Natwest Markets Plc v Bilta (UK) Ltd ((in Liquidation)) and Others
| Jurisdiction | England & Wales |
| Judge | Lord Justice Birss,Lady Justice Andrews,Lady Justice Asplin |
| Judgment Date | 10 May 2021 |
| Neutral Citation | [2021] EWCA Civ 680 |
| Date | 10 May 2021 |
| Docket Number | Case No: A3 2020/1796/1797 AND 1798 |
| Court | Court of Appeal (Civil Division) |
Lady Justice Asplin
Lady Justice Andrews
and
Lord Justice Birss
Case No: A3 2020/1796/1797 AND 1798
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS
CHANCERY DIVISION (FINANCIAL LIST)
THE HONOURABLE MR JUSTICE SNOWDEN
FL-2016-000017
Royal Courts of Justice
Strand, London, WC2A 2LL
John Wardell QC and Michael Ryan (instructed by Pinsent Masons LLP) for the First Appellant
Kenneth MacLean QC, Steven Elliott QC and Tamara Kagan (instructed by Slaughter and May) for the Second Appellant
Christopher Parker QC, Orlando Gledhill QC and Oliver Butler (instructed by Rosenblatt Limited) for the Respondents
Hearing dates: 22–26 March 2021
Approved Judgment
Lady Justice Asplin, Lady Justice Andrews and
INTRODUCTION
This is the judgment of the Court, to which all three members have contributed.
Whenever a situation creates the opportunity for large amounts of money to be obtained dishonestly, especially at the expense of the Revenue, criminals will be swift to take advantage of it. The phenomenon known as missing trader intra-community VAT fraud (“MTIC fraud”) is a good example of this. This appeal concerns a large MTIC fraud which took place in the summer of 2009. The loss to the Revenue was in excess of £44 million. Snowden J (hereafter, “the Judge”) held that the first and second defendants were jointly and severally liable for dishonest assistance of the fraudsters from Friday 26 th June 2009 to Monday 6 th July 2009, by participating in transactions which facilitated their wrongdoing, and turning a blind eye to the fraud. They appeal to this Court with the permission of the Judge himself.
The claimants cross-appeal on the basis that the Judge ought to have found that the dishonest assistance occurred over a longer period, commencing on 17 th June 2009. There is a discrete appeal by the second defendant against the Judge's finding that it was vicariously liable for the wrongdoing of the individuals concerned.
The criminals involved in MTIC fraud exploit the fact that imports and exports of goods between Member States of the EU are VAT-free. Like all successful forms of fraud, the essential mechanics are simple. A trader (“the defaulter”) imports goods from State A into State B, and sells them on within the latter State. No VAT would be payable on the goods when imported, but the onward sale (and any sales further down the chain within State B) would attract a liability to VAT until such time as the goods are exported to another Member State (which could be State A or State C). The final link in the chain will be the person who exports the goods, who is often an accomplice of the defaulter. The intervening sales and purchases are known as “buffer transactions”.
The initial buyer in the chain in State B will pay the price of the goods plus VAT to the defaulter, or sometimes to a third party nominated by the defaulter (often, ostensibly, the person from whom he purchased the goods). The buyer would then be able to offset the VAT he had paid to the defaulter against any liability which he had to account to the revenue authority in State B for VAT received on the price of the goods he sold on. The exporter at the end of the chain can claim back from the revenue authority in State B the VAT that he has paid to the person from whom he purchased the goods, because the goods have now been exported to another EU State in a zero-rated transaction. Meanwhile, the defaulter would pay the price of the goods to its supplier in State A, syphon off the VAT (or pay it to an associate) and then vanish or, if a company, go into liquidation without accounting to the revenue authority in State B for the VAT.
A “carousel fraud” is an MTIC fraud in which the same goods, having been exported, are then re-imported into State B and the process described above is repeated using the same or a different sales chain. There are a number of variants on this theme, with different layers of sophistication and subterfuge, some of which were described by Christopher Clarke J in Red 12 Trading Ltd v HMRC [2010] STC 589 at [2]–[9]. However, as he made clear at [6] the fact that there are a series of sales in a chain does not necessarily mean that everyone in the chain is a party to the fraud. The more innocent “buffers” there are, the harder it may be for the fraud to be detected. Carousel frauds often involve the criminals using an innocent exporter at the end of one chain to mask the involvement of an accomplice exporter at the end of another chain.
The aim of the defaulter is plainly to accumulate sizeable VAT liabilities and to get paid as quickly as possible, so as to avoid detection before he absconds with the funds. Spot markets for trading in commodities are ideal cover for MTIC fraudsters, as they enable numerous back to back trades (often in significant quantities of goods) to take place in a very short space of time. The goods themselves may not need to be physically delivered, but remain in the custody of a warehouse keeper or broker whilst documents of title are exchanged.
However, MTIC frauds are not confined to tangible assets. The fraud at the heart of the present case concerned a particular type of carbon credit issued under the EU Emissions Trading Scheme (“ETS”), known as EU Allowances or “EUAs”. These allowances act as an incentive to industrial sectors to reduce their emissions of greenhouse gases. Companies covered by the scheme – typically, the larger utility companies and other industrial conglomerates who are responsible for the largest quantities of greenhouse gas emissions — are obliged to report their annual emissions. Each year, they are pre-allocated a fixed quantity of EUAs (or similar carbon credits) by the Member State in which they are situated; one EUA represents the right to emit one metric tonne of carbon dioxide or other greenhouse gas. The companies (known as “compliance companies”) must surrender sufficient EUAs or similar to cover their annual emissions; if they do not, they face financial penalties and have to make up the shortfall in allowances surrendered for the following year.
It is possible to buy and sell EUAs. Each EUA exists in digital form, is individually numbered and is readily transferable via accounts held on an electronic registry system. A compliance company which has more EUAs than it needs to cover its annual emissions can sell the surplus either directly to a compliance company which needs additional EUAs, or to traders in the carbon trading market. The ability to profit from such sales acts as an incentive to the compliance company to lower its annual emissions so as to create a tradeable surplus.
At all material times, spot trades in EUAs (and other carbon credits) within the UK attracted a liability to VAT, whereas futures trades did not.
Participants in the trading of carbon credits included banks, trading houses and hedge funds. The big compliance companies would often have a dedicated EUA trading desk which would trade on a daily basis, typically via brokers. Alternatively, they would trade via investment banks. As a general rule, medium sized and small compliance companies would trade less frequently; when they did, it made sense for them to use a “boutique” broker who could bundle their EUAs together to try to get a better price.
Although the trade in carbon credits began as purely over the counter (“OTC”) dealing, by 2009 a number of dedicated exchanges had been established. The largest of these by far was BlueNext, a French exchange. In order to achieve membership of an exchange, a trader would need to undergo various checks and controls, which any prospective fraudster would need to overcome. One way of doing this would be to sell the EUAs to a bona fide company which was already a member of the exchange.
Between the end of 2008 and the first half of 2009, the carbon credits market grew rapidly and significantly, both in terms of overall volumes (especially on the BlueNext exchange) and in terms of market players, with many new entrants. There was a significant acceleration in the growth of overall volumes traded in the first half of 2009. Spot prices fell to a low point on 8 th February 2009 and then steadily grew.
In around 2008, the first defendant, then known as the Royal Bank of Scotland plc (“RBS”), entered into a joint venture with Sempra Energy which operated through a limited liability partnership, RBS Sempra Commodities LLP (“RBS Sempra” or “the LLP”). In 2009, pursuant to that joint venture, the second defendant, a subsidiary of RBS Sempra then known as RBS Sempra Energy Europe Ltd (“RBS SEEL”) traded carbon credits, including EUAs, on behalf of RBS, through its EU Emissions trading desk (“the Desk”). The relevant arrangements, described in more detail later in this judgment, were governed by a “Commodities Trading Activities Master Agreement” dated 1 st April 2008 to which RBS, RBS Sempra and a group of companies listed in a Schedule to the agreement, including RBS SEEL, were parties (“the CTAMA”).
The Desk was manned by two traders (“the Traders”) employed by RBS SEEL but seconded to RBS under the terms of the CTAMA: Mr Andrew Gygax, who took up his employment as Senior Energy Trader in May 2009, and Mr Jonathan Shain, the junior trader. The two men sat next to each other in an open plan office. The bulk of the Desk's business relevant to this case was so-called “customer flow” trading in which RBS would buy EUAs or other forms of carbon credit from its clients and sell them in the market, or vice versa, making a profit on the difference in price. In order to minimise risk, RBS would aim to...
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