In December 2019, the National Crime Agency (NCA) struck a most unusual deal with one of Pakistan’s most powerful men, property tycoon Malik Riaz Hussain. The deal, brokered by the Pakistani state, required Riaz to pay £199 million out of his UK assets that the NCA had sought to recover as the proceeds of corruption, but he was allowed to use the money to pay off fines due in Pakistan and declare his innocence. A subsequent investigation by Pakistani news outlet Dawn claimed that Pakistani state officials had told the NCA that if they didn’t settle with him, “Riaz would finish their prosecution budget.”
Whether these claims are true or not, the fact remains that the budget-finishing costs that the NCA faces when it takes on deep-pocketed crooks leave it in a very weak negotiating position, as well as open to bullying tactics, threats, and endless legal challenges.
That’s why the amendment Peers voted through last month to the government’s flagship Economic Crime and Corporate Transparency Bill (ECCTB) is so significant. The amendment, proposed by former anti-fraud minister Lord Agnew, will give law enforcement protection from costs where they have acted reasonably and honestly, and it would not be against the interests of justice.
The chilling effect of legal costs
Writing in The Times today, Lord Agnew describes the amendment as a “game-changer” and urges the government to accept it when the ECCTB returns to the Commons in September. He says: “The government should embrace this opportunity to give the courts greater discretion to take the ‘chilling effect’ of unequal costs into account so that law enforcement bodies can get on with seizing the proceeds of kleptocracy.”
The “chilling effect” that Lord Agnew refers to is a result of the current costs regime. Anecdotal evidence suggests it is driving UK law enforcement activity towards low-risk, low-value money-laundering targets – or low-hanging fruit – rather than high-end, big ticket money laundering and kleptocracy cases.
Furthermore, the inequality of arms between law enforcement agencies and super-rich suspects is nowhere clearer than in the different legal fee rates at which costs are awarded. When a law enforcement body such as the NCA loses, it faces private sector legal costs charged at £800-900 an hour. When a defendant loses it faces public sector legal costs charged at £150-180 an hour.
By comparison in the US, if a party wants to get costs from a government enforcement agency when the agency loses a civil recovery case, they must apply to a court and prove that the agency had “no reasonable cause for seizure or arrest.” If they win a court order, the costs are paid, not out of the enforcement body’s budget as is routine in the UK, but out of the US Treasury’s Judgment Fund.
It is perhaps unsurprising that as a result, the US is streets ahead of the UK on asset recovery. Between 2010 and 2021, it has seized and returned $1.7 billion of kleptocratic assets to countries from which they were stolen to support social programmes. In the UK, of the £1.2 billion frozen of corrupt funds since 2006, by our estimates only around £307 million (£199 million of which was to Malik Riaz in Pakistan) has actually been seized and returned over that period.
Precedents elsewhere in UK law
In its first Economic Crime Act passed in 2022, the government accepted the argument that law enforcement should be protected from costs – where it has acted reasonably – in relation to Unexplained Wealth Orders.
But while UWOs are a pet favourite of ministers and make headlines, they are only an investigative tool. The first successful UWO has yet to bring in any concrete confiscated assets. If we really want law enforcement to be effective, we need to reduce the ‘chilling effect’ of costs when it comes to actually seizing assets, not just investigating them.
The government has argued as the bill passes through Parliament that “the ‘loser pays’ principle is a fundamental pillar on which the whole basis of civil litigation operates.”
However, this argument does not take into account that in other areas of law, the courts have far more discretion on whether or not to impose costs on public bodies, including law enforcement, that bring unsuccessful regulatory or enforcement actions. Courts in these areas are allowed to take into account the ‘chilling effect’ that costs may have on the ability of public bodies to make reasonable enforcement decisions made in the public interest.
Currently this discretion for courts is available for:
- Local authorities and police when they make administrative decisions overseen by the magistrates court (following the Booth case in 2000), and where the court can consider “the need to make and stand by honest, reasonable and apparently sound administrative decisions made in the public interest without fear of exposure to undue financial prejudice.”
- The Law Society/Solicitors Regulation Authority when it brings disciplinary action (known as prosecutions) that fail (following the Baxendale-Walker case in 2008), where the court found that “for the Law Society to be exposed to the risk of an adverse costs order simply because properly brought proceedings were unsuccessful might have a chilling effect on the exercise of its regulatory obligations, to the public disadvantage.”
- Law enforcement bodies including the police when they seize assets under the Proceeds of Crime Act that are heard in the magistrates’ court or Crown Court (following the Perinpanathan case in 2010).
As the minister noted in the debate, a crucial Supreme Court ruling in 2022 considered the issue of the costs rule for regulators in relation to a regulatory fine imposed by the Competition and Markets Authority (CMA) against pharmaceutical companies, Flynn Pharma Ltd & Anor. The Supreme Court ruled in that case that the CMA should face costs when it lost the appeal brought by the pharmaceutical companies, and is not subject to a default rule that no costs be ordered after an unsuccessful prosecution.
However, there were specific reasons behind that ruling which the minister did not fully reflect in his statement. The Supreme Court found that the Competition Appeal Tribunal, where CMA cases are heard, already has existing discretion not to impose costs on the CMA after an unsuccessful regulatory action where it finds that to do so would create a chilling effect.
It also found that the CMA had overinflated the costs it was seeking in this specific case (not a good look), and most significantly that adverse costs do not impact on the CMA’s budget. The CMA can fully offset any costs it faces after unsuccessful enforcement actions against fines or penalties imposed during the financial year before the income from these go to the Treasury.
Other law enforcement bodies do not have the ability to offset adverse costs in this way. Nor can they have the chilling effect taken into account by the court when it comes to civil recovery cases, because the High Court does not currently have discretion to consider this in these cases.
To introduce the ability for courts to have such discretion would not be changing the overall principle of ‘loser pays’ as the government argues, but ensuring courts can consider the chilling effect in very specific circumstances involving publicly funded law enforcement bodies.
And it would still be for the Court to decide that law enforcement had acted unreasonably, or in the words of the minister, “if they make a complete Horlicks of a case,” or that it was in the interests of the justice to impose costs.
What’s the way forward?
There is strong appetite within law enforcement for costs protection in civil recovery cases. The Chief Capability Officer of the Serious Fraud Office (SFO) told the Economic Crime and Corporate Transparency Bill Committee that the SFO would like to see this while the head of the National Economic Crime Centre (NECC) told the same Committee that they find costs protection “an attractive proposal.”
Early on in the Bill’s progression the head of the NECC flagged that discussions were under way to establish a regime to help law enforcement manage the risks associated with big financial losses after losing cases. The minister responsible for economic crime, Tom Tugendhat, told Bill Committee members that some form of “war reserve” for law enforcement was his preferred option.
However, this solution does not appear to have been put into place and there was no further mention of it in later stages of the Bill. While it might sound attractive on paper, it carries some very high risks. Not only does it leave the taxpayer picking up expensive costs, but any such fund would of necessity involve greater involvement by government officials in cases run by independent law enforcement bodies. That leaves any regime open to allegations of political interference.
Another solution suggested by the minister in the Lords debate, Lord Bellamy, was that changes to the Civil Procedure Rules would be a more appropriate way to deal with this. However, without clear guidance from parliament and a statutory basis, there is a real question whether the judiciary would consider making such changes.
There is no doubt that the current array of costs regimes for different regulators and enforcement bodies is, as Lord Agnew put it, a mishmash. In the CMA costs case, one of the judges sitting in the Court of Appeal – who ruled in the CMA’s favour in the first instance – called for a Law Commission review of how the different costs regimes are operating. The Law Commission itself has already flagged in its review of a separate part of the Proceeds of Crime Act regime that the costs regime is having a “disincentive effect” on the ability of law enforcement to restrain assets in criminal prosecutions.
A wider review of how costs work across the civil justice system, including how they work in the context of SLAPPS, by the Commission would be both welcome and very sensible, and could look at whether costs caps could be an effective way of preventing perverse incentives to prolong litigation in the courts, and addressing unequal access to justice.
But it would come too late to make a real difference in the immediate term on law enforcement’s ability to take an ambitious approach to recovering assets as envisaged in the new Economic Crime Plan. That’s why we would urge the government to adopt Lord Agnew’s amendment to help law enforcement deliver on the government’s commitment to recover more criminal assets.