The organisation seizing criminal assets may be different in future, but the process will be no simpler, says John Smart


After a thorough mauling at the hands of the House of Commons Public Accounts Committee, few might mourn the passing of the Assets Recovery Agency (ARA) as it prepares to merge with the Serious Organised Crime Agency (SOCA).



The committee focused on the ARA's perceived failure to recover sufficient criminal assets (£23 million by December 2006) to cover its £65 million cost. This was inevitable, given the political imperative imposed on the ARA at its inception to be self-financing.



We would argue that the raison d'être of an agency attacking criminal activity is to disrupt that activity, in this case by denying the access to, and seizing the assets of, the criminals. Making net asset recovery the de facto primary target skews judgements about the suitability of, and technical approach to, individual cases. It has been estimated that there are £2 billion of criminal assets theoretically available for seizure in the UK (although the Home Office report setting out that £2 billion figure was subsequently withdrawn). The ARA is handing over a caseload of about £130 million worth of assets to SOCA, so there may be some justification for the committee's criticism that the ARA chased too few big cases.



Despite the aura of failure hanging over the ARA, some lessons were learned during its existence, and it is to be hoped that these will be built upon by SOCA, and the prosecuting authorities to whom the powers to launch civil recovery proceedings are to be extended: the Crown Prosecution Service, Revenue & Customs Prosecutions Office, Serious Fraud Office, and Public Prosecution Service in Northern Ireland.



Chief among the lessons is the need to act quickly. In fraud, it is our experience that the quicker you act after discovery, the more chance you have of recovering the assets. This may seem simple, but in a world where funds can be transferred in seconds to a myriad of different financial products, located in numerous jurisdictions, it can be a time-consuming and intelligence-heavy process to trace assets. The more time it takes, the more likely it is that a criminal will take further steps to hide those assets.



The broad distribution and jurisdictional complexity of criminal asset holdings immediately raises the question of negotiated settlement with the target. It is a cost/benefit judgement call by the prosecutors: would continuing effort at civil recovery cost more than the assets believed recoverable, versus the public perception that the criminals are keeping some of their ill-gotten gains. Or, to put it another way, would the prosecuting authority be prepared to stand up and say, 'We showed this Mr Big that crime doesn't pay quite as well as it might have done...'?



A further incentive to reach a settlement is the right of the accused to fund their legal defence from the frozen assets. For them, there is no downside: they are either going to lose the money, or they can throw it at their defence, with the prospect of keeping some of it at the end of the trial. The risk of a long legal fight with few assets left at the end of it is one prosecutors have to weigh in the decision to negotiate a settlement. The committee addressed the complexity and cost issues when it said SOCA should 'actively consider the cost/benefit ratios of pursuing recovery through the courts compared with arriving at a negotiated settlement having regard to the net cash benefit to the Exchequer and the public interest'.



The complexity of these cases can be daunting, so a strategy should be in place at the outset which covers the preliminary stages as well as the execution. The first step is to undertake an intelligence-gathering exercise to scope the assets as widely as possible, and plan to hit all the jurisdictions with freezing orders at the same time. Folding the ARA into SOCA has benefits in this respect. As the intelligence agency for serious fraud, SOCA already has in-house expertise and understanding about sharing resources and knowledge between investigators and prosecutors. This teaming of forensic accountants and lawyers also facilitates the necessary discussions that take place around the cost/benefit equation of these recovery actions.



But there should be no illusions: it is still easier to freeze assets than it is to recover them. One reason for this is that the court needs to see evidence that the assets are proceeds of crime, and that they were 'obtained by unlawful conduct'. The ARA was trying to clarify this, and the Home Office's asset recovery action plan in May of this year also promised better definition of the concept of 'obtained', but the Serious Crime Bill, in its final parliamentary stages, has yet to pick up on the ARA's suggested changes.



When the Serious Crime Bill becomes law, SOCA will be able to draw on the investigatory experience of Her Majesty's Revenue & Customs (HMRC) to a greater extent than before. HMRC has been adopting a more aggressive investigatory posture since the combination of the Inland Revenue and HM Customs & Excise, particularly in respect of missing trader intra-community fraud, or 'carousel' fraud. HMRC will still retain its own capability to pursue assets in the course of its own investigations, but there is a higher expectation that they will be sharing some of their asset-recovery experience with SOCA, transferring skills and assisting in training.



There is a general concern about the short-term effectiveness of the newly empowered SOCA, which is that, despite the cross-fertilisation from HMRC, the merger with the ARA will engender a period of structural re-organisation. Any major change or merger of this sort takes time to bed in, and in this case staff retention is where any friction might show up. The committee and the National Audit Office have both remarked already on high staff turnover levels at the ARA. SOCA will doubtless make every effort to retain key ARA staff, but their skills are currently in high demand. In the UK, the Financial Services Authority's focus on fraud will present opportunities for experienced investigators. In the private sector, the rush by western companies into emerging markets is creating a strong demand for investigatory and asset tracing skills.



As professionals involved in the battle against fraud and criminality, we were disappointed at the demise of the ARA. But now that the net value of recovery is just one of several targets and sources of funding for SOCA, it can concentrate on the main objective, which is to disrupt the activities of organised criminals as much as possible. Recovering criminal assets is a means to that end for SOCA, whereas the ARA was encumbered with the perception that the means was the end.



John Smart is head of fraud investigation and dispute services at Ernst & Young