Breaching the perimeter – twice could be enough to be ‘by way of business’

The Court of Appeal has held that an individual who accepted deposits on two separate occasions, that were over 18 months apart, may be liable to conviction for carrying on an unauthorised regulated activity, contrary to the general prohibition (s.19 and 23 FSMA 2000).

R v John Francis Napoli [2012] EWCA Crim 1199 concerned an appeal by Mr Napoli against his conviction for accepting deposits without authorisation.  Mr Napoli argued that although he carried on a regulated activity of accepting deposits, when not authorised, the offence could not be made out because he had not acted “by way of business”.

Mr Napoli sought to avail himself of the Financial Services and Markets Act 2000 (Carrying on Regulated Activities by Way of Business) Order 2001 which details the circumstances in which a person will be deemed to be not acting by way of business and therefore not caught by the general prohibition.   It states that a person will not be regarded as deposit taking by way of business if: (a) he does not hold himself out as accepting deposits on a day to day basis; and (b) any deposits which he accepts are accepted only on particular occasions.

Mr Napoli had accepted two deposits – one pursuant to an agreement dated 10 June 2002 and another pursuant to an agreement dated 15 January 2004.  He argued that the low number and infrequency of the deposit taking meant that no jury, properly directed, could possibly come to the conclusion that the 2001 Order did not apply and accordingly there was no case to answer.

The Court of Appeal rejected Mr Napoli’s case.  Taking a holistic approach to its consideration of the deposit taking scheme operated by Mr Napoli it decided that a jury could properly conclude that Mr Napoli had acted by way of business.  Matters that the Court said supported this finding were: (i) the size of the deposits (the first was for $1million and the second was for £625,000); (ii) the detailed contracts that were entered into to support the payments; (iii) that the deposits were paid into corporate bank accounts; (iv) that the deposits were made with a view to achieving substantial returns; (v) that Mr Napoli had held himself out as willing and able to accept additional deposits of £10million; and (vi) that Mr Napoli had himself (in police interviews and on his CV) described his financial activities in terms of a business.

Furthermore, the Court held that a jury could properly conclude that Mr Napoli would not be able to avail himself of the exemption provided in the 2001 Order. Although Mr Napoli had only accepted two deposits in the course of over 18 months the evidence (detailed draft contracts for additional deposit taking ventures, dealings with other potential investors, Mr Napoli’s own description of his activities) provided clear proof that he had held himself out during the relevant period as accepting deposits on a day to day basis.

The Court also held that the infrequency of the deposit taking did not prove that Mr Napoli only accepted deposits “on particular occasions” (the second limb of the exemption provided by the 2001 Order).  The Court stated that the jury would be entitled to take into account that Mr Napoli was in the market to accept very large sums of money and that such sums might be obtained less frequently than more modest sums. The jury would also be entitled to take into account the close similarity between the two deposits as evidence that they were not one off, occasional, arrangements.

The case demonstrates the purposive approach that Courts will adopt when considering alleged breaches of the general prohibition and shows that they will evaluate the characteristics of investment schemes in their entirety in order to determine the true nature of the financial activity in question. Finally, considering the evidence that was relied upon to uphold the decision, the case also underscores the importance of those subject to investigation being aware that what they disclose in police interviews may be readily used against them. Obtaining expert legal advice is essential.