the other limbs of s 102(3), the inquiry involves a question of fact and degree. It too will be fact-specific and often fact-intensive.
Under this limb, the initial focus shifts from the property to the applicant. Property will not be lawfully acquired if an offence is committed in the process of acquisition or if the funds used to acquire the property were not lawfully acquired[9]. In other cases, consideration will need to be given to the source of the funds used in the acquisition and its effect upon the lawfulness of the transaction.
So, for example, property is unlikely to be lawfully acquired if:
(1) the applicant acquired the property with the proceeds of crime or as a result of some other form of illegality (which it is presently unnecessary and inappropriate to define);
(2) the funds the applicant used to purchase the property were not themselves lawfully acquired; or
(3) the funds the applicant used to purchase the property were provided by a third party who had acquired them unlawfully.
Under this limb, proportional tests – for example, whether most or a substantial proportion of the asset was acquired lawfully – and a “but for” test – whether the property would not have been acquired but for the unlawful activity or tainted funds – are also unlikely to be determinative. For example, if an offence has been committed in the process of acquisition, the extent to which that unlawful activity contributed to the acquisition of the asset will usually be irrelevant because the limb will not be satisfied. For those reasons, the statutory question under this limb is better approached by asking whether the asset was acquired lawfully, other than in respects which would be considered de minimis.
Hence, where the applicant purchased the relevant property there will be a significant overlap in the matters which such applicant must address under both the acquisition condition and the derivation condition.
No discretion
The exclusion tests under the POCA provide that a court “may” make an exclusion order. However, Gordon J observed that this ought not be construed as a discretion. Her Honour stated (at [104]) “If the court is satisfied that the applicant has established that those criteria are met, an order must be made”.
Repairs
In the context of analysing whether the acquisition condition had been met in respect of an aircraft, the Court observed that there was “nothing to suggest that undertaking the repairs contributed to [the applicant] continuing to own the [aircraft] at the time of forfeiture.” That observation highlights the importance of the effect that certain expenditure may have on property rights. Where the expenditure does not result in a further acquisition, it will not be relevant to the acquisition condition.
That said, there is presently a Bill before Parliament by which amendments are sought to be made to the POCA so as to cause improvements to property and loan repayments to be regarded as acquisitions for the purpose of the acquisition condition.
False loan application
One issue which arose on appeal was whether an applicant for exclusion could establish the use condition having regard to a finding by the primary judge that he was unable to be satisfied that a lender was not induced to lend to the borrower (applicant) by the making of the loan application which contained a fraudulent representation in breach of the Queensland Criminal Code. The property was offered as security for that loan. The Court observed (at [27]):
The proffering of Doonan’s Road as security for the Perpetual loans was a use of Doonan’s Road. That use was not a use in the fraudulent act that constituted the Perpetual offences. But it was a use in connection with that fraudulent act: both formed material parts of a single proposal which was directed to and which resulted in Perpetual making the loans. Bubbling for that reason failed to establish the use condition.
Gordon J came to the same conclusion (at [224]):
For the reasons identified by Morrison JA[10], Doonan’s Road was used in, or in connection with, the Perpetual Offences. When the cl 16 representation was made to Perpetual it was made by Bubbling, apart from the individuals who conducted the negotiations, and Bubbling used Doonan’s Road to convince Perpetual to lend to it, by offering Doonan’s Road as security. The security offered to Perpetual was a package and Perpetual sought Doonan’s Road as security, as well as the cl 16 representation. Without security over Doonan’s Road, it is reasonable to infer that the cl 16 representation would not have been given or accepted
It follows that property used as security for loans fraudulently obtained are incapable of exclusion from restraint or forfeiture because of the inability to meet the use condition.
Scope of evidence
In preparing affidavits in support of applications for exclusion (or similar applications) under the POCA, the question commonly arises as to the extent of evidence necessary to discharge the onus on the applicant. On that issue, the Court stated (at [7]):
It is proof in an adversarial proceeding conducted in accordance with the civil procedure of that court[11], including such procedure as exists in that court for the definition of issues between parties. The primary judge and the Court of Appeal were correct in taking the view that, where an application for orders under s 102 proceeds on pleadings, an applicant need not negative possibilities which the Commonwealth does not raise in its defence[1].
Gordon J stated (at [85]):
However, an applicant is not required to consider or negative all possibilities irrespective of whether they are raised by the CDPP[2]. If the CDPP intends to rely upon facts and circumstances which it contends establish that a trial judge should not be satisfied that the use limb is established (or, for that matter, the source limb or the lawfully acquired limb), the CDPP should identify those facts and matters as early as possible in its defence or other pleading in response to any s 102(3) application.
Footnotes:
[1] Commissioner of the Australian Federal Police v Hart (2016) 336 ALR 492 at 678-679 [935]. See also Director of Public Prosecutions (Cth) v Jeffery (1992) 58 A Crim R 310 at 313-314.
[2] Hart (2016) 336 ALR 492 at 678-679 [935]. See also Director of Public Prosecutions (Cth) v Jeffery (1992) 58 A Crim R 310 at 313-314.
[1] (2008) 102 SASR 246.
[2] See the definitions of “property” and “interest” in s 338 of the POCA.
[3] cf Director of Public Prosecutions v George (2008) 102 SASR 246 at 261 [60].
[4] Cf Williams v The Queen (1978) 140 CLR 591 at 602; [1978] HCA 49.
[5] s 317 of the POCA.
[6] s 317 of the POCA.
[7] s 102(3)(b) of the POCA.
[8] See the definitions of “property” and “interest” in s 338 of the POCA.
[9] See Markovski v Director of Public Prosecutions (2014) 41 VR 548 at 563 [76], 564 [83], 567 [94]-[95], [97].
[10] Hart (2016) 336 ALR 492 at 631 [692]-[695]. See [220] above.
[11] Cf Mansfield v Director of Public Prosecutions (WA) (2006) 226 CLR 486 at 491 [7]; [2006] HCA 38, citing Electric Light and Power Supply Corporation Ltd v Electricity Commission of NSW (1956) 94 CLR 554 at 560; [1956] HCA 22.
