Commonwealth Director of Public Prosecutions v Hart [2010] QDC 457

DISTRICT COURT OF QUEENSLAND CITATION: Commonwealth Director of Public Prosecutions v Hart [2010] QDC 457 PARTIES: COMMONWEALTH DIRECTOR OF PUBLIC PROSECUTIONS (Applicant) v STEVEN IRVINE HART (Respondent) FILE NO/S: BD1416 of 2003 DIVISION: Civil Trial Division PROCEEDING: Application for pecuniary penalty order pursuant to ss116 & 134 of the Proceeds of Crime Act 2002 ORIGINATING COURT: District Court of Queensland DELIVERED ON: Judgment 19/11/10 reasons 30/11/10 DELIVERED AT: Brisbane HEARING DATE: 29 July, 3,4,5,6,7,13,14,18,24,25 August, 15,16,17, 18 and 21 September 2009. Written submissions 28 and 29 September and 8 October 2009. At the parties’ request consideration of the judgment deferred to 20 November 2009. Judgment given 19 November 2010. JUDGE: Andrews SC DCJ ORDER: Order that the respondent pay to the applicant the sum of $14,757,287.35. COSTS RESERVED CATCHWORDS: JURISDICTION, PRACTICE AND PROCEDURE – Proceeds of Crime Act 2002(Cth) – application for pecuniary penalty order for $14,757,287.35 – whether the District Court of Queensland has proceeds jurisdiction where the sum sought exceeds the monetary limit in s 68 District Court of Queensland Act JURISDICTION, PRACTICE AND PROCEDURE – Proceeds of Crime Act 2002(Cth) – application for pecuniary penalty order – where the application relates to a person's conviction for an indictable offence - where the applicant relies on a transcript of counsel’s opening from the trial in which the respondent was convicted – purpose for which the opening is admissible – whether the opening is admissible as evidence against the respondent in the application for a -- 1 of 138 -- 2 pecuniary penalty order PECUNIARY PENALTY ORDER – Proceeds of Crime Act 2002(Cth) – application for pecuniary penalty order – assessment of benefits derived indirectly - where the application relates to accountant's convictions for indictable offences of defrauding the Commonwealth – where offences involved causing clients’ income tax returns to be lodged claiming a deduction for expenditure in June 1990 which had not been incurred – where the expenditure would have been the first step in a lawful tax minimisation scheme to continue for several years – where the clients at the accountant’s direction and to participate in the scheme paid a third party monthly payments from November 1990 pursuant to lawful agreement between the clients and the third party – where a consequence of the clients’ payments to the third party was to support the appearance of the expenditure in June 1990 which had not been incurred - where payments to the third party preceded and followed the lodgement of income tax returns – whether lawful payments pursuant to agreement with the third party were benefits indirectly derived by the accountant from the offence CRIMINAL LAW – Particular Offences – defrauding Commonwealth - Crimes Act 1914 (Cth) s29D – where accountant promoted tax schemes – where accountant knew clients would claim expenses in income tax returns – whether accountant knew taxpayer clients not entitled to claim expenses as deduction – where no proof ATO deceived with respect to particular tax returns – where no proof of assessments issued relying on false claims in particular tax returns – where no proof of loss by Commonwealth - whether fraud occurs without proof of assessment – whether fraud occurred before tax returns lodged CRIMINAL LAW – Particular Offences – defrauding Commonwealth - Crimes Act 1914 (Cth) s29D – Criminal Code Act 1995 (Cth) s 135.1(5) - where accountant promoted tax schemes – where accountant knew clients would claim scheme payments in income tax returns – where clients made “loan” agreements with finance company - where finance company provided promissory note not money as loan principal – where promissory note used as client’s contribution to trustee of an employee welfare fund or superannuation fund – where promissory note not presented by trustee – where insurer accepted promissory note from trustee as price of premium for 10 year insurance bond – where promissory note not presented by insurer and not to be presented to finance company before 10 years – whether finance company had capacity to pay promissory notes if presented - where finance company lacked capacity to pay promissory note - where clients paid finance company’s fees and interest pursuant to “loan” agreements – where -- 2 of 138 -- 3 agreements not shams or illegal– whether there was a loan by finance company to client of amount of promissory note – whether there was a benefit for the fund’s beneficiary – where client claimed fees and interest paid and the face value of the promissory note contributed to the trustee as deductions - whether they were tax deductible – whether accountant knew no loan – whether accountant knew finance company had no capacity to pay promissory notes – whether accountant knew clients not entitled to claim fees or interest paid or the contribution as a tax deduction – whether contribution for providing a benefit to a beneficiary of trust – whether accountant intended to prejudice the economic interests of the Commonwealth – whether accountant received legal advice that claims for deductions were lawful - whether accountant’s means were dishonest by the standards of ordinary decent people – whether accountant knew his means were dishonest by the standards of ordinary decent people Proceeds of Crime Act 2002 (Cth) ss 5,116, 134, 138(2), 314 Crimes Act 1914 (Cth ) s 29D Criminal Code Act 1995 (Cth) s 135.1(5) District Court of Queensland Act 1967 s 68 Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336 applied Rejfek v McElroy [1965] HCA 46; (1965) 112 CLR 517 applied Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298 applied R v Hart; ex parte Cth DPP [2006] QCA 39 [72] distinguished Director of Public Prosecutions (Cth) v Saffron (1989) 85 ALR 153 distinguished State of Queensland v Brooks [2008] Qd R 484 applied CDPP v Hart & Ors [2007] QCA 184 considered R v Iannelli [2003] NSWCA 1; (2003) 56 NSWLR 247 at [108] applied Welham v Director of Public Prosecutions [1961] AC 103 considered Scott v Metropolitan Police Commissioner [1975] AC 818 considered R v Barker (1994) 127 ALR 280; (1994) 54 FCR 451 -- 3 of 138 -- 4 followed Campbell v R [1996] FCA 809 Spies v The Queen (2000) 201 CLR 603 at [78] applied Peters v The Queen (1998) 192 CLR 493 considered R v Kastratovic (1985) 42 SASR 59 at 62 - 63 considered McMunn v R [2007] VSCA 149 applied Pearce v R [2005] WASCA 74 applied Dyers v R (2002) 210 CLR 285 [6] distinguished R v Fagher (1989) 16 NSWLR 67 at 80 followed State of Queensland v Hirst [2003] QSC 266 at [14] followed New South Wales Crime Commission v Kelly [2003] NSWSC 154 at [49] followed Archbold Criminal Pleadings, Evidence and Practice 42nd edition COUNSEL: Flanagan SC and Brien for the applicant Respondent for himself and on 17 September 2009 with Davis SC who addressed on certain of the matters of law SOLICITORS: Office of Commonwealth Director of Public Prosecutions for the applicant James Conomos and Co on 17 September 2009 to instruct Davis SC -- 4 of 138 -- 5 Index Nature of the Application …………………………………………………………………...8 Mr Hart’s Legal Representation and Submissions ………………………………………..9 Proceeds Jurisdiction of this court in this Proceeding……………………………………..9 Onus and Standard of Proof…………...………………………………….……...………...12 Inference from prior convictions ……………………………..…………….………..…….13 Mr Hart’s failure to give evidence and the rule in Jones v Dunkel …………….………...14 Matter admissible pursuant to POCA s138 ………………………..………….…………..16 Application 1(a) for benefits derived from offences the subject of nine convictions .. ....16 Benefits “derived” from commission of the nine offences………………………..…….…21 Alleged Offences by Mr Hart against s29D of the Crimes Act 1914 (Cth) & s135.1 (5) Criminal Code (Cth)……………….….……….………….………….………....…..……...28 No limitation period defence……………..……..…….………….………….……………...28 First issue of law relating to s29D of the Crimes Act ………………………..…...……….29 Second issue of law relating to s29 of the Crimes Act ………………………..…...………31 Were the participants entitled to claim their deductions? ………………………..……...40 Application – Paragraph 1(b)(i): 1997 Employee Welfare Fund (“EWF”) ……….…….47 Pleadings regarding dishonest relating to application 1(b)(i) and the 1997 EWF ……...48 Pleading argument: Whether CDPP fairly raised an issue that Mr Hart knew payments did not provide a benefit for employees…………..…………………………..……..…….51 Facts relevant to the 1997 EWF and subsequent schemes ……………………………….52 The CDPP’s failure to call certain witnesses relevant to the 1997 EWF and subsequent schemes and the rule in Jones v Dunkel ….…………………..…………………....………53 Facts continued ………………………..………………………..……..……………........….57 Operation of the 1997 EWF Scheme ………………………..……………..………………58 Operation of the 1998 EWF Scheme …………………..………………………..…………75 Non-recourse “loans” by UOCL …...………………..………………………..……..……..76 UOCL’s financial capacity ………………..………………………..……..………………..80 Conclusions with respect to 1(b)(i) of the application …………………..………………...95 European Grande Assurance S.A .……..………………………..……..…………………. 97 (a) Transfer of money to specified accounts …...…………..…………..……..………...109 (b) Status of deposit and bank balances …………………..………………………..…...112 (c) UOCL Loans …………………..………………………..……..……………………113 (d) Office arrangements and payments …………………..………………………..…....114 -- 5 of 138 -- 6 (e) Authorise payments of commission …………………..………………………..……116 (f) Consulting fees …………………..………………………..……..………………….117 Application 1 (b) (ii) and the 1998 EWF ……..………………………..……..………….118 Conclusions with respect to 1(b)(ii) of the application………………..…………..……..119 The 1999 EWF Scheme …………………..………………………..……………….….......120 Non-Complying Superannuation Scheme …………………….……………………..…...121 Application 1(b)(iii)……………….……….………………………………………….……125 Application 1(b)(iv) ……………….…...…………………………………………….…….125 Application 1(b)(v) ………………..……………………………………………………….125 Findings in relation to applications 1(b)(iii), 1(b)(iv) and 1(b)(v) ………………..……..126 Promissory notes are lawful ………………..………………………..……..……………..127 Legal advices ………………..………………………..……..……………………………...127 Serious Offence s29D Crimes Act…………………………………………………………134 Assessment of benefits regarding applications 1(b)(i) –1(b)(v) …………………………134 Total benefits derived/Penalty amount……………………………………………………139 -- 6 of 138 -- 7 [1] This is an application by the Commonwealth Director of Public Prosecutions (“CDPP”) for a pecuniary penalty order (“PPO”) that the respondent, Steven Irvine Hart (“Mr Hart”) pay to the Commonwealth $14,757.287.80 pursuant to the Proceeds of Crime Act 2002 (“POCA”). The application is brought1 to deprive Mr Hart of $706,402.93 as benefits he allegedly derived from his commission of nine offences against the laws of the Commonwealth for which he was convicted (“the nine offences”). The CDPP also seeks to prove that Mr Hart committed further offences against the laws of the Commonwealth for which he has not been charged (“further offences”). If the further offences are proved the CDPP seeks also to deprive Mr Hart of benefits derived by him from his commission of the further offences. The CDPP alleges that he derived a further $18,850,884.42 from those further offences. The further offences are denied by Mr Hart. The quantum of benefits derived from the further offences is disputed. [2] The parties were before me on 19 November 2010. At the parties’ request I then gave judgment on the basis that I would subsequently publish reasons. In giving judgment I then found that Mr Hart committed the offences alleged at paragraphs 8,10,12,14 and 16 of the CDPP’s further amended points of claim and found that they were serious offences within the meaning of POCA. I ordered that Mr Hart pay the CDPP $14,757,287.35 with costs reserved. [3] Mr Hart practised as an accountant. All offences are alleged to have occurred in Mr Hart’s promotion to clients of investment schemes which would minimise tax. The nine offences were offences of defrauding the Commonwealth, by contravening s 29D of the Crimes Act 1914 (Cth). The alleged further offences from which Mr Hart allegedly derived benefits would have been offences of defrauding the Commonwealth, by contravening s 29D of the Crimes Act 1914 (Cth) or its subsequent equivalent, s 135.1(5) of the Criminal Code Act 1995 (Cth). [4] In respect of the nine offences Mr Hart concedes that it would be appropriate to make a PPO against him in the sum of $85,617.73 2 but the CDPP seeks a further $620,785.20. The contest in relation to the nine offences is about whether payments of $620,785.20 made by clients over four years as part of a scheme are benefits “derived” directly or indirectly by Mr Hart. [5] The CDPP seeks a PPO requiring Mr Hart to pay a total of $14,757,287.35 to the Commonwealth. That is in respect of the $706,402.93 benefits allegedly derived from the nine offences and $14,050,884.42 of $18,850,884.42 allegedly derived from the further offences it seeks to prove. If the court is to make a PPO in this proceeding there is an agreement between the parties that any penalty amount is to be reduced pursuant to POCA Chapter 2, Part 2-4, Division 2 Subdivision C by the amount of $4,800,000.00. It was not made clear in submissions whether Mr Hart’s concession that it would be appropriate to make a PPO against him in the sum of $85,617.73 is subject to reduction pursuant to the agreement to reduce the amount of any penalty by $4,800,000.00. Reference to the further amended points of claim suggests that even the sum of $85,617.73 is subject to reduction. The total of $14,757,287.35 sought by the CDPP takes into account the reduction of $4,800,000.00. 1 under POCA Chapter 2, Part 2-4, Division 2, pursuant to s 116 and s 134 2 Respondent’s Outline Of Submissions On Matters Of Law paragraph 6 -- 7 of 138 -- 8 The nature of the application [6] Principal objects of POCA are “to deprive persons of … benefits derived from offences against the laws of the Commonwealth …”3 and “to punish and deter persons from breaching laws of the Commonwealth”4 As a means to those ends, POCA provides for the making of a PPO by a court with proceeds jurisdiction5 on the application of the CDPP if the court is satisfied, inter alia, that the person against whom the PPO is sought has been convicted of an indictable offence and has derived benefits from the commission of the offence 6 or that the person against whom the PPO is sought has committed a serious offence as defined by POCA within certain time limits.7 [7] The CDPP may make application for a PPO8 in relation to one or more offences.9 [8] POCA s 116 provides, so far as is relevant: “116 Making pecuniary penalty orders (1) A court with proceeds jurisdiction must make an order requiring a person to pay an amount to the Commonwealth if: (a) the DPP applies for the order; and (b) the court is satisfied of either or both of the following: (i) the person has been convicted of an indictable offence, and has derived benefits from the commission of the offence; (ii) subject to subsection (2), the person has committed a serious offence. (2) Subparagraph (1)(b)(ii) does not apply in relation to a serious offence that is not a terrorism offence unless the court is satisfied that the offence was committed: (a) within the 6 years preceding the application (or, if some or all of the person’s property is already covered by a restraining order, preceding the application for the restraining order); or (b) since the application was made. The period of 6 years may be a period that began before the commencement of this Act. (3) In determining whether a person has derived a benefit, the court may treat as property of the person any property that, in the court’s opinion, is subject to the person’s effective control. 3 POCA s 5(a) 4 POCA s 5(c) 5 POCA s 116 and see s 335 6 POCA s 116(1)(b)(i) 7 POCA s 116(2)(a) 8 POCA s 134(1) 9 POCA s 134(4). -- 8 of 138 -- 9 (4) The court’s power to make a pecuniary penalty order in relation to an offence is not affected by the existence of another confiscation order in relation to that offence.” [9] POCA s 116, imposes an obligation on the court to make a PPO where the CDPP applies for an order and the court is satisfied of either or both of the following: Mr Hart has been convicted of an indictable offence and has derived benefits from the offence; Mr Hart has committed a serious offence within a specified time period. [10] On 26 May 2005, Mr Hart was convicted of nine indictable offences of defrauding the Commonwealth contrary to section 29D of the Crimes Act 1914 (Cth). There is no contest that Mr Hart derived benefits from the commission of those offences.10 It follows that this court is obliged to make a PPO in respect of those nine indictable offences for which Mr Hart was convicted, at least in respect of benefits found to be derived from commission of those nine offences. Mr Hart’s legal representation and submissions [11] Mr Hart’s points of defence were settled by senior counsel. Mr Hart appeared during trial without legal representation until the third day of addresses. On the third of five days of oral addresses, senior counsel appeared briefly for Mr Hart to present a written submission entitled “Respondent’s Outline of Submissions on Matters of Law” and made some oral submissions to explain it and also made oral submissions in reply to a written submission of counsel for the CDPP in reply to “Respondent’s Outline of Submissions on Matters of Law”. Senior counsel for Mr Hart, by his written submission confirmed that it did “deal with matters of law” and that it responded to the CDPP’s written outline and matters of law in the written opening of the CDPP. The written submission advised that a second written submission was prepared by Mr Hart which presented Mr Hart’s case concerning the factual disputes. Mr Hart provided that second written submission. After oral addresses Mr Hart added a further written “Submission that the Applicant be Limited to its Original Pleadings”, the CDPP subsequently provided a further written submission entitled “Dishonest Means” and Mr Hart supplied a written “Respondent’s Reply Submission to the Applicant’s Dishonest Means Submission”. Proceeds jurisdiction of this court in this proceeding [12] It became necessary to consider whether this court has “proceeds jurisdiction” within the meaning of those words in POCA s 116(1). It was not raised in the points of defence as the subject of contest nor was it the subject of submission by Mr Hart. On the third day of addresses, senior counsel for Mr Hart advised in response to a question from the bench about jurisdiction that he did not have instructions to concede in submissions that this court has jurisdiction to make the orders sought.11 Accordingly, I will consider whether this court has proceeds jurisdiction to make the orders sought in this proceeding. [13] Mr Hart was convicted in the District Court at Brisbane on 26 May 2005 upon indictment containing nine counts of defrauding the Commonwealth between the first 10 Statement of agreed facts paragraph 12 11 T14 -2 L45 -- 9 of 138 -- 10 day of June 1990 and the 30th day of June 1991 at Brisbane in the State of Queensland. The PPO sought relates in part to the conduct constituting those nine offences. [14] POCA relevantly provides: “314 State and Territory courts to have jurisdiction (1) Jurisdiction is vested in the several courts of the States … with respect to matters arising under this Act. (2) … the jurisdiction vested in a court by virtue of subsection (1) is not limited by any limits to which any other jurisdiction of the court may be subject… 335 Proceeds jurisdiction (1) Whether a court has proceeds jurisdiction for an order depends on the circumstances of the offence or offences to which the order would relate. General rules (2) If all or part of the conduct constituting an offence to which the order would relate: (a) occurred in a particular State …; (b) is reasonably suspected of having occurred in that State…; the courts that have proceeds jurisdiction for the order are those with jurisdiction to deal with criminal matters on indictment in that State... (3) If all of the conduct constituting an offence to which the order would relate: (a) occurred outside Australia; or (b) is reasonably suspected of having occurred outside Australia; the courts that have proceeds jurisdiction for the order are those of any State … with jurisdiction to deal with criminal matters on indictment.” [15] There were no submissions addressed to the issue of this court’s jurisdiction to deal with an order for a PPO for a sum which exceeds the monetary limit referred to in the District Court of Queensland Act 1967, s 68. The jurisdiction of the District Court of Queensland in civil matters is conferred in all “personal actions” where the amount sought to be recovered does not exceed a monetary limit.12 The CDPP seeks to recover amounts exceeding that monetary limit. Proceedings for a PPO are proceedings for a “confiscation order” within the meaning of those words in POCA 13 and are not criminal proceedings.14 It is arguable that this proceeding falls within the description of a “personal action” in the District Court of Queensland Act, s 68 especially having regard to sub-section (1)(a)(iv) of s 68. The intent of POCA s 314 is that if this court is given jurisdiction with respect to matters under POCA that jurisdiction is not limited by any limits to which any other jurisdiction of this court is limited. There has been no argument as to whether the two laws are inconsistent or, alternatively, separate and consistent sources of jurisdiction with the District Court of Queensland Act creating jurisdiction to a certain monetary limit and POCA creating a further jurisdiction unaffected by a monetary limit. The District Court of Queensland, unlike the Supreme Court, has no inherent jurisdiction. Its jurisdiction derives from statute. If this proceeding is a “personal action” within the meaning of the District Court of 12 District Court of Queensland Act 1967, s 68. 13 s 338 POCA 14 s 315(1) POCA -- 10 of 138 -- 11 Queensland Act, s68 it seems to me that s 68 does not operate to restrict the District Court of Queensland from hearing and determining a personal action where the amount sought to be recovered exceeds the monetary limit imposed by that Act. It operates as a source of jurisdiction to the monetary limit. It does not purport to be the exclusive source or to restrict the court from receiving jurisdiction from another statutory source or to restrict the Commonwealth parliament from conferring jurisdiction beyond the monetary limit. I do not regard District Court of Queensland Act, s68 as inconsistent with POCA s 314. The fact that District Court of Queensland Act, s 68 created a jurisdiction to a monetary limit is not inconsistent with POCA creating jurisdiction where the amount in dispute exceeds that monetary limit. [16] If I am wrong about the absence of an inconsistency, any inconsistency between the laws is to be resolved in favour of the Commonwealth law.15 It becomes unnecessary for me to determine whether the two laws are inconsistent. If this court is given proceeds jurisdiction by POCA, that proceeds jurisdiction is not limited by a monetary limit on the jurisdiction conferred by the District Court of Queensland Act. [17] This court has proceeds jurisdiction for making the PPO sought in respect of the offences for which there were nine convictions: firstly, all or part of the conduct constituting those offences occurred “at Brisbane in the State of Queensland” as the indictments alleged; secondly, this court has jurisdiction to deal with criminal matters on indictment in Queensland. That leaves the issue of the court’s jurisdiction to make a PPO in respect of other alleged offences by Mr Hart which are not the subject of his nine convictions. [18] The CDPP submitted that as the offences for which there were nine convictions all occurred in Queensland this court has been vested with jurisdiction to deal with this matter.16 This implies that, if the court has proceeds jurisdiction to make a PPO relating to those nine offences for which Mr Hart was convicted it has jurisdiction to make a PPO relating to other conduct for which Mr Hart has not been convicted but which is found to be unlawful. That seems to ignore POCA s335 and the geographical conditions for jurisdiction which that section creates. [19] For the court to have proceeds jurisdiction in respect of any one of the other alleged offences, according to POCA s335 it must be established that all or part of the conduct constituting the offence to which the order would relate either occurred in Queensland, or is reasonably suspected of having occurred in Queensland, or all of the conduct constituting an offence to which the order would relate occurred outside Australia or is reasonably suspected of having occurred outside Australia. [20] If other alleged conduct by Mr Hart constituted an offence to which the PPO would relate it is plausible, if not probable that a part of the conduct alleged to constitute an offence occurred in or would reasonably be suspected of having occurred in Queensland. That may explain why there was no issue raised by Mr Hart in the pleadings or in argument about this geographical condition for jurisdiction for the conduct which was not the subject of nine convictions. [21] If Mr Hart had sought to challenge the jurisdiction of this court in respect of this proceeding he was required to file a conditional notice of intention to defend.17 Mr Hart 15 Commonwealth of Australia Constitution Act, s 109 16 Applicant’s Submissions on Jurisdiction 17/9/09 17 Uniform Civil Procedure Rules 1999 r 144 (1) -- 11 of 138 -- 12 filed an unconditional notice to defend and is taken to have submitted to the jurisdiction of this court and waived any irregularity in the proceeding. The parties raised no contest about the geographical requirements for jurisdiction in their pleadings, in the evidence, in the questions to witnesses or in addresses. It makes it unnecessary for me to determine whether there was a geographical requirement for this court to exercise jurisdiction in respect of the further offences. I proceed on the basis that this court has proceeds jurisdiction for the orders sought in this proceeding. Onus and standard of proof [22] The onus is on the CDPP, as applicant, to prove the matters necessary to establish the grounds for making the PPO. 18 Any question of fact is to be decided on the balance of probabilities. 19 [23] The degree of proof required to establish unlawful activity on the balance of probabilities was authoritatively set out in Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336 “The truth is that, when the law requires proof of any fact, the tribunal must feel an actual persuasion of its occurrence or existence before it can be found. It cannot be found as a result of a mere mechanical comparison of probabilities independently of any belief in its reality. No doubt an opinion that a state of facts exists may be held according to indefinite gradations of certainty; and this has led to attempts to define exactly the certainty required by the law for various purposes. Fortunately, however, at common law no third standard of persuasion was definitely developed. Except upon criminal issues to be proved by the prosecution, it is enough that the affirmative of an allegation is made out to the reasonable satisfaction of the tribunal. But reasonable satisfaction is not a state of mind that is attained or established independently of the nature and consequence of the fact or facts to be proved. The seriousness of an allegation made, the inherent unlikelihood of an occurrence of a given description, or the gravity of the consequences flowing from a particular finding are considerations which must affect the answer to the question whether the issue has been proved to the reasonable satisfaction of the tribunal. In such matter ‘reasonable satisfaction’ should not be produced by inexact proofs, indefinite testimony or indirect references. Everyone must feel that, when, for instance, the issue is on which of the two dates an admitted occurrence took place, a satisfactory conclusion may be reached on materials of a kind that would not satisfy any sound and proven judgement if the question was whether some act had been done involving grave moral delinquency.” [24] The High Court in Rejfek v McElroy [1965] HCA 46; (1965) 112 CLR 517 at 521 explained the application of the Briginshaw principle to fraud cases: 18 POCA s 317(1). 19 POCA s 317(2) -- 12 of 138 -- 13 “The "clarity" of the proof required, where so serious a matter as fraud is to be found, is an acknowledgment that the degree of satisfaction for which the civil standard of proof calls may vary according to the gravity of the fact to be proved: see Briginshaw v. Briginshaw per Dixon J.; Helton v Allen per Starke J.; Smith Bros. v. Madden, per Dixon J. 11. But the standard of proof to be applied in a case and the relationship between the degree of persuasion of the mind according to the balance of probabilities and the gravity or otherwise of the fact of whose existence the mind is to be persuaded are not to be confused. The difference between the criminal standard of proof and the civil standard of proof is no mere matter of words: it is a matter of critical substance. No matter how grave the fact which is to be found in a civil case, the mind has only to be reasonably satisfied and has not with respect to any matter in issue in such a proceeding to attain that degree of certainty which is indispensable to the support of a conviction upon a criminal charge: see Helton v. Allen per Dixon, Evatt and McTiernan JJ.”(Footnotes removed) [25] In the present case, there is a Statement of Agreed Facts (“SAF”, or “SOAF”).20 There are however, a number of important facts which have not been agreed. These include the facts that are central to establishing that Mr Hart’s conduct in respect of which Mr Hart has not been convicted constituted defrauding the Commonwealth. The CDPP seeks to establish that Mr Hart engaged in that alleged unlawful activity as a matter of inference drawn from various facts, matters and circumstances. Much of the factual dispute goes to the extent of Mr Hart’s influence or control over a number of overseas entities which were involved in the various arrangements. Another factual dispute is in relation to the capacity of a financier, United Overseas Credit Limited (“UOCL”), to make loans to the participants in the arrangements, and whether any such loans were in fact made by UOCL to any participants. [26] The CDPP accepts that it bears the onus of establishing these disputed factual matters on the balance of probabilities as that concept is understood and applied in the way explained by the High Court in Briginshaw. Inferences from prior convictions [27] Mr Hart was convicted of nine offences which involved the element of dishonesty by him. The fact of those convictions is necessarily before me to justify the application for PPOs. The dishonest conduct involved in the nine offences was conduct of a kind which occurred at the expense of the Federal Commissioner of Taxation. Convictions for nine such offences are thus evidence of a disposition to engage in conduct which is dishonestly detrimental to the interests of the Federal Commissioner of Taxation. That evidence, if it is relied upon when considering other alleged conduct by Mr Hart, could be prejudicial to him. Mr Hart’s disposition in the commission of those nine offences would arguably have probative value supporting a finding that he had a similar disposition while engaged in the other conduct. The CDPP submitted that the court is bound to ignore those implied findings of dishonesty involved in the conviction of the nine offences when considering what inferences to draw in respect of other conduct 20 Exhibit 1. -- 13 of 138 -- 14 alleged to involve Mr Hart.21 I propose to act as the CDPP submitted when considering Mr Hart’s state of mind in respect of other conduct allegedly involving him. I ignore the inferences of dishonesty available from Mr Hart’s convictions when considering other conduct alleged against Mr Hart. [28] The evidence in chief of witnesses called by the CDPP was often in affidavit form. The CDPP, with Mr Hart’s consent, sought to strike from some affidavits portions of typed evidence conceded to be inadmissible. This was sometimes done on the affidavits on the court file and sometimes, at the request of Mr Hart, on only the electronic copies. The paper record may contain evidence ruled inadmissible. I have ignored the parts which have been struck out or conceded to be inadmissible. Mr Hart’s failure to give evidence and the rule in Jones v Dunkel [29] An issue arose whether any inferences should be drawn from the election by Mr Hart to neither give or to call evidence. At directions hearings before trial, and during the presentation of the CDPP’s case, including during the examination, cross-examination and re-examination of witnesses, Mr Hart represented himself. Only during a part of the addresses on the third day of addresses was he represented by senior counsel. The CDPP was directed to adduce its evidence in chief by affidavits to be served in advance on Mr Hart. The CDPP complied.22 Mr Hart had sufficient time to become familiar with the evidence to be presented against him before witnesses were called. Mr Hart appeared to be familiar with the evidence against him when the CDPP closed its case. [30] The CDPP offered an undertaking to Mr Hart when he was considering his election about giving evidence. It was as follows: "In respect of District Court proceedings BD 1414 of 2003 the Director of Public Prosecutions Commonwealth undertakes: 1. Not to make any direct or indirect use of any evidence given or document produced by Steven Irvine Hart; and 2. Not to disclose directly, or indirectly, any evidence given or document produced in those proceedings to any; except in the following circumstances: (a) in criminal proceedings for giving false or misleading evidence or documents; (b) where a Court rules or orders that the CDPP is required to use or disclose the said evidence or documents; and/or (c) in or for the purposes of District Court proceedings BD 1416/2003 and/or District Court proceedings BD 3048/2006; (d) in or for the purpose of proceedings ancillary to and/or for the enforcement of an order made in District Court proceedings BD 1416/2003 and/or District Court proceedings BD 3068/2006; And in any case where the CDDP proposes to disclose the said evidence or documents to an officer of an external agency, the CDPP will not do so without first obtaining an undertaking in 21 T6-71 22 With insignificant exceptions, by leave. -- 14 of 138 -- 15 writing from the external agency to the effect that the agency will not make any direct or indirect use of the relevant evidence of documents other than in accordance with the paragraphs (a) to (d) above." [31] Mr Hart’s election to give no evidence is notable. Mr Hart gave an explanation from the bar table. The relevant parts of the explanation can be summarised as being Mr Hart’s forensic judgment based on his assessment of the evidence coupled with his fear that his evidence might be used against him in future criminal proceedings. As to that fear Mr Hart added: “On the 27th of August 2004 there was a letter of comfort given to Mr Geoff Todd to give evidence to these proceedings which said, "The Australian Federal Police do not propose to charge, nor does this office" - and it came from the DPP - "propose to prosecute you in relation to your involvement with this particular investigation." However, in a letter that was used to obtain the search warrant in Mauritius sent by the Attorney-General's department in 2006, on the 23rd of May 2006, it states: "There are a number of other people involved in the promotion of the tax fraud schemes in Australia. These people include Steven Cox and Geoffrey Todd. Australian authorities may also wish to use the material obtained in answer to this request for assistance for the purpose of the investigation and possible prosecution of these people." Now … based on the contradiction of a 2004 letter of comfort to Mr Todd and a 2006 letter to the Mauritian authority to obtain a search warrant, I can't and don't wish to take the risk that the Director at some future time might change his mind.” [32] An unexplained failure by a party to give evidence or to call witnesses may lead to a court’s drawing an inference that the uncalled evidence would not have assisted that party’s case. Where a court draws that inference it is entitled to take that into account in deciding whether to accept other evidence which relates to a matter on which the absent witness could have spoken and allows the court more readily to draw any inference fairly to be drawn from the other evidence. These are aspects of the rule in Jones v Dunkel [1959] HCA 8; (1959) 101 CLR 298. If applied, the rule23 is not used to fill gaps in the evidence nor permit an adverse inference that the evidence of uncalled witnesses would have been damaging to the party not calling them. [33] The CDPP drew attention to uncertainty as to the application of the rule in Jones v Dunkel where a PPO is sought. The CDPP submitted that I should not draw any “adverse” inference from the fact that Mr Hart did not give evidence despite the undertaking provided by the CDPP and that the CDPP has discharged its onus and that the evidence is of such strength the CDPP will succeed without the need for the court to draw an inference. It may be inaccurate to describe all Jones v Dunkel inferences as “adverse” and so I note that the CDPP also submitted that no Jones v Dunkel inference is sought. 23 For a summary of the rule see Heydon J, Cross on Evidence Australian ed [1215]. -- 15 of 138 -- 16 [34] From the election by Mr Hart to give no evidence I draw no inference that his evidence would not have assisted his case and draw no inference from his failure to give evidence that I should more readily accept evidence which relates to a matter on which Mr Hart could have given evidence. I was not asked to find that there are other witnesses whom Mr Hart might have called to give relevant evidence. From Mr Hart’s election to call no witnesses to give evidence on his behalf I draw no inference. Based upon the CDPP’s submissions it is unnecessary to make a finding about the truth of the unsworn explanation given by Mr Hart for his election not to give evidence. Matter admissible pursuant to POCA s 138 [35] POCA s138 concerns evidence on an application for a PPO in relation to convictions for indictable offences. Section 138(2) provides: "If the application relates to a person's conviction of an indictable offence, the court may, in determining the application, have regard to: (a) the transcript of any proceeding against the person for: (i) that offence; or (ii) ...; and (b) the evidence given in any such proceeding. " [36] The CDPP sought to place reliance upon parts of the transcript of the five week trial which resulted in Mr Hart’s convictions for the nine offences. No submission was made by or for Mr Hart that this was improper. The CDPP referred in submissions to the transcript of oral testimony and of the prosecutor’s opening to the jury in that trial. It seems unlikely that a court’s liberty to have regard to an opening in the trial transcript was intended to mean that the court was at liberty to regard it as admissible for more than proof of what prosecuting counsel expected to be the prosecution evidence. I am not prepared to have regard to the extracts of the opening as a source of evidence upon which to make findings against Mr Hart’s interests in this proceeding. I am at liberty to have regard to the evidence given in the criminal trial. [37] Application 1 (a) for benefits derived from offences the subject of nine convictions [38] The first component of the order sought by the CDPP by its application is: “Pursuant to section 116 and 134 of the Proceeds of Crime Act 2002("the Act") for a pecuniary penalty order that Steven Irvine Hart pay to the Commonwealth an amount of money the court determines under Chapter 2, Part 2-4, Division 2 of the Act in respect to: (a) the benefits derived by Steven Irvine Hart from nine offences of defrauding the Commonwealth contrary to section 29D of the Crimes Act 1914 (Cth) between 1 June 1990 and 30 June 1991 of which the said Steven Irvine Hart was convicted on 25 May 2005” [39] Mr Hart stood trial in 2005 for the following nine relevant offences. Those nine counts each alleged that between 1 June 1990 and 30 June 1991 at Brisbane, Mr Hart defrauded the Commonwealth by causing an income tax return to be lodged for the financial year ending 30 June 1990, which contained a false claim for a deduction. The particulars provided for each count read: ''Particulars (a) the income tax return for the following entity claimed the -- 16 of 138 -- 17 following amount as expenditure in relation to the purchase of an insurance bond: (i) (in each count there appeared the name of a [different] small proprietary company and a dollar amount ranging from $80,000 to $500,000): (b) no such expenditure had been incurred in that financial year." [40] The particulars in the indictment were not an accurate statement of the gravamen of the allegations against Mr Hart in that trial. The relevant point for the prosecution at trial was that the deduction claimed, however it was described, was for an expenditure which had not in fact been incurred in that financial year, and to which the taxpayer had not been definitively committed in that financial year, even if the payment was not made in that year.24 [41] Mr Hart was found guilty by jury in the District Court at Brisbane on 25 May 2005 of those nine counts of defrauding the Commonwealth between the first day of June 1990 and the 30th day of June 1991 at Brisbane in the State of Queensland. Those counts are the nine offences to which I have referred. [42] The “facts and circumstances forming the basis of Mr Hart’s conviction” are agreed in SAF at paragraph 4. [43] Mr Hart was a director and secretary of Harts Fidelity Ltd, formerly known as Hartcorp Fidelity Ltd (“HFL”). Mr Hart was also a director of Harts Pty Ltd, formerly known as Steve Hart & Associates Pty Ltd (“Hart’s accounting practice”). Mevton Pty Ltd (“Mevton”) was a company associated with Mr Hart. At the relevant time, Mr Hart was a registered tax agent. Mr Hart ran an accounting practice and provided accounting services to, inter alia, the nine client employers named in the indictment (“the nine clients”). [44] Mr Hart appealed against his convictions for the nine offences in R v Hart; ex parte Cth DPP [2006] QCA 39. The general facts of the scheme were agreed on appeal and are set out in reasons for judgment on by Jerrard JA and. There was no submission as to whether this court could rely on the facts set out in the judgment as res judicata or otherwise binding the parties to this proceeding, for example by reference to POCA s 138(2). Accordingly, I do not. I refer to the judgment for his Honour’s nice recital of those facts which are consistent with the facts agreed in the SAF. That part of the judgment follows: “[10] … in 1989 Mr Hart adapted an investment opportunity then being marketed by the AMP, known as Employee Retention Plans (“ERPs”), and offered those to some of the clients of the accounting practice in the period leading up to 30 June 1990. The nine counts of defrauding the Commonwealth were based on events involving nine clients who agreed to enter into the arrangements known as ERPs. A significant feature of an ERP (as described originally to the clients) was that it could provide a tax deduction to a client employer making a contribution to a staff benefit trust fund for the purchase of a 10 24 R v Hart; ex parte Cth DPP[2006] QCA 39 at [45] -- 17 of 138 -- 18 year lump sum single premium insurance bond from the AMP, in favour of a key employee of the client. If the employee remained employed by the client for a period of 10 years, the employee would receive the proceeds of the insurance bond; the contribution to the staff benefit trust for the purchase of the bond was tax deductible because the client was providing an incentive to retain key employees by way of the gift to the trust. The appellant’s written outline contended that the deductions were valid provided the ERP was a commercially viable and realistic arrangement. The scheme was marketed on the basis that participating clients would contribute 12.7 per cent by way of deposit and borrow the remaining 87.3 per cent of the face value of the bond from Chase AMP; the 12.7 per cent contributed by the client and the 87.3 per cent borrowed would be used by the trustee of the staff benefit trust fund to buy the lump sum bond. [11] The necessary arrangements and structuring of ERPs properly entered into, as originally proposed, were as follows: • A trust would be set up for the benefit of the employee of a corporate taxpayer, and in the case of each employer there was a separate ERP trust fund. • HFL was the trustee of each trust fund. • The amounts to be contributed to those trust funds differed from client taxpayer to taxpayer. • Each client taxpayer would provide 12.7 per cent of the total contribution of cash needed to buy the lump single premium insurance bond. • The balance of the contribution would come from a loan by the Chase AMP Bank. • The client corporate taxpayer (the employer) and the employee – usually the active director, or a significant director or employee of the taxpayer – would enter into agreements, the essence of which was a provision that the employer would enter into ERP arrangements for the benefit of the employee, and the employee would be loyal to the employer. • The money deposited to the trust funds would be used to purchase the lump sum bonds in the name of the trustee, which would hold those bonds under the respective trusts for the benefit of the respective employees for a period of 10 years. • Promoters of the ERP scheme asserted that the capitalised income earned by each bond would not be taxable in the hands of the trustee, and that the only tax attaching to the payment by the trustee of the matured bond to the employee would be fringe benefits tax, payable either on the original lump sum (the view of the promoters) or, perhaps, on the full amount of the matured bond (the opinion of one of the tax investigators involved in the matter). Nothing turns on those two differing opinions. Advantages described by Mr Hart in his evidence included that the 87.3 per cent borrowed was an interest only loan, with the interest payments tax deductible, as well as the 100 per cent deductibility of the bond amount. [12] A number of Mr Hart’s clients entered into ERPs, and approvals for loans to those client taxpayers by the Chase AMP Bank had been -- 18 of 138 -- 19 made by 30 June 1990. For those clients there were what the prosecution conceded to be genuine arrangements in place, permitting the client company to claim a tax deduction in that financial year, pursuant to s 51 of the Income Tax Assessment Act 1936 (Cth). Shortly before 30 June 1990 it became apparent to Mr Hart that some client taxpayers who had agreed to enter into ERP arrangements would not have loans to them approved by the Chase AMP Bank prior to 30 June 1990. The Chase AMP Bank, which had as its sole security for its loan a charge over the AMP bond to be purchased, had required in the first week in June 1990 that the loan from it be to the trustee (HFL) and not to the client taxpayer. That in turn required the preparation of further documents, including an indemnity from the employer (the client taxpayer) indemnifying the staff benefit trust fund with respect to the loan. That requirement by the Chase AMP Bank delayed loan approvals by it. [13] To deal with the problems caused by those delays, documents were prepared recording the introduction of a company Mevton Pty Ltd (“Mevton”) into the proposed arrangements, as a lender in place of the Chase AMP Bank prior to 30 June1990. Those documents approved loans by Mevton to the taxpayer clients. Mr Hart intended that when the Chase AMP Bank approved loans to those clients (necessarily after 30 June 1990), Mevton would be treated as an intermediary or what he called a “securitiser”, and would drop out…” [45] The documents referred to as recording the introduction of Mevton Pty Ltd into the proposed arrangements, as a lender in place of the Chase AMP Bank prior to 30 June 1990 were created before 30 June 1990. [46] The ERP scheme was promoted to the nine clients by Mr Hart on the bases that if the client’s application for finance was approved by 30 June 1990, the relevant client would receive a tax deduction in its return for the financial year ending 30 June (“FYE”) 1990 for amounts expended in purchasing the insurance bonds, including cash funds contributed by the client to HFL as trustee, the amount of the loan funds and any loan application fees and the relevant client would also receive a tax deduction for interest the client paid on the loan in future financial years. The particulars of the ERP explained to the nine clients included that the client made a cash payment or initial contribution of 12.7% to HFL as trustee in respect of the nominated employee member; the client made application to Chase AMP Bank for finance for the purpose of borrowing monies to fund a further contribution to HFL as trustee; HFL made application to AMP to purchase a single premium insurance bond in respect of the life of the member of the employee’s benefit trust. [47] Loans for the purchase of insurance bonds for the nine clients were not made by 30 June 1990 and for the nine clients the ERP scheme was not in place by 30 June 1990. [48] During FYE 1990, the payments made by the nine clients in relation to the purchase of the insurance bonds totalled $196,192.00. An amount of $110,574.27 was returned to four of the nine clients in respect of their contributions to the ERP. CDPP and Mr Hart treat the amount returned as reducing the $196,192.00 to $85,617.73 and accept that lesser amount to be a benefit derived by Mr Hart relating to payments made by the nine clients in FYE 1990. -- 19 of 138 -- 20 [49] The nine clients were subsequently advised that the loans had been provided by Mevton, not Chase AMP and that payments in relation to the purchase of the insurance bonds should be made to Mevton. The nine clients commenced paying Mevton by about November 1990. The advice that the nine clients pay Mevton must have been given in about October 1990. [50] The CDPP submitted that Mr Hart instructed participants to pay Mevton and relied upon extracts of evidence from Mr Hart’s criminal trial.25 No submission to the contrary was made by or for Mr Hart. Mr Hart’s amended points of defence denied that he caused the nine clients to make the payments to Mevton in FYE 1991 – 1994 on the basis that the payments were made by each client in discharge of the client's contractual obligations to Mevton as a consequence of the operation of the ERP. Mr Hart did not raise as a basis for his denial that he did not cause the clients to enter into contractual obligations to Mevton as a consequence of the operation of the ERP. On these bases I accept that payments made by the nine clients to Mevton in FYE 1991 – 1994 were made at Mr Hart’s direction. Mevton received a monthly payment from a client which it then transferred it to HFL which in turn paid it to AMP.26 [51] One consequence of directing clients to pay Mevton from about November 1990 was to support the appearance of a loan having been made by Mevton in June 1990. Unless there was a loan made by Mevton by 30 June 1990 to fund 87.3% of the purchase price of an AMP insurance bond the ERP scheme promoted would not have been effected and the opportunity would be lost to include in the income tax return for FYE 1990 a claim for the full price of an AMP insurance bond as a deductible expense. The directions in about November 1990 to the nine clients to pay Mevton were necessary for maintaining the claims for a deduction in the income tax returns for FYE 1990. Unless Mevton was paid in FYE 1991 on account of interest it would not have been possible to maintain an argument that the clients had by 30 June 1990 either borrowed or been definitively committed to borrow 87.3% of the face value of an AMP insurance bond. [52] Income tax returns for FYE 1990 were prepared by Hart’s accounting practice for the nine clients in each case claiming a tax deduction in the amount of the cash funds contributed by the client to HFL and the amount of loan funds purportedly borrowed in June 1990 from Mevton. The timing is easier to understand by way of example. One of the nine clients, Gamcove Pty Ltd, made a payment to HFL by 30 June 1990 anticipating that it was participating in an ERP as promoted by Mr Hart. Gamcove ought to have expected to be billed from July 1990 to make payments to its financier which it would have then have expected to be Chase AMP. Gamcove was advised after June 1990 that the loan had been provided by Mevton instead of Chase AMP. Gamcove was directed by Mr Hart by about November 1990 to make payments pursuant to the ERP to Mevton instead of Chase AMP and would have commenced to do so in about November 1990. Gamcove’s income tax return for FYE 1990 was processed by the Australian Tax Office on or from 18 April 1991. It would have been lodged on or before that date. Gamcove’s payments to Mevton from about November 1990 would not have been included as deductions in the income tax return for FYE 1990 lodged in about April 1991. If payments to Mevton were claimed as deductions 25 Affidavit of Simon Matthew Allen SA-01, page 1043, lines 40 to 60; see also page 1063, lines 25 to 32; page 635, lines 38 to 52; page 636, lines 25 – 50. 26 Affidavit of Simon Matthew Allen, Exhibit SA-01, page 123, lines 25 to 55 -- 20 of 138 -- 21 the claims would have been made in the return for the financial year in which the payment was made to Mevton. [53] During FYE 1991 to 1994, payments made by the nine clients to Mevton in respect of application fees, interest charged and repayments of principal totalled $620,785.20.27 The payments were made to continue participation in the ERP scheme. [54] The nine clients who participated in the ERP scheme were not entitled to claim amounts expended in purchasing insurance bonds and paying application fees and interest charged as a tax deduction in the FYE 1990. [55] Mr Hart knew that any such claim for a tax deduction by the nine clients for FYE 1990 and any subsequent years was, or was likely to be, false.28 Benefits “derived” from commission of the nine offences [56] There is a dispute as to what benefits Mr Hart “derived” from commission of the nine offences. To understand it requires an understanding of s 121(3) in Division 2 of POCA. S 121 provides: “121 Determining penalty amounts (1) The amount that a person is ordered to pay to the Commonwealth under a pecuniary penalty order (the penalty amount) is the amount the court determines under this Division. (2) If the offence to which the order relates is not a serious offence, the penalty amount is determined by: (a) assessing under Subdivision B the value of the benefits the person derived from the commission of the offence; and (b) subtracting from that value the sum of all the reductions (if any) in the penalty amount under Subdivision C. (3) If the offence to which the order relates is a serious offence, the penalty amount is determined by: (a) assessing under Subdivision B the value of the benefits the person derived from: (i) the commission of that offence; and (ii) subject to subsection (4), the commission of any other offence that constitutes *unlawful activity; and (b) subtracting from that value the sum of all the reductions (if any) in the penalty amount under Subdivision C. (4) Subparagraph (3)(a)(ii) does not apply in relation to an offence that is not a terrorism offence unless the offence was committed: (a) within: 27 SAF 6 28 SAF 10 -- 21 of 138 -- 22 (i) if some or all of the person’s property is covered by a restraining order—the period of 6 years preceding the application for the restraining order; or (ii) otherwise—the period of 6 years preceding the application for the pecuniary penalty order; or (b) during the period since that application for the restraining order or the pecuniary penalty order was made [57] Mr Hart’s pleading alleged that the payments to Mevton by the nine clients “are not a benefit of any alleged serious offence committed by him within six years preceding the application or any restraining order” and that the payments cannot be taken into account in determining the penalty amount by reason of sections 121(3) and 121(4). Thus the pleading appeared to raise as issues whether the nine offences were “serious offences” and whether they were committed “within six years preceding the application or any restraining order”. [58] In POCA s338 it is provided, so far as is relevant, that unless the contrary intention appears: “serious offence means: (a) an indictable offence punishable by imprisonment for 3 or more years, involving: (iii) unlawful conduct by a person that causes, or is intended to cause, a benefit to the value of at least $10,000 for that person or another person; or (iv) unlawful conduct by a person that causes, or is intended to cause, a loss to the Commonwealth or another person of at least $10,000;” [59] Each of the nine offences was an indictable offence punishable by imprisonment for 3 or more years. Clauses (a)(iii) and (a)(iv) of the definition of “serious offence” raise factual matters which are to be satisfied as a precondition for an offence being a “serious offence”. Despite pleading that each of the nine offences was not a “serious offence” within the meaning of s 121(3), there was no argument made by or for Mr Hart that each of the nine offences was not a “serious offence” within the meaning of s 121(3). There were no written submissions by either party on this issue. In relation to the issue of whether the nine offences were “serious”, in reply to a question from the bench, senior counsel for the CDPP in oral submissions explained that for the payments to Mevton it relied upon clause (iii) and principally upon clause (iv) of the definition of “serious offence” at POCA s338 and that there is no dispute that the nine offences are serious offences.29 If there is no dispute I need not examine the facts further on this issue. Mr Hart provided a written opening30 before the CDPP led oral evidence. It explained that the only dispute on application 1(a) was on a matter of law. As it happened, the dispute raised in addresses was on a question of mixed fact and law, namely whether payments made by the nine clients to Mevton were benefits derived by Mr Hart. On these bases I proceed on the basis that there is no dispute that each of the nine offences was a “serious offence” within the meaning of POCA s 121(3). 29 CDPP’s opening par 20; T 12-7 L17-23 30 On 3 August 2009 -- 22 of 138 -- 23 [60] Despite pleading an issue as to whether the nine offences were committed as specified by POCA s 121(4) “within six years preceding the application or any restraining order” there was no submission made by or for Mr Hart or the CDPP about this issue. The nine offences were committed more than six years preceding the application or any restraining order. However the requirement that an offence which is not a terrorism offence be committed “within six years preceding the application or any restraining order” does not apply to the nine offences as each is a “serious offence” and referred to in POCA s 121(3)(a)(i). The temporal condition is imposed only where the offences in question are those referred to in POCA s 121(3)(a)(ii) by the words “any other offence that constitutes unlawful activity”. [61] The contest about benefits received from commission of the nine offences relates to those payments in FYE 1991 to FYE 1994 inclusive, which totalled $620,785.20. [62] It was agreed between Mr Hart and the CDPP that in the event that the court is satisfied that subsequent payments made by the nine clients to Mevton for FYE 1991 to 1994 are directly or indirectly derived from the nine offences the amount of benefits derived by Mr Hart from the commission of the nine offences is $706,402.93. 31 It was agreed that in the event that the court is not satisfied that subsequent payments made by the nine clients to Mevton are directly or indirectly derived from the nine offences, the amount of benefits derived by Mr Hart from the commission of the nine offences is $85,617.73. 32 The issue is so narrowed because of the words of s116 which are, so far as is relevant to this issue: “116 Making pecuniary penalty orders (1) A court with proceeds jurisdiction must make an order requiring a person to pay an amount to the Commonwealth if: (a) the DPP applies for the order; and (b) the court is satisfied of either or both of the following: (i) the person has been convicted of an indictable offence, and has derived benefits from the commission of the offence;” [63] In POCA the meaning of “derived” appears in s 336 which provides, so far as is relevant: “336 Meaning of derived A reference to a person having derived proceeds, a benefit or literary proceeds includes a reference to: (a) the person; or (b) another person at the request or direction of the first person; having derived the proceeds, benefit or literary proceeds directly or indirectly.” 31 $85,617.73 from FYE 1990 and $620,785.20 from FYE 1991-1994 32 SAF 12 -- 23 of 138 -- 24 [64] The definition at s 336(b) includes a meaning for “derived” which is different from common parlance and which is relevant in this proceeding. Mr Hart may have “derived” a benefit where, at the request or direction of Mr Hart, for example to his nine clients, Mevton has derived proceeds or a benefit, directly or indirectly. Thus Mr Hart may have “derived” a benefit though no money or benefit is provided to him. If Mevton derived a benefit at the request or direction of Mr Hart from Mr Hart’s commission of the nine offences that is a benefit “derived” by Mr Hart within the meaning of POCA s 336. [65] The court is required by POCA s 116(1) to make an order requiring a person (Mr Hart) to pay the further $620,785.20 to the Commonwealth if the CDPP applies for the order (it has) and the court is satisfied the person (Mr Hart) has been convicted of an indictable offence (he has been convicted of the nine indictable offences), and has derived (directly or indirectly) benefits from the commission of the offence. The issue is whether the $620,785.20 paid to Mevton was “derived” by Mr Hart directly or indirectly from the commission of the nine offences. [66] The issue does not concern whether it was paid to Mr Hart or whether he benefited from payments made to Mevton. Mr Hart accepted his liability for the $85,617.73 paid by clients to HFL in FYE 1990. A premise for that liability is that Mr Hart “derived” that sum as proceeds or a benefit. That premise did not require proof that Mr Hart personally received or profited from any of it. [67] The issue the CDPP pleaded33 which relates to the $620,785.20 was essentially confined to paragraphs 4 and 7 which read: “4. Hart caused subsequent payments to be made by the nine clients to Mevton in the amounts shown in respect of application fees, interest charged and repayments of principal during the years ending 30 June 1991 to 30 June 1994. Particulars of How Hart Caused these Subsequent Payments (a) The payments were made to Mevton by the nine clients as a consequence of the operation of the ERP as promoted by Hart. 7. The amount of $706,402.9334 constitutes the benefit derived by Hart from the commission of the nine indictable offences because: (a) the payments by the nine clients to Hartcorp Fidelity and to Mevton were paid at the request or direction of Hart. Particulars (i) The Applicant repeats and relies on the particulars of how Hart caused the payments and subsequent payments to be paid in paragraphs 3 and 4 above; (b) the offences were committed as a consequence of the nine clients participation in the ERP promoted by Hart. (c) Hartcorp Fidelity and Mevton were companies associated with Hart. 33 Amended points of claim paragraphs 4 and 7 34 Now limited to $620,785.20 -- 24 of 138 -- 25 (d) The payments came under the control of Hart.” [68] The CDPP appeared by paragraph 7 (d) to raise as an issue as to whether the payments came under the control of Mr Hart. The nice question of whether Mr Hart “derived” the further $620,785.20 is not dependent on finding that the payments came under the control of Mr Hart. [69] Consistently with the reference at paragraph 7(d) of the pleading to payments coming under the control of Mr Hart, senior counsel for the CDPP, in oral submissions, submitted that Mevton was a company under Mr Hart’s control.35 There was no submission as to what evidence was relied upon for the submission or what significance should follow from a finding that Mr Hart controlled Mevton. I note that the CDPP did not plead or submit that the money paid to Mevton came under Mr Hart’s “effective control” within the meaning of those words in POCA s116(3).36 In POCA, “effective control” has a meaning affected by POCA s 337.37 POCA s 337 sets out a number of meanings of “effective control” which are not exhaustive. The words “effective control” have special significance because of their appearance in POCA s 116(3). Those words can be distinguished from the word “control”. A finding that property came under the mere “control” of a person is relevant to the assessment of the value of benefits that a person has derived. 38 A person’s mere “control” of property does not appear in POCA to be relevant to whether a person has derived a benefit unless it is relevant because proof of control is relevant to proof of “effective control”. In R v Hart; ex parte Cth DPP [2006] QCA 39 Jerrard JA at [13], when setting out general facts agreed on appeal, wrote that “Mevton was effectively controlled by Mr Hart and the indemnified Crown witness Ian Stevens”. That fact does not appear in SAF and is not a conclusion which can be made from the facts in SAF or from the affidavit evidence of Ian Stevens. It may be a proper inference from the transcript of evidence of the criminal trial39 however I have not undertaken the task of determining whether it is an inference to be drawn. I proceed on the basis that the CDPP has not raised as an issue that money paid to Mevton by the nine clients was under Mr Hart’s effective control. I make no finding as to whether payments received by Mevton in FYE 1991 to 1994 were under Mr Hart’s control while in Mevton’s control. The failure to make that finding does not determine the issue of whether Mr Hart derived a benefit as Mr Hart may derive a benefit from directing a payment to Mevton, without proof that Mr Hart controlled the money or Mevton. [70] Mr Hart’s argument was made by Davis SC.40 It is useful to remember that each of the nine offences and the Crown case in each case was that between 1 June 1990 and 30 June 1991 Mr Hart defrauded the Commonwealth by causing an income tax return to be lodged which contained a claim for a deduction which was false because it was for an expenditure which had not been incurred in FYE 1990 and to which the client had not definitively committed in 1990. The payments of $620,785.20 were not referred to as deductions in the nine income tax returns lodged for FYE 1990. Those payments were made over the four financial years following FYE 1990. It was submitted that it cannot be that the nine clients’ payments to Mevton in subsequent financial 35 T14 -27. 36 Set out at [7] herein. 37 POCA s 338. 38 POCA s 122(1)(a). 39 Affidavit of Simon Matthew Allen, Exhibit SA-01 40 In respondent’s outline of written submissions on matters of law and at T 14-24 to 14-25 -- 25 of 138 -- 26 years41 were derived directly or indirectly from Mr Hart’s act42 of causing nine false returns for FYE 1990 to be lodged. It was explained by Davis SC: “…the real point is they're not derived from the act or omission of which he was convicted, which was lodging the tax returns in 199043 … They're derived from the ongoing scheme, … what's actually happened is tax returns are lodged in 1991, '92, '93, '94, claiming, as I understand it, the ongoing deductions under the Mevton scheme. But he wasn't charged with those. He wasn't charged with an offence of defrauding the Commonwealth in relation to each of those alleged offences. And the Commonwealth are now out of time to allege those as unlawful conduct under section 116 and 121 of the Act. So they have to allege that those later payments were derived from the offence for which he's been convicted.” 44 [71] The argument was put concisely and differently in his pleading where Mr Hart denied that he caused the payments to be made on the basis that the payments were made by each client in discharge of the client's contractual obligations to Mevton as a consequence of the operation of the ERP. [72] Senior counsel for the CDPP orally submitted: “By committing the offence he has caused clients to enter into loan arrangements with Mevton and make those claims for the amount of the loan in their relevant tax return for the 30th of June 1990, but we say it's at least an indirect benefit to him that as a result of that illegal conduct, or that convicted conduct, they have to pay interest on the loan … to Mevton, which is a company under his control, … at his direction. So we would say it's an indirect benefit to him from the commission of that offence.”45 [73] The CDPP submitted in writing that the conduct for which Mr Hart was convicted included promoting a scheme where participants were advised that they had borrowed monies from Mevton for the purpose of obtaining a tax deduction for the purchase of an insurance bond in their tax return for the year ending 30 June 1990 in circumstances where the respondent knew that claims for tax deductions in respect to interest payable on those loans to Mevton by participants in that and subsequent years were or were likely to be false. It is in those circumstances that the CDPP submitted that the subsequent payments of interest, application fees and principal by participants to Mevton constituted either a direct or indirect benefit to the respondent from the commission of the nine offences. [74] It oversimplifies matters to submit that commission of the offence caused the clients to enter into a loan from Mevton. Firstly, each offence was not complete until the return was lodged and that lodgement occurred by 30 June 1991. In the case of Gamcove it occurred by 18 April 1991. It is possible with respect to each of the nine clients that lodgement of the return occurred months after the clients entered into arrangements with Mevton. Secondly, it may be that there was an agreement between Mevton and each of the nine clients, at least to be inferred from the clients’ conduct in making 41 Which implies the 4 financial years in which $620,785.20 was paid to Mevton 42 Occurring between the first day of June 1990 and the thirtieth day of June1991 43 I infer Davis SC meant to say “which was causing the lodging of the tax returns for FYE 1990 in the 13 month period between the first day of June 1990 and the thirtieth day of June1991” 44 T 14-24 to 14-25 per Davis SC 45 T 14-27 per Flanagan SC -- 26 of 138 -- 27 payments to Mevton from November 1990 and it may be that the agreement can be properly characterised as a loan. It oversimplifies matters to submit that the conduct for which Mr Hart was convicted included promoting a scheme when the conduct for which he was convicted was misrepresenting an aspect of the scheme in nine returns. [75] The act of directing clients to make payments to Mevton was not of itself an offence or charged as an offence. No legal obligation to make payments to Mevton arose from Mr Hart’s subsequently causing lodgement of 1990 FYE income tax returns. The CDPP submission is that payments to Mevton were a benefit derived at least indirectly from the commission of the offence. [76] The CDPP supported its submission that the payments to Mevton were indirect benefits by reference to Director of Public Prosecutions (Cth) v Saffron.46 I derive no assistance as to the meaning of an indirect benefit from that case. It concerns a prior statute but its benefit is lost because the reasons in the passage extracted from her Honour’s judgment at [158] and relied upon by the CDPP were based upon the combined effect of sections 4(3) and 27(4) of that statute. The reasons were more an application of section 27(4) than a finding as to the meaning of a benefit indirectly derived. [77] The parties have agreed that “facts and circumstances forming the basis of Mr Hart’s conviction” include that the nine clients were advised that the loans had been provided by Mevton, not Chase AMP and that interest and loan repayments should be made to Mevton. It does not matter whether the nine clients’ returns were lodged before or after the nine clients entered into arrangements with Mevton which led to the payments to Mevton. [78] Whether the arrangement is properly called a loan or not, the arrangements between the nine clients and Mevton which resulted in the clients paying Mevton were necessary to facilitate the commission of the offences for which Mr Hart was convicted. Payments to Mevton facilitated the commission of an offence by maintaining appearances of either a loan made by Mevton in June 1990 or of the client’s definitive commitment in June 1990 to accept a loan from Mevton. That appearance was created to support the claim for a deduction against income for FYE 1990 for the amount Mevton supposedly lent. [79] The clients’ arrangements with Mevton and their payments pursuant to the arrangements were lawful activities. That lawfulness does not prevent the payments from falling within the category of benefits indirectly derived from the commission of offences. I am assisted by the CDPP’s reference to a statement by Keane JA as his Honour then was in State of Queensland v Brooks47 . Though his Honour was considering the Criminal Proceeds Confiscation Act 2002 (Qld) the observations apply with equal force to the Commonwealth Act, as the definition of “derived” in both statutes includes benefits directly or indirectly derived. His Honour wrote that: “The expansion of the definition of the expression ‘derived’ to include ‘indirectly derived’ is quite inconsistent with such a narrow focus. It is sufficiently broad to encompass a combination of legal and illegal activity as the cause of a benefit within the meaning of s 18 of the Act. A thief who deposits stolen money with a bank could not be heard to say that the interest on the deposit is not the proceeds of his theft merely because it was 46 (1989) 85 ALR 153 47 [2008] Qd R 484 at [58] -- 27 of 138 -- 28 also, and more directly, derived from a lawful deposit. So Mr Brooks cannot claim that the profit he intended to make was not the proceeds of his fraud merely because part of his scheme involved the lawful purchase and sale of the apartment.” [80] I am satisfied that payments made by the nine clients to Mevton for FYE 1991 to 1994 are indirectly derived from the nine offences. The amount of benefits derived by Mr Hart from the commission of the nine offences is $706,402.93. Alleged Offences by Mr Hart against s29D of the Crimes Act 1914 (Cth) and s 135.1(5) of the Criminal Code (Cth) [81] The CDPP also seeks to prove that Mr Hart committed further offences for which he has not been charged. The CDPP’s application describes the alleged further offences as unlawful activity and separates the unlawful activity into five episodes which are particularised in the application at paragraph 1 clauses (b)(i) to (b)(v). If the further offences are proved the CDPP seeks also to deprive Mr Hart of benefits derived by him from his commission of the further offences. The CDPP alleges that he derived a further $14,070,937.87 from his commission of the further offences. The further offences are denied by Mr Hart. The quantum of benefits derived from the further offences is disputed. [82] The first four in time of the five episodes of unlawful activity are particularised in the application at paragraph 1 clauses (b)(i) to (b)(iv) and are alleged to have occurred at dates when section 29D of the Crimes Act 1914 (Cth) (“Crimes Act”) was in force. Section 135.1(5) of the Criminal Code (Cth) replaced s 29D of the Crimes Act 1914 by the enactment of the Criminal Code (Cth) in 1995. Section 135.1(5) commenced on 24 May 2001 48 . The fifth episode of unlawful activity particularised in the application at paragraph 1(b)(v) is alleged to have occurred between 24 May 2001 and 30 June 2003 being a period when Section 135.1(5) of the Criminal Code (Cth) was in force. No limitation period defence [83] No defence based upon a limitation period is raised with respect to any episode of the alleged unlawful activity. The date of the offending alleged is relevant for the purposes of a six year limitation period in POCA s 121(4)(a).49 Mr Hart admits that on 8 May 2003 an application for a restraining order was made and the order was granted and some of Mr Hart’s property is covered by the restraining order. S 121(4) was considered in CDPP v Hart & Ors [2007] QCA 184. Mr Hart previously applied to strike out that part of this application which seeks benefits alleged to have been derived by Mr Hart more than six years before 17 July 2006. This date was the date of the filing of this application for the PPO. The Court of Appeal determined that some or all of Mr Hart’s property was “covered by” the restraining order of 8 May 2003 within the meaning of POCA s 121(4)(a)(i) so as to permit the CDPP to quantify the pecuniary penalty order which was sought by reference to benefits derived by Mr Hart during the six years prior to 8 May 2003. The unlawful activity alleged in the application at paragraph 1 clauses (b) (i) to (v) is alleged to have occurred within the period of six years preceding the application for the restraining order made on 8 May 2003. Mr Hart 48 Subsection 135.1 was inserted into the Criminal Code Act 1995 by the Criminal Code Amendment (Theft, Fraud, Bribery and Related Offences) Act 2000 (No. 137) 49 See [57] herein -- 28 of 138 -- 29 does not by his amended points of defence or by submissions raise this limitation point in defence of the claims relating to the further offences. First issue of law relating to Crimes Act s 29D [84] Two issues of law arose relating to specifically s 29D of the Crimes Act. [85] Firstly, is it a necessary element of an offence against s 29D that Mr Hart knew that his conduct was dishonest according to the standards of ordinary honest people? This issue was not raised between the parties. I raise it from caution because in Queensland, a jury considering an offence against s 29D is commonly instructed that it is necessary that the prosecution prove it. Despite that convention, the CDPP submission did not include it as an element of an offence against s 29D and senior counsel for Mr Hart raised no issue about it. [86] Section 29D of the Crimes Act 1914 provided at material times: “A person who defrauds the Commonwealth or a public authority under the Commonwealth is guilty of an indictable offence.” [87] The successor to s 29D, s 135.1(5) of the Criminal Code (Cth) provided at the material time: “A person is guilty of an offence if: (a) the person dishonestly causes a loss, or dishonestly causes a risk of loss to another person; and (b) the first mentioned person knows or believes that the loss will occur or that there is a substantial risk of the loss occurring; and (c) the other person is a Commonwealth entity.” [88] The meaning of dishonesty in relation to s 135.1(5) is that stated in s 130.3 of the Criminal Code (Cth) as: (a) dishonest according to the standards of ordinary people; and (b) known by the defendant to be dishonest according to the standards of ordinary people. To establish an offence against s 135.1(5) the CDPP must establish that Mr Hart knew that his conduct was dishonest according to the standards of ordinary people. Is something similar required for s 29D of the Crimes Act? [89] The standard direction to a jury in Queensland considering a charge of an offence against s 29D is that the prosecution must prove an appropriate variant of three matters, namely: (1) that the defendant dishonestly deprived the Commonwealth of money which was the Commonwealth’s or to which the Commonwealth would or might be entitled but for the dishonesty of the defendant; (2) what the defendant did was dishonest according to the standards of ordinary honest people; and (3) that the defendant knew that what he did was dishonest by those standards.50 It can be seen that 50 The form of direction is in the Queensland Supreme and District Courts Benchbook at 104.1 where the footnote observes the direction “is based on the judgment of the House of Lords in Scott v Metropolitan Police Commissioner [1975] AC 819, 838 per Viscount Dilhorne as to ‘defrauding’, and the judgment of the Court of Criminal Appeal in Queensland in Maher [1987] 1 Qd R 171 approving the directions of the trial Judge based on Ghosh [1982] QB 1053. Maher was a case involving conspiracy to defraud, and the Court’s judgment must now be seen in the light of the -- 29 of 138 -- 30 third element of the standard direction is subjective and is like the element in the definition of dishonesty at s 130.3 (b) of the Criminal Code (Cth) as it refers to a defendant’s understanding that conduct is dishonest according to the standards of ordinary people. [90] The CDPP submitted with respect to the first four episodes of conduct allegedly in breach of s 29D of the Crimes Act that it need show that: (1)Mr Hart intended to prejudice the economic interests of the Commonwealth and (2) his means were dishonest by the standards of ordinary decent people. The CDPP submitted that it is only with respect to the fifth episode occurring after s 135.1(5) of the Criminal Code (Cth) came into force that the CDPP must also prove that Mr Hart’s conduct was known by him to be dishonest according to the standards of ordinary people.51 The written submission of the CDPP 52 was that in the present case the application of either test does not make any difference to the result. [91] Senior counsel for Mr Hart did not dispute the submission that in the present case the application of either test does not make any difference to the result. Senior counsel for Mr Hart submitted that for the CDPP to prove an offence, “in practical terms means that there was (to the respondent’s knowledge) no allowable deduction”. Reference to the pleadings shows that for the first four episodes of alleged offending against s 29D of the Crimes Act the material facts pleaded were sufficient even if the CDPP had been obliged to prove that Mr Hart knew that what he did was dishonest by the standards of ordinary honest people. [92] The CDPP’s points of claim with respect to the four episodes of conduct alleged to be in breach of s 29D of the Crimes Act does not contain an express allegation that Mr Hart knew that what he did was dishonest according to the standards of ordinary honest people. It does contain for each episode an allegation that Mr Hart knew that there was no allowable deduction and gives particulars of factual matters supporting that inference. With respect to each episode, the points of claim allege that Mr Hart defrauded the Commonwealth in that he prejudiced its right to tax payable by diverse persons and alleges that the offence arises from facts including that in relation to income tax returns Mr Hart caused the true nature of things to be misrepresented and High Court’s judgment in Peters (1998) 151 ALR 517, 96 A Crim R 250. The Court split 3/2 about the appropriate directions a trial judge should be given in the relation to any offence in which the jury have to decide if a particular act was dishonest. Toohey and Gaudron JJ (with whom Kirby J agreed but not on the basis of their reasoning but for the purpose of providing “clear instruction to those who have the responsibility of conducting criminal trials”), 255 of 96 A Crim R 250: “In a case in which it is necessary for a jury to decide whether an act is dishonest, the proper course is for the trial judge to identify the knowledge, belief or intent which is said to render that act dishonest and to instruct the jury to decide whether the accused had that knowledge, belief or intent, and, if so, to determine whether, on that account, the act was dishonest ….. If the question is whether the act was dishonest according to ordinary notions, it is sufficient that the jury is instructed that that is to be decided by the standards of ordinary, decent people”. Although centred on the notion of dishonesty as an element of the offence of conspiracy to defraud (which they decided it was not) McHugh J (and Gummow J who agreed with McHugh J) delivered a persuasive minority judgment which might suggest that the subjective element of the concept of dishonesty may be removed in the future by the High Court.” 51 CDPP’s outline of submissions [49] to [52] and T14-33 referring to R v Ianelli [2003] 56 NSWLR 247 at headnote (4) 52 At CDPP’s outline of submissions [57] -- 30 of 138 -- 31 knew53 that the taxpayers were not entitled to claim the deduction arising from the scheme. Mr Hart pleads denials to those allegations in respect of each episode and generally the bases of the denials are that the returns did not misrepresent the true nature of things, that the taxpayers were entitled to deductions claimed, but if they were not entitled, Mr Hart believed the deductions were lawfully made and Mr Hart caused the returns to be prepared as they were in reliance upon legal and other advice. [93] If it were necessary to establish an offence against s 29D that the CDPP prove that Mr Hart knew that his conduct was dishonest according to the standards of ordinary honest people it has, by pleading that Mr Hart caused the true nature of things to be misrepresented and that Mr Hart knew the taxpayers were not entitled to claim the deduction arising from the scheme, sufficiently put Mr Hart on notice of the material facts relevant to this issue. If the CDPP establishes that Mr Hart caused the true nature of things to be misrepresented in particular income tax returns and knew those taxpayers were not entitled to claim the deduction arising from the scheme, from those findings I would be able to determine whether Mr Hart’s conduct was dishonest according to the standards of ordinary honest people and if it is necessary am also able to determine whether Mr Hart knew that it was dishonest according to those standards. As I have noted, neither party submitted that it was necessary for me to consider the matter of subjective knowledge in respect of the first four episodes but caution causes me to consider whether to make such finding. Accordingly if I find that Mr Hart’s conduct was dishonest according to the standards of ordinary honest people I will consider whether Mr Hart knew that it was dishonest according to the standards of ordinary honest people. Second issue of law relating to the Crimes Act, s 29D [94] The second issue is whether an offence by Mr Hart against s 29D would be incomplete and at best an attempt to defraud until the Australian Taxation Office (“ATO”) issues an assessment based upon the correctness of the misleading claim for a deduction? That issue arises because the CDPP did not plead or prove that the ATO issued income tax assessments based upon the correctness of the claims for a deduction in income tax returns or that the Commonwealth sustained loss and did not plead that the offence was an attempt to defraud the Commonwealth. There is no case which directly considers when an offence against s 29D occurs in similar circumstances. [95] This was one of the few issues upon which Mr Hart’s submission was made by senior counsel. It was submitted in written submissions by senior counsel for Mr Hart: “…It doesn’t seem to be accepted by the applicant that at least for the section 29D offences the Commonwealth must have to have been “defrauded” of “something”… The respondent submits that proof of the fact of a claim for a deduction is necessary to prove the entitlement to the pecuniary penalty namely the commission of a “serious offence”, or at least those serious offences against s.29D of the Crimes Act 1914 as alleged in paragraphs 1(b) (i), (ii), (iii) and (iv) of the application. What is also relevant is whether an assessment in reliance upon the returns was issued. The issue which makes these matters relevant is whether the Commonwealth was “defrauded”… The question…then is whether the respondent is guilty of defrauding the Commonwealth if all he does is (at its 53 Paragraphs 9(n) p15, 11(jj) p28, 12(i) p31 and 13(q) p33 and 15(f) p35. -- 31 of 138 -- 32 highest for the applicant) cause the returns to be lodged…It is submitted that in order for there to be a defrauding there must be some detriment suffered by the Commonwealth. The applicant submits that the offence under s.29D of the Crimes Act is committed once the respondent causes a “risk” to the revenue which, it seems, is submitted to be complete once the respondent does things to enable the taxpayers to lodge a claim for a deduction. The respondent submits that the applicant’s contention is wrong and that no offence under s.29D is complete at least until the Commonwealth allows a deduction. If it doesn’t, then the Commonwealth was not “defrauded” of anything.” [96] If that submission for Mr Hart is correct, an accountant may dishonestly promote to a taxpayer a scheme to minimise tax, the taxpayer may enter into the scheme to minimise tax by signing relevant pieces of a paper trail of documents which create a false impression that a deductible expense has occurred, the accountant’s part in the offence may be complete before the return is prepared or lodged with the ATO, the taxpayer may honestly prepare a return with a false claim for a deduction and lodge it with the ATO and the accountant has not yet committed an offence against s 29D. The return may lie in the ATO’s office awaiting scrutiny by an employee and upon scrutiny there may be an assessment issued. If the assessor rejects the false claim before issuing an assessment it was submitted that in respect of that return the Commonwealth is not defrauded pursuant to s 29D and the Commonwealth’s right to revenue has not been imperilled or put at risk but rather there has been an attempt to prejudice the Commonwealth’s right to pursue revenue.54 [97] It is not correct that the Commonwealth allows a deduction after considering the veracity of documents lodged with a return. The process was explained by counsel for the CDPP. A person or entity is required to lodge a return in a form which sets out the taxpayer’s income and expenditure. Taxpayers must retain records in case they are subsequently audited but the records to explain or verify these deductions are not submitted with the return. The Commissioner ascertains the amount of taxable income and the tax payable on that taxable income from the information set out in the return and any other information in the Commissioner’s possession55 . [98] Income tax returns contain only summary information and many expenses that normally would appear in a profit and loss statement are aggregated and appear in a tax return under the label “all other expenses”.56 It was only where a participant was audited or subsequently voluntarily disclosed participation to the Commissioner that the Commissioner became aware that expenses related to various schemes promoted by Mr Hart had been included in the deductible expenses claimed by a taxpayer in a return. [99] Counsel for the CDPP submitted that it is not necessary to prove that tax returns were lodged by participants claiming unjustifiable deductions. They submitted the offence occurs when Mr Hart promoted the scheme to participants and provided them or caused to be provided to them documents to provide to the Commissioner. It was submitted that the documents made it appear as though the participants were entitled to a deduction when Mr Hart knew that the documents did not represent the true position and knew that the participants were not entitled to the deductions and knew that some 54 T14-7, T14-8 55 S166 Income Tax Assessment Act 1936 56 Affidavit Singh para 22 -- 32 of 138 -- 33 or most participants would claim a deduction. It was submitted that Mr Hart had at this time put at risk the economic interests of the Commonwealth to secure the correct amount of tax and he had done this by dishonest means. There is evidence that 256 participants did claim the expenses as deductions57 . The CDPP’s submission was not that the offence occurred when the claim was made. [100] Counsel for the CDPP submitted that by reference to the judgment of Bell J in R v Iannelli58 that s 29D created the substantive offence of defrauding the Commonwealth, that the Crimes Act does not define “defraud”, that the principles of the common law with respect to criminal liability apply in the interpretation of the Crimes Act by virtue of Crimes Act s 4. I accept the submission. Accordingly reference to the common law is appropriate. [101] Counsel for the CDPP submitted that Archbold59 outlines the elements of a charge of defrauding as follows: “(a) ‘to defraud’ or to act ‘fraudulently’ is dishonestly to prejudice or take the risk of prejudicing another’s right, knowing that you have no right to do so; (b) it is not confined to a risk of possible injury resulting in economic loss, though most cases do involve this; (c) dishonestly to induce a person performing a public duty to act in a way which would be contrary to his duty if he had known the true position is to risk injury to the right of the State, or the public authority as the case may be, to have that duty properly performed and amounts to intent to defraud.” [102] Senior counsel for Mr Hart sought to distinguish those observations. He submitted that: “For instance, the applicant quotes Archbold60 ‘as [outlining] the elements of the charge of defrauding…’ In fact, that passage of Archbold is contained in the Part dealing with ‘mens rea’. The passage relates not to the elements of fraud but to the elements of the ‘intention to defraud’. On the respondent’s submissions, even if the applicant proved an ‘intention to defraud’ it cannot prove a ‘defrauding’ unless the Commonwealth allowed the deductions”. [103] Counsel for the CDPP referred to Welham v Director of Public Prosecutions61 and a passage from Lord Radcliffe.62 I highlight parts which appear particularly relevant in this and some subsequent authorities. His lordship wrote: “Now, I think that there are one or two things that can be said with confidence about the meaning of this word ‘defraud’. It requires a person as its object: that is, defrauding involves doing something to someone. Although in the nature of things it is almost invariably associated with the 57 Affidavit of Singh, Exh PS 3 & PS6 58 (2003) 56 NSWLR 247 at [108]; [2003] NSWCA 1 59 Criminal Pleadings, Evidence and Practice 42nd edition 60 Criminal Pleadings, Evidence and Practice 42nd edition 61 [1961] AC 103 62 At p.123 -- 33 of 138 -- 34 obtaining of an advantage for the person who commits the fraud, it is the effect upon the person who is the object of the fraud that ultimately determines its meaning. This is none the less true because since the middle of the last century the law has not required an indictment to specify the person intended to be defrauded or to prove intent to defraud a particular person. Secondly, popular speech does not give, and I do not think ever has given, any sure guide as to the limits of what is meant by ‘to defraud’. It may mean to cheat someone. It may mean to practise a fraud upon someone. It may mean to deprive someone by deceit of something which is regarded as belonging to him or, though not belonging to him, as due to him or his right. It passes easily into metaphor, as does so much of the English natural speech. Murray’s New English Dictionary instances such usages as defrauding a man of his due praise or his hopes. Rudyard Kipling in the First World War wrote of our ‘angry and defrauded young’. There is nothing in any of this that suggests that to defraud is in ordinary speech confined to the idea of depriving a man by deceit of some economic advantage or inflicting upon him some economic loss. Has the law ever so confined it? In my opinion there is no warrant for saying that it has. What it has looked for in considering the effect of cheating upon another person and so in defining the criminal intent is the prejudice of that person: what Blackstone (Commentaries, 18th ed, vol 4, at p247) called ‘to the prejudice of another man’s right’. East, Pleas of the Crown (1803), vol 2 at pp 852, 854, makes the same point in the chapter on Forgery: ‘in all cases of forgery, properly so called, it is immaterial whether any person be actually injured or not, provided any may be prejudiced by it.’ Of course, as I have said, in ninety-nine cases out of a hundred the intent to deceive one person to his prejudice merely connotes the deceiver’s intention of obtaining an advantage for himself by inflicting a corresponding loss upon the person deceived. In all such cases the economic explanation is sufficient. But in that special line of cases where the person deceived is a public authority or a person holding a public office, deceit may secure an advantage for the deceiver without causing anything that can fairly be called either a pecuniary or an economic injury to the person deceived. If there could be no intent to defraud in the eyes of the law without an intent to inflict a pecuniary or economic injury, such cases as these could not have been punished as forgeries at common law, in which an intent to defraud is an essential element of the offence, yet I am satisfied that they were regularly so treated.” [104] Senior counsel for Mr Hart submitted that passage in Welham was written against the backdrop of a charge of “uttering forged documents with intent to defraud” and the House of Lords was not considering any element of an actual defrauding. I accept that submission but it does not deprive the passage of all benefit for the problem at hand. The dictum was referred to with approval in Scott v Metropolitan Police Commissioner63. 63 [1975] AC 818 -- 34 of 138 -- 35 [105] Counsel for the CDPP referred to Scott. In Scott Viscount Dilhorne, with whom the other members of the House of Lords agreed, wrote64 in the context of a case relating to conspiracy to defraud that “to defraud” ordinarily means: “to deprive a person dishonestly of something which is his or something to which he is or would be or might but for the perpetration of the fraud be entitled.” His Lordship referred to the dictum in Scott and wrote that it was not necessary to decide that a conspiracy to defraud may exist though its object was not to inflict an economic loss on the person at whom the conspiracy was directed but that there was no reason why the dictum in relation to forgery should not apply to conspiracy to defraud.65 [106] Senior counsel for Mr Hart submitted that for there to be a conspiracy to defraud there need not be a defrauding. I accept that. That only slightly depreciates the value of the dictum in Scott. The opinion expressed was about the meaning of “to defraud” in cases of conspiracy to defraud but the opinion was not expressed in a way that suggested it could not apply equally to the meaning of “to defraud” generally. [107] Counsel for the CDPP referred to a decision of the Full Bench of the Federal Court in R v Barker. 66 That case involved an appeal from convictions for defrauding the Commonwealth under s29D of the Crimes Act by two defendants, Mr Campbell, a solicitor, and Mrs Campbell, his wife, for concealing from the ATO the true price payable by a company owned by the Campbells for stock with the intention of deceiving the ATO to believe the assets of two taxpayers to satisfy impending tax liabilities were of much less value than they were in fact. The ATO issued amended assessments to two taxpayers in June 1989 which brought into existence debts due by them to the Commonwealth of about $3.8M. The ATO and the two taxpayers were negotiating about the amount they could afford to pay and the timing of it. At a meeting on 4 September 1989 between the taxpayers and the ATO representations were made as to the taxpayers’ assets and what they could afford to pay. The taxpayers advised that they were in negotiation for the sale of their jewellery business. The ATO agreed to accept $2M. The defendants were convicted on a charge that together with the taxpayers between 1 July 1989 and 18 February 1991they defrauded the Commonwealth by concealing the true total price payable for the purchase of the stock of the business as at 1 July 1989 pursuant to agreement with the intention of deceiving the ATO. The defendants’ fraud helped create an impression that the taxpayers had $800,000 less due to them for stock of their jewellery business than was the case. Jenkinson and O’Loughlin JJ wrote67 in a joint judgment with which Miles J agreed, so far as is relevant: “In Wai Yu-tsan v R [1992] 1 AC 269 it was held sufficient to constitute a defrauding that a deceit, and the same may be said of concealment, has caused the imperilment of the economic interest of the person deceived or, in the case of bodies corporate and polities, the economic interest of the body on behalf of which that person is acting. The Judicial Committee approved reasoning of the English Court of Appeal in R v Allsop (1976) 64 Cr App R 29 which included the following observations (at 31, 32): 64 At 839 C 65 At 839 D-E 66 (1994) 127 ALR 280 (1994) 54 FCR 451 67 (1994) 127 ALR 280 at 307 (1994) 54 FCR 451 at 483 B-G -- 35 of 138 -- 36 Generally the primary objective of fraudsmen is to advantage themselves. The detriment that results to their victims is secondary to that purpose and incidental. It is ‘intended’ only in the sense that it is a contemplated outcome of the fraud that is perpetrated. If the deceit which is employed imperils the economic interest of the person deceived, this is sufficient to constitute fraud even though in the event no actual loss is suffered and notwithstanding that the deceiver did not desire to bring about an actual loss. We see nothing in Lord Diplock's speech to suggest a different view. ‘Economic loss’ may be ephemeral and not lasting, or potential and not actual; but even a threat of financial prejudice while it exists it [sic] may be measured in terms of money. … Interests which are imperilled are less valuable in terms of money than those same interests when they are secure and protected. Where a person intends by deceit to induce a course of conduct in another which puts that other's economic interests in jeopardy he is guilty of fraud even though he does not intend or desire that actual loss should ultimately be suffered by that other in this context. The Supreme Court of Canada has also approved that reasoning: R v Olan (1978) 41 CCC (2d) 145 at 150; Vézina v R (1986) 25 DLR (4th) 82 at 96. Nor is it in our opinion inconsistent with any authority binding on this court. In our opinion the learned trial judge's directions in relation to the required detriment were both legally correct and apt in reference to the circumstances which the evidence disclosed. At the time of the trial it was not possible to say with certainty that the Commonwealth would suffer economic loss in consequence of the concealment alleged in that count. It was possible that thereafter the Chaplins would be compelled to pay the whole of the aggregate debt of $3,800,000 together with interest thereon. But there could be no room for doubt that the concealment — if it had occurred as the Crown contended — had imperilled the economic interest of the Commonwealth.” [108] Senior counsel for Mr Hart sought to distinguish R v Barker by noting that the ATO’s assessment had issued in that case, and arguing that it was easier there to say that the ATO’s right to revenue was imperilled because of that assessment. There was no analysis to explain the basis of the distinction or why R v Barker does not impeach the general submission until the ATO allows a deduction the Commonwealth has not been defrauded of anything68 and the deduction might be disallowed. Barker is not easily distinguished. In R v Barker the fraud did not deceive the ATO into issuing an assessment based upon a false claim for a deduction. The fraud was for the purpose of deceiving the ATO as to the worth of the taxpayers. It did not appear from the facts whether the ATO was deceived by the dishonest concealment when making an agreement to accept $2M. It is plausible that the ATO was not deceived when the compromise was agreed because the facts suggest that the compromise was made at about the time of the meeting with the ATO and representatives for the taxpayers. At that meeting the ATO was told that the sale of the business was being negotiated. It 68 Respondent’s outline of submissions on matters of law [18] -- 36 of 138 -- 37 seems improbable that the ATO were told at that meeting that the stock was sold and for about $800,000 less than its real sale price. 69 It is obvious that the ATO eventually discovered the fraud. Its discovery meant that it could terminate the compromise and seek to recover $3.8M. It was possible that the Commonwealth would suffer no loss. [109] I speculate as to two possible bases for distinguishing R v Barker because the assessment issued in that case. I will mention them though they were not raised for Mr Hart and were not the subject of argument. [110] Senior counsel for Mr Hart submitted that the imperillment would not occur if the taxpayer merely prepared the return misrepresenting a claim for a deduction but did not lodge it. He submitted that imperillment does not occur upon lodgment but only upon the assessment. Two bases for these submissions may be that the offence requires the Commonwealth to be deceived or that the offence requires the Commonwealth to suffer actual loss. A problem with the submission arises if deception of the Commonwealth is not a necessary element of the offence. If deception of the Commonwealth is not an element of the offence, there is less reason to distinguish between lodgment of the return and issue of an assessment. [111] Counsel for the CDPP submitted: “It is clear that ‘deceit’ is not an essential element of defraud. The elements of the offence of defrauding the Commonwealth contrary to s29D may be stated as follows; (a) a person does an act; (b) which injures or puts at risk some proprietary right or economic interest of the Commonwealth; (c) dishonestly.” [112] I accept that submission.70 It was not disputed by senior counsel for Mr Hart. However it may not entirely dispose of the argument for Mr Hart that imperillment does not occur upon lodgment but does occur by the time of the issue of an assessment. While deceit of the Commonwealth is not an element of the offence, it is arguable that imperillment is only contingent until deceit. Thus, deceit is arguably a fact which must be proved in a case where economic imperillment does not occur until the Commonwealth does an act in reliance on the deception and the Commonwealth’s act causes it economic loss. That analysis was not submitted. It would appear to be inconsistent with R v Barker because economic loss remained contingent at the time of the appeal and yet there was imperillment. [113] A second basis for submitting that R v Barker may be that legal consequences result upon assessment. There was no submission for Mr Hart that the right to tax does not become a debt due to the Commonwealth until an assessment issues and for that reason 69 However, in Campbell v R [1996] FCA 809 it appears in the discussion of count three that one of the two defendants convicted in Barker, Mr Campbell, was subsequently convicted on retrial of another offence of defrauding the Commonwealth. The particulars were that on or about 4 September 1989 he deceived the ATO as to the financial circumstances of the taxpayers and the ability of each of them to pay the required taxation and penalties. The court observed that the Crown case relating to count three was that at the business had been sold and the ATO were misled at the 4 September meeting as the ATO did not know at the time that the sale was a sham. 70 Cf Spies v The Queen (2000) 201 CLR 603 at [78] -- 37 of 138 -- 38 does not become an economic interest capable of imperillment until an assessment issues. A similar argument was raised, though not considered, in R v Barker71 . It appears to be inconsistent with the outcome in Barker. It would be inappropriate for me to further explore this basis for distinguishing Barker as it was not raised or argued. [114] R v Barker is significant because it remains as authority that an offence of defrauding the Commonwealth in breach of s 29D of the Crimes Act can occur though the ATO discovers the fraud and though the Commonwealth may suffer no economic loss. [115] Counsel for Mr Hart and for the CDPP relied upon Peters v The Queen72 . While noting that it concerned only conspiracy to defraud, it was submitted that in Peters: “the High Court approved The Queen v Kastratovic73 . There, King C.J. said: “The essential notion of defrauding is dishonestly depriving some person of money or property, or depriving him of, or prejudicially affecting him in relation to, some lawful right, interest, opportunity or advantage which he possesses.” As Lord Radcliffe pointed out in Welham v Director of Public Prosecutions [1961] AC 103 at P123 ‘although in the nature of things it is almost invariably associated with the obtaining of an advantage for the person who commits the fraud, it is the effect upon the person who is the object of the fraud that ultimately determines its meaning’. The detriment suffered by a person defrauded is usually economic but is not necessarily so. To defraud must involve something more than the mere inducing of a course of action by dishonest means; Welham v Director of Public Prosecutions [1961] AC 103, Per Lord Radcliffe at p.127. In offences constituted by obtaining money or property with intent to defraud, that something more may be found in the mere parting by the victim of the fraud with money or property which he is entitled to retain and which he would not have parted with but for the use of the dishonest means; Balcombe v De Simoni (1972) 126 CLR 576. In other cases, the defrauding may consist of deceiving a person responsible for a public duty into doing something that he would not have done but for the deceit, or not doing something that but for it he would have done. In all cases, the element of intent to defraud connotes the intention to produce a consequence which is in some sense detrimental to a lawful right, interest, opportunity or advantage of the person be to defrauded, and is an intention distinct from and additional to the intention to use the forbidden means”74 . [116] The passage shows that defrauding can occur without deprivation of the victim’s money or property. The first sentence of the passage is consistent with the arguments for both parties. While it explains that the dishonest deprivation of money is defrauding, it adds that prejudicially affecting a person in relation to some lawful right, interest, opportunity or advantage is also defrauding. It is determining at what point prejudicially affecting a person occurs which is of concern. The first sentence of the passage was recited with approval in Peters.75 71 At 463 F - G 72 (1998) 192 CLR 493 73 (1985) 42 SASR 59 at 62 74 At 62-63 75 [30] per Toohey and Gaudron JJ -- 38 of 138 -- 39 [117] Senior counsel for Mr Hart also relied upon Spies v R 76 in the joint judgment of Gaudron McHugh Gummow and Hayne JJ 77 where it was said: “… when there is a charge of defrauding, as opposed to a charge of committing an act with intent to defraud, what is required is an actual obtaining of property or of depriving the person defrauded of something which is regarded as belonging to him or her.” At [88] in Spies it was observed that the prosecution had not attempted to identify “the particular property, right or interest of which any creditor was deprived.” The passage at [91] was relied upon for emphasising that their Honours spoke of “depriving” a victim of something whether it be property, a right or an interest. It was relied upon as the statement which came closest to showing that imperilment requires that the Commonwealth be deprived of something78 and of supporting the argument that the Commonwealth is not defrauded when a return is lodged because it is not then deprived of something. However, their Honours in earlier passages79 referred to other judgments without disapproval, including Peters where Toohey and Gaudron JJ approved of the first sentence of the judgment of King CJ in R v Kastratovic80. I do not regard the passage from Spies as indicating an intention by their Honours to exclude from the meaning of defrauding, those cases where a victim is not deprived of property but has economic interests imperilled. I am fortified in this by noting that three years after Spies the judgments in Ianelli of Bell J at [123] and Handley JA agreeing at [55] approved the principle that prejudice to the Commonwealth’s economic interests suffices for an offence against s 29D. [118] Where there is an offence of conspiracy to defraud, the intended victim may not be deceived and may suffer no loss. For the offence against s 29D to occur at the early stage submitted for by the CDPP before there is any reasonable certainty that the Commonwealth will be deceived or suffer loss it would be like “a conspiracy to defraud without the need for a conspiracy”. An offence against s 29D was described as “a conspiracy to defraud without the need for a conspiracy” in December 1995 by the authors of Chapter 3 Theft Bribery and Related Offences Final Report. It was submitted and I accept that the opinion was expressed by Sir Harry Gibbs and those who sat with him in framing the Commonwealth Criminal Code. [119] I reject the arguments of senior counsel for Mr Hart supporting his submission that an assessment must issue before an offence against s 29D can occur. I accept the submission of the CDPP that an offence against s 29D of the kind pleaded occurs at an earlier time than the issue of an assessment as the economic interests of the Commonwealth to secure the correct amount of tax are put sufficiently at risk before the time when an assessment issues. [120] That finding makes it unnecessary for me to consider a further submission for Mr Hart which depended on my finding that assessments must issue allowing the deductions to complete the offence against s 29D. I refer to the submission that it becomes impossible to determine how many serious offences occurred and impossible to calculate the benefit derived from an offence. 76 (2000) 201 CLR 603 77 At [91] 78 T14 -10 line 16 79 [79] – [82] 80 (1985) 42 SASR 59 at 62 -- 39 of 138 -- 40 [121] Senior counsel for Mr Hart did not submit that his argument was available for an offence against Criminal Code, s 135.5. He conceded that in that case it may be enough for the Commonwealth to prove that Mr Hart dishonestly armed the taxpayers with the ability to lodge a false return. Were the participants entitled to claim their deductions? [122] The CDPP did not plead in the amended points of claim that the clients who participated in four schemes and claimed deductions were not entitled to the deductions. The various schemes in which clients participated were called in the CDPP’s pleading the 1997 EWF scheme, the 1998 EWF scheme, the 1999 EWF scheme and the 1999 Superannuation scheme. [123] It was alleged by the CDPP that Mr Hart knew that the participants in the 1997 EWF were not entitled to claim the interest payments on their loans to UOCL as a tax deduction and that participants in the 1998 EWF scheme and in the 1999 EWF scheme were not entitled to claim the contribution, the fees and the interest payments on their loans to UOCL as a tax deduction and that he knew that participant's in the 1999 Superannuation scheme were not entitled to claim the contributions, fees, and interest payments as a tax deduction. Mr Hart in his amended points of defence alleged in respect of each scheme and each relevant financial year that as a matter of law the taxpayers were entitled to the deductions which they claimed in relation to the scheme. Where there was a claim for a contribution to be deductible the amount claimed for a contribution was the entire amount of the “loan” from UOCL because that was to constitute the insurance bond premium price. [124] Neither party made submissions about which party bears the onus of proof that the claimed deductions were not allowable. The ATO disallowed the claims for deductions. Neither party submitted that I should judge deductibility by reference to particular sections of any statutes relating to income tax. Neither party submitted what statutes or sections of statutes were relevant. [125] Not all the deductions claimed by participants in the 1997 EWF require scrutiny. I need not consider deductibility of claims for payments made by participants to Eurobank prior to 2 June 1998. In June 1998 Mr Hart directed 28 participants in the 1997 EWF who had been paying interest to Eurobank to pay interest in future to UOCL. The CDPP alleged that Mr Hart knew that any of the participants who paid interest to UOCL were not entitled to claim the interest payments to UOCL as a tax deduction. [126] Deductibility of a claim made for interest paid to UOCL by any of the 28 participant in the 1997 EWF became an issue. [127] The three subsequent schemes had some common features. Each required a scheme participant to make payment of fees and interest to UOCL for a “loan” made by UOCL for a prescribed purpose; the scheme was promoted on the basis that the participant could reduce tax liability by claiming for the interest and fees paid to UOCL and also for the amount of the “loan” “contributed” to either an employee’s welfare trust or superannuation trust and was used as the premium price for an insurance bond maturing in ten years. At least a part of the attraction of each scheme for some participants must have been the perceived ability to claim a deduction in the year of entry into the scheme for the full amount of a loan without having paid the amount of the loan. Participants were not required by any of the loan agreements to repay loans before ten years. UOCL would issue a promissory note for the face value of the “loan”. -- 40 of 138 -- 41 The promissory note would be provided to NET as trustee of an employee welfare fund or as trustee of a superannuation fund. The provision of the promissory note was the participant’s contribution to the trust. NET would assign the promissory note to EGA in consideration for an insurance bond issued by EGA. EGA would receive the promissory note as the price of the premium for the insurance bond. EGA would not present the promissory note to UOCL in the short term. Precisely when EGA was expected to present the note was the subject of changing submissions. Mr Hart opened with a submission that “EGA calls on the promissory note for payment when the client requests that the arrangement be terminated. EGA also calls on the promissory note for payment when UOC calls its security under the loan agreement when the borrower defaults on the repayment.” Mr Hart closed with a submission that “EGA only calls on the promissory note for payment when the loan is requested to be paid out by the trustee.” In any event, EGA did not receive money as a payment for the insurance bonds it issued and had no money invested to enable it to honour the insurance bonds at maturity. EGA’s assets were the promissory notes. No claims were to be paid with money from EGA. The promissory note would have been matched against the claim, and there would be no claim paid with money. [128] Other particular features of the schemes appear elsewhere in these reasons. [129] The CDPP relied upon McMunn v R81 and Pearce v R.82 [130] In McMunn there had been a conviction of a tax scheme promoter on sixteen counts of defrauding the Commonwealth contrary to s 29D of the Crimes Act 1914. The promoter appealed the conviction to Court of Appeal of Victoria. The promoter bought software enabling calculation of interest on various types of loan. He purported to sell the software to Recalculation Services Pty Ltd (“Recalc”). The tax scheme promoted by the promoter involved an arrangement whereby the investor would purchase a Master Licence from Recalc entitling the investor to licence a company Interest Recount Corp Ltd (“Recount”) controlled by the promoter to perform interest recalculations for the public for fees. The investor had to pay certain upfront fees. The scheme offered the Master Licensee a loan from Bankfix, a company registered in New Zealand. Under the terms of the Loan Agreement, Bankfix undertook to draw down and pay Recalc, on behalf of the Master Licensee, the full amount of that balance. The loan funds were to be paid upfront to Recalc in payment for the first year’s management services which were to be provided by it (albeit, though Recount). This loan was represented to involve a limited recourse. [131] It was the Crown’s case that the promoter never intended that Bankfix would (or would have the capacity to) make upfront loan advances to or on behalf of Master Licensees in accordance with the written representations relating thereto contained in the promotional material and agreements. It was also part of the Crown’s case, that there was no financial capacity, for Recalc, through Recount, to conduct the businesses which the investors were led to believe would be conducted. It was further part of the Crown case that both Recalc and Bankfix were entities ultimately controlled by the appellant. [132] The Crown in McMunn v R had submitted to the jury that the scheme was a sham. Because of the then recent decision the High Court in Equuscorp Pty Ltd v Glengallan Investments Pty Ltd (2004) 218 CLR 471 the promoter argued that there was no sham. 81 [2007] VSCA 149 82 [2005] WASCA 74 -- 41 of 138 -- 42 [133] Ashley JA83 in McMunn explained the Equuscorp litigation at paragraphs [60] and [61]: “[60] The Equuscorp litigation arose out of the participation by investors in a ‘large scale aquaculture project in Northern Queensland’. Participation was by purchase of units. Provision was made by borrowing almost all of the cost of units. It was asserted by the promoter that nearly all the cost would be deductible in the initial financial year. Equuscorp (as assignee of the loans) in due course sued the investors relying upon written loan agreements which they had executed – but which, they claimed did not constitute their agreement to the lender. The question which arose was whether any loans had been made to the investors. If there had been no loans, then there could be no recovery by Equuscorp. [61] It was held at first instance that there were no loans because a round robin of transactions were ‘book entries made to create an audit trail’, and that each of the transactions was ‘a complete artifice or charade’. The Queensland Court of Appeal dismissed Equuscorp’s appeal, observing that ‘it was fundamental to the performance of the various agreements....that real money flow from [the purported lender] to the entities responsible for conducting the enterprise’. In the High Court, however, a contrary conclusion was reached. The Court held that the source of rights and obligations was the written agreement executed by each of the investors. It further held that each of the financial transactions recorded by Westpac was legally effective. Debts were ‘created and satisfied at all points in the chain’.” [134] Having considered the Equuscorp litigation, his Honour nonetheless dismissed the argument writing at [62]: “The applicant seized on references to ‘real money’ in the reasons for judgment in Equuscorp as if they provided an answer to the charges brought against him. But nothing said by the High Court addressed the circumstances of the present matter. The Crown case here is that there never was the capacity, and it was never intended by the applicant, that there be any loan to investors, satisfied by payment to Recalc; and that there were no loans in fact. Absent loans, the Crown argued, there was no capital for use in prosecuting the telemarketing business; and in fact that business was not prosecuted in the case of any investor. Moreover, the question whether or not the Equuscorp investors could properly claim tax deductibility of what they had expended, very largely by way of loans which the High Court held had actually been made to them, would say nothing about the tax deductibility of an investment in respect of which expenditure largely consisted of a loan which was never made.” 83 With whom Kellam JA and Kaye AJA agreed -- 42 of 138 -- 43 [135] In Pearce v R 84 the Court of Appeal of the Supreme Court of Western Australia considered an appeal against a conviction for an offence of conspiracy to defraud. In that case written material provided to potential franchisees was intended to represent to each potential franchisee that $39,500 would be received by the franchisor and that of that amount, $38,000 would be expended in the provision of the services to be provided in the period of 13 months after the expenditure had been incurred. The representations made were both false and intended to cause the franchisees to claim the $38,000 as deductible expenditure against their income in the year ended 30 June 1998. As a matter of fact, to the knowledge of the appellant promoters, while the loan agreements themselves were not shams, there was not to be any genuine transfer of funds, but only a "round-robin" calculated only to provide an artificial basis for the participants to claim a deduction in the amount of $38,000. The Crown expressly disallowed reliance upon the loan transaction being a sham or on notions of fiscal nullity85 . The scheme was intended by the appellants to enable each franchisee to fund the amount invested from the taxation refund which was obtained from the ATO. It was the intention of the promoters that, if the claimed deductions were not allowed by the ATO, the franchisees would innocently use the false information provided to them by the appellants to contest the disallowance of the deductions claimed. [136] Malcolm CJ accepted that the conduct constituted conspiracy to defraud: “[159] In my opinion, the jury was entitled to conclude that each of the appellants knew what the true facts were, namely, that the participating taxpayers were not in fact...truly entitled to the deduction they were being invited to claim in respect of the $38,000.00. The facts were that the amount of money actually to be made available to the franchisees was a fraction of that amount. This was clearly highly relevant to the question of whether the relevant deduction would be allowed or, if allowed, subsequently cancelled under the relevant provisions of the Act.” [137] The CDPP alleged that Mr Hart knew that UOCL did not make any loans or have the capacity to make any loans, that NET never received funds from UOCL and that Mr Hart knew that no funds were lent by UOCL to any client who participated in the 1998 EWF scheme or subsequent schemes. Senior counsel for the CDPP submitted that Mr Hart knew that the promissory notes held by EGA in this transaction and the operation of this scheme were not to be presented to UOCL for payment as a result of which he knew that no investment could be made by EGA in an insurance bond, that the insurance bond issued by EGA is nothing but a piece of paper, which has no substance behind it. “So, we're not saying that obligations aren't created by these documents. We're not saying these documents are a sham… We say it was not for the purpose of benefiting the employee.”86 [138] Senior counsel for Mr Hart submitted that the CDPP relies primarily on McMunn87 and Pearce88as authority for the proposition that as UOCL had (allegedly) no capacity to physically pay the value of the promissory notes there have been no real loans and 84 Op cit 85 Paragraph [137] 86 T14 - 38 87 [2007] VSCR 149 88 [2005] WASCA 74 -- 43 of 138 -- 44 therefore there are no deductions and therefore there is a fraud upon the Commonwealth. Mr Hart’s position is: 1. To the extent that McMunn and Pearce are authority for the proposition advanced by the CDPP they are wrongly decided; and 2. Even if correctly decided they do not apply here as there are valid underlying transactions which justify the claims for the deductions. [139] Senior counsel for Mr Hart submitted that the only two possibilities are: 1. The EWF arrangements are “shams” (not even alleged by the applicant); or 2. They constitute valid binding agreements which give the taxpayers a right to a deduction. He submitted that to the extent that McMunn and Pearce suggest that there is a third possibility, namely that the transactions are valid transactions, but because one party did not have the capacity to complete the taxpayer’s commitments do not constitute tax deductions, those cases are wrongly decided. I infer that to be a submission that an expense incurred in performing a legal obligation which would otherwise be a tax deductible expense does not lose its deductibility because one party does not perform its legal obligations and the taxpayer does not receive the benefit it anticipated when incurring the expense. He submitted that the fallacy of the CDPP’s position is clearly demonstrated by the fact that once it is accepted that the documents are not a sham then the taxpayers could sue or be sued. It was submitted that transactions need not be evidenced by the physical passage of money and that while the transactions may in some respects be artificial because there is effectively a round robin of documents to evidence the passing of money, the transactions are not a sham. He submitted that for Mr Hart to be guilty of defrauding the Commonwealth it would have to be established that he knew that interest was not payable. [140] I am not persuaded that the judgments to which I referred in McMunn and Pearce are wrongly decided or that I should not follow them. [141] If McMunn and Pearce are properly decided I do not accept that the validity of an agreement pursuant to which a payment was made qualifies the payment as deductible from income. A payment may be due pursuant to a lawful agreement without qualifying as a deduction. Senior counsel for Mr Hart did not dispute the premise in the submission of senior counsel for the CDPP that the payments in this case must have a purpose of benefiting an employee. It was a premise consistent with an agreed fact, namely that Mr Hart believed that for client/employers in EWF or Superannuation schemes to be entitled to a deduction for contributions, fees and/or interest payments made to the trustee of the EWF or Superannuation fund, the contribution had to be for the purpose of providing a benefit to an employee or member of the Superannuation fund. [142] UOCL did not make loans to the clients. Instead it issued promissory notes. For reasons more fully developed elsewhere in these reasons UOCL did not have the financial capacity to make loans in the amount of the promissory notes in respect of the 1998 EWF or any subsequent scheme. No money was received by NET, the trustee of the employee welfare or superannuation funds as the contribution. The insurer EGA did not receive the contribution as money from NET or from UOCL and EGA did not present the promissory note to receive money equivalent to the contribution when it issued its insurance bond. Without receipt of money the insurer had no prospect of earning income to pay on maturity of the bond and no prospect of paying the bond -- 44 of 138 -- 45 upon maturity. UOCL had no real prospect of paying the face value of the promissory notes if presented by the insurer at maturity. It follows that the amounts claimed by participants as the initial contribution in any of the 1998 EWF, 1999 EWF and 1999 Superannuation schemes were amounts which were not for the benefit of the beneficiaries of the trust funds. The contribution was illusory. The establishment fees paid to cause UOCL to supply the illusory contribution were not for the benefit of the beneficiaries of the trust funds. The payments called “interest” subsequently paid to UOCL pursuant to agreement to provide the illusory contribution were not for the benefit of the beneficiaries of the trust funds. [143] The “loans” to participants in the 1998 EWF were non-recourse according to the terms of the Loan Agreement. It is not reasonable to consider deductibility of contributions claimed by participants in the 1998 EWF on the hypothesis that the principal would have been paid by participants to UOCL ten years later. [144] One of the 28 employer participants in the 1997 EWF appears to have accepted an invitation from Mr Hart by letter of 2 June 1998 to sign a loan agreement from UOCL and other documents created for the 1998 EWF. I draw that inference from the facts referred to in Re Parry and Federal Commissioner of Taxation.89 I reject Mr Hart’s submission that the case dealt with the 1997 EWF. It does appear to have considered claims disallowed relating to both the 1997 EWF and the 1998 EWF. The Senior Member Mr Beddoe wrote90 that “I am satisfied on the material before me both sets arrangements as evidenced by the documents create a façade that there was a fund called the David Parry Pty Ltd Employee Welfare Fund…”. I infer that Mr Beddoe was referring to the documents which relate to the 1997 EWF and the 1998 EWF. At [47] Mr Beddoe described these arrangements as “a paper façade with nothing behind it, or as Windeyer J said in Scott’s case it was a mere façade behind which activities might be carried on which were not really directed to the stated purpose but to other ends, in this case the avoidance of income tax”. At [49] Mr Beddoe wrote “I am satisfied that the essential character of the outgoings in so far as they were incurred by the Trustee, was to create a “mirage” of deductible outgoings. The outgoings were not incurred in the course of gaining or producing assessable income and were not incurred in carrying on business for that purpose.”91 On the material before me, the same can be said for any payments made to UOCL by the 28 participants in the 1997 EWF or for any payments made to UOCL or contributions claimed by participants in the 1998 EWF. [145] With regard to the 1999 EWF and 1999 Superannuation schemes, the wording of the Loan Agreement used for them arguably permits UOCL to pursue a lender if the “Principal” is not “repaid”. The terms are discussed elsewhere in the judgment where I consider whether the Loan Agreement was non-recourse. Repayment was not required before 10 years. Each “loan” was approved without credit checks by UOCL or valuable security provided to UOCL. The terms hindered early repayment by requiring 12 month’s notice. UOCL took as security for its promissory notes an assignment of the insurance bonds issued by EGA which held UOCL’s promissory notes as its primary asset. These features are not consistent with an intention by UOCL to pursue a personal remedy for the “Principal” from the participants at the end of the ten year term. Mr Hart did not submit that UOCL would pursue participants personally for the principal. At the highest, Mr Hart submitted but did not call evidence to prove that 89 [2004] AATA 1193 at [24], [36], [38] and [39]. 90 At [46] 91 This case of Parry dealt with an objection by one of the participants in the schemes promoted by the respondent -- 45 of 138 -- 46 there was an expectation that participants would pay principal. One exercise performed by Mr Vincent of tracing deposits of more than $17 million received by UOCL over 6 years revealed one deposit of $200,000 recorded as “principle” while the rest were recorded as interest and establishment fees. I have not determined to which scheme that repayment by a Dr Ambler related. It would be reasonable for UOCL’s directors and any promoter of the schemes to expect that pursuit of participants would involve expense, loss of goodwill for Harts and the risk of litigation for UOCL and for any promoter of the scheme including Mr Hart. [146] For reasons expressed elsewhere in these reasons I find that Mr Hart at all material times regarded the 1999 EWF and 1999 Superannuation schemes as non-recourse. Because of the degree of knowledge Mr Hart had as to how UOCL would act in the operation of the schemes or because of the degree of control Mr Hart had over UOCL, Mr Hart’s view supports the finding that the relevant Loan Agreements would have been treated by UOCL as non-recourse. [147] Because the interpretation of the Loan Agreement used in the 1999 EWF and 1999 Superannuation schemes is problematic I will consider deductibility of payments made and contributions claimed pursuant to those schemes on the unlikely hypothesis that UOCL would receive principal at the end of the term and the likely hypothesis that UOCL would receive no principal. [148] The hypothesis that some participants in the 1999 EWF and 1999 Superannuation schemes may have paid some or the entire principal of their “loan” at or before the end of the ten year term would not assist Mr Hart to establish deductibility of the claims made earlier. It would not render deductible the fees and interest paid over the prior decade and the contribution allegedly made a decade before. The hypothetical payment of the entire principal at the end of the term would put UOCL in funds to pay to EGA the face value of the promissory note which had been issued for the participant 10 years before. It would not retrospectively make the contribution claimed ten years earlier a benefit for the beneficiary of the trust or a loss or outgoing incurred in the course of carrying on business for the purpose of gaining or producing assessable income. Payment to EGA at the end of the term would not allow EGA to retrospectively earn ten year’s return on the original illusory contribution. It would not allow EGA to pay a return on the illusory contribution invested in the insurance bond. At best, it would allow EGA to pay a participant’s employee the principal which the participant paid to UOCL at the end of the ten year term. This hypothesis might justify a participant’s argument that payment to UOCL of the principal at the end of the term was a deductible expense. It would not retrospectively render deductible the illusory contribution claimed to have been made by the participant 10 years before. [149] The participants were not entitled to claim the fees and interest paid to UOCL or the contribution allegedly made to NET pursuant to the 1998 EWF, the 1999 EWF or the 1999 Superannuation scheme as tax deductions. I accept the submission that legal obligations were created by the loan agreements with UOCL but the payments made pursuant to the obligations and the “contribution” claimed to have been made were not deductible from income. They were not losses or outgoings incurred in the course of carrying on business for the purpose of gaining or producing assessable income. [150] The 28 participants in the 1997 EWF who were urged by Mr Hart to pay interest to UOCL instead of Eurobank fall into two categories. Some, such as Mr Cavill, and D Parry and Sons Pty Ltd may have paid interest to UOCL between 2 June 1998 and the -- 46 of 138 -- 47 end of FYE 1998 only after entering into a loan agreement of the kind used in the 1998 EWF which required the participant to pay “interest” to UOCL. The deductibility of “interest” payments made by such persons is the same as the deductibility of interest payments by participants in the 1998 EWF. Such interest payments were not deductible for the reasons above. [151] Those of the 28 participants who paid “interest” to UOCL without first entering into a loan agreement with UOCL are in a different category. It is uncertain how many of them there were. Interest paid to UOCL between 2 June 1998 and March 1999 by such participants was paid when there was no Loan Agreement between them and UOCL, no assignment to UOCL of Eurobank’s right to receive interest from a participant and no legal obligation for such participants to pay the interest to UOCL. It is possible that in March 1999 UOCL became an assignee of Eurobank’s right to receive interest from the 28 participants but UOCL was not in FYE 1998 or before March 1999 an assignee of Eurobank’s right to receive interest for reasons I express elsewhere in the judgment. By that time it is reasonable to conclude that most if not all of the 28 participants would, like Mr Cavill, have responded to the advice in the letter of 2 June 1998 and for their parts signed the 1998 EWF scheme documents showing UOCL as the lender. Such payments of “interest” to UOCL between 2 June 1998 and March 1999 were not interest in any conventional sense. They were not losses or outgoings incurred in the course of carrying on business for the purpose of gaining or producing assessable income. They were not deductible. Application – Paragraph 1(b) (i): 1997 Employee Welfare Fund [152] The first component of the PPO sought by the CDPP in respect of uncharged alleged offences is set out in the application thus: “Pursuant to section 116 and 134 of the Proceeds of Crime Act 2002("the Act") for a pecuniary penalty order that Steven Irvine Hart pay to the Commonwealth an amount of money the court determines under Chapter 2, Part 2-4, Division 2 of the Act in respect to: (b) the benefits derived by Steven Irvine Hart in respect to the following unlawful activity: (i) between the first day of June 1998 and the thirtieth day of June 1999 at various locations in the States of Queensland, Victoria and Western Australia Steven Irvine Hart did contrary to section 29D Crimes Act 1914 as amended, defraud the Commonwealth in that he prejudiced the right of the Commonwealth to tax payable by diverse persons. Particulars In relation to income tax returns to be lodged by taxpayers for the financial year ending 30 June 1998 and subsequent years Steven Irvine Hart caused the true nature of payments made to United Overseas Credit Limited by taxpayers who had entered into agreements with European Industrial Bank Limited, Dresdner Finance Company Pty Ltd and ASIACITI.Trust (New Zealand) Limited to be misrepresented. [153] That part of the application at 1(b)(i) for a PPO specifies an offence which Mr Hart allegedly committed contrary to s 29D of the Crimes Act 1914 (Cth) (Crimes Act). -- 47 of 138 -- 48 Pleadings re dishonesty relating to application 1(b)(i) and the 1997 Employee Welfare Fund [154] It is in respect of the involvement of UOCL that the CDPP alleges that Mr Hart committed an offence contrary to the Crimes Act, s 29D. The CDPP submitted that fraudulent conduct on the part of Mr Hart in relation to the 1997 EWF is that he falsely represented to participants that their loans had been taken over by UOCL knowing that the loans had not in fact been taken over by UOCL either by 30 June 1998 or subsequently. 92 The allegation of dishonesty is in more detail in the CDPP’s pleading at paragraphs 8(a) and 9(n) with particulars (i) to (iv) where it was alleged inter alia: 8. Hart committed the following alleged offence which constitutes unlawful activity: (a) between the first day of June 1998 and the thirtieth day of June 1999 at various locations in the States of Queensland, Victoria and Western Australia, Hart did, contrary to section 29D Crimes Act 1914 as amended, defraud the Commonwealth in that he prejudiced the right of the Commonwealth to tax payable by diverse persons. Particulars In relation to income tax returns to be lodged by tax payers for the financial year ending 30 June 1998 and subsequent years, Hart caused the true nature of payments made to United Overseas Credit Limited by tax payers who had entered into agreements with European Industrial Bank Limited, Dresdner Finance Company Pty Ltd and ASIACITI Trust (New Zealand) Limited to be misrepresented. 9. The offence alleged in paragraph 8 above arises from the following facts, matters and circumstances: (n) Hart knew that his clients who participated in the 1997 EWF were not entitled to claim the interest payments on their loans to UOCL as a tax deduction. Particulars (i) Hart knew and continued to know that there were no funds loaned by UOCL to any of his clients who participated in the 1997 EWF or any subsequent schemes; (ii) Hart knew there were no funds ever received from UOCL or held by NET on behalf of any of his clients who participated in the 1997 EWF; (iii) Hart knew and continued to know that UOCL did not have the financial capacity to make the loans to each of his clients who participated in the 1997 EWF or any subsequent scheme. Hart's knowledge that UOCL did not have the financial capacity to provide funds by way of loans to his clients who participated in the 1997 EWF or any participants in subsequent schemes is to be inferred from the following facts, matters and circumstances: 92 Applicant’s outline of submissions [89] -- 48 of 138 -- 49 (A) Hart had to borrow money to fund the setting up of UOCL; (B) UOCL was set up at Hart's request and Acceptor Corporation Limited ("Acceptor") operated UOCL as a nominee for Hart and in accordance with Hart's instructions as principal up to 7 September 2000. From 7 September 2000, Zetland Financial Group Ltd operated UOCL as a nominee for Hart and in accordance with Hart's instructions as principal; (C) UOCL was not issued with a money lenders licence until 17 September 1998; (D) UOCL reported to Hart on the status of deposits and bank balances of UOCL, when requested by Hart; Particulars i. see Schedule A attached (E) UOCL prepared spreadsheets of amounts banked to the UOCL accounts and presented these spreadsheets to Hart when he was in Hong Kong; (F) UOCL transferred moneys from UOCL to specified accounts and entities at the direction of Hart; Particulars i. see Schedule B attached (iv) as late as 24 February 1999 Hart knew that EGA had not issued any insurance bonds in relation to the 1997 EWF or the 1998 EWF scheme; [155] Mr Hart’s amended points of defence raised the following in response to those allegations of dishonesty: 5. The respondent denies the allegations made in paragraph 8 of the points of claim on the bases that: (a) The tax returns properly represented the true nature of payments made to United Overseas Credit Limited; (b) As a matter of law the taxpayers were entitled to the deductions which they claimed in relation to the 1997 EWF; alternatively (c) If the taxpayers were not entitled to the deductions which they claimed in relation to the 1997 EWF then he had no intention to defraud the Commonwealth; Particulars (i) The respondent believed that the deductions claimed in relation to the 1997 EWF were proper deductions lawfully made; (ii) The respondent caused the tax returns to be prepared, as they appeared, in reliance upon legal and other advice, which he believed was correct, to the effect that the deductions were lawfully claimed. In the premises: -- 49 of 138 -- 50 (d) The respondent did not commit the offence alleged in paragraph 8 of the points of claim 6. As to the allegations made in paragraph 9 of the points of claim the respondent: … (e) Denies the allegations made in paragraph 9(n) on the bases that: (i) Prior to lodgment of the tax returns the respondent obtained legal and other advice to the effect that interest payments made to UOCL by taxpayers was a valid, and lawful tax deduction; (ii) At all times UOCL was set up, owned, managed and performed its contractual responsibilities independently of, and not as a nominee for, the respondent; (iii) Says that at all times UOCL was not controlled or directed by him but was controlled by others; (iv) Says that any advice or direction given by the respondent to UOCL was for UOCL's consideration, decision and action as decided solely by UOCL and was given by the respondent in the ordinary course of his business as an independent business consultant ; (v)The respondent does not admit the following allegations on the bases that he has made reasonable inquiries to ascertain the truth of the allegations and remains uncertain as to the truth or otherwise of .the allegations namely: (A) who participated in the 1997 EWF or any subsequent schemes; (B) any clients of the respondent who participated in the 1997 EWF; (C) That UOCL did not have the financial capacity to make the loans to each of the respondent's clients who participated in the 1997 EWF or any subsequent scheme; (vi) If the facts which are by paragraph 6(e)(v) hereof not admitted, true then; (A) The respondent did not, at any material time, know them to be true; and (B) Even if the allegations are true then, as a matter of law, the taxpayers were entitled to the deductions claimed; … (viii) As to the allegations made in paragraphs 9(n)(iii)(D) to 9(n)(iii)(F) inclusive the respondent: (A) Says that any communications and discussions with UOCL and advice and directions given by the respondent were given by him in the ordinary course of his business as an independent business consultant; and (B) Were given by the respondent at the direction of Allardice; -- 50 of 138 -- 51 (ix) As to the allegations made in paragraph 9(n)(iv) the respondent: (A) Does not admit that EGA had not issued any insurance bonds in relation to the 1997 EWF or 1998 EWF on the basis that he has made reasonable inquiries and remains uncertain of the truth or otherwise of that allegation; (B) If EGA did not issue any insurance bonds then the respondent denies that he at any material time knew that EGA had not issued any insurance bonds in relation to the 1997 EWF or the 1998 EWF; and (C) The respondent believed they had been issued; and (D) Says that there was no legal requirement for the insurance bonds to be issued on or before any particular date; Pleading argument – whether CDPP fairly raised an issue that Mr Hart knew payments did not provide a benefit for employees [156] In oral submissions, senior counsel for the CDPP described the case as, among other things, a “general dishonesty” case of fraud. He also said “Mr Hart would have known that… the purpose of the payments to the EWF was not to provide a real benefit to an employee” and when I observed that the pleading did not include an allegation that Mr Hart knew that the purpose of the payments was not to provide a benefit to the employees senior counsel for the CDPP replied that that had been pleaded more broadly. Mr Hart in a later written submission 93 submitted that these were departures from the pleaded case and the CDPP should be constrained by its pleading and opening. The CDPP did not dispute the proposition that it should be limited to its pleaded case and opening. I accept that it should and will consider whether the CDPP establishes the case it fairly raised. [157] I accept that the CDPP has pleaded in a broad way that Mr Hart knew that the purpose of payments by client taxpayers was not to provide a benefit to the employees of those client taxpayers. It is an inference which fairly arises from the Further Amended Points of Claim at paragraph 9(n) particular (ii) and paragraph 11(jj) particular (ii) and (iv). To allege that Mr Hart knew that his clients who participated in an employee welfare scheme were not entitled to claim interest payments in respect of their loans from UOCL with a particular that he knew that no funds were received by the trustee of the employee welfare fund from UOCL on behalf of his clients does broadly and fairly raise as an issue that Mr Hart knew that his clients were not entitled to claim interest payments as a deduction because he knew there was no benefit for their employees. This emerges from paragraph 9(n) particular (ii). To plead that Mr Hart knew that the participants in the 1998 EWF scheme were not entitled to claim the contribution, the fees and the interest payments on their loans fairly raised the issue that Mr Hart knew that the participants in the 1998 EWF scheme were not entitled to claim the contribution, the fees and the interest payments on their loans to UOCL as a tax deduction and to give particulars that he knew there were no funds loaned by UOCL, that he knew no insurance bonds had been purchased as at 30 June 1998, and that as late as 24 February 1999 he knew that EGA (the insurer) had not issued any 93 Submission that Applicant be limited to its original pleadings emailed 21.09.09 -- 51 of 138 -- 52 insurance bonds in relation to the 1998 EWF scheme was to broadly and fairly raise that he knew that the participants in the 1998 EWF were not entitled to their payments as deductions because the payments did not provide a benefit to the employees. This arises from paragraph 11(jj) Particulars (ii) and (iv). The parties agreed a substantial quantity of facts which were reduced to a statement of agreed facts (“SAF” or “SOAF”). 94 SAF, was agreed before the CDPP opened its case. In SAF paragraph 84 is an agreed fact that “Mr Hart believed that for the client/employers in the 1999 EWF Scheme to be entitled to a deduction for a contribution made to the trustee of the EWF, the contribution had to be for the purpose of providing a benefit to an employee of the fund.” At SAF paragraph 99 it is agreed that “Mr Hart believed that for clients in the 1999 EWF or Superannuation Schemes to be entitled to a deduction for a contribution made to the trustee of the EWF or Superannuation Fund, the contribution had to be for the purpose of providing a benefit to an employee or member of the Superannuation Fund.” Facts were agreed to similar effect at paragraphs 110 and 122 of the SAF. It was only in respect of the 1998 EWF that there was not an agreed fact that Hart believed that for clients in the 1998 EWF to be entitled to a deduction for a contribution made to the trustee of the EWF the contribution had to be for the purpose of providing a benefit to an employee. I infer that Mr Hart believed that also with respect to the 1998 EWF scheme. [158] I reject the submission of Mr Hart that the case for the CDPP has changed to one of “there being no benefits for the employees, which was not previously particularized”. The issue of whether Mr Hart knew that the purpose of payments by client taxpayers was not to provide a benefit to the employees of those client taxpayers was fairly raised. Facts relevant to the 1997 Employee Welfare Fund and subsequent schemes [159] The documents referred to in the trial were voluminous and mostly presented electronically. Some were compiled by each side into significant document folders. The SDF of the CDPP became exhibit 2 (“SDF”). In submissions and in the SAF the parties referred sometimes to an electronic reference or a page number in the SDF or both. It seems likely that the SDF was a work in progress for some time before it was tendered. As a consequence, sometimes the references in submissions to documents in the SDF were incorrect and especially if the reference was in a document prepared at an early stage such as in the CDPP’s written opening. Documents were often more easily located by the electronic reference. I have extracted passages from submissions of the parties relating to the facts to incorporate into these reasons and I have generally left the party’s SDF. Often, but not always, I have corrected the SDF reference to conform with exhibit 2. If these reasons contain a reference to a page in the SDF that reference may be the incorrect reference supplied by a party. [160] The allegations of unlawful activity are pleaded under five headings 1(b) (i) to 1(b) (v). The allegations relate to Mr Hart’s promotion of an employee welfare fund scheme between 1 June 1998 and 30 June 1999 and progress to deal some changes to that scheme and the continuing promotion of it over several years and deal with a non contributing superannuation scheme also promoted. The period of alleged unlawful conduct is between 1 June 1998 and 30 June 2003. 94 Exhibit 1 annexure B -- 52 of 138 -- 53 The CDPP’s failure to call certain witnesses relevant to the 1997 EWF and subsequent schemes and the rule in Jones v Dunkel [161] Mr Hart made submissions which, if accepted could affect the findings of fact. Mr Hart submitted that the absence of certain persons from the list of witnesses called by the CDPP should mean that the rule in Jones v Dunkel should operate in his favour. Mr Hart by written submissions of his own took issue with the fact that the CDPP did not interview, obtain an affidavit from or call certain witnesses, namely, Mr Leung95 , Mr Horne 96 , Mr Sutherland97 , Mr Allardice 98 , Mr Aguis99 , Mr Tomlin100 , Ms Anderson101 and Ms Campbell102 (“the possible witnesses”). Mr Hart’s senior counsel expressed the intention to make oral submissions103 on this issue but did not. The CDPP made submissions in response in writing104 and Mr Hart replied to those orally.105 [162] With respect to several witnesses, Mr Hart identified the issue which would be affected by the inference that might be drawn from the failure to call the witnesses as the issue of whether he was the beneficial owner of UOCL or of EGA or Merrell. His beneficial ownership of those companies is not alleged by the CDPP in this proceeding. It is not part of the CDPP’s case that Mr Hart was ever the beneficial owner of those companies. I infer that Mr Hart’s concern is also with the separate issue of the degree of control he had, if any, over UOCL and EGA. Mr Hart tended to make submissions that equated ownership and control. The two are different. [163] Mr Hart submitted that the failure to call Mr Leung, an auditor who once resided in Mauritius who audited the accounts of EGA for FYE 1999 should cause me to infer that his evidence would not have assisted the Crown and that I should not draw any inference the Crown asks in relation to the financial viability of EGA. [164] Mr Hart submitted that the CDPP could have compelled Mr Michael Horne to give evidence, but they did not do so and that the court should infer that the evidence that Mr Horne would have given would not have assisted the Crown. He did not submit what findings should be affected by the failure to call Mr Horne. In relation to Mr Horne, Mr Hawthorn stated: he did not request an interview with Mr Horne;106 he did not ask the Hong Kong police to try and interview Mr Horne;107 to the best of his knowledge no-one has tried to get a statement from Mr Horne108 ; he was not aware whether Mr Horne was in the premises of Zetland when the search warrant was executed.109 Mr Watkin did not recall speaking to a Mr Horne110 . There is no evidence of power: to force an interview with Mr Horne;111 to force Mr Horne to attend and give 95 Pages 10, 123 of the respondent’s Closing “Facts” submissions 96 Pages 10, 60, 108 of the respondent’s Closing “Facts” submissions 97 Pages 10, 51, 52, 60, 61, 104 of the respondent’s Closing “Facts” submissions 98 Pages 60, 61, 68, 69, 104 of the respondent’s Closing “Facts” submissions 99 Page 108 to 123 of the respondent’s Closing “Facts” submissions 100 Page 124 of the respondent’s Closing “Facts” submissions 101 Page 124 of the respondent’s Closing “Facts” submissions 102 Page 125 of the respondent’s Closing “Facts” submissions 103 T 14 – 24 L 8 104 Applicant’s Reply Submissions pages 7 to 16 105 T 14 – 66 L 55 to T 14 – 78 L 52 106 T 6-9 l.25 107 T 6-9 l. 40 108 T 6-9 l.44 109 T 6-9 l. 46 110 T 2-41 l.15 111 Page 10 of the respondent’s submissions -- 53 of 138 -- 54 evidence in these proceedings;112 to compel Mr Horne to participate in an interview with Hong Kong Police and compel him to give evidence;113 to force Mr Horne to give evidence from Hong Kong,114 assuming he is in Hong Kong of which there is no evidence. [165] Mr Hart submitted that the CDPP had power to force Mr Sutherland to attend to give evidence from Hong Kong. Mr Sutherland was a director of UOCL and like Mr Horne, was a director of EGA. He submitted that any inference the Crown seek to have drawn should be refused. Mr Hart also submitted that Mr Sutherland was the beneficial owner and guiding mind of EGA from September 2000. He submitted that the CDPP cannot now rely on inferences to try to support their case in this regard. It should be noted that the CDPP does not assert that Mr Hart was the beneficial owner of EGA or that Mr Sutherland was not the beneficial owner from September 2000 of EGA, UOCL or Merrell. Mr Hart did not make clear what findings should be affected from the inference that Mr Sutherland’s evidence would not assist the CDPP. I infer that the issue of Mr Hart’ degree of control over EGA and UOCL was one subject of his concern. Letters from the auditor of UOCL, Mr Tang, suggested that control of UOCL in FYE 2000 was from Australia. A submission from the CDPP implied that Mr Hart was submitting that the failure to call Mr Sutherland somehow would affect the weight attributable to Mr Tang’s assertions in his letters. With respect to Mr Sutherland, there was evidence that several years ago he had a habit of travelling regularly from Hong Kong to Australia and that his wife and daughter then lived on the Gold Coast. There was no evidence as to Mr Sutherland’s whereabouts at the time of trial or as to whether he was in Hong Kong and whether he could be compelled to give evidence. From about September 2000, UOCL, EGA and Merrell were clients of Zetland Financial Services. Mr Sutherland was a director of Zetland. From 7 September 2000 Mr Sutherland was the beneficial owner of EGA. Mr Hart submitted that an inference should be drawn that a reference by a Mr Tang in his letter dated 27 June 2002 to the central management and control of UOCL as being in Australia related to Mr Sutherland rather than to Mr Hart. The evidence establishes that Mr Tang’s statement was made for FYE 2000. There is no evidence that Mr Sutherland was involved with UOCL in FYE 2000. If the failure of the CDPP to call Mr Sutherland was a matter about which I should draw an inference, that inference would not affect my consideration of Mr Tang’s reference to the control of UOCL being in Australia in FYE 2000. [166] Mr Hart submitted that Mr Allardice was the beneficial owner until 7 September 2000 of EGA. Mr Hart submitted that Mr Allardice was also the controlling mind of the company until he was replaced in this respect by Mr Sutherland. Mr Hart submitted that Mr Allardice could have been served with a subpoena. Mr Hart did not submit what inferences should be drawn from the failure of the CDPP to call Mr Allardice. Mr Hart did not submit what findings would be affected if I inferred that the evidence of Mr Allardice would not assist the CDPP. I infer that Mr Hart’s concern was with the issue of the degree of control which Mr Hart had over UOCL and EGA. A submission by the CDPP implied that Mr Hart had another issue of concern, namely the issue of whether it was lawful for UOCL to lend without the money lending licence it applied for. Mr Hart submitted that Mr Allardice was the person in control of UOCL and that he was a person who would have known whether a money lender’s licence 112 Page 10 of the respondent’s submissions 113 Page 108 of the respondent’s submissions 114 Page 51 of the respondent’s submissions -- 54 of 138 -- 55 was required by UOCL before that Hong Kong company lent money to Australian residents. Under cross-examination Mr Hawthorn gave evidence in relation to Mr Allardice that: he has never spoken to, interviewed or obtained a statement from Mr Allardice;115 Mr Allardice was approached by the Hong Kong Police and he refused to talk to them; 116 Mr Hawthorn didn’t know what the procedure is in Hong Kong where a person does not give an interview to police.117 Mr Watkin stated that he was asked to speak to Mr Allardice, he spoke to him on the phone and it never went any further than that.118 There is no evidence of a power to compel Mr Allardice to attend an interview in Hong Kong or to compel him to explain documents or to give evidence or to subpoena him to give evidence from Hong Kong. This court is not deemed to know the law of Hong Kong. There is no evidence that Hong Kong police or Australian authorities by request could have used information about the date of the issue of the money lending licence to UOCL to compel Mr Allardice to attend an interview to be questioned about whether any illegality was committed by UOCL in lending to Australian residents before it had a Money Lender’s Licence. [167] A Mr Agius was not called. Mr Hart submitted that the CDPP should have interviewed him and, if necessary, served him with a subpoena to give evidence. He submitted that the court should not draw any inference in relation to Mr Agius in this proceeding. He did not make a submission about what findings would be affected if I were to infer that the CDPP failed to call Mr Agius because his evidence would not have assisted the CDPP’s case. In relation to Mr Agius, Mr Hawthorne stated that he did not attempt to have an interview with Mr Agius119 and that Mr Aguis had not been asked to give an interview in the proceedings120 . There was no evidence: that Mr Agius would have participated in an interview or provided an affidavit for use in these proceedings;121 that power exists to compel Mr Agius to participate in an interview or to subpoena him to give evidence;122 as to the location of Mr Agius at the time of trial.123 I set out some of the correspondence sent to Mr Agius as the schemes were set up. Mr Hart would take advantage of the mystery concerning the involvement of Mr Agius to submit that the CDPP fails to satisfy its onus because a court should have a reasonable doubt that Mr Agius was in control. I do not infer that Mr Agius was in control of UOCL and the failure to call him does not make that a reasonable inference on the facts of this case. [168] Mr Harold Tomlin was a promoter of the 1997 EWF Scheme. He was interviewed by Mr Singh of the ATO in September 2000 and an affidavit was obtained from him. The CDPP did not read the affidavit and did not call Mr Tomlin to give evidence. Mr Hart submitted that an inference can be drawn that the information he would have given the court would not have assisted the CDPP. Mr Hart did not make a submission as to what potential findings should be affected if I made that inference. [169] Mr Hart submitted that Ms Judy Anderson was manager in the accounting practice of Hart’s Accountants from 1 July 1996 to 24 December 1999 and submitted that she told the ATO that she was telling participants in the relevant tax minimisation schemes that 115 T 6-5 l. 50 and 6-6 l.5 116 T 6-6 l.8 117 T 6-6 l.11 118 T 2-41 l.8 119 T 6-10 l.23 120 T 6-10 l.25 121 Page 114 of the respondent’s submissions 122 Page 123 of the respondent’s submissions 123 Page 123 of the respondent’s submissions -- 55 of 138 -- 56 they should repay their loans after a three to five year period and that she told the ATO that she was told this by Mr Hart. He submitted that she was mistakenly identified as “Henderson” in the CDPP’s further amended points of claim. The CDPP did not obtain an affidavit from Ms Anderson and she did not give evidence for the CDPP. Mr Hart submitted that an inference should be drawn that Ms Anderson would not have assisted the CDPP. The pleading by the CDPP with respect to this person was admitted in the amended points of defence. I assume that Mr Hart intended to submit that an inference should be drawn that Ms Anderson’s evidence would not have assisted the CDPP. He did not identify what findings would be affected if I were to draw the inference. [170] Ms Campbell was a manager at Hart’s Accountants. In the Amended Points of Claim it alleged that Mr Hart explained to managers of his accounting practice including Ms Campbell (and Ms Anderson) about the EWF and it alleged what was explained. The pleading by the CDPP with respect to these persons was admitted in the amended points of defence. Mr Hart submitted Ms Campbell would have been in a position to give evidence of whether she was telling clients that they must repay the loan they borrowed from UOCL and when. If Mr Hart had been instructing his managers to inform the participants that they should repay their loans from UOCL it may have been significant. If the clients had paid UOCL the full amount of the loans it would have put UOCL in funds. If UOCL had been in funds, EGA would have been in a position reasonably to expect that UOCL had capacity to pay EGA if EGA presented to UOCL promissory notes issued by UOCL. That may have been relevant to the issue of whether an insurance bond issued by EGA would have become of benefit for an employee of a taxpayer client. Mr Hart submitted that an inference could be drawn that the evidence of Ms Campbell would not have assisted the CDPP in the prosecution of its case. [171] Mr Hart made no submissions as to why the CDPP rather than Mr Hart should have called Ms Anderson and Ms Campbell. Mr Tomlin may also have been an Australian resident. I infer that each of them had been Australian residents in the late 1990s and may still have been at the time of trial. Mr Hart gave no explanation as to why he did not call them or why the CDPP should have. [172] Apart from Mr Tomlin who provided an affidavit that was filed in these proceedings but not read, none of the other possible witnesses referred to by Mr Hart in the context of Jones v Dunkel provided an affidavit. [173] In relation the possible witnesses Leung, Anderson and Campbell, Mr Hart did not ask any questions and elicit any evidence in cross-examination as to the desire of witnesses to participate, the present location of witnesses and the ability to force an interview or compel a person to give evidence. In relation to all of the possible witnesses there is no evidence that a witness would not make a claim for privilege. [174] I do not accept Mr Hart’s submissions as to the Jones v Dunkel inferences which should be made or the findings which should be affected by the inferences. [175] References to case law were made by the CDPP in this respect.124 They were helpful. I do not rely upon the passages to which I was referred in Dyers v R 125and R v Hart; ex parte Cth DPP. 126I am not persuaded that the law relating to inferences to be drawn 124 Applicants reply Submissions [25] to [32] 125 (2002) 210 CLR 285 [6] 126 [2006] QCA 39 [72] -- 56 of 138 -- 57 from a prosecution’s failure to call a witness in a criminal jury trial is applicable in this trial. If I accepted that it applied in this trial it would be a stronger basis for rejecting Mr Hart’s submissions. Facts continued [176] It is generally practical to present the facts chronologically. The application at 1(b) (i) concerns Mr Hart’s changes to the 1997 EWF from 2 June 1998. There were events particularly relevant to the application at 1(b) (i) which were occurring as events particularly relevant to application 1(b) (ii) were occurring. I will distinguish the facts and submissions particularly relied upon by the parties for the application at 1(b) (i) and the findings related to them by presenting them in italics. The parts in italics remain relevant to the other applications 1(b) (ii) to 1(b)(v). [177] From at least 1990, Mr Hart was involved in providing tax minimization planning to clients. Mr Hart’s convictions for the nine offences considered above related to schemes promoted by Mr Hart prior to 30 June 1990 and the indictment specified the offending as occurring between the first day of June 1990 and the 30 th day of June 1991. [178] In the 1990s there were two hundred to three hundred different alternative investment schemes that created advantages for taxpayers. Promoters of such schemes regularly offered them to Harts. Towards the end of a financial year it was the practice at Harts from the early 1990s to present tax-effective investments to its very significant client base. At material times, the approach at Harts was generally not to promote other persons’ tax minimization schemes. Mr Hayter, a director of numerous companies associated with Harts observed to Mr Hart in cross-examination: “In my time at Harts, we never promoted anyone else's tax scheme. We never promoted anyone else’s tax-effective arrangements because your view, which I subscribed to, was if it is good and if it is legal, we do it our self.” I accept that to have been the preferred strategy at Harts and Mr Hart’s preferred strategy. [179] In 1996 and 1997 the ATO was seeking information formally, pursuant to its statutory powers and informally with respect to several of Hart’s clients. Mr Ian Stevens (“Stevens”), a manager of Harts had as one of his jobs the task of liaising with the ATO if a client had audit issues. He would sit with Mr Hart and lawyers to draft responses to some ATO requests. He regarded the ATO pressure as building in the latter half of 1997. [180] Mr Hayter worked for Harts from 1996. His background was with insurance companies and he understood some matters of Australian insurance company law. Mr Hayter thought the ATO developed a stricter attitude to tax minimization schemes in the late 1990s. [181] In 1997 Donald Fleming and Harold Tomblin, both of South Australia, promoted an Employee Welfare Fund scheme (“the 1997 EWF”) for FYE 1997. Later that year, Mr Hart explained to managers of his accounting practice, including Stevens, Deborah Campbell and Judy Henderson (“Henderson”) 127 about the 1997 EWF, including the 127 Mr Hart submitted in the course of written submissions that Ms Henderson was Ms Anderson and that the CDPP are mistaken about her name. Nothing turns on the submitted error. The facts in pleaded in relation to Ms Henderson were admitted. The debate about her proper name is not important. -- 57 of 138 -- 58 tax benefits any participating clients would obtain. Mr Hart did this so that the managers would promote the 1997 EWF to clients of Hart’s accounting practice. [182] The 1997 EWF operated in the following way128 : 1. The client employer or a director of the client employer would obtain a loan from an overseas loan company called European Industrial Bank Limited (“Eurobank”) which was incorporated in Western Samoa; 2. The purpose of the loan was to purchase, in favour of a nominated employee, a life insurance bond, which would mature in 10 years; 3. The amount of the loan was forwarded to the Employee Welfare Fund Trustee, namely ASIACITI Trust (New Zealand) Limited (“ASIACITI”); 4. For a fee of 1% Dresdner Finance Pty Ltd (“Dresdner”) agreed to provide bridging finance cheques on behalf of clients payable to ASIACITI; 5. The cheques were endorsed in favour of Strathford Insurance Company Limited (“Strathford”), incorporated in Western Samoa, for the purchase of the insurance bond; 6. Eurobank and Dresdner agreed that Strathford would endorse the cheques to Eurobank and Eurobank would receive the endorsed cheques; 7. The transaction was accounted for by Eurobank via journal entries; 8. The Eurobank loans to clients paid out the Dresdner loans. [183] The following client employers participated in the 1997 EWF promoted by Mr Hart: 1. Milcan Pty Ltd; 2. Bokana Pty Ltd; 3. Clubcourt Pty Ltd; 4. Cyron Pty Ltd; 5. Glencoe Meats Pty Ltd; 6. Glencoe Meats Pty Ltd; 7. Hampcrest Pty Ltd; 8. J E Cavill Holdings Pty Ltd; 9. Kelly Bros Games; 10. Mc Laughlin Cotton Pty Ltd; 11. Northside Vet Pty Ltd; 12. ACA Consulting Pty Ltd; 13. Agenti Arch Pty Ltd; 14. Clumita Pty Ltd; 15. D Parry & Sons Pty Ltd; 16. Idlecroft Pty Ltd; 17. Manitall Pty Ltd; 18. Pymborough Pty Ltd; 19. Viking Noms Pty Ltd; 20. Rapmont Pty Ltd; 21. Cosmetic Laser Surg Pty Ltd; 22. Grovahill Pty Ltd; 23. P C Brown & Assoc Pty Ltd; 24. Ralcrest Pty Ltd; 25. Lyons Corp Mkt’g Pty Ltd; 128 SAF [16] -- 58 of 138 -- 59 26. G & M Lamura Pty Ltd; 27. Deraview Pty Ltd; 28. Paybrook Pty Ltd. [184] Each of those clients executed pro-forma documentation in relation to the scheme. It is not alleged for the purpose of these proceedings that any conduct by Mr Hart in relation to the 1997 EWF Scheme prior to 2 June 1998 constituted unlawful conduct. [185] The scheme as originally promoted by Fleming and Tomblin consisted of a number of steps. These steps are explained by Mr Singh, an officer with the Australian Taxation Office129 . The first step in the arrangement was a non-recourse loan from the lender to the director of the taxpayer entity. The lenders for the 1997 EWF were European Industrial Bank, Samoa (“Eurobank”) and Dresdner Finance Company Pty Ltd (“Dresdner”). The amount of the loan was claimed to have been contributed to a trust fund in New Zealand. The trustee of the fund was Asiaciti Trust (New Zealand) Ltd (“Asiaciti”). [186] The taxpayer claimed a deduction for this contribution. The next step was that Asiaciti invested the contribution in an insurance bond issued by an insurance company. The insurance company in the scheme promoted by Fleming and Tomblin was Strathford Insurance Company Ltd (“Strathford”). 130 Under the scheme, the funds received by Strathford were to be invested with Eurobank thus completing a round-robin. [187] Mr Singh explained in paragraph 19 of his affidavit that the central feature of the arrangement was a round-robin transaction between a taxpayer, a trustee of a fund, an insurance company and a lender [188] I infer that Mr Hart knew by 1998 from the past inquisitive conduct of the ATO that claims for deductions by some participants in any EWF scheme promoted by Harts would ultimately be likely to be the subject of enquiry and audit by the ATO. He was correct to do so. The ATO did show interest in early 1999 in EWF schemes used by Harts’ clients and in a non-complying superannuation scheme which evolved from them. [189] In or about early 1998 Mr Hart began developing a different employee welfare fund scheme based on the 1997 EWF Scheme. The parties have called it the 1998 EWF. The 1998 EWF used a different lender, trustee and insurer. [190] Mr Hayter deposed, about a conversation which probably occurred in early 1998: “My conversation with Hart in relation to the suggested EWF strategy was words to the effect of: He said: 'We can do this and we can do this better'. I said: 'How can you do that' He said: 'We should set up our own finance company and set up a 10 year insurance bond off shore' I said: 'Alright how do you do that' He said: 'We'll go and sit down with Baker McKenzie (a firm of Solicitors in Hong Kong)' 129 Affidavit of Prashant Singh filed 18 July 2006 130 An example of the life insurance policy issued by this company is found in the significant document folder (“SDF”), page 18. and at B00017343 -- 59 of 138 -- 60 I said: 'How much will that cost', He said: 'About $250 to $300k.” [191] By cross-examination Mr Hart sought to challenge only part of Mr Hayter’s recollections of the conversation, namely that Mr Hart said Harts should set up its own finance company and insurer. Mr Hart did not challenge the recollection of the part of the plan that involved taking advice from a firm in Hong Kong or that off shore finance and insurance companies would be used. Mr Hayter accepted in cross-examination that he was not sure that Harts set up Harts’ own finance and insurance companies. He said that whether Harts did or did not set up a finance company or an insurance company was Mr Hart’s mandate. He was not challenged by Mr Hart that it was within Mr Hart’s mandate to determine whether or not to set up companies related to Harts. When asked about whether the conversation was as deposed to in his affidavit sworn 4 May 2005 Mr Hayter’s evidence131 was to the effect that paragraph 12 was his recollection of the effect of the conversation. I accept his evidence that this was the effect of the conversation. [192] A tax minimisation scheme was costly to promote. It might involve legal advice, travel around Australia to explain it to accountants and in the case of the 1998 EWF it involved travel to Hong Kong and taking legal advice there. Within Australia, for a scheme there would be legal fees to Cleary and Hoare solicitors, and travel expenses for Mr Hart and Mr Hayter incurred as they travelled Australia promoting the scheme. [193] It was in Mr Hart’s contemplation for the 1998 EWF that there would be expenses incurred for him to arrange for an off shore lender and an off shore insurer. [194] It was the general practice for Harts to obtain independent advice about a tax minimisation structure Harts was considering promoting to clients. When a legal opinion was obtained from solicitors or from counsel it was common for Mr Hart and Mr Hayter to discuss the opinion. There would be discussion about what Harts could and could not do. [195] On about 19 March 1998 Mr Hayter, at Mr Hart’s request, approached Mr Willemse and Ms Clark (now Ms Horritz), directors of a client of Harts, Queensland Mushrooms and asked them to lend $250,000 to Mr Hart to set up the 1998 EWF arrangement. Mr Hayter was cross examined about the purpose of the loan: “…I was requested or I was asked by yourself to talk to them and see if they wanted to be involved. I did that…. How the money was applied was at your [Mr Hart’s] discretion.” (Hayter T 6-50 l.22) [196] Ms Horritz had no independent recollection by the time of trial as to whether Mr Hayter had asked her in 1998 for a loan to establish an offshore bank and insurer. Her affidavit was deposed to on 26 October 2004 when she swore that on 19 and 31 March 1998 Mr Hayter had advised that the money requested was to set up a bank in Hong Kong and to set up an insurance company to hold bonds. The money was to be repaid before 30 June 1998. She deposed then that the facts in the affidavit were within her knowledge. I accept that the meetings occurred. It was not suggested to her that she had no independent recollection in 2004 of what occurred at the meetings or that her recollection in 2004 was suspect or incorrect. Her evidence is not direct evidence of Mr Hart’s conversation with Mr Hayter or direct evidence of Mr Hart’s plan. Horritz 131 T6-58 l30 -- 60 of 138 -- 61 (formerly Clark) made a note of this meeting. (B00017479 – SDF 216) She asked to paraphrase what the note states: “XXN So this actually says what if you had to paraphrase it?—That Steve Hart was going to Hong Kong, to set up a welfare fund. A bank company and an insurance company. The purpose of it was to get loans so the directors could pay out their shareholder loans, and then the margins of profit that were going to be made or fees charged for clients. And that you’re funding…?---And we were asked to fund 250 to 300,000 to help set this up, these companies up.” (Horritz T 7-58 l.20) “XXN I’m suggesting the “250-300 to fund” was to fund the establishment costs of Harts in Australia?—What part of Harts in Australia? .. If you don’t recall, just--?—I –I believed that the 250,000 was to fund – set up the companies in Hong Kong, the bank and the insurance company.” (Horritz T 7-62 l.29) [197] There was also a meeting on 7 April 1998 at which Mr Hayter explained to Mr Willemse and Ms Horritz that a proposed EWF scheme would involve a Hong Kong bank, a New Zealand entity and an insurance company. This was recalled by Mr Willemse. [198] These recollections of Mrs Horritz and Mr Willemse assist me in considering the reliability of Mr Hayter’s recollections that Mr Hart had said: “We should set up our own finance company and set up a 10 year insurance bond off shore”. They are consistent with them. [199] I accept that Mr Hart’s plan by 19 March 1998 was to set up a finance company in Hong Kong and an off shore insurer. Whether the plan was that the two entities were to be legally under the control of Harts or Mr Hart or whether they would have separate shareholders and directors was not clear from Mr Hayter’s evidence. Even if the plan was that they be legally independent entities, I find that Mr Hart planned to set up companies which would act as he would request so as to implement his scheme. Subsequent events support the finding that this was the plan. $250,000 was lent in response to Mr Hayter’s request. Payment of $150,000 to Harts was made on 7 April 1998 and $100,000 on 21 April 1998. It does not follow that expenses had not been incurred prior to 7 April 1998. The amended points of defence denied that the loan was to set up overseas companies and alleged that the cheque for $150,000.00 dated 7 April 1998 was money intended to be paid, and in fact paid to "Bomilsco" for the marketing of the EWF. [200] In March and April 1998 Mr Hart met with accountants in Western Australia to promote an EWF. [201] On 29 March 1998 Mr Hart travelled to Hong Kong. On 1 April 1998 he returned from Hong Kong. On 31 March 1998, Mr Hayter was in Australia for the meeting with Ms Horritz. -- 61 of 138 -- 62 [202] The schemes which were developed for use after the 1997 EWF involved companies registered in Hong Kong, Mauritius and New Zealand. [203] The Hong Kong companies included Acceptor Trust Corporation Limited (“Acceptor”), United Overseas Credit Limited (“UOCL”) (previously Lucky Dragon Group), Merrell Associates Limited (“Merrell”) and Zetland Financial Group (“Zetland”). [204] European Grande Assurance SA was registered in Mauritius and the National Welfare Trust (New Zealand) Limited (previously the National Employee Trust)(“NET”) was registered in New Zealand. [205] At material times in Hong Kong, Acceptor was a custodial, fiduciary service company which provided the services of office staff, office space and equipment as needed to undertake the functions required by clients. A Mr Allardice was its director in 1998. [206] Mr Hayter deposed in 2005 that in early to mid 1998 he travelled to Hong Kong. His flight dates could not be confirmed by records. He deposed to attendance at a meeting with Mr Hart and a lawyer from Baker McKenzie in Hong Kong, Mr Olesnicky. He deposed that Mr Olesnicky then referred Mr Hart to Mike Allardice who was the Senior General Manager of the Acceptor Trust Corporation in Hong Kong. He recalled receiving a card from Mr Allardice at the meeting. He recalled that Mr Hart said that he wanted the EWF structure to include an offshore finance company and an insurance company, and for the cost of the setting up of that structure to be about $200,000 to $250,000. [207] At trial, Mr Hayter accepted in cross examination that some of the details he deposed to which related to a trip he made to Hong Kong were consistent with a trip he and Mr Hart made in September 1998 and inconsistent with a trip in early to mid 1998. That made suspect his recollections of Mr Olesnicky referring Mr Hart to Allardice and of conversation dealing with the cost of setting up a structure. UOCL and an EWF involving UOCL were well underway by September 1998 and Mr Hart had dealt with Mr Allardice well before September 1998. Mr Hayter accepted that he could not have been in Hong Kong on 31 March 1998. Mr Hayter was obviously unreliable as to dates. He implied that he reconstructed dates. He was perplexed when cross-examined that he had deposed to details of the trip which were consistent with his September trip when his recollections of what was said at the meeting were inconsistent with a September meeting. Mr Hart suggested to Mr Hayter in cross examination that he and Mr Hayter met Mr Olesnicky more than once. Mr Hayter did not accept that when Mr Hart suggested it. Mr Hayter’s demeanour was that of a person fearful that Mr Hart was tricking him. However Mr Hayter gave later evidence that he may have been to Hong Kong one, two or three times in the relevant period because of other things he was doing for Harts and for himself. Despite acknowledging his own confusion he appeared convinced of the referral of Mr Hart to Mr Allardice. He said “where we started the journey in my view was in Hong Kong, was sitting with Baker McKenzie. Now, whether or not I was present at the first or the second or the third meeting, doesn't matter, from my perspective. They gave us the initial legal advice or gave Harts the initial legal advice on who they should consult if they wanted a structure put together of that nature. The referral was then to a group called Acceptor…” [208] Mr Hayter had an expertise which made it sensible that he be involved in discussions with Baker McKenzie earlier rather than later. He explained: -- 62 of 138 -- 63 whether I was there once or twice, the fact is I was involved in a meeting with Baker McKenzie on certain aspects of the structure where they were discussed. As I said before, my background experience that was being used at that time or drawn upon at that time was on Australian insurance law and investment bond structures because I'd spent the early part of my life in that industry. So it made sense that I would have been involved early rather than later in the construction of how the policy was going to be issued and the features and benefits of that contract. Now, whether I was there twice or even more, I don't know. [209] Mr Hayter’s affidavit evidence was that after meeting Mr Olesnicky, Mr Hayter and Mr Hart “later met with Mr Frank Mullins and Michael Allardice at Acceptor in Hong Kong. Allardice assisted Hart in the setting up of United Overseas Credit Limited ("UOCL") and registered UOCL as a finance company based in Hong Kong. He also assisted Hart in the setting up of European Grande Assurance SA ("EGA") as an Insurance Company based in Mauritius.” He accepted that he could not remember Mr Mullins. He explained in evidence that his basis for the rest of that evidence was that: the next stop after Baker McKenzie, was to sit down with people who had expertise in offshore structures of finance companies and insurance companies. So I was certainly involved in a discussion on those matters. [210] I accept that Mr Olesnicky referred Mr Hart to Mr Allardice and that it was at a meeting which took place during Mr Hart’s visit between 29 March and 1 April 1998. I accept that after the meeting with Mr Olesnicky Mr Hart went to Allardice at Acceptor for assistance with the setting up of UOCL and EGA. My finding is consistent with later events. It is consistent also with Mr Hart’s submission that he was advised by Baker McKenzie on or prior to 7 April 1998. 132 [211] On 7 April 1998 a Mr Sek Sum of Offshore Incorporations (Mauritius) Limited, sent a fax from Mauritius to Allardice advising “that name “European Grande Assurance S.A” (EGA) has been approved and reserved for a period of two months by the Registrar of Companies”. Sek Sum had never met Allardice when he sent the fax. Allardice, as the senior manager of Acceptor, had telephoned Sek Sum and spoke about the setting up of EGA in Mauritius. This coincidence helps confirm the inference that on his visit to Hong Kong from 31 March 1998 to 1 April 1998, Mr Hart met with Olesnicky and also Allardice. [212] On 7 April 1998 a meeting between Hayter, Horritz and Willemse occurred in relation to the loan of $250,000. 133 Willemse said Hayter explained it as: “RXN The businesses put money into the employee welfare fund and then some of that goes up into it looks like “HK”, Hong Kong, “insurance company, through security to Hong Kong Bank” and then a fee, or something, comes back down into the business again. Then also out of the welfare – out of the employee welfare fund, somehow it goes through an entity and then New Zealand, I believe.” (Willemse T 7-53 l.1) 132 Respondents closing facts submissions pg 34 133 Willemse T 7-48 l. 48 and T 7-49 l. 36 -- 63 of 138 -- 64 [213] On 7 April 1998 Queensland Mushrooms Pty Ltd entered into a loan agreement with Harts Consulting Pty Ltd for the sum of $250,000 repayable on 31 July 1998 or such other date as agreed between the parties. (B00017482 – SDF 217). On 7 April 1998 $150,000 was paid by Queensland Mushrooms to Harts Consulting Pty Ltd, being a loan for what Hayter had explained was costs of setting up the Hong Kong companies. (Affidavit Clark Q00012119 paras 11 to 14) [214] In or about 1998 Mr Hart personally and through his staff presented information and promoted the 1998 EWF Scheme and its benefits to accountants in Hart’s accounting practice and accountants in Western Australia, including Tieleman, Power and Murphy and to clients of Hart’s accounting practice including O’Brien, Walters and Zander. [215] In or about 1998 Mr Hart provided to the managers and other staff of Hart’s accounting practice and other accounting practices, pro-forma documents for the 1998 EWF Scheme. [216] On 15 April 1998 Mr Hart wrote to Olesnicky of Baker McKenzie in Hong Kong, referring to a letter dated 7 April 1998 addressed to Mr Agius of Bastille Investments Limited a copy of which was sent to Mr Hart. The letter134 states: “Robert has asked me to on forward to you a copy of the following: (a) Life Insurance Policy used by Strathford Life. 8 pages. (b) An explanation letter supplied by Strathford Life of 4 pages. (c) An insurance policy proposal.” [217] This letter is significant in two respects. First, it helps confirms the inference that on his visit to Hong Kong from 31 March 1998 to 1 April 1998, Mr Hart met with Olesnicky. Second, Mr Hart sent pro-forma policy documents to Baker McKenzie in Hong Kong. The reference to Strathford Life is a reference to the insurance company used by Asiaciti in the 1997 EWF scheme. [218] Mr Hart gave evidence at his criminal trial in relation to Robert Agius. His evidence was to the effect that Agius contacted him in late April, early May 1990 (eight years before these events) and Agius informed him that he was an accountant from Moore Stephens and was resident in Vanuatu. Mr Hart stated that he subsequently met Agius in Sydney for a face to face meeting where the ERP scheme was discussed. Mr Hart stated: “He (Agius) said he’d just formed an insurance company called Security Life in Vanuatu and he had a finance company called Grade – I think it was Grade Enterprises, [219] On 21 April 1998 $100,000 was paid by Queensland Mushrooms to Harts Consulting Pty Ltd. (Affidavit Clark Q00012119 paras 12 -14). That same day, Allardice sent a letter marked “Strictly Private and Confidential” addressed to Mr Agus of Bastille Investments Limited with a BCC to Mr Hart by fax to Mr Hart at Harts Accountants & Auditors on fax number 61 73229 8182 stating: “1. Company C, Just a short note to confirm that Lucky Dragon Group Limited has been reserved for use in the structure. 2. Funds to put the structure in place 134 B00017111 -- 64 of 138 -- 65 We understand you will very shortly be remitting approximately USD65,000. We confirm that the excess above the initial estimate for the stage 1 costs (USD34,280) will be paid into the bank account of company C when the bank account is opened with Standard Chartered Bank in Hong Kong so that the funds are available to meet ongoing expenses as incurred.” (Q00029590 – SDF 230 and Q00029591 – SDF 231) [220] The CDPP submitted the Court may infer from this that the payment of the AUD$100,000.00 on 21 April 1998 relates to the request from Mr Allardice of Acceptor for a remittance of approximately USD$65,000.00. Mr Hart submitted that I should not draw an inference that the money paid by Queensland Mushrooms was remitted to Hong Kong because: “(i)The Australian Federal Police officers conducted Austrac searches on participants including various companies associated with Mr. Hart. Some of these searches are attached to the affidavit of Federal Agent Muller. However, there is no evidence in these proceedings that points to any money going out of Australia by any person or company associated with Mr. Hart in all the relevant periods. We would suggest that if there were any Austrac records showing a different scenario then the Crown would have placed that evidence before this Court. Therefore the inference that Crown is requesting to be drawn in relation to the payment of $100,000 on 21/4/1998 should be disregarded and no inference as they suggest can or should be drawn. (ii) Secondly and equally as important is the fact that the money was requested by Mr. Hayter from the Queensland Mushrooms group on 31/3/1998. No evidence was led by the Crown over why the payments for the $250,000 was in paid over two amounts two weeks apart. It could be inferred that the reason for the two payments was related to the cash flow requirements of Queensland Mushrooms Group rather than the inference the Crown are trying to draw.” [221] The theory that Queensland Mushrooms had cash flow problems is not supported by evidence and was not suggested to the relevant two witnesses from that company. I accept the submission of the CDPP as being consistent with the recollections of Mr Hayter, Mr Willemse and Ms Horritz. [222] Allardice’s letter of 21 April 1998 also leads to an inference about the purpose for which Mr Hart went to Hong Kong from 31 March 1998 to 1 April 1998. In the letter, Allardice states “just a short note to confirm that Lucky Dragon Group Ltd has been reserved for use in the structure”. Lucky Dragon Group Ltd subsequently changed its name to United Overseas Credit Limited. It is consistent with Mr Hart’s having gone to Hong Kong from 31 March to 1 April 1998 to establish UOCL for use in the Mr Hart’s variation of the 1997 EWF scheme. [223] The fax does not otherwise state an address for Mr Agus of Bastille Investments Limited. [224] On 29 April 1998 Le Grande European Group SA was incorporated in the Bahamas. 135 135 MPVC00498 – SDF 1305 and affidavit Sek Sum Q00051659 Ex DSS-1 -- 65 of 138 -- 66 [225] On 6 May 1998 Capcept Limited and Torcept Limited were appointed the first directors of UOCL. Subscriber shares were transferred from Offshore Incorporations Limited to Reserve Cash Limited as nominee for Le Grande European Group SA and from Well Held Limited to Territorial Cash Limited as nominee for Le Grande European Group SA. Offshore Incorporations Limited resigned as secretary and Accel Secretaries Limited was appointed.136 [226] From 6 May 1998 UOCL operated its business from its registered address within the office of Acceptor in Hong Kong. 137 Acceptor’s operational and registered address was 11 th Floor Ruttonjee House, 11 Duddell Street, Hong Kong.138 Mike Allardice and Peggy Chan were employed by Acceptor.139 [227] On 8 May 1998 Lucky Dragon Group Limited resolved to change its name to UOCL. 140 UOCL was registered in Hong Kong with its registered address at 12th Floor Ruttonjee House, 11 Duddell Street, Hong Kong. 141 [228] On 15 May 1998 the change of name from Lucky Dragon Group Limited to United Overseas Credit Limited was registered.142 [229] From 17 to 19 May 1998 Mr Hart was in Hong Kong. [230] A copy document143 dated 18 May 1998 purports to be a copy of a Services Agreement with Acceptor and with Mr Hart as Principal and UOCL as the Company. Acceptor provided fiduciary services to other companies.144 Acceptor had an address at 12/F 11 Duddell Street, Central Hong Kong.145 This is the address shown in the document. Acceptor was previously Multiversal Traders (HK) Ltd.146 Stevens identified the signature of Mr Hart on page three of the document.147 Although Chan did not recognise the document she said that she understood that proforma agreements for the provision of fiduciary services existed but she had not seen them. 148 The service agreement provided: “1. Definitions “The Principal” means the person or persons who has made the request as stated hereunder and whose name..is given in Schedule 1. “The Company” means the Company or the Trust or any other legal entity as specified in Schedule III. ........................ 5. Payment of Charges 136 Q00042791 – SDF 232, Q00042881 – SDF 224 and Q00042882 – SDF 225 137 SAF 129 and 131 138 SAF 35 139 SAF 36 140 SAF 129(a) 141 SAF 129 142 Q00042896 – SDF 228, Q00045721 – SDF 227 143 Q00039589 – SDF 234 144 Chan T 2-60 l.2 145 Chan T 6-42 l.9 146 Chan T 2-62 l.10 147 Stevens T 8-18 l.10 148 T 2-60 l.15 -- 66 of 138 -- 67 Debit notes or invoices raised may at the request of the Principal....be made out against the Company.....The Principal will nonetheless remain primarily responsible for payment of all accounts rendered by ACL or the Nominee. 6. Instructions The Principal …shall give instructions and provide information to ACL..ACL ..are expressly authorised to act on verbal instructions or on instructions communicated by, or on behalf of, the Principal… Schedule I – The Principal – Steve Hart Schedule III – The Company United Overseas Credit Limited.” [231] Mr Hart challenged the document on bases: that it was a photocopy (this submission was as to weight not admissibility); dates can be wrong as demonstrated by another agreement between Mr Hart and UOCL which bears two different dates; the signature is faint; it was found in a file titled “UOCL profits tax 2000 to 2001” and Mr Hart implied that if there had been an original it would be in the records of UOCL yet no document was produced (this could be a suggestion of a suspicion of impropriety by the CDPP or others or a suggestion that there was no original for the photocopy); there may be pages missing because handwriting on the front cover reads as “G1” and in another place as “G7” leading to an inference Mr Hart submitted that there should have been 7 pages and 4 are missing and other clues suggest that pages may be missing; Mr Stephens is unreliable in recognising the signature; and Mr Hart could not become principal of UOCL in April1998 as it was incorporated on 27/6/07. [232] There is no evidence that the applicant has done anything other than tender the copy of documents as originally seized from Hong Kong. Where a question arose in relation to whether the copy reflected what was seized, the original file was tendered. The original file that contains the principal agreement constitutes exhibit 82. [233] There is no reason to doubt the evidence of Mr Stevens in respect to the recognition of the respondent’s signature: “See, I don’t think you can recognise my signature after all these years? …Oh, I think I can, Mr Hart. I’ve seen it a few thousand times.”149 [234] The only part of the document that Mr Hart can persuasively submit is missing is Schedule 2, the Schedule of Fees. Mr Hart submitted that because Schedule 2 is missing, “the Court does not know what fees and charges Mr Hart was purportedly signing for as principal.” It is not necessary to know the actual fees charged to determine that this agreement shows the true nature of the relationship between Acceptor, Mr Hart and UOCL. I note that Schedule 2 (which refers to the Schedule of Fees) states that it is “printed separately”. [235] Notwithstanding that Mr Hart’s submissions are all arguable, there is no evidence to suggest the document seized is a forgery or a copy of a forgery, and I accept the evidence of Mr Stephens that he recognised Mr Hart’s signature upon the document. I am satisfied that the document shows the true nature of the relationship between Acceptor, Mr Hart and UOCL. Acceptor was a custodial, fiduciary service company which provided the services of office staff, office space and equipment as needed to undertake the functions required by Mr Hart. 149 T8-52 L3-5 -- 67 of 138 -- 68 [236] The Acceptor services agreement makes it clear that it is Mr Hart who is the principal and able to give instructions and provide information to Acceptor in relation to UOCL. By clause 6 of the service agreement, Acceptor was expressly authorised to act on verbal instructions or on instructions communicated by or on behalf of the principal. The terms of the agreement are entirely consistent with the evidence of Ms Chan that she would act on the verbal and written instructions of Mr Hart, but not on the instructions of others without the express consent of Mr Hart. [237] On 19 May 1998 UOCL resolved to apply for a money lenders licence.150 [238] On 19 May 1998 Allardice sent a letter marked “Strictly Private and Confidential” addressed to Mr Agus of Bastille Investments Limited with a BCC to Mr Hart by fax to Mr Hart at Harts Accountants and Auditors on fax number 61 7 3221 2787 stating: “Re: Licence for Company C 1. We are pleased to inform you that the certificate of incorporation on change of name has been received from the Hong Kong Companies Registry today. 2. The application for the Licence for Company C can now proceed in the new company name, however due to the time the certificate was received, it was not possible to file the application to the relevant authorities today” (Q00029582 – SDF 238) The fax does not otherwise state an address for Mr Agus of Bastille Investments Limited. [239] I find that Mr Hart was centrally involved in the establishment of UOCL as the financier in the 1998 EWF and subsequent EWF and non-complying superannuation schemes promoted by him. [240] On 19 May 1998 Mr Hart returned from Hong Kong. [241] Mr Hart told Geoffrey Todd (Todd), an accountant resident in New Zealand and the sole director of NET, that he wanted to use NET instead of Asiaciti as trustee for Harts’ clients in the 1997 EWF and that “the Asiaciti loans could be purchased and those clients could become clients of NET and UOCL”. (Affidavit Todd NZGI02756 par 35) From about the end of May 1998 (or probably later) Mr Hart started talking to Mr Briggs of Asiaciti. (Todd T 7-12 l.15 and 18) The discussions included the taking over of the functions of trustee and loans (Todd T 7-12 l.39), funding (Todd T 7-12 l.42) and costing (Todd T 7-12 l.47). [242] On 20 May 1998 National Welfare Fund Limited, changed its name to National Welfare Trust (New Zealand) Limited (NWT). (SOAF 56) Ultimately it changed its name on 15 March 1999 to National Employee Trust (New Zealand) Limited (“NET”). The parties tended to refer to it as NET during the trial. [243] A fax dated 22 May 1998 from Baker & McKenzie to Mr Hart (Ex 74, B00026355 – SDF 241) attached a revised version of the Loan agreement (Titled United Loan D.doc. Ex 72: B00026350 – SDF 247). The fax stated: “We understand that the Lender has already commenced its application for a money lender’s licence.” 150 Q00045720 – SDF 239 -- 68 of 138 -- 69 [244] On 26 May 1999, Mr Hart emailed Mr Allardice of Acceptor, in the following terms: “Mike, I suggest that we use our new doc’s to pay out the old loans and issue new loans. You will see the people are already paying you interest. In relation to the old insurance policies, I think they also are cancelled and new ones from Dennis issued.”151 [245] On 27 May 1998 a seminar was conducted by AIM in Perth on the EWF. Mr Hart was present. [246] On 28 May 1998 the Companies Registry wrote to UOCL in relation to the application for a money lender’s licence asking for the telephone number for the business and for the authorisation evidence to be counter signed by another director. (Q00045722) [247] On or around 2 June 1998, by letter, Mr Hart advised the client employers who participated in the 1997 EWF that changes had been made to the scheme.152 The letter advised changes as follows: 1. The loan that the client employer had previously borrowed through Eurobank had been taken over by United Overseas Credit Limited 12th floor Ruttonjee House, 11 Duddell St Hong Kong (“UOCL”); 2. The trustee of the relevant welfare fund, ASIACITI, had changed to National Welfare Trust (New Zealand) Limited (“NET”); 3. The client employer was to make all future welfare payments to NET; 4. The client employer was to make all future interest payments to UOCL; 5. NET had redeemed the old insurance bond from Strathford and taken out a new bond; 6. The new bond had been taken out with European Grande Assurance S.A. (“EGA”); 7. The client employer would receive an invoice on a quarterly basis for payment of the interest; 8. The interest rate that was generally payable in relation to the loan had been adjusted to 5% plus withholding tax; 9. The rate of interest varied from client to client; 10. It was imperative that each client/employer pay the relevant amount by 30 June at the end of each relevant financial year. [248] Mr Hart advised the clients/employers who participated in the 1997 EWF by the letter dated 2 June 1998 153 : “The interest rate has now been adjusted to 5%, plus withholding tax, which must be paid on a quarterly basis. In future, an invoice will be sent in each quarter of the year – September, December, March and June – for payment of the interest rate. This amount must be paid in full by the end of each quarter. You are aware that you have only partly paid the interest for the 1998 financial year, and the balance of 2.5% must be paid on or before the 30th June to the new entity, namely United Overseas Credit Limited. 151 SAF 32 152 B00017075 is an example sent to Mr James Cavill of JE Cavill Holdings Pty Ltd 153 SDF page 464 -- 69 of 138 -- 70 Could you please make arrangements to have this amount paid when the invoice is issued to you. It is imperative that this amount be paid by the 30th June.” [249] Mr Hart knew that some or most client employers in the 1997 EWF would, or were likely to, claim payments by way of interest to UOCL as an expense in their income tax returns for FYE 1998 and following. 154 [250] An example of the letters was one sent to Mr James Cavill of JE Cavill Holdings Pty Ltd which advised that “new documentation needs to be signed by you which I will arrange for Peter Andrew to drop around with the documentation for signing”. There was no indication in the letter that the documents were to be signed before 30 June 1998. [251] Mr Hart’s letter of advice that a loan has been taken over by UOCL in context with advice that future interest must be paid to UOCL must have been intended to mean that Eurobank had assigned to UOCL its right to receive interest from the borrowers. [252] Mr Cavill deposed that upon receipt of the letter of 2 June 1998 he made an appointment to see Mr Hart and Peter Andrew at Harts, attended and completed the new loan documentation provided to him by Peter Andrew prior to leaving. The CDPP submitted this occurred well after 30 June 1998. That was inconsistent with Mr Cavill’s evidence. A “Loan Agreement” Mr Cavill signed155 bears a typed date 28 June 1998 on its cover sheet. It is however the form of agreement developed for the 1999 EWF. Mr Hart submitted that Mr Cavill signed the document on or before 30 June 1998. The issue turns upon Mr Cavill’s affidavit. The onus favours the respondent. I am not satisfied from that the document was backdated. Mr Cavill was the borrower from UOCL. J E Cavill Holdings Pty Ltd was not referred to in the document and did not sign as borrower. Nothing turns on that so far as I am aware. [253] Mr Hart submitted that “in June of 1998 all clients re-signed new documentation”. Inconsistently with that submission he submitted “it is not clear from the evidence produced by Mr. Vincent or by Mr. Singh in these proceedings… How many of these participants obtained… new loans with UOC… We would suggest that an inference could be drawn that in fact not all participants with "old” loans obtained new loans with UOC.” The CDPP made no submission in response. There is no evidence that all 28 participants in the 1997 EWF signed new loan agreements with UOCL by 30 June 1997. The evidence does not reveal how many of the participants signed in FYE 1998 or in FYE 1999. It is a reasonable inference that of the 28 participants some other than Mr Cavill signed a loan agreement with UOCL and some, as Mr Hart urged me to infer, did not, that some signed in FYE 1998 and some in FYE 1999. It is also a reasonable inference that UOCL for its part did not sign the loan documents until 1999. Mr Cavill’s was signed by him as early as 28 June 1998 but was not signed and confirmed by UOCL until 30 April 1999. [254] The CDPP submitted in its opening156 and repeated in its closing157 that the fraud the subject of application 1(b)(i) was that Mr Hart subsequently informed some of the 154 SAF [33], amended points of defence [6](a) 155 B00017346 156 Applicants opening [86] and [91] 157 Applicants outline of submissions [89] -- 70 of 138 -- 71 participants in the 1997 EWF scheme that their loans had been taken over by UOCL when Mr Hart knew that some or most clients/employers in the 1997 EWF would, or were likely to, claim payments by way of interest to UOCL as an expense in their income tax returns for the financial year ending 30 June 1998 and following158 . [255] The CDPP submitted in its opening159 that client/employer participants in the 1997 EWF were not in fact entitled to claim as deductions these interest payments made to UOCL because prior to the 30th June 1998 and subsequently the loans previously held by the participants with Eurobank had not been assigned to UOCL. If it is correct that the loans were not assigned I would accept that submission subject to one qualification which arises on the evidence. That submission would apply to the case of a participant which claimed a deduction for interest paid to UOCL where the payment was made before entering into a binding agreement with UOCL to pay interest to UOCL. If an agreement had been entered into with UOCL before the interest payment was made to UOCL and if interest was paid pursuant to the agreement with UOCL then the deductibility of the payment would not depend upon whether Eurobank had assigned its rights to interest to UOCL. Deductibility would depend on the fresh agreement with UOCL, on matters such as whether pursuant to the agreement there was a loan made by UOCL to the borrower and whether the loan was invested so as to benefit an employee of the borrower. If a payment of interest was made, for example by Mr Cavill, on 28 June 1998 after entering into a loan agreement with UOCL, that payment might be deductible though no assignment had been made by Eurobank to UOCL. [256] I infer that the case for the CDPP adequately raises fraud by Mr Hart’s conduct with respect to the 28 participants whether they made interest payments to UOCL before or after entering into an agreement with UOCL and whether they made interest payments or not. The CDPP’s pleading supports that inference. I understand the CDPP’s case to be that the alleged fraud involved the allegation that payments of interest to UOCL by persons who had previously been making payments to Eurobank would themselves have been not deductible in FYE 1998 or subsequently on two bases: Firstly because there had been no assignment by 30 June 1998 by Eurobank to UOCL of Eurobank’s rights against borrowers to receive payment of interest (this is consistent with its submissions in the opening and closing addresses). It follows that if the taxpayers made payments of interest to UOCL in FYE 1998 [or later] the payments were not then payable to UOCL because there was no loan agreement between the taxpayer and UOCL which had been made by 30 June 1998 [or before the interest was paid to UOCL] (this is consistent with a factual contest which the parties appeared to wage with witnesses and is consistent with issue 2 of an issues paper once prepared by the CDPP and handed up in an interlocutory hearing and which Mr Hart appended as schedule B at page 206 of his written Closing Facts Submission): Secondly, (the case pleaded) if interest was paid to UOCL in FYE 1998 pursuant to a loan agreement between the taxpayer and UOCL “ Hart knew that his clients who participated in the 1997 EWF were not entitled to claim the interest payments on their loans to UOCL as a tax deduction. Particulars (i) Hart knew and continued to know that there were no funds loaned by UOCL to any of his clients who participated in the 1997 EWF or any subsequent schemes; (ii) Hart knew there were no funds ever received from UOCL or held by NET on behalf of any of his clients who participated in the 1997 EWF; 158 SAF, paragraph 33 159 Opening [87] -- 71 of 138 -- 72 (iii) Hart knew and continued to know that UOCL did not have the financial capacity to make the loans to each of his clients who participated in the 1997 EWF or any subsequent scheme.” [257] The letter of 2 June 1998 also informed the participants that there had been a change in trustees of the welfare fund so that Asiaciti was replaced with National Welfare Trust (New Zealand) Ltd (“NET”). This letter further informed clients that NET had redeemed the old insurance bond from Strathford and taken out a new one with European Grande Assurance S.A. (“EGA”), a company incorporated in Mauritius. [258] That was incorrect. Negotiations between the old and new trustee for the purchase of the bonds, loans and change of trustee continued until March 1999. Negotiations in relation to some clients continued until 24 May 1999.160 The CDPP submitted that the Eurobank loans were actually assigned by Asiaciti to NET in March 1999 and May 1999. The CDPP referred to SAF 27, 28, 29 and 31 and the documents appearing there. The CDPP also referred me to SAF 30 in support of this issue. The document to which SAF 30 referred is at SDF 837. [259] Todd at NET had never seen the letter of 2 June 1998 but explained what he understood it to mean. (Todd T 7-33 l.40) “RXN Please also be advised that you borrowed $350,000 through European Industrial Bank Limited.” Todd understood European Industrial Bank to be “it was through the Asiaciti Trust Limited” (Todd T 7-33 l.50) “RXN What role did European Industrial Bank Limited play in that scheme?—I believe that was the loan facility. Right. And it was a company incorporated in Western Samoa, from that letter in any event, but it says, “Please also be advised that this loan has been taken over by the following entity United Overseas Credit limited. My question is as at the 2nd June 1998, did you know that fact?—As far as I was aware, we hadn’t established any purchase of any Asiaciti clients until a long time later. …..it says here, “For your information, I have been advised by the new trustee”. Who was the new trustee?—National employee trust or NET. You were the sole director of that company?—I was. “That he has also changed one of the assets of your fund, namely the insurance bond, and has redeemed the old bond and taken out a new one with the following entity.”…European Grande Assurance. As at the 2nd of June 1998 had you in fact redeemed the old insurance bonds?—Those, I don’t believe were finalised until April 1999. Are you able to tell us who the assurance bond was held?—A company by the name of, Stratford Life. Did you have any knowledge of its association with Asiaciti?—Its association, only from the point of view that it was, what – or the company that issue the bond from the proceeds of the loan from European Industrial Bank to Hart’s clients. Now, Mr Todd, did you have any conversation with Mr Hart in relation to the redeeming of old bonds and taking out of new bonds 160 (B00017123 – SDF 826) -- 72 of 138 -- 73 with European Grande Assurance as at the 2nd or prior to the 2nd of June 1998?—Mr Hart brought up May 1998, I remember from his original questioning. Whether that was specifically May 1998 that those discussions were raised, I cannot recall. But no other discussion in relation to the taking over the bond, just the taking over of the clients. As the sole director of the new trustee NET, did you make a decision to redeem the old bond as at the 2nd of June 1998?—I don’t recall I ever would have done that. Right. Did you make a decision to invest for this particular participant in a new bond in European Grande Assurance SA as at 2nd of June 1998?—I would not have made that personal decision, no. When you say you would not have, why is that?—Negotiations had not been finalised to purchase these clients until a long time after that date.” (Todd T 7-33 l.54) [260] On 2 June 1998, Allardice sent a letter marked “Strictly Private and Confidential” addressed to Mr Agus of Bastille Investments Limited with a BCC to Mr Hart by fax to Mr Hart at Harts Accountants & Auditors on fax number 61 7 3229 8182 stating: “Re: Company B (insurance) 1. The correspondence address of the captioned company will be; 12th Floor, Ruttonjee House.” (Q00026640 – SDF 257) The fax does not otherwise state an address for Mr Agus of Bastille Investments Limited. [261] On 3 June 1998 Allardice sent a letter marked “Strictly Private and Confidential” addressed to Mr Agus of Bastille Investments Limited with a BCC to Mr Hart by fax to Mr Hart at Harts Accountants & Auditors on fax number 617 3221 2787 stating: “RE: TELEPHONE/FAX FOR COMPANY C We are pleased to inform you that the telephone and the fax numbers allotted to Company C are as follows: Tel No. (852) 2147-3260 Fax No. (852) 2147-3421 If you have any queries, please do not hesitate to contact the undersigned.” (Q00029580 – SDF 262 and Q00029581 – SDF 263) [262] On 17 June 1998 a letter from Harts enclosing documents for the EWF and requesting a cheque payable to UOCL for establishment costs was handed to Zander. (Affidavit Zander Q00012121 para 8 and B00017750 – SDF 264) [263] On 19 June 1998 Allardice sent a letter marked “Strictly Private and Confidential” addressed to Mr Agus of Bastille Investments Limited with a BCC to Mr Hart by fax to Mr Hart on fax number 61 7 3229 8182 stating: “Re: Company C 1. The bank account details are as follows:- Bank: Standard Chartered Bank Branch: Landmark Branch Edingburgh Tower,15 Queen’s Road Central,Hong Kong Account Number: 447-105-1439-8 USD Statement Savings Account Account Name: United Overseas Credit Limited” (Q00029579 – SDF 265) -- 73 of 138 -- 74 [264] On or around 22 June 1998, Ryan met with Mr Andrew and was advised to enter into the EWF. On 22 June 1998 a loan establishment fee was paid to UOCL. (Affidavit Ryan Q00012047 sworn 4 May 2004 paras 4 and 7) [265] On 23 June 1998 UOCL wrote to the Central Police Station in relation to an application for a money lender’s licence and provided further details. Allardice signed the letter. In paragraph 4 the letter states “…at present the company is waiting for the processing of its Money Lenders licence before spending money on the establishment of premises”. (Q00045725 – SDF 266) [266] On 26 June 1998 UOCL wrote to the Central Police Station “re: Money Lender Licence Application” stating: “2. Financial Position of the Business of the Company (i) The company has not yet commenced business… (ii) When the Money Lending Licence is granted to us we expect to commence Business. (iii)The Financial Position of the company is we currently have had no transactions and have no liabilities of any kind as per the above explanation.” (Q00045741 – SDF 285) [267] Mr Cavill was associated with one of the client employers, J E Cavill Holdings Pty Ltd. Cavill’s Insurance policy proposal for European Grande Assurance and application for loan is dated 26 June 1998. (Q00022295 – SDF 284; B00017075 – SDF 21; Q00022297 – SDF 268; Q00022296 – SDF 281; Q00022698 – SDF 270; B00017404 – SDF 269 and Q00022250) [268] Cavill signed a Loan Agreement with UOCL dated 28 June 1998. (B00017346 – SDF 287) Asiaciti had a loan and an insurance bond and the insurance bond and the loan paid each other out. (Todd T 7-38 l.55) There was no money transferred to Todd at NET from Asiaciti on account of Mr Cavill or on account of other persons. (Todd T 7- 39 l. 22) A form of Loan Agreement signed by Mr Cavill as borrower contained the wording of the forms of Loan Agreement signed by participants in the 1999 EWF. The names of the schemes do not necessarily accord with the year or financial year in which a participant entered into a Loan Agreement with UOCL. [269] On 28 June 1998 a Service Agreement was entered into between UOCL and Mr Hart, signed on 10 November 1998. The agreement provided: “The company wishes to appoint Hart to advise it on matters relating to the investment and management of loans situated in Australia from time to time upon its request. Hart has agreed to provide such services upon terms and conditions set out herein.” (B00017662 – SDF 600, Q00039591 – SDF 605, Q00012126 – SDF 294, Q00042781 – SDF 596) [270] Effective 1 July 1998 UOCL entered into an agreement with Harts Consulting Pty Ltd signed by Allardice and Mr Hart (Q00039593 – SDF 324) whereby Harts Consulting duties were to “seek out opportunities for UOC to lend or invest monies …and to introduce to UOC parties …wishing to borrow monies or enter into joint venture arrangements with the financier” for an initial term of 2 years with the ability to extend for a further two years. Recital A states: -- 74 of 138 -- 75 “UOC is a licensed money lender operating in Hong Kong carrying on the business of secured and unsecured lending and joint venture funding.” [271] On 8 July 1998 UOCL wrote to the Central Commissioner of Police in relation to the ‘Application for New issue of Money Lender Licence’ signed by Allardice. In paragraph 7, UOCL sets out its financial situation, and states:161 “(ii) does not intend to provide any lending facilities which are not fully covered by security obtained by the company from the borrower. …. (v) intends to have a conservative lending policy as it is the company’s intention to provide only secured loans and to obtain a small interest margin on this “safe” business and not to seek to make unsecured loans to obtain high interest margins. (vi) intends to obtain funds or financing facilities from registered banks and insurance companies. It is not the intention that the company seek funds from non registered banks or non registered insurance companies or the general public.” [272] Mr Hart developed a 1998 EWF Scheme (“1998 EWF”) based on the 1997 EWF Scheme. UOCL, NET and EGA were used as “lender”, trustee and insurer. [273] The 1998 EWF was promoted to operate in the following way:162 1. The director of the client/employer applies for a loan from UOCL; 2. The purpose of the loan is to purchase an insurance bond in favour of a nominated employee; 3. UOCL promises to pay the relevant director the loan amount by way of promissory note; 4. The relevant director loans money to the client/employer company by endorsing the promissory note in favour of the client/employer company; 5. The client/employer company then endorses the promissory note in favour of the trustee of the Employee Welfare Fund, NET; 6. NET, as trustee, then invests in a 10 year insurance bond with EGA by endorsing the promissory note in favour of EGA; 7. NET assigns the rights in the EGA insurance bond to UOCL as security for the loan; 8. The nominated employee may make claims to NET, as trustee of the welfare fund, for reimbursement of medical, dental, medical insurance, life insurance, redundancy, sickness and trauma expenses. [274] The pro-forma documents used with the 1998 EWF explain that the initial contribution was not used for the purpose of paying claims within the relevant period but for the purpose of purchasing an Insurance Bond from EGA. [275] Where the nominated employee made a claim to NET, as trustee of the welfare fund, the client/employer was to send a cheque to cover the cost of the amount claimed 161 Ex 15: Q00045746 162 SAF 57 and 58 -- 75 of 138 -- 76 together with a cheque in the sum of $10 to cover administration costs. The welfare fund would then pay the claim by reimbursement to the employee of the claimed sum. [276] The loan offer letter for this scheme 163 and the two following schemes contained as a condition precedent to the loan that UOCL receive copies of two year’s profit and loss statements of the borrower and a copy of the borrower’s asset and liabilities statement. The apparent concern with a participant’s capacity to pay interest and repay principal was not real. Although the pro forma documents included forms for credit reference checks164 Ms Chan did not undertake credit reference checks for UOCL. 165 Mr Hart said that loan approval was automatic.166 [277] Non-recourse “loans” by UOCL: Central to the 1998 EWF and the later 1999 EWF and 1999 Superannuation schemes alleged to involve unlawful activity was a “loan” from UOCL to a scheme participant for the amount of the participant’s initial contribution to the relevant scheme. There was jargon used by the parties in describing the loans. An adjective used by both parties was “non-recourse”. It was evident that “non-recourse” was used by the CDPP to describe financial obligations in which an obligee would have no recourse against an obligor personally and an obligee’s remedy would be limited to rights against some agreed security. If the adjective is used with that meaning it follows that in the case of non-recourse debts or loans: (1) a lender would have no recourse against a borrower in the event of the borrower’s default; (2) if a borrower defaulted, a lender could seize any agreed security; (3) a lender's right to recovery would be limited to the security; (4) if the security proved to be insufficient to cover the outstanding debt, the difference between the value of the security and the amount of the debt could not be recovered from the borrower. [278] Mr Hart gave an opening at the start of the trial and despite being a respondent. Mr Hart supplied a written document as part of his opening. In that document, Mr Hart set out in a diagram a structure in a schedule marked “A” involving the companies UOCL, the borrower, the company or trust involved with the borrower, the company NET and the insurer EGA and the relationship which Mr Hart submitted applied between them. The opening advised: “I have prepared a diagrammatical outline of the arrangement which I have attached and marked SCHEDULE “A”.” The schedule asserted that the “Loan is full non-recourse loan (Loan Agreement) with the only recourse being the security document167 listed in the schedule”, and that “EGA … calls on the promissory note for payment when the client requests that the arrangement be terminated. EGA also calls on the note for payment when UOC calls its security under the loan agreement when the borrower defaults on the repayment.” The footnote to the words “security document” in Mr Hart’s schedule referred to a definition in a particular Loan Agreement with its electronic reference. That definition appears in that Loan Agreement as: "Security Document" means an insurance policy upon the life of the Borrower with European Grande. It was a non-recourse loan which was demonstrated by Mr Hart’s example. [279] Mr Hart’s opening thus unambiguously submitted the loans to participants were non- recourse except for the security of an insurance policy. The submission was not limited to a particular scheme. I accept that to have been Mr Hart’s understanding of the 163 SDF pg 34 at clause 14 on pg 36; Q00022128 164 T4-33 L 43-55. 165 Affidavit Chan Q00012116 para 17. 166 Affidavits: McSwain Q00044804 para 12, Andrew Q00012107 para 14, Power WAMP00087 para 20. 167 B00017293 … Security Document Defined -- 76 of 138 -- 77 schemes when the trial began. It follows that Mr Hart understood that participants in the schemes could not or would not be pursued for payment of the face value of the promissory notes if they failed to pay the face value of the promissory notes. [280] On the second day of oral addresses Flanagan SC submitted: “The participant would also have known from those documents that the loans are fully - or Mr Hart uses the word "fully" but probably the better word is "limited non-recourse loans" in the sense that UOCL would seek to enforce the loan absent default only by reference to the insurance bond. That's because UOCL in this scheme was the ultimate holder of the insurance bond as security.”168 [281] By the third day of oral submissions, Mr Hart submitted: I use wrong terminologies at times and I think Mr Flanagan quite kindly yesterday said that it's not a fully non-recourse, but a partially non-recourse, and that's correct. They changed in the - I think it was '98 to '99 where they still had to keep all their payments up. That is one of the attractions. Can I - and I'm not moving away from that. That was one of the attractions that they couldn't come and say to Steve Hart, "I'll take your house.", because they had the asset here that secured their loan on the other hand. So they had the bond and the loan. Provided everyone paid their interest it was okay, but there was an expectation, your Honour, that they would meet the principal at the worst, at the end of 10 years, at the worst.” [282] That submission was internally inconsistent: An attraction was the hypothesis that “they” (UOCL) couldn’t take a participant’s house provided the participant paid interest. Yet Mr Hart submitted there was an expectation that the participants would pay principal. That “principal” implied an amount equal to the face value of a promissory note issued for a participant under any scheme. The submission of an expectation that principal would be paid is not consistent with Mr Hart’s opening; it is not consistent with the non-recourse nature of 1997 EWF; it is not consistent with the non-recourse form of Loan Agreement169 for the 1998 EWF. The 1997 EWF involving the lender Eurobank was non-recourse. Mr Singh gave that evidence and it was not disputed. However Mr Hart’s submission on the third day of oral submissions is arguably consistent with the forms of Loan Agreement used for the 1999 EWF and 1999 Superannuation schemes. [283] A submission by Mr Hart as to how schemes worked is a matter I can consider in determining what Mr Hart believed at earlier material times to be the way in which schemes would work. Mr Hart’s submission is relevant to the issue of whether Mr Hart anticipated at material times that the amount of “loans” for participants’ initial contributions in each scheme would generally remain unpaid by participants to UOCL. [284] If the evidence established that Mr Hart had an expectation that UOCL would call upon borrowers to pay or that the borrowers had an expectation that they would pay the 168 T14-38 l 50 169 SDF pages 74-82 -- 77 of 138 -- 78 face value of the promissory notes it would arguably be relevant in considering whether there were offences committed by Mr Hart in the promotion of the schemes. It would have significance if Mr Hart expected that payment would be made to UOCL early in the ten year term. That expectation might have led to an expectation by Mr Hart that EGA would present promissory notes to UOCL for payment early in the term. That might have led to an expectation by Mr Hart that EGA would receive the face value of the promissory notes from UOCL in money and invest the money to earn a return on insurance bonds owned by NET as trustee so that there would be a prospect of a return for the beneficiaries. I was not asked to consider the hypotheses that Mr Hart held these various expectations. There was some evidence to support the expectation at material times by Mr Hart that some participants would pay principal. A branch office manager of Harts between 1 July 1996 and 24 November 1999 , Ms Anderson, advised the ATO by written response to a notice issued pursuant to s 264 of the Income Tax Assessment Act 1936. Her advice was tendered.170 She recalled dealing with five participants with respect to employee welfare trusts in 1998 and 1999. She recalled being trained by Mr Hart to advise that “A 10 year interest only loan was set up but it was explained that after 3-5 years, this would be expected to convert to principal and interest repayments.” That expectation is not consistent with any loan agreement. [285] Mr Hart’s submission on the third day of oral submissions did not explain whose expectation he referred to. Mr Hart did not expressly submit that it was his expectation. If he had, it would not have been consistent with his opening; it would not have been consistent with the 1997 EWF or the 1998 EWF or with page 204 of Mr Hart’s closing facts submission at schedule A, note 1, paragraph 2. It would be no surprise that some accountants or participants would expect that principal was to be repaid if they assumed that money had been lent. Mr Hart’s oral submission on the third day of addresses is not sworn evidence. I draw no inference from it. If I were entitled to draw an inference about the facts from Mr Hart’s oral submission, I would reject it as inconsistent with evidence I do accept and reject it as being inconsistent with the part of Mr Hart’s opening to which I referred. Ms Anderson also recalled Mr Hart’s advice to have been that the trustee “put money into the bond”. That was not a feature of the schemes. There are limits to the inferences that can realistically be drawn from Ms Anderson’s recollection. I draw an inference from Ms Anderson’s letter to the ATO that it sets out her recollection of Mr Hart’s advice to her. I do not draw an inference from the letter that her recollection was accurate or that Mr Hart expected that participants in the 1999 EWF or 1999 Superannuation schemes would pay “principal” to UOCL before the ten year term expired. That would be inconsistent with the terms which required 12 months notice of intention to pay principal and inconsistent with Mr Hart’s opening and closing submissions and his submissions that they were non- recourse and the submission on the third day of addresses that “they” could not come and say “I’ll take your house.” I do not draw an inference from Ms Anderson’s letter that Mr Hart expected that participants in any of the schemes would pay principal at the end of the term. [286] An example of the Loan Agreement for the 1998 EWF is within the SDF. 171 It is consistent with the submission Mr Hart made in his opening. The UOCL’s recourse to the “Borrower” was limited to UOCL’s rights under a charge over an insurance policy 170 Exhibit 65 171 Exhibit 2 at Volume 1 pages 74-82 -- 78 of 138 -- 79 executed by the participant in favour of UOCL on the date of entry into the “Loan Agreement”. [287] No reader of a 1998 EWF “Loan Agreement” would appreciate from its clauses that a promissory note from the borrower was in the contemplation of its parties as an alternative to a loan of money. While the 1998 EWF was promoted to operate with UOCL promising to pay the relevant director the loan by way of promissory note the 1998 EWF “Loan Agreement” does not refer to a promissory note. The agreement does not expressly provide that a borrower must accept a promissory note instead of money. It does not define “Loan” to mean promissory note. It does not expressly require a borrower to pay interest to UOCL upon the borrower’s receipt of UOCL’s promissory note. It does not expressly provide that a borrower will repay to UOCL the face value of a promissory note. It gives the borrower liberty to “draw down the Loan in one drawing … provided no event of default under this Agreement shall have occurred and be continuing and provided the Lender shall have received… before the proposed date of drawing:…(d) receipt of the duly executed written notice of drawdown…” [288] One form of “Loan Agreement” was used for subsequent schemes being the 1999 EWF 172 and the 1999 Superannuation scheme. 173 It had a different “Limited Recourse” clause from that which was in the 1998 EWF “Loan Agreement”. The defined security was similar: “"Security Document" means an insurance policy upon the life of the Borrower with European Grande Assurance S.A. assigned in favour of the Lender on the date of this Agreement.” But the recourse clause for the1999 EWF and the 1999 Superannuation scheme provided: 5. Limited Recourse. The Lender confirms and agrees that the Lender's recourse to the Borrower for any sum due to the Lender under this Agreement shall only be recoverable from the Borrower to the extent of any monies recovered by or on behalf of the Lender upon enforcement of the Lender's rights under the Security Document as specified in the Schedule, provided: (a) no Event of Default occurs and the Borrower pays interest in accordance with the Agreement and (b) the Principal amount is repaid on the due date in accordance with clause 2 of the agreement. [289] The CDPP submitted that this form of Loan Agreement was non-recourse. That submission over-simplifies the interpretation. The difference in this Loan Agreement is significant. The clause suggests that if the “Principal” is not “repaid” then the limitation of the lender to recourse to the insurance policy did not apply. Arguably, if “Principal” was not “repaid” UOCL could pursue the borrower for whatever remedy UOCL had arising from the terms of the Loan Agreement. That remedy is difficult to be sure of. The agreements for the1999 EWF and the 1999 do not expressly provide that a borrower must accept a promissory note instead of money. They do not define “Loan” to mean promissory note. They do not expressly require a borrower to pay interest to UOCL upon the borrower’s receipt of UOCL’s promissory note. They do not expressly provide that a borrower will repay to UOCL the face value of a promissory note. They differ from the 1998 EWF Loan Agreement insofar as they have reference to a promissory note and the schedule contemplates it will be issued to the “Borrower”. 172 Ex 2 SDF vol 1 pg 174 at 176 173 Ex 2 SDF vol 1 pg 123 at 125 -- 79 of 138 -- 80 [290] The other consequence of the change appearing in the 1999 EWF and the 1999 Superannuation scheme Loan Agreements was that upon a participant’s default in payment of interest to UOCL the limited recourse of UOCL to the insurance policy would cease. [291] Whatever the intent of the Loan Agreements the 1999 EWF and the 1999 Superannuation scheme about UOCL’s recourse upon failure to pay the face value of the promissory note one feature of these agreements was clear. They prohibited a “Borrower” from repaying the “Loan” earlier than on the Repayment Date at ten years without giving 12 month’s written notice. If these agreements meant that participants were to pay principal, being the face value of a promissory note, there cannot have been an expectation arising from a reading of these two Loan Agreements that participants generally would pay the principal before ten years. That expectation would have been inconsistent the prohibition upon repayment without notice and it would have been contrary to ordinary experience. [292] I find that Mr Hart did not anticipate that participants would repay principal before the ten year terms of the loan agreements expired. I find that at material times Mr Hart expected that UOCL would not pursue participants for “principal” at the end of the ten year terms of the loan agreements relating to any of the schemes. UOCL’s financial capacity [293] Mr Vincent’s Task 3 Report174 collates some matters relevant to UOCL’s capacity to lend or to pay promissory notes. UOCL did not have a bank account until 7 July 1998. UOCL did not have a money lenders licence until 17 September 1998. For loans UOCL "took over" from the 1997 EWF it would be reasonable to expect that the previous lender would have been paid out. The paid up Share Capital of UOCL is nominal: $1 for the 2000 and 2001 years and $2,237 for the 2002 and 2003 years. UOCL had nominal Fixed Assets. It appears that the initial fixed assets of $893 in 2000 have been depreciated at the rate of 17.5% per year. The records of UOCL show no monies were paid out in respect of each loan. The records of UOCL show that this did not occur. At any year’s end, the loans made to the borrowers were all made by way of Promissory Notes being: Loans Receivable ($) Promissory Notes ($) 2000 94,684,000 98,684,000 2001 91,119,000 91,119,000 2002 80,658,000 81,158,000 [294] There were no financial statements prepared for the years ended 30 June 1997, 1998 and 1999, however it appears that the profit and loss account for the year ended 30 June 2000 includes all income and expenses from 27 June 1997 to 30 June 2000. This is highly irregular. Mr Vincent wrote the following comments in relation to that summary: • Total income reported as being earned by UOCL from its nominal Capital invested (less than $5,000) for the period summarised was $26,660,620. • This income is recorded as being earned from "Loan Interest Income" totalling $17,342,848 on loans where no real monies were ever advanced and from "Application Fees" for the establishment of loans where no real 174 Q00015777 -- 80 of 138 -- 81 monies were ever advanced, totalling $9,317,772. [295] In his Addendum Task 3 Report, 175 Mr Vincent identifies that approximately $14,508,140.63 was paid from UOCL to Hart related entities.176 [296] UOCL’s auditor, Tang, received four letters from EGA one for each year that he prepared audited accounts for UOCL confirming that EGA would not present the promissory notes for payment within the next 12 months.177 Tang said that if he had not received the letters he would have classified the debt as a current liability and he would have had concerns about UOCL’s ability to meet the liability. [297] By not presenting notes, EGA remained incapable of investing for the benefit of the relevant employee or for superannuation purposes. [298] I am satisfied that Mr Hart had such control of UOCL and of EGA that he was able to ensure that EGA would not present the promissory notes and am satisfied that at all material times he intended that they would not be presented before a loan agreement was terminated either at the end of its term or upon the earlier termination of the agreement by a borrower or by UOCL. [299] It was part of the CDPP’s case that UOCL did not have the capacity to pay the promissory notes it issued. Mr Hart submitted, in effect, that the court could not be satisfied of this. He submitted that while there was not $94 million in liquid cash assets to underpin arrangements UOCL could have paid the promissory notes in four ways: 1. By arranging with EGA that EGA not call on the promissory note for payment; 2. UOCL could have arranged a facility with its bank to honour the promissory note. EGA could have agreed to put the equivalent amount of money on deposit with the bank as security for UOCLs’ borrowing against the facility; 3. UOCL could have sold the promissory notes to a 3rd party, including EGA; 4. The clients who participated in the scheme could have repaid the principal on their loans. [300] The first of Mr Hart’s methods is the method which was used. It is not a method of payment of the promissory notes. It was a method of postponement of the obligation to pay. [301] The second method depends upon a bank’s willingness to lend funds to UOCL. With its income, UOCL could have serviced some borrowings if it could persuade a lender that its liabilities pursuant to the promissory notes were postponed. There is no evidence in the financial accounts of UOCL that apart from the asset of the purported loans, it had any other substantial assets. UOCL had a nominal share capital and nominal fixed assets. Its primary source of income was the payment of establishment fees and interest by participants in the scheme.178 There was no evidence that UOCL had arranged a facility for borrowing funds to repay $98,000,000 or any of it at any 175 Q00015778 176 Addendum Task 3 Report, para. 2.4 177 T 2-50 L35-40 178 Task 3 Report, para.4.1.4 -- 81 of 138 -- 82 time, and no evidence that UOCL had contemplated the contingency of paying EGA or prepared for it. I accept that Sek Sum’s expectation was correct and consistent with the evidence. He understood no claims were to be paid out. The promissory note would have been matched against the claim, and there would be no claim paid. Sek Sum understood the risk for EGA was flat or nil. [302] The third method would depend upon EGA’s determining to sell the notes and finding a buyer prepared to pay for them and the price paid. I find that EGA would not sell the notes without Mr Hart’s approval. A purchaser would not pay for the notes more than the value of UOCL’s capacity to pay. I do not accept that UOCL had at any time a capacity to pay the face value of the notes it had issued whether from its own assets or from funds it could borrow. [303] I explored the fourth theory elsewhere in these reasons when considering whether the various loans were non-recourse and whether the participant’s claims were deductible. Even upon the unlikely hypothesis that participants in the 1999 EWF and Superannuation schemes were expected by Mr Hart to repay principal, Mr Hart knew at all material times that there had been no loan, there had no money invested with the trustee at the commencement of the term of the loan agreement, there was no capacity in UOCL to pay promissory notes before the Loan Agreement was terminated and there was no benefit the beneficiary derived from any of the payments of fees or interest made to UOCL or from the “contribution” up to ten years before termination. [304] It was in or about 1998 that Mr Hart, personally and through his staff, presented information and promoted the 1998 EWF Scheme and its benefits to: accountants in Hart’s accounting practice to accountants in Western Australia, including Rudolph Tieleman (“Tieleman”), Mark Power and Robert Murphy; to clients of Hart’s accounting practice including June O’Brien, Colin Walters and Neil Zander. [305] Mr Hart explained the 1998 EWF Scheme to the managers so that the managers would promote the scheme to clients of Hart’s accounting practice. [306] The 1998 EWF Scheme was promoted by Mr Hart and his staff: at management meetings with staff of Hart’s accounting practice; at meetings with clients and accountants; and at seminars. [307] The 1998 EWF Scheme was promoted as: an effective way for client/employers to reduce their tax liability by claiming tax deductions for contributions made to the relevant EWF and for interest paid to UOCL; and/or to promote employee loyalty and retention. The finding that it was promoted as these things is not a finding that this was the effect of the scheme. [308] Mr Hart provided to the managers and other staff of Hart’s accounting practice and other accounting practices, pro-forma documents for the 1998 EWF Scheme. The pro- forma documents for the 1998 EWF Scheme included the following documents in exhibit 2 SDF volume 1: ƒ index to documents (WAAW00128, page 7 – SDF p.55); ƒ loan application checkbox for file (WAAW00129, page 1 – SDF p.56); ƒ check box provided to loan applicant (WAAW00129, page 2 – SDF p.57); ƒ minutes for meeting of directors resolving to borrow funds for the purpose of contributing to the relevant welfare fund (WAAW00128, page 1 – SDF p49.); -- 82 of 138 -- 83 ƒ application for loan from UOCL for the purchase of an insurance bond (WAAW00129, page 3 – SDF p.58); ƒ loan agreement between borrower and lender (WAAW00129, page 19 – SDF p.74-82); ƒ employer obligations in respect of employee welfare fund (WAAW00128, page 5 – SDF p.); ƒ Employee Welfare Fund benefits calculation sheet (WAAW00129, page 7 – SDF p62.); ƒ Employee Welfare Funds – (Special Purpose Discretionary Trust format) Summary summarising tax benefits of the employee welfare fund (WAAW00129, page 8 – SDF p63.); ƒ Employee Welfare Funds – possible uses (WAAW00129, page 9 – SDF p64.); ƒ Employee Welfare Fund - Information circular for employees (WAAW00128, page 3 – SDF p.); ƒ Insurance Policy proposal – EGA (WAAW00129, page 5 – SDF p.); ƒ Invitation to Employees (including directors) (WAAW00128, page 4 – SDF p.52); ƒ Minutes for resolution of directors for the appointment of NET as trustee of the relevant employee welfare fund (WAAW00128, page 2 – SDF p.242); ƒ Notification to Trustee of dependants Form (WAAW00129, page 5 – SDF p.252); ƒ National Welfare Fidelity Ltd – Information Memorandum (WAAW00129, page 10 – SDF p.65-68); ƒ Fee Structure Welfare funds (WAAW00129, page 15 – SDF p.69); ƒ Employee welfare fund guidelines (WAAW00129, page 16 – SDF p.70); ƒ NET as trustee for Employee Welfare Fund – Pro-forma employer information sheet (WAAW00129, page 18 – SDF p.72); ƒ NET as trustee for Employee Welfare Fund - Employee details (WAAW00129, page 19 – SDF p73); and ƒ Promissory Note (Q00046105 – SDF p.38). [309] As a result of the promotion of the 1998 EWF Scheme, clients of Hart’s and other accounting practices participated in scheme. [310] The client/employers in the 1998 EWF paid fees, which were normally 12% of the amount of the loan. Client/employers made interest payments to UOCL, normally by cheque and/or directly into a nominated account. Interest on the loan was calculated as simple interest and levied on a quarterly basis. Interest was generally paid at the rate of 5% though the rate of interest varied from client to client. [311] Mr Hart knew that some or most client/employers in the 1998 EWF Scheme would, or were likely to, claim payments by way of the initial contribution, fees and/or interest payments paid to UOCL as an expense in the participant’s income tax return for the financial year ending 30 June 1998 and following. [312] The client/employers and accountants in this and the subsequent two schemes believed that loans had been made and funds invested by the trustee by the use of promissory notes. [313] The initial contribution, fees and interest payments on the loans to UOCL claimed as tax deductions by client/employers in the 1998 EWF were disallowed. -- 83 of 138 -- 84 [314] The operation of the 1998 EWF as explained in a circular by Todd of the corporate trustee of the EWF, NET was: This Fund has been set up so as to reward service to employees and to promote goodwill among those who have been invited to become Members of the Fund. After receiving an application to establish a Welfare Fund and completion of related documentation, a Trust Deed is adjudicated in Hong Kong with Golden Dream Ltd. being the settlor. A loan may be taken with United Overseas Credit to assist in making the initial contribution to the Welfare Fund account. This loan is assigned to National Welfare Trust as trustee of the Welfare Fund who in turn assigns it to European Grande for investment in a short- term (26AH compliant) insurance bond. United Overseas Credit takes this Bond as security against its loan to the company. (A copy of the policy and current status of the bond as at June 30 will be forwarded). In order to utilize the Fund for its intended purpose a contribution is made to the Welfare account which is held in trust for the benefit of the Fund's members. This contribution is made by way of a deposit directly into a local National Australia Bank, using the Chase Manhattan deposit book that is specific to the Welfare Fund. This contribution covers any claims made, fees payable for bank drafts and any trustee fees due. PAYMENT ON INTEREST ON THE LOAN IS NOT TO BE MADE USING TI-US BOOK. The fund's members make claims for reimbursement of expenses as outlined in the Information Circular which is attached to their Invitation to become a Member of the fund. These claims are outlined on a signed Members Claim Form, which is then given to the Fund's Advisory Trustee for approval. The Advisory Trustee summarizes the claims made as a total for each member and signs an Advisory Trustee Approval form to indicate his/her approval that payment of claims may be made out of the Welfare Account (at the Trustees discretion). The signed Claim and Approval forms are then faxed and/or mailed to this office along with associated receipts. Once these and the appropriate contribution are received, claims are processed and reimbursement is made to the member if appropriate. A further contribution may be made to the Welfare Account for purchase of any assets eg stocks/bonds, livestock etc. These will be owned by National Welfare Trust as trustee of the Welfare Fund. It may also be invested in an interest bearing account. with the tax paid interest being applied for the benefit of members. Any such instruction to the Trustee is to be by way of letter from the employer and NOT by way of a members claim against the Fund. Charges for sharebroking etc will be at cost plus an hourly rate. Charges for the provision of full copies of the Trust Deed. Insurance Policy and auditing of the Welfare Account will be made if these are requested. [315] The fund operated generally as described in the circular. However, I do not accept that it was “set up so as to reward service to employees and to promote goodwill among those who have been invited to become Members of the Fund”. The “loan” referred to -- 84 of 138 -- 85 by Mr Todd was not a loan but a promissory note issued by UOCL. The set up of an individual employee’s welfare fund did not involve any money being contributed to NET as trustee for the employee’s welfare fund at the commencement of the fund and nothing required an employer ever to contribute money to the trust fund during the term of a “loan” from UOCL or otherwise. Thus, because the “loan” was the issue of a promissory note, NET received no money when receiving the initial contribution and held no money in trust for the employee when, as trustee of an employee welfare fund, it “invested” that initial contribution by assigning the promissory note to European Grande and European Grande received no money as the price for its issue of an insurance bond. UOCL took the bond as security for the “loan”. [316] No money was transferred by UOCL to a participant, or to NET. EGA received no money as the contribution.179 UOCL did not have the money to lend or the ability to make the loans.180 [317] UOCL was not issued with a money lenders licence in Hong Kong until 17 September 1998 181 , which was after it had purported to make loans. Exhibit 93 shows that prior to obtaining a money lenders license, UOCL purported to make 136 loans amounting to $33,041,000. 182 [318] The first step in the 1998 EWF Scheme was that the director of the client/employer applied for a loan from UOCL using a pro-forma application.183 The purpose of the loan was to purchase an insurance bond in favour of a nominated employee. A pro- forma letter of offer from UOCL 184 was to be signed by the participant. It contained agreement that the documents governing the terms of the facility included the letter of offer, the Loan Agreement, the Promissory Note, assigned and endorsed and a credit information authority. The special conditions were three: that Security documentation was to be prepared in house including a letter to EGA acknowledging UOCL’s interest in the subject insurance bond; acquisition of the insurance bond was to be handled through UOCL to control payment/receipt of insurance bond; the insurance bond was to be held by UOCL. [319] The relevant director of the client/employer then lent money to the client/employer company by endorsing the promissory note in favour of the client/employer company. The company then endorsed the promissory note in favour of the trustee of the Employee Welfare Fund, namely, NET. NET, as trustee of the Welfare Fund, then invested in a ten year insurance bond with EGA by endorsing the promissory note in favour of EGA. [320] The pro-forma loan agreement with UOCL and the letter of offer required the payment of interest on the principal sum borrowed. This was notwithstanding that nothing more than a promissory note was to be issued. Interest was paid to UOCL though the note was not presented to UOCL for payment. UOCL was earning quarterly “interest” without first advancing money. A reader of the Loan Agreement alone would not have appreciated this feature. 179 Vincent’s Task 3 Report, para. 4.1.5 Q00015777 180 Vincent’s Task 3 Report, para.4.1.4 Q00015777. 181 Q00045765; SDF Vol.1 p.460 182 See also T 9-8 L8-15 183 SDF vol 1 pg 58 184 SDF vol 1 pg 34 -- 85 of 138 -- 86 [321] The letter of offer by clause 17 also required the promissory note to be endorsed by the borrower where his/her name appeared and by an authorised representative of the company. The letter stated the reason for this requirement: “This allows us to directly credit the insurer as outlined in clause 16 above.” [322] The “loan” from UOCL was to be used to purchase in full a life insurance policy from EGA. An example of the life insurance policy of EGA is found at SDF, page 39. The policy specified that “The payment of the Premium shall be made on or before the Effective Date to the Company 185 in the currency …as specified in the Policy Schedule…” The currency was specified as Australian dollars. An example of the schedule is found at SDF, page 48. Any reader of the policy would be unaware that the insurer would accept a promissory note from a finance company in Hong Kong instead of Australian dollar currency. The sum assured was the “Premium, or all assets into which the Premium has been converted…and all investment income…after deduction of any losses…” [323] It is an agreed fact in relation to the 1998 EWF that the client/employers and accountants believed that loans had been made and funds invested by the trustee by the use of promissory notes.186 That belief was incorrect. The pro-forma documents which Mr Hart caused to be provided to participants in the 1998 EWF Scheme were consistent with an agreement for a participant to borrow money from UOCL upon which interest was payable, that borrowings were to be used for the purpose of making a contribution to NET as trustee of the relevant Welfare Fund for the purposes of NET investing in a life insurance bond issued by EGA. The agreed fact that participants knew promissory notes were invested by the trustee implies investment with a view to profit. The promissory notes were not presented. No investment income was pursued by the insurer. [324] The issue of a promissory note is not a loan, rather it is a promise to pay money upon the conditions set out in the note. It is lawful to issue a promissory note and it is a way to offer finance to the recipient but it is an alternative to a loan. The difference may have little consequence in practice if the recipient of the note can present it to receive money. It can have a significant consequence if the note is not to be presented. Unless the issued note is presented and payment made to fulfill the promise, funds are not paid by the financier UOCL and no funds are provided to the trustee of the employee welfare fund. [325] On 19 August 1998 Merrell Associates Ltd obtained a 70% shareholding in NET for $50,000. Todd held the other 30%. The original cheque from CLSIA in the amount of $450,000 went into the NET foreign currency bank account. $400,000 was then transferred to Hong Kong. Mr Hart said $50,000 was owed by Dr Fleming in fees and was to come in as share capital for NET and the other $400,000 was to go directly to a bond or to UOCL. (Affidavit Todd NZGI02756 para 55 and NZGI01285 - SDF 371) 187 185 EGA 186 SAF, paragraph 77 187 In relation to the $400,000 transfer, see Vincents Report Task 3 Q00015779 para 7.1, 5th dot point. See also Q00026306 – SDF 694 and Q00026325 – SDF 692 and Q00026247 – SDF 776. -- 86 of 138 -- 87 [326] On 25 August 1998, 5.29pm, Mr Olesnicky sent an email to Mr Hart in relation to insurance bonds (Ex 68: B00017112 – SDF 384), stating: “Dear Steve, I realise there are a few matters outstanding. I am sending four separate emails. 1. The first contains the insurance policy together with the schedule and police application form. This is modelled on the previous insurance policy, but obviously has a different “look”…The policy is governed by Mauritian law…” Insurance Policy – (Ex 79, B00026357 – SDF 387) Policy Application – (Ex 77, B00026353 – SDF 397) Policy Schedule – (Ex 76, B00026352 – SDF 401) “2. The second contains the other documents relating to the insurance proposal (service agreement, letter of indemnity by policy- owner to insurance company, charge over policy to Finance Co. for loan made to a third party (ie, the individual client where the policy is owned by a trust/company); letter from policy-owner to insurer notifying insurer of charge; letter from insurer to Finance Co. acknowledging the charge). …I have not included….Given the circumstances of your case, this is probably not necessary, but please let me know if you think otherwise.” Service agreement SH with Ins. Co. (Ex 73: B00026351 – SDF 404) Indemnity Policy Owner to Ins. Co. (Ex 69: B00026361 – SDF 411) Indemnity Policy Owner to Ins. Co. (Ex 70: B00026360 – SDF 413) Letter confirming assignment in Ins Bond (Ex 78: B00026356 – SDF 415) Ins Bond Assign to Fin Co. (Ex 80: B00026359 – SDF 418) “3. The third answers the specific questions that you asked with respect to the insurance bond arrangement.” Insurance Bond Advice marked as created on 18 September 1998 but dated 20 August 1998 on the advice (Ex 75: B00026358 – SDF 429) “4. The fourth deals with these specific questions you raised about the film finance proposal” [327] On 1 September 1998, 8.36am, Mr Hart emailed Olesnicky stating: “Dear Mike, I am in receipt of all your E-mails and attachments. Thank you. I will be in HK on Monday 21st of September and I should be there for approx 3 days. Can I see you during that time to finalise some of the matters. ..” (Ex 71 and B00026362 – SDF 435) [328] On 14 September 1998, HK 5:20pm, Allardice sent an email to Mr Hart. It is consistent with Mr Hart having the control. The email stated: “As we may from time to time need to meet people with our UOC “hat on” I wonder whether we should have some business cards made up for PC & myself. PC as credit manager and MGA as -- 87 of 138 -- 88 General Manager. Please let me know your thoughts and I will arrange for next week if Robert believes it a good idea.” (SOAF 146 and Q00029367 – SDF 447) [329] On 14 September 1998, 5.55pm, Mr Hart sent an email to Todd. (B00017118 – SDF 445) In this email Mr Hart asked of Todd: “Have you heard from Gordon Stewart re the transferring of the trustees and also the loans and insurance policy. I think it is time that you went and saw him in person. He does have the power to negotiate on behalf of the Asiaciti Group even though he will tell you that he doesn’t. I want it resolved ASAP. I would be willing to pay $80,000 AUD in full and final settlement of all loans, interest, trustee fees after the cashing in of the bonds for all of my clients and associates in relation to this matter. Let me know how you get on.” [330] Todd was asked the following questions about the email: “RXN Mr Todd, as at the 14th September 1998 had you heard from Gordon Stewart?—I probably had an initial discussions before this came up. I can’t remember specifically because I remember offering Gordon Stewart $20,000, or it may have been Graeme Briggs, and they turned that down point blank. I presume that was in relation to the purchase of these clients. Who was Gordon Stewart?—Gordon Stewart as the trustee of Asiaciti clients in Wellington. You will see as at the 14th of September 1998 Mr Hart was willing to pay $80,000?—I see that, yes. What was the final figure that was ultimately agreed between Mr Stewart and yourself? – Specific clients, I believe it was 100,000 and then there was additional clients that did not have welfare funds and they purchased for a quantity of 30,000.” (Todd T 7-35 l.1) [331] On 25 September 1998, 10.21am, Shirley Petersen sent an email to Geoff Todd stating: “The form as requested”. The email indicates that the attached word document is titled “Insurance Form.doc”. (Q00029441 – SDF 557) [332] On 29 September 1998, Baker & McKenzie invoiced UOCL for Professional Services for the period 30 March to September 1998: “Re: Insurance Arrangements TO OUR PROFESSIONAL SERVICES with respect to meeting with Steve Hart and advising on insurance proposal, preparing insurance policy, loan documents, charge documents, indemnity documents, service agreement, reviewing Mauritian insurance rules, discussing proposal to establish bank in Mauritius, researching Australian tax rules relating to foreign life policy provisions. (HK$176,620.10, but say HK$120,000.00)”. The invoice is in the sum of US$15,616. (Q00026447 – SDF 559) -- 88 of 138 -- 89 [333] On 7 October 1998, a document reveals that Mr Hart had input into how documents were to be filled out. At 9.21pm, Allardice emailed Mr Hart questions in relation to promissory notes: “ ...1. Some of the promissory notes do not have dates against the signatures of the various assignees. Is this something we have the signatories correct? Please confirm 2. Geoff did not date the promissory notes when he signed. As I know he signed the promissory notes on 24 September 98 is it ok to date his signature 24 th September 98. Please confirm. 3. Geoff has asked us to send one of the Promissory notes for signature as the Promissory note has not been signed to assign the Promissory note to the welfare funds. I presume it is in order to ask for the promissory note to be signed and dated currently. Please confirm.” Mr Hart emailed Allardice responding to questions in relation to the promissory notes. Mr Hart stated “..we should date ourselves on the date of their loan documents”. (SOAF 154 and Q00026213 – SDF 566; Q00026214 – SDF 1303 and Q00026211 – SDF 567) [334] On 8 October 1998 Chan emailed Mr Hart to ask what interest rate should be inserted in pro forma loan documents and Mr Hart replied on ( October that the interest rate if not specified will be 5%.188 [335] On 30 November 1998, at 11.30 am Michael Olesnicky sent an email to Mr Hart stating189 : “Dear Steve, I issued a bill some time ago but, at your request have not sent it to you. At the same time, I have not notified you of the amount. I have also recently issued a small additional bill to bring everything up to date. FYI I should add that I discounted the total time costs by HK$26,620 to reflect the fact that a lot of the advisory work was very general in nature. The total of the two bills come to US$16,747 of HK$129,789.25. This is along the lines that we discussed. Could you please arrange payment either by cheque or through a bank account remission...” [336] On 1 December 1998, 5.50pm, Mr Hart responded to Olesnicky by email and copied the email to UOCL stating190 : “If you could give the account to Mike Allardice he will arrange payment. …I think it would be better if the account was in the name of United Overseas Credit Limited. He can pay this account immediately….” [337] On 3 December 1998, 6.08am, Mr Hart emailed Allardice stating191 : “Could you please organise Merrell to lend Steve Hart Family Holdings a further $100,000…” [338] On 3 December 1998, 6:00am, Mr Hart emailed Chan and request that she192 : “…please let me know the balance of the account less the interest owed to the 188 Q00026207 189 SAF 162 and Q00026469 190 Q00026469 191 SAF 163 and Q00021201 192 Q00026467 -- 89 of 138 -- 90 Insurance Co. I showed you what I mean in regards to how to work out the interest to the Insurance Co. If you are unsure, please telephone me today. I also need to know what is the balance of the account for Merrell. Could I have this info today.” [339] On 7 December 1998, Allardice sent a letter marked “Strictly Private and Confidential” addressed to Mr Agus of Bastille Investments Limited with a BCC to Mr Hart and faxed to Mr Hart on fax number 61 7 3229 8182 stating193 : “Re: Baker & McKenzie I attach a copy of Baker & McKenzie’s letter dated 25 November 1998 for your information. The amount of the invoices are in line with our expectations and accordingly we propose to arrange payment. We wonder whether the wording of the invoices is something that Mr Hart may wish to discuss with Baker & McKenzie. Please would you let us know your views on this point.” [340] On 7 December 1998, a document shows the high level of control Mr Hart had over the trustee NET. At 6.17am, Mr Hart sent an email to Todd and c/c to Allardice stating194 : “Geoff and Mike, 1. Geoff, I would close the office between Xmas and the new year as nothing of note happens during that time. This will allow you and your staff to have a break ready for the new year. 2. I will be away from Australia from Monday 21st until Feb 1st on holidays with the family and also being in the USA on business. I will be contactable however on e-mail during that time. This is for your information. Kind regards, Steve.” [341] I infer that Baker McKenzie invoiced UOCL for their professional services because of a specific request by Mr Hart. This inference is supported by Mr Hart’s response of 1 December 1998 to the email of 30 November 1998 and by Mr Allardice’s letter of 7 December. Mr Hart’s presumption that he could direct an account for legal advice he obtained to UOCL assists me to conclude that Mr Hart sought the assistance of Baker McKenzie and Mr Allardice in relation to the establishment of EGA and UOCL in their roles for Mr Hart’s plan for a 1998 EWF. The request that the invoice be issued to UOCL rather than to himself is consistent with Mr Hart’s control over UOCL and his attempting to distance himself from the arrangements. [342] On 9 December 1998, 6.51am, Mr Hart sent an email to UOCL stating195 : “Robert asked me to find out what is the current bank account balances AFTER the deduction of the money owing to the Insurance Co. I requested this info last week while you were away but Mike ask me to wait until this week”. [343] On 10 December 1998 Chan forwarded a memorandum196 to Mr Hart marked ‘Strictly Private & Confidential’ including the bank balances, money owed to insurance company, VISA card, returned cheques, Golden Dream, loan payments and loan agreements. 193 Q00026445 194 Q00026450 195 Q00026440 196 Q00026438 -- 90 of 138 -- 91 [344] On 16 December 1998 Chan forwarded a memorandum to Mr Hart. She asked for the address of Bastille Investments Limited. He replied c/- Robert Agius, Moore Stephens House, Kumul Highway, Port Vila, Vanuatu.197 [345] On 17 December 1998 Chan sent a memorandum marked “Strictly Private and Confidential” addressed to Mr Agus of Bastille Investments Limited with a BCC to Mr Hart and faxed to Mr Hart at Harts Accountants & Auditors on fax number 3229 8182 Re: The Meyer Family Trust referring to a fax of 15 December 1998 and a telephone call from Tammy Ramsden saying that she wanted to change the name of the borrower. The fax does not otherwise state an address for Mr Agus of Bastille Investments Limited. Q00026409 [346] On 24 December 1998, Chan sent a memorandum to Mr Hart headed “Strictly Private and Confidential” stating: “1. Money Owing to European Grande As at 24 December 1998 money owing to EG is A$265,950 (for Q1 only); Current balance in AUD A/C is A$220,692.51 approximately; Please suggest how much money we need to transfer to the new AUD account of United Overseas set up an escrow account for fund due to EG; 2. Telephone call from Ian Daly .. He told me that the letter was very strange because they have no telephone, fax no. and contact person. He wanted me to tell him if United Overseas had any relationship with EG; I told him that I was not handling EG, I am only handle United Overseas; In addition, there is no relationship between UOC and EG … … He insists to get an answer if UOC is related to EG … Please advise any further action If he phone again, how can I reply to them? I think someone else may try to phone again to ask similar question, please advise what answer should give.” SAF 164 and Q00026398 [347] On 26 December 1998, 10:13pm, Mr Hart emailed Chan: “Peggy, Keep the money at present in the account that you have for Overseas United. I will tell you when to transfer. In regards to Ian Daly or anyone else, ask Mike for a telephone number and fax number for European Grande. Please let me know the numbers as well. Keep saying that the 2 UOC and EG are not joined.” SAF 165; Q00026395 197 Q00026426 and Q00026417 -- 91 of 138 -- 92 [348] On 19 February 1999, 2.50am, Todd sent an email to Mr Hart forwarding an email he had received from Graeme Briggs at Asiaciti on 18 February 1999“re: ‘Harts clients settlement”. Mr Briggs email stated: “I refer to recent discussions to your offer…Advanced Credit Management has given their verbal consent to the proposed settlement. Subject to receiving their written consent, which we expect to receive in the next few days, we are prepared to accept your offer of $130,000, payable as $100,000 on 1 March 1999 and $30,000 on or before 3 March 1999. This acceptance is subject to the following- 1) $100,000 being paid on 1 March 1999 after which the assignment documentation is to be prepared; 2) assignment documentation to be executed and delivered against payment of $30,000 on or before 31 March 1999; 3) If assignment documentation is to be prepared by our New Zealand office a fee of AUD$200 per welfare fund will be charged by that office. No charge will be levied if documentation is prepared by you…”I believe the process that we would be happy with is that the loans from EIB to clients should be assigned to Strathford Life. Strathford would then assign the debt to ATNZ who will in turn assign it to National Welfare Trust.” SAF 27 and B00017190 [349] Todd was queried in relation to the contents of the email: “RXN In relation to the date, 19 February 1999, had any loans been assigned from the financier in relation to the Asiaciti scheme to United Overseas Credit limited?—At this point no assignments had been completed, no. Were there ever any loans assigned from the relevant financier to United Overseas Credit Limited?—I’m unaware of anything such thing happening” (Todd T 7-35 l.28) “RXN Yes?—I’m aware of obviously the negotiations between EIB, European Industrial Bank and United Overseas. When the package was completed, one of the things I received from Asiaciti was in fact that the loan being the sole asset of the Asiaciti fund had been transferred to the National Welfare Trust, but specifically to Asiaciti, no. Thank you. What’s your best recollection now of when the matters in terms of the transfer of loans settled with Asiaciti?—As per the e-mail here 19 February 1999 I certainly wished Asiaciti to complete the documentation so that there were n hiccups, so it would have been shortly after this point.” (Todd T 7-35 l.44) [350] On 26 February 1999, 6.37pm, Graeme Briggs of Asiaciti Trust sent an email to Todd giving details for $100,000 to be paid to European Industrial Bank. The email stated, “I look forward to receiving your remittance on March 1. Upon receipt I will instruct Gordon Stewart to commence preparation on the assignment documentation”. Affidavit Todd B00017632 para 11and B00017119 [351] On 2 March 1999, 4.09pm, Todd emailed Mr Hart asking Mr Hart to ensure the deposit of settlements to Asiaciti that day. (Affidavit Todd B00017632 para 11 and B00017120 ) -- 92 of 138 -- 93 [352] Around March 1999, (Todd could not be specific with the dates) agreements were met about how much in relation to Asiaciti. (Todd T 7-13 l.50). The amounts paid were $100,000 and $30,000. (Todd T 7-13 l.52). To a suggestion that NET paid a further $6000, Todd responded “That fee was specifically for a signing of documentation of $200 per document I believe.”. (Todd T 7-14 l.58) “The 130, was actually for all the outstanding interest and charges that Asiaciti said they wanted to be paid by their – to take over”. (Todd T 7-14 l.20). UOC paid the $100,000 and $30,000. (Todd T 7-14 l.26) [353] On 4 March 1999 Mr Hart sent an email to Todd saying that he had requested Allardice to deposit settlements to Asiaciti. (SOAF 28 and Q00046736 – SDF 661) [354] On 4 March 1999 Mr Hart sent a memorandum to Allardice stating: “Could you please arrange to make a transfer of $100,000 for interest for last years clients to the following account. I will explain it to you later…Account: The fiduciary company Limited” (Q00029313) [355] On 4 March 1999, 5.01am, Chan emailed Todd “We will transfer $100,000 to The Fiduciary Company Limited today”. (NZGI00006 – SDF 780 and Todd T 7-14 l.10) [356] On 28 March 1999 Todd sent an email to Mr Hart stating: “All ASIACITI indemnities and transfers have been signed and sent back to Gordon Stewart’s office for final signature. Please remember to arrange for $30,000 to be transferred to ASIACITI trust account by 31 March 1999”. (SOAF 29 and B00017162 – SDF 788) [357] Todd was questioned in relation to this email: “RXN As at this date had the first – as at the date of the 28th of March 1999 had the first 100,000-dollar transfer taken place?—It had, by the 15th I believe. Now, in relation to this transaction, Mr Todd, did Asiaciti enter into an agreement with NET? Do you have a recollection of that?—I’m sorry, sir, you’ll have to repeat that. To the best of your recollection did this transaction result in an agreement between Asiaciti and your company NET?—It certainly did.” (Todd T 7-36 l.5) [358] Around the end of March 1999, UOCL paid the $30,000. (Todd T 7-14 l.30) [359] By 20 April 1999 all payments were made to Asiaciti. (Todd T 7-15 l.5) [360] On 26 April 1999 Todd sent a letter to Cavill enclosing “completed documentation relating to the assignment of his loan with Eurobank to NET”. The attached assignment is dated March 1999. (SAF 31; B00017400 – SDF 801 and B00017401 – SDF 1291) [361] On 30 April 1999, 10.49am, Todd sent an email to Briggs stating: “You will be aware that I have been communicating with John Ashwood of Asiaciti Samoa in order to obtain details on the rest of Harts clients that have loans with Eurobank. I am in a position to make an offer to Asiaciti in order to transfer these clients to National Welfare Trust … I make an -- 93 of 138 -- 94 offer of $A20,000 as complete and final payment of all margins, withdrawal fees, credit management fees, administrative fees and any other incidental fees due and payable for these clients”. Briggs rejected the offer. (B00017122 – SDF 805) [362] On 24 May 1999, 8.46am, Allardice sent an email to Mr Hart stating: “..3… (a) you still had more promissory notes which you would forward to us enable EG to issue the policies …. (b) you or Geoff would send us the documents regarding the transfer of policies to EG so that we could understand how this was to work and on what basis EG would issue policies. As we do not appear to have received this documentation, please would you either arrange for the documents to be sent to me or alternatively call me to discuss. Whilst I appreciate the pressure to issue the policies I trust you agree EG has to have a reasonable basis before issuing policies”. (SOAF 193 and Q00027444 – SDF 833) [363] On 25 May 1999, 10.35am, Mr Hart sent an email to Allardice in response to his email of 24 May 1999 stating: “…the policy should have issued a long time ago … These are the ones being transferred”. (SOAF 193 and Q00027444 – SDF 833) [364] On 25 May 1999 Allardice replied to Mr Hart: “I have spoken to Geoff who has told me he: (a) has just received the Asiaciti NZ documentation in his office; (b) is not 100% sure who the NZ welfare fund should assign the old loans and policies to; (c) will fax to me one complete set of documents tomorrow morning so that I can review them; and (d) will be over with you next week therefore we can review all the documents then.”198 [365] On 26 May 1999, 5.54am, Mr Hart replied to Allardice: “Mike, I suggest that we use our new doc’s to pay out the old loans and issue new loans. You will see the people are already paying you interest. In relation to the old insurance policies, I think they also are cancelled and new ones from Dennis issued.” (SOAF 32 and Q00027379 – SDF 834) [366] On 26 May 1999 Todd sent a fax to UOCL stating: “A copy of an original assignment from Asiaciti Trust New Zealand (ATNZ) to National Welfare Trust follows. There were 28 assignments in total. A copy of clients is attached.” The loan assignment agreement is dated March 1999. (NZGI00006 – SDF 837 and Affidavit Todd NZGI02756 para 38) 198 Q00027379, SDF Vol.2, page 834 -- 94 of 138 -- 95 [367] The three entities in the 1997 EWF arrangement, Stratford, Eurobank and Asiaciti were part of the Asiaciti Group of companies. [368] Mr Hart submitted “that an inference can be drawn that by the second of June 1998, an arrangement had been reached with the Asiaciti Group that they would collapse their funds by the payout of the loan taken with Eurobank by the clients with the insurance bond issued by Stratford. The negotiations from that time onwards with Asiaciti Group then centred on the amount payable to settle the claims outstanding for interest and charges. If all correspondence that the Crown referred to in their closing submission is read on this subject it has one common theme in our submission, that is how much was to be paid to collapse the previous arrangement.” [369] The only evidence pointed to by Mr Hart to support the inference that an arrangement was reached with the Asiaciti Group of companies by June 1998 was Mr Hart’s letter of 2 June 1998 to Mr Cavill. It is not evidence of an agreement with Asiaciti Group. I find that there was no agreement by 2 June 1998 to assign to UOCL, Eurobank’s right to receive interest from the 28 participants. If this occurred at all, it was not before March 1999. [370] Mr Hart appears to accept this in his submission199 where he wrote: “It is submitted that there was no loans to be assigned as the insurance policy of Stratford paid out the loan of Eurobank…Therefore there were no loans that could possibly be assigned at that time. New documentation would need to have been signed by the clients and this in fact occurred previously.” I note that Mr Hart asked200 for the inference to be drawn that not all 28 participants entered into new loans (with UOCL). I draw the inference that not all of the 28 participants entered into new loans with UOCL by FYE 1998 because it is reasonable. I regard it as probable that, as each of the 28 participants made payments of “interest” to UOCL, each would have responded to the advice in the letter of 2 June 1998 by entering into the 1998 EWF documentation. Conclusions with respect to 1(b) (i) of the application [371] When Mr Hart by his letter of 2 June asked for interest payments to be made to UOCL and before 30 June 1998, he did not require that new documents first be signed. The signing of new documents was anticipated but was not expressed to be a precondition for payment of interest to UOCL. I find that at that date Mr Hart anticipated that some participants would pay UOCL without first signing a document which made interest payable to UOCL. Mr Hart knew some or most client employers in the 1997 EWF would, or were likely to, claim payments by way of interest to UOCL as an expense in their income tax returns for FYE 1998 and following.201 When Mr Hart sent the letter of 2 June 1998 he anticipated that some of the 28 participants would pay interest to UOCL before and after the end of FYE 1998 and without first signing a loan agreement with UOCL and Mr Hart knew that UOCL had no right to receive those payments, and he knew of no facts which made the anticipated payments properly deductible. It was false when Mr Hart wrote that “the welfare fund you contributed to last year has now changed trustees” and it was false when he wrote “the new Trustee that he has also changed one of the assets of your fund, namely the insurance bond, and has redeemed the old bond and taken out a new one.” Mr Hart knew those assertions to be false. 199 Respondent’s losing Facts Submission pages 13 and 14 200 Respondent’s losing Facts Submission page 15 (xxi) a) 201 SAF [33], amended points of defence [6](a) -- 95 of 138 -- 96 [372] Mr Hart’s amended points of defence alleged “The respondent caused the tax returns to be prepared, as they appeared, in reliance upon legal and other advice, which he believed was correct, to the effect that the deductions were lawfully claimed.” There was no evidence that legal advice was taken as to the propriety of the letter of 2 June 1998 or of claims for deductions for alleged interest paid to UOCL by any participant who did not first sign a loan agreement with UOCL. [373] I find that by sending the letter of 2 June 1998 to the 28 participants in those circumstances Mr Hart caused the true nature of interest payments by those participants to be misrepresented and intended to prejudice the economic interests of the Commonwealth and his means were dishonest by the standards of ordinary decent people and Mr Hart knew his means were dishonest by the standards of ordinary decent people. [374] But Mr Hart also contemplated that some participants might, before paying interest to UOCL, first sign a fleet of documents such as Mr Cavill signed which made the participant liable to pay interest to UOCL. In respect of that group the CDPP’s case in respect of the non-deductibility of such interest payments and whether Mr Hart was dishonest is in practical respects the same as its case with respect to the 1998 EWF or the 1999 EWF. For the reasons I explain elsewhere in these reasons relating to the 1998 EWF and the 1999 EWF: I find that by sending the letter of 2 June 1998 to the 28 participants anticipating that some would enter into arrangements with UOCL before making interest payments to UOCL Mr Hart misrepresented the true nature of the interest payments knowing then and continuing to know that the participants who entered into a loan agreement with UOCL were not entitled to a tax deduction for their interest payments because Mr Hart knew then and continued to know that no money would be lent by UOCL to any of the 28 participants or received from UOCL by NET as a contribution on behalf of any of the 28 participants and that the purpose of payments by any of the 28 participants to UOCL was not to provide a benefit to the employees of those participants. [375] Mr Hart arranged that participants be provided with pro-forma documents202 that made it appear that a loan had been obtained from UOCL, the funds contributed to a trustee of an EWF and that the trustee had invested those funds in an insurance bond. [376] Mr Hart intended to prejudice the economic interests of the Commonwealth and his means were dishonest by the standards of ordinary decent people and Mr Hart knew his means were dishonest by the standards of ordinary decent people. [377] The interest rates demanded by UOCL were less than those payable to Eurobank. Mr Hart made a submission to the effect that the Commonwealth was better off for receiving claims for less deductions. Whether that is correct or not is not a matter I need to find as a fact. It is not a defence to this offence. The Commonwealth’s right to tax payable by the 28 participants was prejudiced. [378] I find that between the between the first day of June 1998 and the thirtieth day of June 1999 at various locations in the States of Queensland and Western Australia, Mr Hart did, contrary to section 29D Crimes Act 1914 as amended, defraud the Commonwealth in that he prejudiced the right of the Commonwealth to tax payable by diverse persons. 202 1997 Proforma Documents – SDF 281 - 284, 287 - 293; See for example Affidavit Cavill Q00012111 para 7, 8, 12, 15; SDF 834; Affidavit Stevens Q00012102 par 26. -- 96 of 138 -- 97 [379] PS6203 to the affidavit of Mr Singh204 sets out the amounts which the 28 participants claimed in FYE 1997. It was $5,959,700 in respect of the 1997 EWF. Of that amount only $423,300-00 could be interest. The amount of interest payable in the last quarter of FYE 1998, after the letter of 2 June 1998 in respect of the 1997 EWF would probably be less than one quarter of the interest claimed for FYE 1997. It would be less because the interest rates demanded by the letter of 2 June 1998 to be payable to UOCL were less than the rates which were payable to Eurobank. The letter, if it was inviting participants to pay and claim interest was probably inviting payments to UOCL for FYE 1998 of less than $423,300-00. If the payments invited were of the order of two to three hundred thousand dollars and were not properly deductible205 the invitation was imperilling the Commonwealth’s revenue from those participants for FYE 1998 to the extent of an amount of a hundred thousand dollars or thereabouts. The amount paid in the last quarter to UOCL and claimed as a deduction was liable to increase to up to four times that amount in FYE 1999. It is not necessary to be more precise. The purpose of considering the benefits or intended benefits to UOCL and the loss or intended loss to the Commonwealth is to determine whether the offending satisfied a condition206 for qualifying as a “serious offence”. I find that Mr Hart intended that UOCL would benefit from payments made by the 28 participants in respect of FYE 1998 and FYE 1999 by an amount in excess of $10,000 and intended that the Commonwealth would suffer a loss in excess of $10,000 from the claims made for deductions in respect of those losses. I find that UOCL benefited to an extent in excess of $10,000 from those payments. On these facts there are 3 bases to classify this offence as serious. I am satisfied that the offence was a serious offence. [380] From mid 1998 to September 2000, Chan undertook administrative duties for UOCL. Chan’s administrative duties included: send out invoices on UOCL loans; identify UOCL clients who had not paid interest and inform Mr Hart of these facts; inform Mr Hart of status of deposits and bank balances of UOCL; upon Mr Hart’s request prepare spreadsheets of amounts banked to UOCL accounts and present these to Mr Hart; receive and read emails sent to her by Mr Hart; and transfer money to specified accounts. (SOAF 133) [381] Ms Chan stated that Mr Hart designed the promissory notes,207 and to her knowledge nobody else had input208 and she did not recall if Mr Todd had input209 . Ms Chan could recognise Allardice’s handwriting on a draft promissory note210 . Ms Chan stated that the respondent sat next to her at the computer and fixed the promissory note and positioned the watermark.211 European Grande Assurance S.A. 203 Q00011356 204 Q00044734 205 As was found elsewhere in these reasons 206 Of POCA s 338 set out at [58] herein 207 T 3-29 L55 208 T 3-30 L1 209 T 3-33 L38 210 T 3-34 L50 211 T 4-20 L30 -- 97 of 138 -- 98 [382] On 30 June 1998 EGA was registered and incorporated in Mauritius with its registered address at 5 Duke of Edinburgh Avenue, Port Louis, Mauritius.212 EGA was formed by Sek Sum at the request of Acceptor using documents from Allardice.213 [383] EGA was formed as an insurance company to sell long term life insurance policies offshore. As an offshore company in Mauritius, EGA was not allowed to deal with Mauritian residents, only with international non residents. All insurance policies of EGA were standard, prepared in Hong Kong and were sent to Sek Sum’s office in Mauritius for signature. Sek Sum signed them and then his office returned them to Hong Kong. His office kept only a copy of the insurance policies in Mauritius. EGA had a passive role in Mauritius. All of the administration and decisions for EGA were made abroad. Sek Sum’s responsibility in Mauritius was only to issue the policies after they had been prepared and sent to his office from Hong Kong. Allardice and his assistant in Hong Kong, Peggy Chan would correspond with Sek Sum’s office in Mauritius and perform the role of administrators in Hong Kong. Allardice gave Sek Sum instructions (either directly or through his assistant Ms Peggy Chan) in relation to his role as a director of EGA, by telephone and e-mail.214 [384] Sek Sum made an application to the Offshore Business activities Authority for an Offshore certificate.215 Allardice from Acceptor in Hong Kong, provided all of the information and details attached to the application documents. The submitted documents included: 1. the business plan which also contained the curriculum vitae of Mr Hart as insurance consultant of EGA; 2. a sample life assurance policy; and 3. a facsimile from Mr Hart to Sek Sum dated 6 November 1998 containing life tables.216 [385] From 30 June 1998 to 5 September 2005, Sek Sum was the resident director in Mauritius of EGA. 217 Allardice was appointed director on 6 January 1999.218 The other directors of EGA were Allardice (6 January 1999 to 7 September 2000), James Sutherland (7 August 2000 to 30 September 2004), Michael Horne (7 August 2000 to date) and Michael Kwong from (30 June 1998 to 6 January 1999). 219 [386] Le Grande European Group SA held 250,000 shares in EGA220 . There were only 3 other issued shares.221 Up to 7 September 2000 the beneficial owner of EGA was Allardice.222 [387] EGA operated from an allocated area within the office of Acceptor in Hong Kong.223 From mid 1998 to September 2000, Chan undertook administrative duties for EGA. 224 212 SAF 52, 130(b) and (d) and MPVC00825 – SDF 322 213 Affidavit Sek Sum Q00051659 paras 3, 6 214 Affidavit of Sek Sum, paragraph 11 215 Affidavit of Sek Sum, paragraph 6 216 Affidavit of Sek Sum, paragraph 6 217 SAF 55 and 130(c) 218 Affidavit of Sek Sum, paragraph 11 219 Affidavit of Sek Sum, paragraph 11 220 Affidavit of Sek Sum, paragraph 13 221 Affidavit of Sek Sum, paragraph 13 222 Affidavit of Sek Sum, paragraph 21 223 SAF 131 -- 98 of 138 -- 99 Allardice and Chan would correspond with Sek Sum’s office in Mauritius and perform the role of administrators in Hong Kong. [388] On 30 September 1998 Allardice sent an email to Hart stating: “1. Geoff has asked for Hong Kong and Mauritius addresses of Insurance Company to complete documents. ....... 4. Please ensure that Geoff indicates the Insurance Company currently has no capacity to sign any documents and will have no capacity until the license is issued, I will send separate e-mail on status.225 ” [389] On 1 October 1998, Mr Hart sent an email to Allardice stating: “Everyone was expecting the licence to issue prior to June. I was told that it would only take approximately 6 to 8 weeks. Here we are nearly 5 months later and still no licence”226 . [390] On 8 October 1998 Mr Hart emailed Allardice responding to questions in relation to the promissory notes227 . [391] On 16 October 1998 Allardice emailed Mr Hart in the following terms: “1. Geoff is asking for the address of Mauritius office and the Hong Kong address in order for him to prepare the insurance policy documents. Mauritius Address 2.2 We do not know which insurance documents Geoff wishes to prepare but on the basis that the company can only conduct business after it has a license we suggest the St James Court address be given to Geoff. Please let us know your views. Hong Kong Address 3.1 We understand a different address from United Overseas should be used. We have three addresses with ‘manned’ offices which we can use at no extra cost. So far we have the address for 3.1.1 United Overseas 3.1.2 MA Limited 3.1.3 Trustee Company 3.2 Choices for the Hong Kong address include: (i) Using (of the three address in 3.1) (ii) Different floors in the same building as United Overseas (iii) Different areas on Hong Kong Island and Lantau Island which will reliably forward all mail but which are not registered office address; (iv) Will use a different office address in Hong Kong which will cost an extra $200 to $500 USD per year 3.3 Please will you let us know your views at the above.”228 224 SAF 133 225 SDF, page 419 226 SAF, paragraph 151 and SDF, page 420 227 SAF, paragraph 154 228 SAF, paragraph 156 and SDF, page 425 -- 99 of 138 -- 100 [392] On 29 October 1998 Chan emailed Mr Hart that Mike has not received a reply to the email of 16 October 1998. “Geoff is keeping on to chase up the address. Please let us know your views”229 . [393] On 24 December 1998 Chan sent a memorandum to Mr Hart headed “Strictly Private and Confidential” stating: 1. As at 24 December 1998 money owing to EG is A$226,950; 2. Current balance in AUD account is A$220,692.51 approximately; 3. Please suggest how much money we need to transfer to the new AUD account of United Overseas set up an escrow account for fund due to EG; 4. In a telephone call from Ian Daly, Daly wanted me to tell him if United Overseas had any relationship with EG; 5. Chan advised Daly that: (a) she was not handling EG; (b) she only handles United Overseas; (c) there is no relationship between UOC and EG: (d) Daly insists to get an answer if UOC is related to EG. 6. Chan queried if Daly phone’s again how can I reply to them230 . [394] On 26 December 1998 Mr Hart responded to Chan’s email, “keep the money at present in the account that you have for Overseas United. I will tell you when to transfer. In regards to Ian Daly or anyone else, ask Mike for a telephone number and fax number for European Grande. Please let me know the numbers as well. Keep saying that the 2 UOC and EG are not joined.”231 [395] On 28 December 1998 Chan emailed Mr Hart advising as follows: “2. Telephone and fax line 2.1 At present EG does not have any dedicated telephone or fax lines in Hong Kong or Mauritius. 2.2 Until the license is issued it is probably prudent that any enquiries are directed to EG’s Hong Kong administrative office. 2.3 Mike has suggested EG; (i) Apply to Hong Kong Telecom for dedicated phone and fax line (takes approximately 7 days and costs approximately HKD475 per line); and (ii) Purchases: (a) A plain paper fax machine (approximate cost HKD4,200 for a inkjet of model number UF-332-Panasonic); and (b) A telephone handset (similar to UOC’s but with speakerphone capabilities, approximate cost HKD1,700) 2.4 Please will you let me know your/Robert’s view on the above. 3. Ian Daly 3.1 Mike has suggested I send a letter from UOC to EG passing on Ian’s suggestions to EG with cc to Ian and in the letter suggest to EG that in future they amend their letterhead to show telephone and fax numbers. 229 SDF, page 425 230 SAF, paragraph 164 231 SAF, paragraph 165 and SDF, page 526 -- 100 of 138 -- 101 3.2 Please will you let me know your/Robert’s views on the above.”232 [396] On 29 December 1998 Mr Hart emailed Chan that ‘Robert’ agrees to both of your suggestions in relation to telephone and faxes233 . [397] Sek Sum received a request from Hong Kong to apply for a telephone service and an email account for EGA in Mauritius234 . [398] On 31 December 1998 the Mauritius Offshore Business Activities Authority issued an Offshore Certificate to EGA 235 . [399] On 8 January 1999 Mr Hart emailed Chan requesting that she ask Allardice when Chan can start using the “Insu. Co Licence”.236 [400] On 3 February 1999 European Grande Assurance SA (European) opened an account with the Shanghai Banking Corporation of Hong Kong account number 500305420 in Hong Kong 237 . [401] On 12 February 1999 Chan emailed Mr Hart requesting confirmation to Chan asap: “Print 500 original and 1000 copies per page of the insurance proposal. I have passed the hard copy to the printer to arrange for the printing. I need you to double confirm how many pages we need to print. I got a Insurance Cover page from the floppy disk of Geoff. Do you want to print it as well? I think so. But why I need to ask you because in your file of Insurance Policy there is no such cover page. Therefore I need you to double confirm.” The email then sets out the various costs and discounts provided.”238 [402] On 15 February 1999 Mr Hart emails Chan “please print the cover page as you have stated. Also the printing is okay. We need to have the policies issued urgently.”239 [403] On 20 February 1999 Mr Hart emailed Chan requesting a transfer of AUD$339,946.12 to be sent to Ward & Partners Trust Account. Mr Hart wrote that this is very urgent and the money is held at present in the account of L’G E. 240 [404] On 22 February 1999 in response to that email an email was forwarded to Mr Hart advising the bank balance of the LE Grande is AUD$5,029.42: “because you instructed us to transfer AUD400,000 from LE Grande to European Grande and then transfer AUD400,000 from European Grande to United Overseas (re your email on 11/2/99). The current bank balance of United Overseas is AUD868,144.60. I think the TT of AUD339,946.12 to Ward & Partners should be made by United Overseas. Please confirm”241. 232 SAF, paragraph 166 and SDF, page 28 and 536 233 SDF, page 31 234 Affidavit of Sek Sum, paragraph 57 235 SAF, paragraph 130(d) 236 SAF, paragraph 168 237 Affidavit of Gin filed 18 July 2006, paragraph 8 238 SDF, page 437 239 SAF, paragraph 169 and SDF, page 437 240 SDF, page 438 241 SDF, page 438 -- 101 of 138 -- 102 [405] On 23 February 1999 Chan emailed Mr Hart: “There is a policy schedule in Geoff’s floppy disk file. I think we can use it. Please inform me: In the pt 4 of the Effective Date and pt 8 of Date of Signing of the Policy: It mention “Date Policy issue”, What is the date of the Policy Issue? Some clients telephone and fax nos may be incorrect. I prefer to use the nos in the agreement first. What do you think? Pt 6, amount of premium payable is it the same a the Loan amount? Pt 7, special Provisions (if any), do we need to add anything on it? Policy No start from 10101, is it OK? Please confirm. Your prompt reply is much appreciated.” 242 [406] On 24 February 1999 Mr Hart emailed Chan in response, (1) The date the license was issued, (2) I agree, (3) Loan amount, (4) No, (5) Yes.243 [407] On 24 February 1999 Mr Hart emailed Chan that she had spoken to Mr Hart about this (the 22 February 1999 email) and wrote “I said to pay from United”244 . [408] In about March 1999 Sek Sum signed the first batch of life insurance policies245 . [409] Mr Todd emailed Mr Hart on 19 May 1999 saying: “I have received a call from Norm Henry of MineMac Pty asking for details as to the investment structure of European Grande. In the past, he received a request from EGA asking how he would like any money to be invested. He apparently was advised by his accountants (Harts?) to invest it back into Australia. I have said that his advice on investments was not to be taken as an instruction. As of 1 July, any future bond growth was to be at a fixed rate of 1% in an investment account. Please let me know what EGA have been doing in the past and intend to do in the future as the investment side of things has not been part of my portfolio for dealing with clients. Norm was told to contact this office for information.” [410] Mr Hart replied by email on 24 May 1999: “Geoff unless I say otherwise, EGA will not be taking any advice in regards to the investment of the Bond money.” [411] On 27 May 1999 Chan advised Mr Hart of the current balances of the European Grande account of “AUD941.36”. [412] On 19 August 1999 a letter by Allardice marked “Strictly Private and Confidential” addressed to Mr Agus of Bastille Investments Limited with a BCC to Mr Hart advises: “Re: Re: Insurance Policy Proposals 1. 1998 242 SDF, page 439 243 SDF, page 439 244 SAF, paragraph 176 and SDF, page 438 245 Affidavit of Sek Sum, paragraph 20 -- 102 of 138 -- 103 1.1 For the 1998 policies we have the original policy proposals and have not sent them to Denis. 1.2 I suggest we retain originals here and send copies to Denis. 2. 1999 2.1 We do not have original or copy policy proposals here. 2.2 I understand the original policy proposals are in the Religious town and I propose to request they be returned to us. 2.3 In the meantime where we have confirmation from the Religious town that the original policy proposals are on the way to us we propose to arrange the issue of policies. 3. Please let me know your views on the above. (Q00027171 – SDF 944) [413] On 11 November 1999 Chan sent an email to Mr Hart stating that the new email address of EGA. 246 [414] In November 1999 a HSBC bank account for EGA was opened in Mauritius however it was never used.247 [415] On 30 August 2000 Sek Sum emailed Mr Hart in relation to the implications of the departure of Allardice from Acceptor effective on 31 August 2000. Sek Sum advised that Mr Hart needs to obtain a consent letter from Allardice with respect to the proposed change in beneficial ownership of European Grande Assurance and further that “we need to urgently hold a board meeting” to appoint James Sutherland and Michael Horne on the board of European Grande. He also advised that accounts have to be prepared on an urgent basis.248 [416] On 31 August 2000 Mr Hart emailed Horne requesting that he urgently obtain the consent from Allardice as per Sek Sum’s email and arrange for a board meeting to appoint Horne and Sutherland to the board of European Grande.249 [417] On or about 31 August 2000 Horne forwarded an email to Sutherland, Cheung and Yu advising that he will obtain an undated consent letter from Allardice. He asked could Marina please prepare the Minutes to Appoint JCS and MHH to the board. “Per the client’s wishes.”250 I find that the “client” referred to by Mr Horne was Mr Hart. [418] Allardice provided Sek Sum a letter setting out details of the change to the beneficial ownership and giving him his consent to the transfer of the beneficial ownership to Sutherland so that Sek Sum could provide documentation to MOBAA. 251 [419] From 7 September 2000, the beneficial owner of EGA was James Sutherland of Zetland.252 [420] Prior to January 2002, no financial accounts were prepared for EGA. 253 In approximately January 2002 FSC started to enforce obligations so that everybody 246 SAF, paragraph 214 247 Affidavit of Sek Sum, paragraph 26 248 SDF, page 997 249 SAF, paragraph 225 and SDF, page 997 250 SDF, page 997 251 Affidavit of Sek Sum, paragraph 22 252 Affidavit of Sek Sum, paragraph 21 253 Affidavit of Sek Sum, paragraph 40 -- 103 of 138 -- 104 applied themselves including Sek Sum with regard to the preparation of accounts at EGA. 254 [421] On 6 June 2002 and 27 June 2003 and 24 June 2004 Zetland invoiced EGA at its Hong Kong address in the same office as Zetland for providing two nominee company directors (Horne and Sutherland) and a Hong Kong correspondence address.255 James Sutherland was the principal of Zetland and Michael Horne worked for Zetland.256 Zetland was based in Hong Kong and provided fiduciary and other services to clients. [422] On 3 November 2003 Horne emailed Mr Hart advising that EGA intends to include a notification in future letters to policy holders where policies are cancelled prior to their maturity dates that “the Company’s Investment Income has seen very significant reduction…Accordingly the Directors have decided to impose… an across-the-board charge of 3.5% of the surrender value of every policy that is cancelled prior to its maturity date”.257 The email wrote of “investment losses of some AU$2.6m that have crystallized over the past two and a half years.” I do not infer from this email that EGA had money invested or assets which were a source of income. [423] On 4 November 2003 Mr Hart emailed Horne advising that he would have referred to “$4.5M” losses and wrote that “other than that I think the letter is great.”258 [424] EGA was a client of Zetland until 6 October 2004.259 [425] There are no EGA assets located in Mauritius. 260 Sek Sum understood, based on financial statements prepared in Hong Kong, that the assets of EGA consisted of promissory notes and the accounts receivable for UOCL. I accept that Sek Sum’s understanding was correct. I infer that the reference to the accounts receivable of UOCL as an asset was intended to mean that the value of EGA’s promissory note assets was to be measured by reference to the accounts receivable by UOCL. The financial records and books of account of EGA were kept and maintained in Hong Kong. Sek Sum’s office prepared the management accounts based on the books or financial records that were sent from Hong Kong, namely the trial balance.261 [426] No money was ever sent to EGA in Mauritius from UOCL or EGA in Hong Kong or the National Employee Trust (“NET”) in New Zealand. No money was ever sent by EGA from Mauritius to UOCL or to EGA in Hong Kong or to NET. No money was ever received in any bank accounts in Mauritius. No monies were ever set aside in Mauritius for the payment of any claims and no allowances or provisions were set aside for bad debts262 . [427] As to whether or not EGA could have paid out of its bank accounts any claims made on the policies issued, Sek Sum stated that his understanding was that no claims were to be paid out; that the promissory note would have been matched against the claim, 254 Affidavit of Sek Sum, paragraph 44 255 SAF, paragraph 49 256 SAF, paragraph 46 and 47 257 SDF, page 1230 258 SDF, page 1230 259 SAF, paragraph 51 260 Affidavit of Sek Sum, paragraph 26 261 Affidavit of Sek Sum, paragraph 27 262 Affidavit of Sek Sum, paragraph 29 -- 104 of 138 -- 105 and there would be no claim paid. I accept that understanding to be honest and correct. Sek Sum understood the risk for EGA was flat or nil.263 I accept that evidence of Sek Sum. [428] EGA paid its day to day accounts by invoicing Acceptor up until September 2000 and subsequently Zetland because of the management change.264 [429] On occasions EGA would receive correspondence from policy holders requesting copies of EGA’s financial statements, actuarial reports or other documentation. EGA would forward the documentation to Hong Kong to be dealt with. The Hong Kong office of EGA would draft an appropriate response to such correspondence. EGA’s Mauritius office was unable to respond to such requests for financial statements as they did not have any of those records265 . [430] No money passed from UOCL to EGA on account of contributions or promissory notes. EGA did not present promissory notes for payment. EGA provided regular letters to UOCL confirming not to demand payment or assign the notes for twelve months. The latest was on 13 May 2004.266 [431] The only significant assets disclosed in the Balance Sheet of EGA were Promissory Notes issued by UOCL totalling $76,829,000 and a Receivable of $399,000. Mr Vincent’s investigation revealed that the Receivable related to funds owing from UOCL. When EGA was established it represented that it had Paid up Capital of US$250,000, (approximately AUD$400,000). On 15 February 1999, EGA banked into its Australian Dollar Hong Kong Account at HSBC No. HK500305420-0001 an amount of $401,000 provided to it by Le Grande European Group for the Issued Capital in EGA. On that same day, 15 February 1999, EGA transferred to UOCL an amount of $400,000. That is, on the same day that EGA was capitalised, the funds subscribing for that capital were transferred from EGA to UOCL. [432] EGA had two bank accounts in Hong Kong, an Australian Dollar account and a US Dollar account. The first transaction on the Australian Dollar Account was on 15 February 1999. The first transaction on the US Dollar Account was on 1 April 1999.267 No deposits through these accounts resemble that of an insurance company and no expenditure incurred by EGA resembles that of an insurance company. 268 [433] For the year ended 30 June 1999, the first year of operations of EGA (a year in which it claims to have issued $76,829,000 in insurance policies), it generated $Nil income and incurred only $17,628 in expenses. EGA claims to have issued Insurance Bonds crediting interest to participants but there is no interest expense in the profit and loss account and no income was generated by EGA and only $941 was in the bank so it was not in a position to pay interest to the participants.269 I accept the CDPP’s submission that the bond statements were nothing other than a piece of paper created to give the participants and through them the ATO the false impression that a beneficial investment existed. 263 Affidavit of Sek Sum, paragraph 31 264 Affidavit of Sek Sum, paragraph 54 265 Affidavit of Sek Sum, paragraph 58 266 SDF1248 267 Appendix 8 to Vincent’s Task 3 Report Q00015732 268 Schedule 4 to Vincent’s Task 3 Report, paragraph 7.7 Q00015777 269 Q00051949 and Vincent’s Task 3 Report para.7.1 Q00015777 -- 105 of 138 -- 106 [434] Any claims made in respect of reimbursement of employee welfare expenses had to be accompanied by a cheque from the employer for the amount of the claim plus $10 for each cheque to be issued.270 The disbursements were not intended to be made from the “invested” funds purportedly borrowed from UOCL and contributed to NET for the EWF or non-complying superannuation scheme. [435] Mr Singh was asked about the documents and the ATO decision to disallow the deductions. He described the documents and their apparent purpose as: “put in place to give the evidence - give the impression that these are genuine arrangements and these include things like the forms for the credit reference checks, forms talking about actuarial calculations, forms talking about, you know, filling in the name, age details, things like that, there was a number of these window dressing documents that were there”.271 [436] I accept that as correctly reflecting the documents and their purpose. [437] Mr Hart referred to evidence that EGA purchased shares in publicly listed companies as investments: “(i) In a letter dated 23/9/1999, EGA’s bankers are instructed that a payment of $104,768.17 be sent to HSBC Broking Securities for the purchase of shares. (ii) In a dated 28/10/1999 EGA purchased 480 NAB shares. (iii) In a letter dated 30th of November 2000 to HSBC Broking, EGA requested the sale of 100,000 shares in "Kingstream Steel Ltd" (iv) A facsimile sent to EGA by HSBC on 19/1/2001 confirms the purchase of shares in HK for $72,659.19” [438] Notwithstanding that evidence, there is no evidence that any investment on account of contributions was in fact made by EGA and no evidence of an investment that would give to an employee a return on insurance bond in the order of 4% to 7% per annum or any return. EGA’s purchase of those shares is a conundrum. It does cause me to infer that EGA was attempting to earn a return for $98,000,000 worth of insurance bonds issued to NET. Unless it presented the promissory notes for payment to UOCL, EGA did not have any capital to invest. [439] NET, EGA and UOCL were not independent of each other. Some further examples follow. EGA only obtained a telephone and fax number after a participant queried the fact that the letter he received from EGA did not have a telephone or fax no and contact person. After Mr Hart was advised of this by Ms Chan he sent an email to her saying “ask Mike for a telephone number and fax number for European Grande. Please let me know the numbers as well. Keep saying that the 2 OUC and EG are not joined”. Ms Chan emailed the respondent asking for “your/Robert’s views” on a suggestion by Mr Allardice that EGA apply for a dedicated telephone and fax line, fax machine and telephone handset. Mr Hart replied that Robert agrees. Ms Chan emailed Mr Hart that Mr Todd suggested that “all the relevant letters or invoices should go to their Accountants directly”. Mr Hart replied to Chan and copies the reply to Todd saying ‘you are not to send it to the accountants directly. Your client is the person concerned not the accountant’ and to Mr Todd “You are also not to send to the Accountant but are to stay sending to the client for the same reason I have explained to 270 Affidavit of Todd, para.31 NZGI02756 and affidavit of Andrew, para.19 Q00012107 271 T 4-33 L43-55 -- 106 of 138 -- 107 Peggy. Do you want to bring everything we are doing down. It is the clients choice to send it to the accountant if he wishes not yours, for what happens is that the information does not get to the client quickly, guess who then is blamed. Please do not change the system when it is working. The Client/Trustee or the Client/Financier relationship is a must.” [440] Allardice was Chan’s boss. When Chan was away Allardice would perform her functions for her. Chan received verbal instructions from Mr Hart in relation to the operations of UOCL. [441] Chan believed that her time while working on company records of UOCL, EGA and Merrell was invoiced to Mr Hart, because “it was my boss, Mike Allardice who told me in person”. (Chan T 2-69 l.33 and affidavit Chan Q00012116 para 5) When challenged, Chan repeated: “XXN Not that I believed it or not but is was my boss Mike Allardice who told me in person that Mr Hart was the beneficial owner and – Mike Allardice also told me at the time the job that I was doing for time cost was between Mr Hart and Acceptor. That means Acceptor collecting payment from Mr Hart.” (Chan T 2-69 l.55) [442] Documents kept by UOCL were kept on a specific computer. Chan operated the computer. The computer was bought by the former client Mr Hart. (Chan T 2-60 l.18) The company records of EGA and Merrell were also held on that computer. (Chan T 2- 60 l.30) The business records of UOCL were kept on the computer provided by Mr Hart. (Chan T 2-60 l.40) The program where Chan put in the interest rate payments, the client name, the principal amount and their payments for each of the schemes was designed by Mr Hart. (Chan T 3-15 l.40) When Mr Hart visited Hong Kong he would look at the computer and make changes to the information. (Chan T 3-15 l.50) [443] Mr Hart sought to establish that UOCL, rather than Mr Hart, owned the computer used by UOCL, on the basis that there is an entry listing the computer in the 30 June 1999 trial balance as an asset of UOCL. Flader agreed there was an entry but stated that as he was not an accountant it is “hard to say” if the entry confirms ownership272 . Tang agreed the computer was an asset of UOCL 273 . Ms Chan agreed there was an entry in the trial balance274 but she believed that the beneficial owner of UOCL is Hart.275 Ms Chan’s belief that Mr Hart was beneficial owner is an opinion which is not direct evidence of the beneficial ownership. It is circumstantial evidence that Mr Hart and any other persons with whom Chan had contact in relation to UOCL, such as Mr Allardice, behaved in a way that suggested to Chan that Mr Hart was the owner. Ms Chan accepted the office equipment was owned by UOCL.276 Ms Chan said “so what” to a suggestion that UOCL owned the computer based on the trial balance entry listing the computer as UOCL’s asset.277 Ms Chan said Allardice told her that the computer was brought by Mr Hart for exclusive use in relation to the companies and Mr Hart directed UOCL to put the entry as an asset of UOCL.278 There is little significance in 272 T 2-19 l.5 273 T 2-54 L3 274 T 2-69 L21 275 T 2-69 L21 276 T 2-69 L5 277 T 2-70 L31 278 T 2-70 L35 -- 107 of 138 -- 108 determining whether Mr Hart or UOCL “owned” the computer. There is no dispute that the computer was supplied by Mr Hart and was used to store the files of UOCL, EGA and Merrell (the legal owner of 70% of NET). Mr Hart had access to this computer and would change information on it. This is consistent with Mr Hart’s exercising a high level of control over the day to day operations of UOCL, EGA and Merrell and having detailed knowledge of the operations of these companies. [444] In relation to making payments Chan’s evidence was consistent with Mr Hart’s having such control of finances of UOCL, EGA and Merrell because his approval was required. Chan stated in answer to Mr Hart: “XXN…When you paid payments from any of the three companies, Mr Allardice had to sign the transfers?—But approval had first to be sought from Mr Hart and then consent from Mr Allardice before such signature could be appended because Mr Allardice was the sole signatory.” (Chan T 3-15 l.53) “XXN I can only say that upon receipt of any instructions for payment, I would first of all ask for Mr Hart’s approval before I ask for Mike Allardice’s approval.” (Chan T 3-24 l.24) “XXXN Can you tell the Court what was your practice in relation to following instructions from Mr Hart as to payment where you had not as yet received an invoice supporting that payment?-- Because that was an instruction from Mr Hart, usually we would do so immediately. Were there any occasions, to the best of your recollection, where Mr Hart, having requested a payment to be made to a third party, that Mr Allardice overruled him?-- I have no such recollection of such happening.”279 [445] In response to senior counsel for the CDPP Ms Chan answered:280 “What was the purpose of you sending Mr Todd's request for reimbursement of expenses to Mr Hart?-- For Mr Hart to approve the reimbursement request, because we were not in a position to use the client's money. When you refer to the client's money, what bank account are you referring to?-- I believe, well, because there were three bank accounts at the time, namely, UOC, EGA and Merrell.” [446] I found Ms Chan to be credible and reliable. [447] Mr Hart set up the ‘Quickbooks’ system for Chan. (Chan T 3-5 l.8) The basic information Chan knew how to enter on the computer and where she didn’t know she would ask Mr Hart. (Chan T 3-5 l.10) In relation to the computer Chan made entries concerning the loan but as for the upkeep of the system did not have much knowledge. (Chan T 3-6 l.5) Where she did not know she would ask Mr Hart and Allardice. (Chan T 3-6 l.15 and l.18) 279 T4-19 l.31 280 T 4-18 l.8 -- 108 of 138 -- 109 [448] Todd would often make requests or give Chan instructions in relation to documents he required as director of the trustee NET. (Chan T 3-7 l.35) However, if a request for expenses came from Todd, the request would be sent to Mr Hart for his approval. (Chan T 4-18 l.15) Chan sought confirmation from Mr Hart in relation to printing the insurance proposal. It was not necessary to seek any similar confirmation from Todd. (Chan T 4-21 l.21) [449] A large proportion of the money which was paid by participants by way of application fees and interest was applied to Mr Hart’s personal expenses and the acquisition of assets by companies associated with Mr Hart or the payment of debts incurred by the Mr Hart and companies associated with him. 281 UOCL had a service agreement with Mr Hart282 and with Harts Consulting Pty Ltd.283 Minutes of a directors meeting of UOCL on 14 November 2001 note that the service agreement entered into by the company and Mr Hart on 10th November 1998 had been assigned to Unlimited Business Consultants (Qld) Pty Ltd and “that Mr Hart had requested that consulting fees (hitherto payable to him under the terms of the Agreement) be paid henceforth to Unlimited Business Consultants (Qld) Pty Ltd at the rate of AU$30,000 on the 15th day of each month, with effect from 15th November, 2001.”284 [450] Ms Chan was questioned about a request for payment of $200,000 on 20 March 1999 on the basis that an invoice would follow285 : “Can you tell the Court what was your practice in relation to following instructions from Mr Hart as to payment where you had not as yet received an invoice supporting that payment?--Because that was an instruction from Mr Hart, usually we would do so immediately. Were there any occasions, to the best of your recollection, where Mr Hart, having requested a payment to be made to a third party, that Mr Allardice overruled him?-- I have no such recollection of such happening.”286 [451] Mr Hart’s issue of invoices to UOCL for services does not persuade me that UOCL was master and Mr Hart consultant nor that the fees paid were for consulting. While Mr Hart undoubtedly was consulted by Allardice I do not accept that Mr Hart’s role was so limited. The services agreement of 18 May 1998 was consistent with a relationship of Acceptor as service provider to UOCL for Mr Hart as principal. Mr Hart’s plan to set up a bank and insurance company was inconsistent with his becoming only a consultant. Mr Hart’s degree of involvement and influence over the operations of Acceptor, Chan, and through them over UOCL, EGA and Merrell leads me to find that Mr Hart was more than a consultant to Acceptor or UOCL. His relationship with Acceptor and UOCL was probably more like that described in the services agreement of 18 May 1998. The rendering of invoices was probably a way of transferring commissions and interest paid by participants to entities associated with Mr Hart. 281 Vincent’s Task 3 Report, para.6.5 Q00015777 282 SDF Vol.1, p.600; Chronology para.178 283 SDF Vol.1, p.324 284 Q00011566 285 SDF Vol.2, p.786 286 T 4-19 L30-40 -- 109 of 138 -- 110 [452] Ms Laura Perry, who is now Mrs Laura Hart and Ms Petersen were associates of Mr Hart. [453] The CDPP drew together in its opening much of the evidence showing Mr Hart’s control over Acceptor’s performance of duties for UOCL. I set out that evidence and the brief submission accompanying it which I also accept: [454] “(a) Transfer of money to specified accounts 1. Requests were made to transfer money from UOCL accounts by Mr Hart, Laura Hart or Shirley Petersen. Where either Laura Hart or Shirley Petersen made the request, consent would be obtained from Mr Hart before the request was acted upon. The requests ordinarily included the amount and transferee details. Requests to transfer money were made on a regular basis and often included significant sums. Following is a sample: (a) On 13 July 1998 Laura Hart of Harts instructed Pamela Wong of UOCL by facsimile to arrange a telegraphic transfer of $300,000 to Harts Consulting Pty Ltd287 . (b) On 30 July 1998 Mr Hart advised Mike Allardice by facsimile that he had just spoken to ‘Robert’ and ‘Robert’ had requested Allardice to arrange the transfer of $650,000 to Harts Australia Limited288 . (c) On 19 August 1998 Mr Hart emailed Chan requesting that she arrange for Allardice to transfer AUD$120,000 to Harts Australia Limited289 . (d) On 14 September 1998 Mr Hart emailed Chan requesting her to organise a bank transfer ‘for me’ in the amount of $50,000.0 to Mr Rolph- Smith290 . (e) On 6 October 1998 Laura Perry (Mrs Hart) sent a facsimile to Chan stating that Mr Hart requests that Chan transfer $102,000 to Geoff Klooger & Associates Trust Account291 . (f) On 22 February 1999 Hart emailed Chan stating: “The amount of $339,946.12 (Part of a loan of $400,000) is to go to the Account of Account Name Ward & Partners Trust Account Laura will send you a fax of the Bank account and Bank account details tomorrow morning. Peggy this is VERY URGENT. The money is held a present in the account of L’GE.”292 (g) On 23 February 1999 Laura Hart provided Chan with Daniel Flemings bank details and stated that the total amount to be transferred is A$340,187.08 and that the transfer needs to be done today. “Please call Steve if you have any queries”293 . 287 SAF, paragraph 139 288 SAF, paragraph 140 289 SAF, paragraph 142 290 SAF, paragraph 145 291 SAF, paragraph 152 292 SDF, page 38 293 SAF, paragraph 173 and SDF, page 37 -- 110 of 138 -- 111 (h) On 24 February 1999 Hart emailed Chan responding to the 22 February 1999 email stating: “You spoke to me about this and I said to pay from United”294 . (i) On 4 March 1999 Mr Hart writes to Allardice and requests Allardice arrange a transfer of $100,000 “for interest for last years clients” to The Fiduciary Company Limited. Mr Hart stated “I will explain to you later”295 . (j) On 28 April 1999 Laura Perry (Mrs Hart) emailed Chan requesting that Chan transfer $30,000 from UOCL to Merrell Associates Ltd and $30,000 from Merrell Associates Ltd to Bickfords Trust Account296 . (k) On 7 May 1999 Mr Hart emailed Chan requesting the telegraphic transfer of USD$16,698 to Federal Financial Group, INC Holding Account297 . (l) On 27 May 1999 Mr Hart emailed Chan requesting she arrange to TT USD$154,000 to go from Merrell. Please transfer from UOC to Merrell to have the funds298 . (m) On 24 June 1999 Mr Hart emailed Chan requesting she arrange to send USD$45,000 to go from Merrell to Federal Financial Group INC Holding Account. Please transfer from UOC to Merrell to have the funds 299 . (n) On 28 June 1999 Mr Hart emailed Chan seeking confirmation that the money had gone to the USA and Chan replied that “a TT of USD$45,000 to USA was made on 24/6/99, value on 25/6/99”300 . (o) On 21 July 1999 Mr Hart emailed Chan requesting that $250,000 be transferred to Harts Consulting by TT today please301 . (p) On 18 August 1999 Laura Hart sent a facsimile to Chan requesting Chan transfer AUD$50,000 to the Woodruff Family Trust account302 . (q) On 23 September 1999 Laura Hart sent a facsimile to Chan requesting Chan transfer $750,000 to the CPA Trust Account for Birralee Plaza Shopping Centre303 . (r) On 11 October 1999 Mr Hart emailed Chan requesting Chan deposit AUD$350,000 in Hart’s Consulting Pty Ltd bank account as soon as possible304 . 294 SDF, page 38 295 SAF, paragraph 179 and SDF, page 39 296 SAF, paragraph 183 297 SAF, paragraph 184 298 SAF, paragraph 195 299 SAF, paragraph 200 300 SAF, paragraph 201 301 SAF, paragraph 205 302 SAF, paragraph 209 303 SAF, paragraph 211 304 SAF, paragraph 212 -- 111 of 138 -- 112 (s) On 10 February 2000 Laura Perry (Mrs Hart) sent a facsimile to Chan requesting the transfer of $82,220 to K2000 Airlines Pty Ltd and stated: “If you have any queries please contact Steve Hart.” A handwritten notation appeared on the facsimile stating ‘confirmed by SH by phone’305 . (t) On 31 July 2001 Horne emailed Florence Ng advising that Shirley from Harts office just telephoned to ask for a further transfer of AUD$50,000. “If UOC has insufficient funds please go ahead and prepare an instruction to SCB in the usual way. If there is insufficient funds please let me know and I will advise Shirley.”306 (u) On 21 August 2001 Mr Hart emailed Ng stating: (i) please transfer $100,000 to Geoff Klooger’s trust account as an investment in Merrell Australia; (ii) transfer a further $50,000 to Mr Harts Consultings’ account as a fee307 . (v) On 29 August 2001 Horne emailed Ng stating that Laura from Harts office just telephoned to pass on Steve’s request for a transfer of AUD$25,000. “If UOC has sufficient funds please go ahead and prepare an instruction to SCB in the usual way. If there is insufficient funds please let me know and I will advise Laura.” 308 (w) On 11 September 2001 Horne instructed Ng to transfer $75,000 from UOCL to Hart’s Consultancy on Mr Hart’s request 309 . (x) On 10 February 2003 Horne forwarded to Rosseti Cheng an email received from Mr Hart stating: “Dear Rossetti Please prepare a transfer of AU$20K from UOC to Merrell and also prepare an instruction to SCB for a transfer of AU$20K from Merrel to UBC this week with reference ‘partial draw-down of our agreed loan facility’”310 . (b) Status of deposit and bank balances 2. Mr Hart regularly sought and received information as to bank balances. For example: (a) On 13 August 1998 Mr Hart emailed Allardice requesting that Chan advise what cheques still have not cleared and the cheques she is waiting to bank311 . (b) On 1 September 1998 Chan emailed Mr Hart stating that the bank balance of Company C was A$1,095,059.33 312 . 305 SAF, paragraph 217 306 SAF, paragraph 221 307 SAF, paragraph 222 308 SAF, paragraph 223 309 SAF, paragraph 226 310 SAF, paragraph 229 311 SAF, paragraph 141 312 SAF, paragraph 144 -- 112 of 138 -- 113 (c) On 15 September 1998 Chan responded to Mr Hart by email advising that after checking with the bank the current balances are 1. Statement savings account A$1,033,766.79, 2. Statement saving account USD$3,488.91 and 3. Current account HKD$21,481.41 313 . (d) On 15 September 1998 Mr Hart emailed Chan seeking confirmation that bank balances were after the 2 amounts Mr Hart requested were sent, namely $30,000 to Steve Hart Family Holdings and $50,000 to Rolph- Smith314 . (e) On 6 October 1998 Laura Perry (Mrs Hart) sent a facsimile to Chan stating that Mr Hart requests that you fax to Shirley a new list of all cheques cleared since the last listing315 . (f) On 3 December 1998 Mr Hart emailed Chan and request that she: “…please let me know the balance of the account less the interest owed to the Insurance Co. I showed you what I mean in regards to how to work out the interest to the Insurance Co. If you are unsure, please telephone me today. I also need to know what is the balance of the account for Merrell. Could I have this info today.” 316 . (g) On 22 February 1999 Chan emailed Mr Hart that: “At present, the bank balance of Le Grande is AUD5,029.42 Because you instructed us to transfer AUD400,000 from Le Grande to European Grade and then transfer AUD400,000 from European Grande to United Overseas. (Re your e-mail on 11/2/99) The current bank balance of UOCL is A$868,144.60” 317 . (h) On 18 April 1999 Mr Hart emailed Chan requesting her to advise of the amount in all of the bank accounts. Mr Hart also stated “Add your password”318 . (i) On 19 April 1999 Chan emailed Mr Hart providing the current balance of the bank accounts as a 19 April 1999 in response to an email from Mr Hart to Chan dated 18 April 1999319 . Balances were provided for United Overseas Credit Limited, Golden Dream Limited, European Grande Assurance S.A., Le Grande European Group S.A and Merrell Associates Limited320 . (j) On 27 May 1999 Chan emailed Mr Hart with bank balances in accounts of UOC, Merrell, European Grande, Golden Dream. Chan advised we have not enough money to transfer USD 154,000 to Federal Financial321 . 313 SAF, paragraph 148 314 SAF, paragraph 147 315 SAF, paragraph 152 316 SDF, page 24 317 SAF, paragraph 172 318 SDF, page 42 319 SAF, paragraph 181 320 SDF, page 44 321 SDF, page 59 -- 113 of 138 -- 114 (k) On 28 May 1999 Mr Hart emailed Chan stating: “Peggy, I thought that we had a lot more money than that in the account. When you gave me the last balance, it was over AUD 400K. Since then I have sent some money out but not that amount and we have received a lot of money as well. Please give me an account accounting urgently since you email of last month in regards to the bank balance.”322 (l) On 19 June 2000 Mr Hart emailed Chan requesting the balance of the account323 . (m) On 2 July 1999 Chan emailed Mr Hart advising the available bank balance of UOC as at 2/07/1999 is AUD$512,092324 . (c) UOCL loans 3. In addition to matters relating to banking instructions Mr Hart directed Chan in relation to UOCL documents, loan arrangements and interest rates, including: (a) On 6 October 1998 Laura Perry sent a facsimile to Chan requesting she email Mr Hart a copy of the letter re the September interest payment that was sent to clients as there was an error in it.325 (b) On 8 October 1998 Mr Hart emailed Chan stating that where the interest rate is not specified “it will be 5%”.326 (c) On 14 October 1998 Mr Hart emailed Chan requesting that Chan: (i) send letters to the people who have not sent the loan documents back and request them; and (ii) send them an account for interest327 . (d) On 17 November 1998 UOCL sent an email to Mr Hart attaching documents in excel format titled ‘outstanding loan agreements’ and ‘loan-payments’328 . (e) On 25 March 1999 Chan emailed Mr Hart “Re further information re outstanding interest payment”. Chan advised Mr Hart should delete James Cavill from the outstanding Sept interest 98 table received by Mr Hart regarding outstanding interest payments for September and December 98329 . (f) On 16 April 1999 Chan emailed Mr Hart advising that she had sent a package of two new agreements of Dianne Passmore and Dr Fleming to Shirley by courier today. “I have a telephone conversation with Shirley today. She told me that the interest payment of Dr Fleming is 322 SAF, paragraph 197 323 SDF, page 452 324 SAF, paragraph 202 325 SAF, paragraph 152 Q00026224 326 SAF, paragraph 153 Q00026207 327 SAF, paragraph 155 328 SAF, paragraph 160 329 SAF, paragraph 179 -- 114 of 138 -- 115 3.5%. Therefore, the % of the interest payment shown in the loan documentation is 3.5%. But my understanding is after we get the interest, UOC will keep 2.5% and EG will keep 2.5%. If the interest payment is 3.5%, how to distribute them? Please advise.” 330 (g) On 16 April 1999 Mr Hart emailed Chan in response “You are wrong with the split. The interest is 3.5%”331 . (h) On 28 May 1999 Mr Hart emailed Chan stating that she should: “sign everything under the Power of Attorney sent to you for the loan. The clients do not need to sign anything further. However please do not send any completed agreements to the clients until I cone to Hong Kong. What you are to do immediately, is to write a letter to each of the Borrowers and tell them that you have received the loan application and the loan has been settled on the date of the power of attorney and that you will be sending them all completed agreements within the next 3 weeks.”332 (d) Office arrangements and payments 4. Matters relating to the day to day running of UOCL were also referred to Mr Hart for instruction or involved Mr Hart’s input, including for example: (a) Mr Hart set up ‘Quick Books’ on the UOCL computer333 . (b) On 19 August 1998 Mr Hart requested that Chan let Allardice know that he believed that: ‘we should have a special password that needs to be typed or spoken so that no one else can authorise money transfers or cheques except Robert or myself’. 334 (c) On 14 September 1998 Allardice sent an email to Mr Hart stating: “As we may from time to time need to meet people with our UOC “hat on” I wonder whether we should have some business cards made up for PC & myself. PC as credit manager and MGA as General Manager”335 . (d) On 7 January 1999 Chan emailed Mr Hart in relation to the application for a phone (EGA) and approval of a visa card payment and receipt of a PIN number 336 . (e) On 8 January 1999 Mr Hart responded to Chan that he has received the PIN number and that the credit payment is in order337 . (f) On 4 March 1999 Mr Hart wrote to Allardice confirming “what I am trying to achieve”. Mr Hart wanted to give every borrower a deposit book for each of them to make payments of interest directly into the bank account of UOCL. 330 SDF, page 41A 331 SDF, page 41A 332 SAF, paragraph 197 333 SAF, paragraph 138 334 SDF, page 8 335 SAF, paragraph 146 336 SDF, page 33 337 SDF, page 33 -- 115 of 138 -- 116 (g) On 20 March 1999 Mr Hart directed that United Overseas Credit must pay $50,000 (handwritten) being legal fees to Kevin Munro and Associates today338 . (h) On 19 May 1999 Chan sought confirmation from Mr Hart that she could transfer A$5,000 from AUD a/c to HKD a/c. Chan advised: “The current balance is HKD A/C is HK$1,409.28 after deduction of the April 1999 visa charges. The visa charges for April 1999 is HKD$6,733.94. We need to pay HK$2,250 to Hong Kong Government being the settlement of the Business Registration fee of 1999/2000.”339 (i) On 24 May 1999 Mr Hart emailed Chan to shift the required money to keep the accounts paid340 . (j) On 15 July 1999 Chan emailed Mr Hart seeking approval to pay AUD$1,155 to Harts Consulting Pty Limited being the courier services charge for the period March 1999 to 9 July 1999 341 . (k) On 16 July 1999 Mr Hart emailed Chan approving the payment342 . (l) On 21 July 1999 Mr Hart emailed Chan directing her to close the AUD a/c of Golden Dream343 . (m) On 21 July 1999 Mr Hart emailed Chan: (i) complaining that it is very difficult to phone you when you constantly have your answering machine on; (ii) advising that Mr Hart will bring someone over to help you for 2 weeks and at the end of that time “I expect you should be up to date with your work” 344 . (e) Authorise payments of commission 5. Payments of commission to those promoting the scheme were directed by Mr Hart or under his authority from Australia. Examples include: (a) On 22 August 1998 Mr Hart emailed Chan requesting that she arrange commission cheques to be sent to Australia, namely: (i) AIM Group – AUD$14,000 address… (ii) Phoenix Group P/L AUD$38,000 address… (iii) Kevin Pardella – AUD$10,000 address… 338 SDF, page 40 339 SAF, paragraph 188 340 SAF, paragraph 189 341 SDF, page 66 342 SAF, paragraph 204 343 SDF, page 68 344 SAF, paragraph 205 and SDF, page 67 -- 116 of 138 -- 117 (iv) Mike Vitobello – AUD$8,150 address…345 (b) On 27 April 1999 Shirley Petersen emailed Chan stating that Mr Hart has asked if you could please pay commission to Ross William Mc Swain in the amount of $2,000346 . (c) On 14 May 1999 Shirley Petersen sent a facsimile to Chan requesting the payment of commissions, namely: (i) Hollis - $4,000 pay to Mr Ross Mc Swain; (ii) Falchi - $1,000 pay to Venmore No. 9 Pty Ltd; and (iii) Falchi - $10,000 pay to Lymkiss Pty Ltd. An added handwritten note stated “Phone conversation with Steve at 9:00am on 14/5/99 confirmed to pay” 347 . (d) On 14 May 1999 Shirley Petersen sent a facsimile to Chan requesting the payment of commissions, namely: (i) Sykes - $2,000 pay to Mr Ross Mc Swain An added handwritten note stated “Phone conversation with SH at 9am confirmed to pay” 348 . (e) On 28 May 1999 Shirley Petersen emailed Chan requesting payment of commissions, namely (i) Sykes $4,000 pay to Mr Ross McSwain (ii) Albert St Invest $1,000 pay to Shaheda Ismail349 . (f) On 23 June 1999 Mr Hart emailed Chan requesting a commission payment of AUD$50,000 to Sophie Treloar350 . (f) Consulting fees 6. Mr Hart asserts that he had a consulting arrangement with UOCL. However the nature of the invoices sent, authorisation of payment and work undertaken are not consistent with that type of arrangement. Examples include: (a) On 12 November 1998 Laura Hart of Harts sent a letter to Chan stating: “As per Mr Hart’s service agreement, clause 3.2 you have to meet the attached costs.” Please pay $25,585.97 by telegraphic transfer to Harts Consulting Pty Ltd for airfares, accommodation and meals351 . 345 SAF, paragraph 143 346 SAF, paragraph 182 and SDF, page 45 347 SAF, paragraph 186 and SDF, page 50 348 SAF, paragraph 187 349 SAF, paragraph 196 350 SAF, paragraph 199 and SDF, page 60 351 SAF, paragraph 158 -- 117 of 138 -- 118 (b) On 19 March 1999 Hart’s accounting practice invoiced UOCL, attention Chan, in the sum of $200,000 for professional fees for perusing new loan agreements and documents for application by borrowers, professional fees for meetings with Australian lawyers and advice given and received in relation to agreements for this year and reimbursement of airfares and hotel costs up to and including 16 March 1999.352 (c) On 20 March 1999 Mr Hart emailed Chan that United Overseas Credit must pay Harts Consulting Pty Ltd $200,000 by telegraphic transfer. The amount must go today.353 (d) On 13 May 1999 Shirley Petersen for Hart’s accounting practice invoiced UOCL, attention Chan, in the sum of AUD$125,000 for professional fees for work performed and introductions made in USA and for perusing new loan agreements and documents for application by borrowers.354 (e) On 13 May 1999 Mr Hart emailed Chan that Shirley has sent an account to you today for Harts Consulting. Could you please pay it urgently.355 (f) On 13 May 1999 Hart’s accounting practice invoiced UOCL, attention Chan, in the sum of AUD$250,000 for professional fees for work performed and introductions made in the USA and for perusing new loan agreements and documents for application by borrowers. All the above up to and including March, April and May 1999.” 356 [455] The CDPP submitted in its opening that an examination of each of the duties of Acceptor and the matters set out in the submission immediately above establishes that Mr Hart was in control of UOCL. By the time of submissions in reply the CDPP qualified this by submitting: “To the extent it is alleged that the respondent controlled these companies, this is a simple form of summarising the respondent’s knowledge as to what these companies actually were, namely, shelf companies that ultimately obtained the relevant financial license in Hong Kong for UOCL and insurance license in Mauritius for EGA. They were companies that never had the financial capacity to, in reality, make loans or issue insurance bonds.” I accept that submission. I also find that Mr Hart controlled UOCL and EGA through others. Application 1 (b) (ii) and the 1998 EWF [456] The offence pleaded in the further amended points of claim at paragraph 10 in respect of application 1 (b) (ii) is: Hart committed the following alleged offence which constitutes unlawful activity: (a) Between the first day of January 1998 and the thirtieth day of June1999 at various locations in the States of Queensland, Victoria and Western Australia Steven Irvine Hart did contrary to section 29D Crimes Act 1914 as amended, defraud the Commonwealth in that he 352 SAF, paragraph 38 and SDF, page 39A 353 SAF, paragraph 178 and SDF, page 40 354 SAF, paragraph 39 and SDF, page 47A 355 SAF, paragraph 185 and SDF, page 49 356 SDF, page 48 -- 118 of 138 -- 119 prejudiced the right of the Commonwealth to tax payable by diverse persons. Particulars In relation to income tax returns to be lodged by taxpayers for the financial year ending 30 June 1998 and subsequent years Steven Irvine Hart caused the true nature of Employee Welfare Funds and agreements between taxpayers and United Overseas Credit Limited and National Welfare Trust (New Zealand) Limited and agreements between National Welfare Trust (New Zealand) Limited, European Grande Assurance Limited and United Overseas Credit Limited and payments made by taxpayers to United Overseas Credit Limited to be misrepresented. [457] The allegations of dishonesty are very similar to those for application 1 (b) (i) though with the addition of amendments to include the claim for a contribution made to UOCL by promissory note. It was alleged:357 Hart knew that the participants in the 1998 EWF scheme were not entitled to claim the contribution, the fees and the interest payments on their loans to UOCL as a tax deduction. Particulars (i) Hart knew that there were no funds loaned by UOCL to any of his clients who participated in the 1998 EWF scheme or any subsequent schemes; (ii) Hart knew that no insurance bonds had been purchased as at 30 June 1998; (iii) Hart knew that UOCL did not have the financial capacity to make the loans to each of the participants in the 1998 EWF scheme or any subsequent schemes. Hart's knowledge that UOCL did not have the financial capacity to provide funds by way of loans to participants in the 1998 EWF scheme or any subsequent scheme is to be inferred from the facts, matters and circumstances set out in paragraph 9 (n)(iii) above. (iv) As late as 24 February 1999 Hart knew that EGA had not issued any insurance bonds in relation to the 1998 EWF scheme; [458] Mr Hart’s pleading in response was generally similar to that raised in respect of the 1997 EWF. Conclusions with respect to 1(b) (ii) of the application [459] The 1998 EWF was based upon non-recourse Loan Agreements. Mr Hart caused the setting up of UOCL and EGA and had sufficient knowledge of and control over UOCL, EGA and NET to know at all material times that UOCL made no loans, only provided promissory notes, that the notes would not be presented to UOCL for payment, that UOCL had insufficient capacity to ever pay the notes, that the trustee’s investment of the alleged contribution provided no benefit to the employee beneficiaries, that EGA received no contribution money to invest, otherwise had no money invested and that its insurance bond was not a benefit and that the payments to UOCL of fees and interest provided no benefit to the beneficiaries. Mr Hart believed 357 Further amended points of claim par 11( jj) pg 28 -- 119 of 138 -- 120 that for claims to be deductible the contribution had to be for the purpose of providing a benefit to an employee. Mr Hart knew that the claims were not deductible. [460] Mr Hart provided participants with a fleet of pro-forma documents that would on their face, show that the contributions, fees and interest likely to be claimed as tax deductions were for the purposes of employee welfare.358 The Loan Agreement did not mention a promissory note. [461] Mr Hart knew that some or most client/employers in the 1998 EWF Scheme would, or were likely to, claim by way of initial contribution, fees and/or interest payments paid to UOCL as an expense in the participant’s income tax return for the financial year ending 30 June 1998 and following.359 [462] In connection with the 1998 EWF I find that Mr Hart intended to prejudice the economic interests of the Commonwealth. Mr Hart’s means were dishonest by the standards of ordinary decent people and I find that Mr Hart knew his means were dishonest by the standards of ordinary decent people. The 1999 EWF Scheme [463] In mid 1999 Mr Hart briefed his staff and accountants on changes to be made to the 1998 EFW Scheme which involved streamlining the previous Schemes. 360 The variant is called by the parties “the 1999 EWF Scheme”. Client/employers authorised Todd and Chan to execute pro-forma documentation on their behalf for the 1999 EWF Scheme pursuant to a specific Power of Attorney. For this reason, the pro-forma documents for the 1999 EWF Scheme also included a specific Power of Attorney document. 361 The only other change of any potential significance was the change to the clause limiting UOCL’s recourse. It is an arguable interpretation of the Loan Agreement when read with other documents in the pro forma fleet, that after receiving 10 years of interest payments for issuing a promissory note not presented for payment, UOCL could have recourse to the participant for the face value of the promissory note if the participant failed to pay it. From the participants’ point of view’ that change from the benign 1998 EWF Loan Document which protected participants from UOCL’s recourse to the potentially malignant clause in the 1999 EWF Loan Agreement would be significant. The 1999 EWF Loan Agreement was one Ms Chan could execute pursuant to a power of attorney, though participants were to have a copy. [464] The power of attorney is made in favour of Peggy Chan of UOCL by the relevant appointer.362 It authorised Peggy Chan to complete any blanks in the pro-forma documents and to make any changes, additions or deletions that she thought desirable. It also authorised her to execute and perform any other deed, matter or thing which in her opinion ought to be done, executed or performed to perfect the pro-forma documents or to give effect to the transactions contemplated by the documents.363 The 358 Proforma Documents – SDF 34-56; Chronology para 33 and 70; Affidavits: Andrew Q00012107 para 3, 14, Hayter Q00013048 para 28, McSwain Q00044804 para 9, 11 and 19, Murphy WAAW00148 para 7; Treloar Q00012156 para 7; Ismail Q00012109 para 5 and 6. 359 SAF para 76. 360 SAF, paragraph 79 361 SAF, paragraphs 80 and 81 362 An example of the specific Power of Attorney is found at SDF, page 181 (Q00029134) 363 SDF, page 379, Clauses 1 to 3 -- 120 of 138 -- 121 specific power of attorney authorised Ms Chan to execute the documents specified in Item 4 of the Schedule. Item 4 specified: “i. The Letter of Approval accepting the terms and conditions of the Loan in the forms supplied. This will include interest of 3.5%. Term of ten years. ii. The Loan Agreement in the forms supplied. Interest will be at the lower rate of 3.5% and higher rate of 9%. Term is ten years. iii. The Promissory Note in the forms supplied for the amount of $ The endorsing of the Promissory Note, if required, to any other party to complete the transaction. iv. The Credit Information Authority in the forms supplied.” [465] The CDPP submits that this variation to the 1998 EWF, namely the introduction of a specific Power of Attorney, had the effect of further distancing the participants from the reality of the operation of the Scheme. That reality was as with the 1998 EWF that UOCL did not make any loans. It issued promissory notes which were not presented for payment and from the original contribution, the trustee NET received no funds and the insurer EGA received no funds. I accept that one effect of the change was to further distance participants from that feature of the operation of the scheme. [466] As was the case with the 1998 EWF, in relation to the 1999 EWF and the 1999 superannuation schemes, Mr Hart believed that for the client/employers to be entitled to a deduction for a contribution made to the trustee of the EWF, the contribution had to be for the purpose of providing a benefit to an employee or member of the superannuation fund. 364 Mr Hart knew in relation to the 1999 EWF Scheme and the 1999 Superannuation scheme that some or most client/employers would, or were likely to, claim payments by way of initial contribution, fees and/or interest payments made to UOCL as an expense in the participant’s income tax return for the financial year ending 30 June 1999 and following.365 [467] The Application in paragraph 1(b)(iii) further particularises Mr Hart defrauding the Commonwealth in sub-paragraph (b) of the Particulars in relation to the operation of the 1999 Superannuation Scheme. The particulars in sub-paragraph (b) to paragraph 1(b)(iii) provide: “(b) in relation to income tax returns to be lodged by taxpayers for the financial year ending 30 June 1999 and subsequent years Steven Irvine Hart caused the true nature of Non-Complying Superannuation Funds and agreements between taxpayers and United Overseas Credit Limited and National Employee Trust (NZ) Limited and agreements between National Employee Trust (NZ) Limited, European Grande Assurance Limited and United Overseas Credit Limited and payments made by taxpayers to United Overseas Credit Limited to be misrepresented.” Non-Complying Superannuation Scheme [468] The 1999 Superannuation Scheme operated as follows: 364 SAF paragraphs 84, 99, 110 and 122. 365 SAF paragraphs 86, 99 and 123 -- 121 of 138 -- 122 1. The director of the client/employer company would apply for a loan from UOCL; 2. The loaned funds were to be invested in superannuation in New Zealand with a company called NET and NET would obtain an insurance policy to cover the value of the loan; 3. The director of the client/employer company signed a Special Power of Attorney; 4. A promissory note was issued by UOCL whereby UOCL promised to pay the amount of the loan funds; 5. The promissory note was then signed by the Attorney on behalf of the relevant director and the client/employer company; 6. A superannuation fund was established with NET as trustee; 7. The promissory note was endorsed in favour of NET as trustee of the Superannuation fund; 8. The promissory note was then endorsed in favour of EGA for the purchase of an insurance bond; 9. The insurance bond was to be used as security for the loan from UOCL. [469] The 1999 Superannuation Scheme was similar to the 1999 EWF except that fund administered by the trustee was for superannuation and not Employee Welfare purposes. [470] The 1999 Superannuation Scheme pro-forma documents are found in SDF vol 1. The relevant difference between the 1999 EWF and the 1999 Superannuation Fund Schemes is that the fund established was a Superannuation Fund as opposed to an Employee Welfare Fund. NET was therefore the trustee of the relevant Superannuation Fund rather than the trustee of an Employee Welfare Fund. This is demonstrated by reference to an example 366 of Minutes of Meeting of directors of NET. Present was Mr Todd of NET. The Minutes note the establishment of a fund: “The chairman tabled the Trust Deed and rules of a Non-Complying Superannuation Plan and proposed that the company establish the Leadlight Craftsman Pty Ltd Superannuation Fund (“the Fund”) and become the first trustee of the fund.” [471] The relevant client/employer would then ostensibly make a contribution to the Superannuation Fund pursuant to s 82AAE of the Income Tax Assessment Act 1936 in favour of a particular employee and the minutes would note a resolution to accept the “contribution”. There was no contribution of money. UOCL’s promissory note remained a central feature. [472] These Minutes in the example also deal with how NET intended to invest the superannuation contributions. They record: “RESOLVED to adopt the investment objectives of the Fund and adopt and implement the investment strategy to achieve the objectives as set out in the investment policy of the Fund. RESOLVED FURTHER that the Fund make an investment of $66,000.00 into an insurance bond with European Grande Assurance S.A. in accordance with the investment policy.” 366 B000173113 SDF vol 1 pg 93 -- 122 of 138 -- 123 [473] The investment made in respect to the 1999 EWF Scheme and the 1999 Superannuation Scheme was exactly the same, namely an investment in an insurance bond issued by EGA. [474] The CDPP submitted the fraud remains the same: like the 1998 and 1999 EWF, the 1999 Superannuation Scheme required the relevant participant to borrow money, for the initial contribution, from UOCL; this was in circumstances where UOCL did not in fact make any loans and did not have the capacity to make any loans; as to the use of promissory notes, that there was no intention on Mr Hart’s part that these promissory notes would ever be presented for payment; the arrangement remained that the promissory notes were to be endorsed in a round-robin fashion in a pre-determined manner; accordingly, no loan was ever made because no relationship of borrower and lender was created. I accept that the scheme for the 1999 EWF and the 1999 Superannuation schemes were essentially the same as each other in that each relied upon an identical Loan Agreement and an identical investment with the trustee by way of promissory note which was not to be presented, with an identical problem that there was no benefit for the beneficiary from the alleged contribution. That Loan Agreement was materially different from the 1998 EWF’s Loan Agreement at the non-recourse clause. I discussed the difference elsewhere in these reasons. With that exception, I accept that the deductibility of claims and the fraud remain the same. [475] Mr Singh of the ATO stated that one reason the initial contributions to the 1998 and 1999 EWF’s and the 1999 Superannuation Scheme “were not allowable deductions because they were not made. That is, there was no payment by the controlling shareholder to the Fund. There was no relationship of borrower and lender created by the documents executed by the parties”. [476] Mr Vincent in his Task 3 Report summarises his opinion as follows: “There were no real monies actually advanced to the Participants, therefore there were no real monies ever received or held by the Trustee on behalf of those Participants, consequently no real monies were invested in or by the insurer. There was simply no money.” [477] The fact that there was no money, is evidenced by Mr Vincent’s examination of the Balance Sheets of UOCL for the years ending 30 June 2000 and 30 June 2003 extracted from the audited Financial Statements of UOCL. There were in fact no Financial Statements prepared for UOCL for the 1997, 1998 or 1999 years so the 2000 Balance Sheet is the earliest Balance Sheet for UOCL367 . [478] Further, in relation to Mr Vincent’s examination of the profit and loss accounts of UOCL he notes that the profit and loss account for the year ended 30 June 2000 includes all income and expenses from 27 June 1997 to 30 June 2000. This combined profit and loss account shows that the total income reported as being earned by UOCL from its nominal capital invested for the period summarized was $26,660,620. This income is recorded as being earned from “loan interest income” totaling $17,342,848. Loans were not made. That interest was paid on the basis of promissory notes issued. Income from application fees paid by participants for the establishment of “loans” totaled $9,317,772.368 367 See paragraph 4.14 of Mr Vincent’s Task 3 Report 368 See paragraph 4.16 of Mr Vincent’s report -- 123 of 138 -- 124 [479] Mr Vincent also analysed the EGA transactions. All the financial records for EGA were kept and maintained in Hong Kong. They were not signed until 15 January 2002, some two and a half years after the end of FYE 1999. For FYE 1999, the first year of operations of EGA, a year in which it claims to have issued $76,829,000 in insurance policies, it generated nil income and only incurred $17,628.00 in expenses. Mr Vincent makes two points from these accounts: “Firstly, EGA claims to have issued insurance bonds crediting interest to the participants yet there is no interest expense in the profit and loss account. Secondly, as there was no income generated by EGA (nor were there any real funds in the bank) it had no ability to be in a position to pay any interest to the participants.”369 [480] Mr Vincent further observed that in relation to EGA, the Balance Sheet does not show any investments and only $941.00 in the bank account. Mr Vincent concluded: “It is clear from this that EGA received no real funds from the trustee for the purpose of issuing an insurance bond and appropriate investment as the business plan suggested.”370 [481] Mr Vincent also observes that even though a bank account for EGA was opened in Mauritius in November 1999, this bank account was never used by EGA371 . The reality is that with the EWF and Superannuation Schemes promoted by Mr Hart, there was no money from the initial contributions by participants available to finance the purported investments for the benefit of members of the employee welfare funds and superannuation funds. [482] The only actual money involved in the transactions was the money paid by participants to UOCL. Mr Vincent in his updated Task 2 Report dated 24 January 2007 has identified from the UOCL database, payments totaling $19,168,097.77 as being recorded by UOCL in the client files of the participants in the Schemes. In Mr Vincent’s Supplementary Task 2 Report dated 27 May 2009 he has further identified an amount of $297,159.90 which was refunded to participants by UOCL in respect of the cancellation of loans. This results in a total payment to UOCL from Scheme participants of $18,870,938. [483] In the Addendum to the Task 3 Report dated 26 April 2007, Mr Vincent in paragraph 2.4 identified that entities associated with Mr Hart received funds in the order of $14,508,140.63 sourced from UOCL. The CDPP relies on Mr Vincent’s analysis to demonstrate that Mr Hart knew that the only real monies involved in the transactions were those “fees” paid by participants to UOCL, most of which may be traced back to entities associated with Mr Hart. I accept this. [484] There was interest by the ATO by early 1999 in relation to the EWF and non- complying superannuation schemes. The interest of the ATO in the schemes was the subject of discussion and led to obtaining the opinions from Mr Russell QC.372 Mr Stevens evidence was that Mr Russell’s opinions were sought to assist in drafting responses to Australian Taxation Office enquiries.373 I accept this. 369 Paragraph 7.1, third dot point of Mr Vincent’s Task 3 Report 370 Paragraph 7.1, fourth dot point of Mr Vincent’s Task 3 Report 371 Paragraph 7.2 and 7.3 of Mr Vincent’s Task 3 Report 372 T 8-54 L8-40 373 T 8-54 L40-50 -- 124 of 138 -- 125 Application 1 (b) (iii) [485] Application 1 (b) (iii) relates to the period from 1 January 1999 to 30 June 2000 and Mr Hart’s promotion of the 1999 EWF and 1999 Superannuation schemes during that period in relation to income tax returns to be lodged by taxpayers for FYE 1999 and subsequent years. [486] Application 1 (b) (iv) [487] Application 1 (b) (iv) relates to the period between 1 January 2000 and 24 May 2001 and Mr Hart’s promotion of the 1999 EWF and 1999 Superannuation schemes during that period in relation to income tax returns to be lodged by taxpayers for FYE 2000 and 2001 and subsequent years. The cutoff date relates to the introduction of the operation of s 135.1(5) of the Criminal Code (Cth). [488] Application 1 (b) (v) [489] Application 1 (b) (v) relates to the period between 24 May 2001 and 30 June 2003 and Mr Hart’s promotion of the 1999 EWF and 1999 Superannuation schemes during that period in relation to income tax returns to be lodged by taxpayers for FYE 2001 and 2002 and 2003 and subsequent years. [490] Mr Hart continued to promote the 1999 EWF Scheme and the 1999 Superannuation Scheme to 30 June 2000. [491] The Schemes on and from 1 January 2000 were a continuation of the 1999 EWF Scheme and the 1999 Superannuation Scheme. The Schemes in this period were operated identically with the way they were operated before 1 January 2000. [492] In this period after 1 January 2000 each client executed the same pro-forma documentation in respect to the 1999 EWF Scheme and the 1999 Superannuation Scheme. The only difference of consequence is that the unlawful conduct alleged in Application 1(b)(v) is alleged to have occurred between 24 May 2001 and 30 June 2003. The basis is not a change in the operation of the schemes but the commencement of the application on 24 May 2001 of s135.1(5) of the Criminal Code (Cth) which provides: “(5) A person is guilty of an offence if: 1. the person dishonestly causes a loss, or dishonestly causes a risk of loss, to another person; and 2. the first mentioned person knows or believes that the loss will occur or that there is a substantial risk of the loss occurring; and 3. the other person is a Commonwealth entity.” [493] This offence in effect replaced s29D of the Crimes Act 1914 by the enactment of the Criminal Code (Cth) in 1995. [494] Mr Hart at all material times knew that some or most client/employers in the 1999 EWF Scheme and that some or most client/employers in the 1999 Superannuation Scheme would, or were likely to, claim the initial contributions, fees and/or interest payments as a taxation deduction in the participant’s income tax return for FYE’s 2000, 2001, 2002, 2003 and following. -- 125 of 138 -- 126 [495] The initial contribution, fees and interest payments to UOCL claimed as tax deductions by client/employers in the 1999 EWF Scheme and the 1999 Superannuation Scheme were disallowed for these later periods as they were for earlier periods. Findings in relation to applications 1(b) (iii), 1 (b) (iv) and 1 (b) (v) [496] The 1999 EWF and 1999 Superannuation schemes were based on documents which may not be non-recourse according to their terms. That arguable interpretation raised the hypothesis for consideration that participants might pay principal at term’s end. While the Loan Agreement did refer to a promissory note, it was only by reference to another document in a fleet of documents that a reader would discern that the initial advance was to be made by a promissory note. The documents did not reveal that the promissory notes were not to be presented or that the trustee’s investment in an insurance bond was in a bond given by an insurer which had no income earning investments. Mr Hart caused the setting up of UOCL and EGA and had sufficient knowledge of and control over UOCL, EGA and NET to know at all material times that UOCL made no loans, only provided promissory notes, that the notes would not be presented to UOCL for payment, that UOCL had insufficient capacity to ever pay the notes, that the trustee’s investment of the alleged contribution provided no benefit to the employee beneficiaries, that EGA received no contribution money to invest, otherwise had no money invested and that its insurance bond was not a benefit and that the payments to UOCL of fees and interest provided no benefit to the beneficiaries. Mr Hart believed that for claims to be deductible the contribution had to be for the purpose of providing a benefit to an employee or to the beneficiary of the superannuation fund. Mr Hart knew sufficient facts to know that the claims were not deductible. Despite the arguable interpretation that the loans gave UOCL recourse against the participant for the contribution Mr Hart regarded them as non-recourse at material times. If principal was paid at term’s end the notional contributions made and claimed a decade earlier would not have retrospectively become the source of a benefit to the beneficiary of the trust. [497] Mr Hart believed that for client/employers in EWF or Superannuation schemes to be entitled to a deduction for contributions, fees and/or interest payments made to the trustee of the EWF or Superannuation fund, the contribution had to be for the purpose of providing a benefit to an employee or member of the Superannuation fund. [498] The client/employers and accountants believed that loans had been made and funds invested by the trustee by the use of promissory notes. Funds were not invested by the insurer with a view to profit. [499] In connection with the 1999 EWF and the 1999 Superannuation funds I find that Mr Hart intended to prejudice the economic interests of the Commonwealth. Mr Hart’s means were dishonest by the standards of ordinary decent people and I find that Mr Hart knew his means were dishonest by the standards of ordinary decent people. For precision I note in respect of application 1(b) (v) that I find that Mr Hart’s means were dishonest according to the standards of ordinary people; and were at material times known by Mr Hart to be dishonest according to the standards of ordinary people. [500] I am satisfied that Mr Hart committed each of the offences alleged in the application relating to the 1999 EWF and 1999 Superannuation schemes. -- 126 of 138 -- 127 Promissory notes are lawful [501] With respect to the unlawful conduct alleged relating to the EWF and non-complying superannuation scheme arrangements Mr Hart’s Closing “Facts” Submission was constructed on a major premise that the proceeding involved three or four basic issues. Two issues which related to the EWF and non-complying superannuation schemes were submitted to be: “(2) Could UOC lawfully issue the promissory notes to the borrowers for the purchase of the insurance bond. … (3) If the answer to question (2) above is no, then did Mr Hart know that UOC could not lawfully issue the promissory notes and promoted the arrangement anyway…” [502] The CDPP did not submit that it was unlawful for UOCL to issue promissory notes. I do not find that it was unlawful for UOCL to issue promissory notes. It is a factual premise for one of the legal arguments made for Mr Hart by senior counsel. [503] Mr Hart submitted: promissory notes can be valuable assets; they are common in Australia they did not cause concern to the auditors of UOCL and EGA; there is nothing improper or unusual about the use of promissory notes; issuers of promissory notes and bills of exchange may negotiate rollover facilities which allow them to use these instruments as sources of floating-rate long-term funds. I accept those submissions. Legal advices [504] Mr Hart’s points of defence raised as a defence to each of the allegations of unlawful conduct either that he caused the tax returns to be prepared, as they appeared, in reliance upon legal and other advice, which he believed was correct, to the effect that the deductions whether for application fees, interest or contributions were lawfully claimed or that prior to lodgement of the tax returns he obtained legal and other advice to the effect that claims to be made by taxpayers were valid, and lawful tax deductions. Particulars of the advices were not supplied in the points of defence. [505] There are 5 specific legal advices to Mr Hart in evidence: 20 August 1998 by Mr Olesnicky;374 25 August 1998 by Mr Olesnicky;375 1 October 1998 by Mr Searle;376 from Russell QC in relation to the EWF Scheme 377 dated 9 June 1999; an opinion378 provided by Mr Russell QC on 29 June 1999. [506] There are problems with Mr Hart’s reliance upon the legal advices for the purposes of submitting that he acted honestly. They were provided after participants in the 1997 EWF were urged to pay interest to UOCL, after participants such as Mr Cavill had signed new agreements with UOCL and accordingly, after the 1998 EWF was operating. Further the opinions were not expressed to be on the essential hypotheses of the schemes: that the insurer would not present the promissory note to the lender for 374 SDF pg 378, B00026372 375 SDF pg 384, B00017112 376 SDF pg 572, WATC00046 377 SDF Vol.2, p.852-918 378 SDF Vol.2, p.721-768 -- 127 of 138 -- 128 funds to invest; that the investment of the initial contribution by the trustee379 in an insurance bond would not earn income; that the 1998 EWF scheme was certainly non- recourse and the 1999 schemes were arguably non-recourse; that the only reasonable prospect of a benefit for the beneficiary of the trust was conditional upon a participant’s repaying the loan on maturity at ten years in which case it was possible that the insurer would recoup the face value of the promissory note and it was possible that the insurer might pay that to the trustee as payout of the insurance bond. [507] Mr Hart tendered a legal advice provided by Mr Michael Olesnicky380 dated 20 August 1998. In the facts outlined in paragraph 1(a) Mr Olesnicky sets out the structure of the bond arrangement as he understood it: “Finance Co. In Hong Kong lends $x to your client (who is an individual). This loan is evidenced by a promissory note (cheque?) issued by Finance Co to your client. Your client assigns the promissory note to his company. The company hands over the promissory note to a New Zealand trustee which administers what is essentially an employee welfare fund. The trustee in turn effects an insurance policy with the Mauritian life insurance company on the life of the client (who presumably is an employee of the company that made the contribution to the trustee). The trustee hands over the promissory note to the insurer as the up-front premium on the policy. The insurance company issues a policy to the trustee on the life of your client. The trustee then pledges the policy to the Finance Co to secure the loan that Finance Co has made to your client.” [508] No reference is made to the insurance company not presenting the promissory note to the finance company for payment. No advice is sought or given on the arrangement where the promissory note is not presented for payment. It is clear from paragraph 1(d) of the facts set out by Mr Olesnicky and the advice provided that it was envisaged that the insurance company would have funds to invest. [509] Mr Olesnicky also comments that “Given that it is the welfare fund that affects the policy, I assume the welfare fund will redeem the policy. How does the client repay the loan to Finance Co- does he receive a payment out of the welfare fund which can be used for the repayment? (Is the loan fully recourse?)”.381 [510] Mr Olesnicky sent a subsequent email of 25 August 1998.382 that he envisaged real investments being made by EGA for the benefit of the relevant employee. A passage in the email of 25 August 1998 was referred to by Mr Hart, namely: “I have not included a charge given by Finance Company in favour of the Mauritian life insurance company with respect to the loan made by the insurer to Finance Company. (This would effectively be an assignment of Finance Company’s security over the insurance policy). Given the circumstances of your case, this is probably not necessary, but please let me know if you think otherwise.” [511] What is contemplated by Mr Olesnicky in this advice is that EGA would call upon UOCL in respect to the promissory notes and then lend back these proceeds to UOCL for the purpose of making the relevant investment pursuant to the insurance bond. This 379 of the employee welfare trust or superannuation trust 380 SDF Vol.1, p.372-376, p. 373 381 SDF Vol.1, p.376 382 SDF Vol.1, page 384 - 385 -- 128 of 138 -- 129 did not occur. EGA did not present the notes and made annual promises not to present them. [512] Mr Olesnicky in his Memorandum of 20 August 1998 contemplated that an investment would be made by the insurance company when he refers in paragraph 1(d): “Your client might establish an Australian resident unit trust. The trustee of the unit trust will purchase property in Australia. It will borrow the purchase price from the insurance company. The loan will be funded out of the client’s policy portfolio. Interest will be payable by the unit trustee (subject to withholding tax). The interest will accrue to the benefit of the policy portfolio.” [513] Mr Olesnicky continued at paragraph 1(e) of the Memorandum of 20 August 1998: “after 10 years, your client will redeem the policy and will receive the original amount, together with interest payments, on a tax free basis.” What was being contemplated was that EGA would actually present the promissory notes for payment to UOCL and receive actual funds. Those funds would then be invested by EGA on behalf of the trustee in an Australian resident unit trust. His advice is in relation to the tax consequences in Australia for profits derived from such an investment by EGA. What was contemplated by Mr Olesnicky was an actual investment by EGA as the issuer of the insurance bond not the passive postponement of presentation of promissory notes. [514] In his subsequent email of 25 August 1998, Mr Olesnicky contemplated a slightly different arrangement for Mr Hart: whereby EGA having presented the promissory notes for payment by UOCL, subsequently lends those monies to UOCL for UOCL to invest. In either scenario, what is still contemplated is the presentation of the promissory notes for payment and an actual investment by EGA for the benefit of employees. [515] An inference cannot be drawn that this advice from Mr Olesnicky constitutes advice to Mr Hart that the different schemes Mr Hart actually implemented would provide participants with a lawful tax deduction for their claims for fees, and interest actually paid to UOCL and their initial contribution notionally paid to a trustee. [516] An advice was obtained from Mr Searle383 dated 1 October 1998. Mr Searle’s instructions are that: “The contributions to the employee welfare fund will not be made for any purpose other than to provide the abovementioned benefits to employees(Clause 11). Contributions are generally made with a large first up payment and then smaller quarterly contributions. The contributions may be invested in a life insurance bond (26AH compliant) issued by a Mauritius incorporated insurance company or in other insurance policies taken out by the independent New Zealand trustee. Each of the contributions will be actuarially calculated based on the profile of the employees (ie. gross income, age, sex, length of service etc). Contributions are not accounted for separately within the trust for each employee.’384 Mr Searle is also instructed that the ‘trust deed provides that the fund is not to 383 SDF Vol.1, p.571-580 384 SDF Vol.1, p.572, para.4 -- 129 of 138 -- 130 be applied for the benefit of the Employer Sponsor in any manner and the employer sponsor can only make contributions to the fund” 385 . [517] The EWF arrangements that were promoted differed from the arrangements described in the instructions referred to by Mr Searle in that: (a) the assignment of a promissory note which was not to be presented for payment and could not be paid upon demand did not constitute a “contribution” to an EWF; (b) if the assignment of the promissory note constituted a contribution, it was not for the purpose of providing benefits to employees as there was no money to be paid and no funds which could be invested for the benefit of employees; (c) the assignment of the promissory note to NET was for the purpose of the employer/participant claiming a tax deduction and for the purpose of the respondent and UOCL earning fees, interest and commissions; (d) the New Zealand trustee was not independent; (e) there is no evidence that the contributions were actuarially calculated based on the profile of the employees; and (f) the life insurance bond was provided as security for the loan the employer obtained from UOCL and UOCL was to be repaid from the bond which constituted an asset of the fund. In that respect the fund was being applied for the benefit of the employer. [518] In paragraph 8 of his advice Mr Searle refers to the general principles concerning deductibility to the EWF under Section 51(1) of the Income Tax Assessment Act 1936 (now 8-1 under the 1997 Act)386 and quoted from the judgment of Nicholson J in Gandy Timbers Pty Ltd v F.C. of T. 95 ATC 4171 387 : “... the characterisation of the outgoing involves a commonsense or practical weighing of the various aspects of the whole set of circumstances including the direct or indirect object of the taxpayer in making the outgoing and the advantages which the taxpayer sought in doing so: Hallstroms Pty Ltd v FCT (1946) 8 ATD at 195, (1946) 72 CLR 634 at 648; FC of T v Foxwood (Tolga) Pty Ltd 81 ATC 4261 at 4264; (1981) 147 CLR 278 at 285, 293; Fletcher & Ors v FC of T 91 ATC 4950 at 4957- 4958; (1991) 173 CLR 1 at 18-19. “Necessarily” means the outgoing must be appropriate and adapted for the ends of the business carried on for the purpose of earning assessable income: Rimpibon Tin NL v FC of T (1949) 385 SDF Vol.1, p572, para.5 386 “(1) You can deduct from your assessable income any loss or outgoing to the extent that: (a) it is incurred in gaining or producing your assessable income; or (b) it is necessarily incurred in carrying on a * business for the purpose of gaining or producing your assessable income. Note: Division 35 prevents losses from non-commercial business activities that may contribute to a tax loss being offset against other assessable income. (2) However, you cannot deduct a loss or outgoing under this section to the extent that: (a) it is a loss or outgoing of capital, or of a capital nature; or (b) it is a loss or outgoing of a private or domestic nature; or (c) it is incurred in relation to gaining or producing your * exempt income or your * non-assessable non-exempt income; or (d) a provision of this Act prevents you from deducting it. “ 387 SDF Vol.1, p.573, para.8 -- 130 of 138 -- 131 8 ATD 431 at 434-435: (1949) 78 CLR 47 at 55-56: FC of T v Snowden & Wilson Pty Ltd (1958) 11 ATD 463 at 469 and 464; (1958) 99 CLR 431 at 444 and 437 cited in Magna Alloys & Research Pty Ltd v FC ot T 80 ATC 4542 at 4558; (1980) 33 ALR 213 at 233. It means for practical purposes that, within the limits of reasonable human conduct, it is for the person carrying on the business to be the judge of what outgoings are necessary to be incurred: FC of T v Snowden and Wilson, (supra) at ATC 469; CLR 444; Magna Alloys, (supra) at ATC 4558; ALR 233. An outgoing will be necessarily incurred in carrying on the business when, viewed objectively, it is seen in the circumstances to be reasonably capable of being seen as desirable or appropriate in pursuit of the business ends of the business being carried on for the purpose of earning assessable income; Magna Alloys & Research, (supra) ATC 4559; ALR 235” [519] Mr Hart knew that no money would be provided by UOCL to the participants, for the initial contribution or available to the trustee or the insurance company. Mr Hart, if he relied upon the advice, must have known that for his schemes the initial contribution, fees and interest payments were not desirable or appropriate in pursuit of the participant’s business. [520] Mr Hart suggested in cross examination that participants obtained a return on their investment in the bonds in the early years and that the only reason that they did not receive a return on their investment when the bonds were cancelled or redeemed after 2000 was because of the arrears in interest payments. It is from email correspondence between Mr Hart and Mr Horne that an additional charge was to be made on all outstanding policies purportedly to take account of investment losses.388 [521] Mr Hart tendered an opinion389 provided by Russell QC on 29 June 1999 on the taxation consequences which follow where the controlling shareholder of a company who is also an employee of the company makes a contribution to a non-complying superannuation fund in respect of the taxpayer. The facts are set out at page 1 and 2 of the opinion and in the instructions to Mr Russell on 28 June 1999390 . In his instructions Mr Hart wrote: “The structure and arrangement is as follows. (1) All contributions are for genuine superannuation purposes. (2) The client borrows money from United Overseas Credit Limited, a finance company that is registered in Hong Kong. The interest rate varies between 5.5% and 9%. The client also pays any withholding tax on that interest. (3) The person has greater than 50% shareholding in the company, is a director of the company, and earns assessable income from the company. (4) The fund is established with the Trustee being a New Zealand company “National Employee Trust (New Zealand) Limited”. The contribution is made to this fund with the independent trustee. (5) The Trustee invests the money in a life assurance company, European Grande Assurance S.A., which is based in Mauritius. A 388 SDF Vol.2, p.1230 389 SDF Vol.2, p.721-768 390 SDF Vol.2. p.696-697 -- 131 of 138 -- 132 26AH bond is issued by the insurance company for the amount of the investment made by the Trustee. The anticipated bond’s earning rate is between 4% to 7% per annum. (6) No monies are lent back to the contributor in any manner whatsoever. The only time the contributor receives any benefit from the fund will be when that person retires from the fund. It has been stressed to every person who makes a contribution in the above manner that it must be only for genuine superannuation purposes. To the writer’s knowledge, each party has stated that as being the fact.” [522] No reference is made to the contribution being made by assigning a promissory note which would not be presented to UOCL for payment. Russell QC wrote that he was asked to assume that “the fund trustee will invest the contribution in a bond which complies with the requirements of section 26AH of the 1936 Act. The anticipated earning rate of the bond will be between 4% and 7% per annum.” Russell QC says at page 5 of his opinion “that provided what has been brought into existence is a genuine superannuation arrangement in the sense discussed by Windeyer J in Scott v Federal Commissioner of Taxation (No. 2) there is no reason in principle why the arrangements should not have achieved their intended effect.” He quoted a passage from Windeyer J which includes the following: “I have come to the conclusion that there is no essential attribute of a superannuation fund established for the benefit of employees except that it must be a fund bona fide devoted as its sole purpose to providing for employees who are participants money benefits (or benefits having a monetary value) upon their reaching a prescribed age. In this connexion “fund”, I take it, ordinarily means money (or investments) set aside and invested, the surplus income therefrom being capitalised.................... The inference I draw from the evidence as a whole is that there never was in truth a superannuation fund established for the benefit of employees.” [523] Mr Russell QC further stated: “This opinion proceeds on the basis that the fund will satisfy this description. A trust estate which does not do so will be taxed in accordance with Division 6 of Part III of the 1936 Act. To the extent that the Commissioner’s recent public utterances on the topic sought simply to say that his Office would not accept as a matter of course that every taxpayer claiming to be, to have contributed to, or to have benefited from a superannuation fund in fact had that status, they could not be cavilled with”.391 [524] At page 10 of his opinion Mr Russell QC emphasised: “It may be observed that in order to be deductible a contribution must be for the purpose of making provision for superannuation benefits for an eligible employee. Superannuation is simply a form of saving. So it seems 391 SDF Vol.2, p.730 -- 132 of 138 -- 133 that a borrowing on long terms of money by a contributor to establish a fund which simply enabled repayment of the borrowing on distribution of the fund would not be for superannuation purposes, particularly where the investment return is (as on my instructions seems a possibility) less than the cost of funds”. [525] At page 46 Mr Russell QC repeated: “Unless the dominant purpose of what is done is to provide superannuation benefits for an eligible employee, section 82AAE will not apply, in which case there is no tax benefit to which part IVA might apply.” [526] Mr Hart emphasized that Russell QC understood that the there was a possibility that the return on the insurance bonds could be lower than the cost of borrowings and advised: “if, however, the borrowing was on very short terms, repaid from current or future earnings, it seems to me clear that what is proposed would satisfy the description of a form of savings… Ideally, the borrowing would be liquidated in a short period (say 2 to 3 years) from current earnings although it seems to me that provided it has been liquidated before the benefits are payable it cannot be said that this aspect of the matter precludes deductibility” [527] The matters stressed by Mr Hart in the advice were not a hypothesis consistent with the schemes. The borrowing was not to be liquidated in a short period, (it was conceivable that it would never be repaid), and the premise of a return on the insurance bonds was implausible where the insurer had no investment capital. A reader such as Mr Hart would not regard that as advice that the different schemes Mr Hart actually implemented would provide participants with a lawful tax deduction for their claims for fees and interest paid to UOCL and their initial contribution notionally paid to a trustee. [528] An opinion dated 9 June 1999 was also obtained from Russell QC in relation to the EWF Scheme. 392 At page 2 of this opinion Russell QC refers to the employer having made contributions to the Fund for the benefit of all its employees. There is no reference to the contribution being by assignment of a promissory note which would not be presented for payment. [529] Mr Hart submitted that the court should infer, unless the CDPP can exclude it, that reputable lawyers such as those who advised him, would have advised that the schemes did not provide lawful deductions if that had been their opinion; that there is no opinion produced that a scheme is unlawful; that I should infer that Mr Hart honestly believed that the deductions claimed were valid. I do not infer that the lawyers knew the precise nature of the schemes. If some did, I do not infer that they would have advised that the claims to be made were properly deductible. [530] It is an agreed fact that Mr Hart believed that for client/employers in the schemes to be entitled to a deduction for a contribution made to the trustee of the relevant EWF/NCS, 392 SDF Vol.2, p.852-918 -- 133 of 138 -- 134 the contribution had to be for the purpose of providing a benefit to an employee who was a member of the fund.393 [531] I reject the defence that Mr Hart relied upon legal advice to the effect that the deductions whether for application fees, interest or contributions were or could be lawfully claimed. [532] Serious offences: Crimes Act, s 29D provided for a penalty of 1000 penalty units or imprisonment for ten years in the event of an offence against that section. An offence against s 135.1(5) of the Criminal Code carries a penalty of imprisonment for five years. Because the term of imprisonment for each of those offences is three years or more the alleged unlawful activity would therefore be a “serious offence” as that term is defined in POCA s 338394 subject to the conduct which constitutes the unlawful activity meeting the $10,000 loss or benefit or intended loss or benefit elements set out in that section in the definition of “serious offence” at (a) (iii) or (a) (iv). In the case of the five episodes of unlawful conduct alleged in each of applications 1 (b) (i) to 1 (b) (v) that conduct was intended by Mr Hart to cause a loss to the Commonwealth of at least $10,000 and was intended to cause a benefit to the value of at least $10,000 for Mr Hart or another person. UOCL is another person. There were no submissions by or for Mr Hart to the effect that if any of the five episodes of conduct was unlawful it was not a “serious offence” within the meaning of POCA s 338. Considering the amounts paid to UOCL and the amounts which might have been paid in later years, there can be no doubt that if offences were committed in respect of the 1998 EWF, the 1999 EWF and the 1999 Superannuation schemes as alleged in the further amended points of claim at paragraphs 10, 12, 14 and 16 that each of the offences fell within the category of “serious offence.” Those amounts paid are set out in the section considering “Assessment of benefits re applications 1(b) (i) to 1 (b) (v)”. I made a finding elsewhere in these reasons in respect of the offence alleged and relating to the 1997 EWF that it was a serious offence. [533] Assessment of benefits re applications 1(b) (i) to 1 (b) (v): By the stage of its submissions in reply the CDPP submitted that Mr Hart derived a further $14,050,884.87 from the unlawful conduct I have found in respect of the conduct pleaded in the further amended points of claim and in relation to applications 1(b) (i) to 1 (b) (v). [534] Courts have observed that the assessment of benefits derived will be performed, often on unsatisfactory material395 and where there are “difficulties of quantification the court will simply do its best to reach a reasonable result in all the circumstances, bearing in mind the self evident legislative intent that people should not profit from criminal activities.”396 [535] The CDPP’s case is that all monies directed to UOCL by scheme participants were directed to UOCL by Mr Hart and are assessable as benefits derived by Mr Hart. The CDPP submits that UOCL’s records of money received from participants will be the 393 See for example SAF, para.84 and 99 394 See [58] herein 395 R v Fagher (1989) 16 NSWLR 67 at 80 per Allen J quoted with approval by McMurdo J in State of Queensland v Hirst [2003] QSC 266 at [14] 396 New South Wales Crime Commission v Kelly [2003] NSWSC 154 per Shaw J at [49] -- 134 of 138 -- 135 minimum it received and can be accepted as an appropriate amount subject to deduction for some refunds UOCL paid to participants. [536] Mr Vincent, a forensic accountant, assessed material and provided reports. Mr Hart submitted the task should have been performed by an auditor instead. I express no opinion as to whether an auditor would have been of more assistance. Mr Hart challenged Mr Vincent in cross-examination and established that Mr Vincent made some errors in his reports though mostly in matters unrelated to the calculations. Mr Vincent said that he had reviewed the accounts of EGA for FYE 1999. Mr Hart established that Mr Vincent had not reviewed an auditor’s report and that an auditor’s report is an important document. Mr Vincent said he found no evidence of UOCL seeking repayment of loans in part or in full, but Mr Hart submits that the reports show that at least one person “repaid” $200,000. Reference to schedule A397 to Mr Vincent’s Task 2 report reveals that one payment of $200,000 was recorded as “principle”. No other payment of principal was recorded in the period 1 July 1998 to 15 September 2004. The record revealed $17,524,904 traced by Mr Vincent as deposits received by UOCL on account of interest and establishment fees and principal. I accept that Mr Vincent failed in his answer in cross-examination to refer to that one deposit of principal. These submissions by Mr Hart were effectively a submission that the court should be wary of the weight to be given to Mr Vincent’s evidence. Mr Hart also submitted that Mr Vincent should have been instructed to investigate whether UOCL had the capacity to honour its promissory notes and to investigate other matters such as whether UOCL had arrangements with a bank. The fact that Mr Vincent was not instructed to consider more tasks has little effect on the tasks he undertook. It does not affect his calculations. It is a matter I bear in mind when considering the reliability of his opinions on matters other than calculations. Mr Hart made submissions challenging the accuracy of conclusions or assumptions made by Mr Vincent about payments made by UOCL and the propriety of some payments. I bear those matters in mind. Mr Hart also identified matters in the reports which directly affect the correctness of Mr Vincent’s calculations. They are significant matters I propose to consider separately. [537] Mr Hart submitted: “Mr. Vincent agreed that Merrell could have been an investment arm of UOC/EGA. This is evidence of Mr. Vincent was unchallenged and should be accepted”. This can be contrasted with what Mr Vincent actually was asked and answered: Were you ever informed or could you draw a conclusion either or from the information you've seen whether UOCL or EGA, or both, used Merrell as an investment vehicle?-- All I can identify are the payments that went to Merrell, so what the purpose of those payments were, I'm not sure. [538] I reject the submission that Merrell’s receipt of money from UOCL was to act as an investment vehicle for EGA. There is no evidence that Merrell was paid money by EGA to invest for EGA. [539] The assessment of the benefits derived is made pursuant to Subdivision B of the Act. Section 122(1) relevantly provides: “(1) In assessing the value of benefits that a person has derived from the commission of an offence or offences (the illegal activity), the court is to have regard to the evidence before it concerning all or any of the following: 397 Q00015689 -- 135 of 138 -- 136 (a) the money, or the value of the property other than money, that, because of the illegal activity, came into possession or under the control of: (i)the person; or (ii)another person at the person’s request or direction.” [540] The applicant submits that the payments by participants in the EWF schemes and the non-complying superannuation schemes to UOCL constitute benefits derived (either directly or indirectly) by the Mr Hart in respect to the offences that constitute unlawful activity. [541] The term “unlawful activity” is defined in POCA s 338 to mean an act or omission that constitutes (relevantly for present purposes), an offence against a law of the Commonwealth. Here the acts or omissions that constitute unlawful activity are the offences of defrauding the Commonwealth and its subsequent equivalent, namely, s 135.1(5) of the Criminal Code (Cth). [542] POCA s 121(3)(a)(ii) is made subject to s 121(4) each of which are set out at [55] above. [543] The unlawful activity to which applications1(b) (i) to 1 (b) (iv) relate from which the benefits are said to be derived by Mr Hart occurred within the period of six years preceding the application for the restraining order made on 8 May 2003. [544] Mr Muller of the Australian Federal Police database compiled a database to quantify the total amount of money paid to UOCL in Hong Kong by participants of the EWF and non-complying superannuation schemes. This quantification was based on a analysis by Mr Muller of the files obtained by the Hong Kong Police Force from the offices of Zetland Corporate Services. For each purported loan entered into between UOCL and a participant in the schemes, Mr Muller generated one entry in the database. This entry was automatically allocated a “loan ID”number. In respect of each loan, the database record consisted of introductory fields and four sections, namely: (a) application for loan; (b) letter of Offer; (c) loan agreement; and (d) statement 398 . [545] Mr Muller was cross-examined by the respondent. No challenge was made to the accuracy of the AFP database which quantified the total amount of money paid to UOCL in Hong Kong by participants in the schemes. [546] Mr Vincent concluded that the AFP database accurately recorded that payments totaling $19,168,097.77 were recorded by UOCL in the client files of the participants in the schemes. This amount comprised payments of establishment fees, repayments of principal and interest paid by the participants in respect to their alleged loans with UOCL. Mr Vincent also identified that payments totaling $47,647.96 were recorded in client files of the participants, but were not recorded in the database. Accordingly, in his opinion, the amount recorded in the database represents the minimum amount that UOCL recorded in their own files as payments from participants in the schemes.399 It is 398 See paragraphs 2, 3, 7 and 9 of Mr Muller’s affidavit – Q00048118 399 Task 2 Report, paragraphs 2.1 and 2.2 -- 136 of 138 -- 137 this lesser amount of $19,168,097.77 which Mr Vincent uses to quantify the amount paid to UOCL at the direction of Mr Hart. He then makes a deduction for refunds by UOCL. [547] Mr Vincent was provided with a copy of the affidavits of Mr Michael Hawthorn dated 7 May 2009 400 and 27 May 2009.401 These affidavits of Mr Hawthorn reviewed the client files of UOCL and identified documents relating to the closure or cancellation of client “loans” by UOCL. Based on his review of the information, Mr Vincent determined that a total amount of $297,159.90 was refunded by UOCL in respect of the cancellation of loans by scheme participants402 . Mr Vincent sets out the details of these refunds in Schedule A to the Task 2 Supplementary Report. In the majority of cases, the amount refunded by UOCL was paid to the trustee of the schemes, namely NET. Mr Vincent noted that NET would ordinarily deduct an administration fee from the refunded amount received from UOCL, before forwarding the balance of funds to the scheme participant.403 [548] Mr Vincent gave evidence that this amount of $297,159.90 should be subtracted from the amount of $19,168,097.77 to arrive at the total contributions by participants in the scheme to UOCL as being $18,870,937.87.404 Mr Hart identified six more participants whose “loans” totaled $1,045,000.00 to whom he submitted refunds of $20,053.45 were paid by UOCL. The CDPP submitted: “Given the size of this sum, the applicant is content to agree that the figure of $297,159.90 should be altered to the figure of $317,213.35. This results in the total of the pecuniary penalty order sought by the applicant as being $14,757.287.80.” [549] Mr Hart raises a challenge to a further $1,974,165.75 which he submits should be deducted from the amount of the $19,168,097.77 which was recorded by UOCL in the client files of the participants as having been paid to UOCL. In Mr. Vincent's report at paragraph 2.4 (ii) he stated: I have identified additional deposits totalling $1,974,165.75 were recorded in the banking records of UOCL from participants who had an alleged loan from UOCL, but were not recorded in the database. Based on my review, I was unable to identify any record of these amounts in the client files of those participants. For this reason, I am unable to positively ascertain whether such payments were made to UOCL in relation to the schemes, or for another reason. [550] The flaw in the challenge is that Mr Vincent’s figure of the $19,168,097.77 which was recorded by UOCL in the client files of the participants does not include the “additional deposits totalling $1,974,165.75 were recorded in the banking records of UOCL from participants who had an alleged loan from UOCL, but were not recorded in the database”. It is clear to me that Mr Vincent declined to include the $1,974,165.75. This figure may represent further amounts received by UOCL from participants. They are amounts which were not recorded in client files or the AFP database but were nonetheless recorded in the banking records of UOCL. They should perhaps have been included as further benefits derived. Rather than using the figure as 400 Q00015584 401 Q00015804 402 Task 2 Supplementary Report, para.2.1 403 Task 2 Supplementary Report, para.5.5(iv) 404 T 9-10 L34-51 -- 137 of 138 -- 138 a basis for subtraction, it makes me more comfortable in regarding the initial starting point of $19,168,097.77 as reasonable. I will not add the $1,974,165.75 as a further benefit and the CDPP does not submit that I should. [551] Mr Hart made a submission which concerned the schemes other than the 1997 EWF. He submitted that about 41% of the deductions participants could have claimed were not claimed; that about $49,000,000 was not claimed as deductions. He submitted that accordingly 41% of the penalty otherwise assessable should be subtracted. The factual premise submitted is wrong. It is wrong to conclude that 41% of deductions were not claimed by reasoning from the ATO’s amended assessments. Mr Singh of the ATO made it clear that he has been unable to identify all the entities that claimed deductions in respect of the arrangements. The AFP access database will therefore include amounts claimed as deductions by tax payers who, for various reasons, were not identified by the ATO during the audit process and for which the tax avoided has not been raised in amended assessments or collected. Mr Singh further states that in some cases, amended assessments were not raised in respect to certain tax payers that were insolvent, bankrupt or in liquidation at the time that their participation in the arrangements was detected. Others were simply not identified. [552] It follows that Mr Hart cannot use the amount raised by way of amended assessments by the ATO, namely, $71,086,935.00 as a foundation to submit that this represents the percentage of the total number of participants who claimed such deduction. [553] Further, the inference sought to be drawn by Mr Hart is not supported by Exhibit PJ7 to the affidavit of Mr Singh. This schedule lists the participants in the schemes who were actually audited by the ATO. Of the participants audited, only a small percentage made no claim in the relevant tax return for contributions either initial contributions, interest or establishment fees in respect to the schemes. For example, from Exhibits PS3 and PS6 of Mr Singh’s affidavit dated 17 July 2006 the following arises: for the 1997 scheme all 28 entitles claimed deductions; for the 1998 schemes seven out of 227 entitles did not claim deductions. [554] Therefore, only seven out of 227 entitles in total did not claim deductions. This represents only 2.7%. I reject the factual submission. As a matter of law it provides no basis to reduce an assessment of benefits derived by Mr Hart. [555] The question for the Court is not the amount of tax that has actually been defrauded, but rather the benefits that Mr Hart has derived either directly or indirectly from unlawful activity. [556] I am satisfied on the balance of probabilities that the benefits derived by Mr Hart directly or indirectly from the unlawful acts are $19,168,097.77 less $297,159.90 less $20,053.45 = $18,850,884.42 Total benefits derived/penalty amount [557] The benefits derived from the commission of the nine offences I assessed as $706,402.93. The total of benefits derived from the nine offences and the unlawful activity is $706,402.93+$18,850,884.42=$19557287.35 [558] Taking account of the agreed reduction of $4,800,000.00 from the benefits assessed the balance of $14,757,287.35 is the appropriate pecuniary penalty. -- 138 of 138 --