Litigation

01 Apr 2010

Newly Enacted Criminal Proceeds (Recovery) Act 2009 Means Banks and Financial Institutions Should Beware when Dealing with Proceeds of Crime

With an expanded regime for the restraint and forfeiture of proceeds of crime, the newly enacted Criminal Proceeds (Recovery) Act 2009 offers provisions that will result in more property covered by restraining orders and forfeiture orders. While the new legislation is aimed at those who have profited from unlawful or criminal activity, these orders will also affect the ability of mortgagees, lessees and other interested parties to sell or deal with the restrained property. 

The Commissioner of Police can now obtain orders for the restraint and subsequent forfeiture of property, even where no one has been convicted or charged with a crime. The Commissioner need only have reasonable grounds to believe that the property is tainted property, or that the suspect has unlawfully benefited from significant criminal activity.

The new legislation also makes it harder for those who profit from criminal activity to hide property behind corporate structures, or by putting property in the name of a spouse parent or other family member. For example, under the new provisions, a respondent does not need to be the legal owner of the restrained property, but only needs to have some right, power or privilege, or effective control over the property. As well as provisions that pierce the corporate veil, there are new trust-busting provisions that go behind trust arrangements, and permit the courts look at a range of family, personal, and business relationships to determine who has effective control over the property.

 As a result of the expanded regime, mortgagees of real property and other security holders are likely to be served with an increased number of restraining and other orders under the Act - even if their own clients are not the criminal suspect. In some cases even the owners may not be aware that their property is tainted or has been derived from criminal activity.

Dealing with restrained property is an offence which is punishable by sentences up to five years imprisonment and/or a fine not exceeding $20,000, or for a corporation a fine of up to $60,000. Consequently, banks and financial institutions, and any other persons who may have an interest in restrained property, should be wary of taking any action in relation to restrained property, or exercising any rights over restrained property.

There are no provisions in the new legislation that protect or clarify the rights of mortgagees. Unless specifically excluded by the orders, a mortgagee's interest in restrained property will be captured by the restraining order. If served, care should be taken by a mortgagee to ensure the terms of the orders exclude the mortgagee's interest. If not, an application to exclude or sever the mortgagee's interest should be considered. Such an application will need to be made prior to the making of any forfeiture orders that may impact on the mortgagee's interest in the property. An alternative may be to seek an undertaking from the Commissioner of Police that they will not seek forfeiture of the mortgagee's interest.

People charged with criminal offences will often go into default with their loans, particularly if other property, such as bank accounts, is also restrained, or if they are unable to service the loan because they are in custody. In a flat or falling property market, banks or mortgagees may not want to wait until the conclusion of a criminal investigation or trial to exercise a power of sale. However, exercising a power of sale or even a right to enter and take possession of restrained property, may still be a breach of the restraining order, and could be a criminal offence in itself.

If the mortgagee wants to exercise a power of sale, then, a mortgagee will need to make an application to the court to sever the mortgagee's interest and obtain orders permitting the sale to take place in accordance with the terms of the mortgage. This is even though the terms of the restraining order exclude the mortgagee's interest. This is because exercising a power of sale, without further orders of the court, will still affect the mortgagor's rights and privileges with respect to any equity they may have in the property. Failure to obtain such orders could expose the mortgagee and its officers to prosecution. 

Banks and financial institutions can also expect an increased number of search warrants and production orders to be served on them. It is an offence to disclose the existence or operation of search orders under the Act, punishable by imprisonment for up to one year plus a fine of $15,000, or in the case of a corporation a fine not exceeding $40,000. Banks and mortgagees should implement procedures to ensure that their clients or any other interested person, such as signatories, joint account holders or joint property owners, are not aware that search orders have been made, in spite of any other customer-client or fiduciary relationship that may exist.

Amanda Frazis is a senior associate in Simpson Grierson's commercial litigation group.

Published: National Business Review April 2010