Offshore asset recovery processes
February 2012 | TALKINGPOINT | FRAUD & CORRUPTION
FW moderates a discussion looking at offshore asset recovery between Jon Barclay at AO Hall, Andrew Thorp at Harneys, and Bill Jennings at Navigant.
FW: According to the World Bank, the cross-border flow of proceeds from criminal activity, corruption and tax evasion is estimated at $1-1.6 trillion annually. What key trends have you seen in cross-border asset recovery over the last 12 months? Is demand for such services on the rise?
Barclay: Reclaiming the proceeds of corruption has been a particularly hot topic this year. Media interest in this has been driven by political developments in North Africa and the Middle East. Legislative changes, notably in the UK, have played a part in heightening awareness of the problem in other spheres of life. Meanwhile, the more traditional sources of asset recovery work are still very much with us. It is hard to come by reliable data on the levels of non-governmental asset recovery activity, but I’m sure that any lawyer in this field would tell you it is definitely on the up.
Thorp: Offshore vehicles are commonplace in investment and corporate structures, and it is unsurprising that many asset recovery exercises at some stage will touch interests held offshore. While the global financial crisis soon exposed some of the largest and most obvious of fraudulent schemes that dominated the headlines, such as Madoff and Stanford, the years since 2008 have also seen a steady increase in the demand for specific and bespoke asset recovery practices. There are a number of factors that have fuelled demand. Well-funded insolvency regimes and secured lenders have become increasingly tenacious in seeking to crack trust and corporate structures to trace into target assets. Areas of traditional recovery such as the fallout of energy-based litigation from former Soviet states have been supplemented by private trust disputes, often from the Far East, as well as a number of high profile divorces from Russia, the UK and elsewhere.
Jennings: The worldwide recession has strangled cash flow causing many multi-national frauds, which depend on a constant flow of new victim funds, to be detected, usually by victims in many different countries who suddenly find themselves holding the proverbial bag of magic beans. These victims, individual and corporate, quickly discover that law enforcement will not be able to make recoveries for them, or worse, may actually prevent them from making the recoveries to which they believe they are entitled. Add to this the snarl of multi-national jurisdictional disputes and the result is that criminals hold assets longer than reasonable and victims are left with little hope of any meaningful justice. As a result, in 2011, victims have sought relief through a variety of non-criminal procedures, ranging from using the equitable powers of insolvency courts to non-conviction based forfeiture and seizing.
FW: Could you outline some of the key challenges and impediments to recovering offshore assets, including procedural issues such as asset freezing, confiscation/forfeiture and repatriation/monitoring?
Thorp: One of the main difficulties faced when assets are held offshore is that of the jurisdiction of the relevant wrongdoer. Even where assets are located within the jurisdiction, if the ultimate wrongdoer is located abroad the conditions for obtaining interim and/or final relief against him and his assets are usually quite strict. Nominee arrangements whereby assets are deliberately placed into the name of a third party require the claimant to show that there is good reason to suppose that the assets are, in truth, those of the wrongdoer. The reverse situation is also frequently encountered, where assets are held in the name of the wrongdoer, but the wrongdoer assets belong beneficially to a third party. Asset tracing requires sensitivity, interim disclosure applications and other forms of relief that come laden with the risk of tipping off wrongdoers. As such, measures such as sealing of the court file and gagging orders against innocent third parties like banks and trust companies are often essential.
Jennings: One of the greatest impediments to recovery in a ponzi-type fraud is that the operation of the scheme itself consumes enormous sums of money. Early victims have often been paid ‘returns’ from the funds provided by later victims. As a result, when the music stops, the fraud feasor usually possesses assets which account for only a small fraction of the total losses. Unlike other types of frauds, asset tracing focused only on the fraud feasor will inevitably come up short. Therefore, it is necessary to carefully study the operation of the crime and to quickly identify third parties who aided and abetted the fraud feasor, as well as victims who may have received sums in excess of the amounts to which they would be entitled to recover.
Barclay: Getting reliable and usable information about where the assets are is a prime consideration. Once you have that information, the process of restraining and then recovering the assets can begin. For all the many differences between various jurisdictions, the essential asset recovery tools are the same wherever you go – freezing orders, disclosure orders, and then the trial process, whether it is civil or criminal, or founded on insolvency procedures. In order to access those tools and use them effectively, you need to have the right information at the right time and the information must not only be available, but also admissible in evidence. Depending on which jurisdiction you are in and how the evidence was obtained, this is not always as straightforward as it sounds.
FW: What legal and regulatory hurdles may complicate the offshore asset tracing and recovery process?
Jennings: The most difficult legal and regulatory hurdles can often be those which do not exist or do not appear to exist. It is a relatively straightforward matter to identify and retain competent legal counsel to advise on local and multi-national laws, regulations, and jurisdictional issues. The difficulties arise in situations where assets reside in jurisdictions where laws and regulations, which would otherwise provide for their recovery or other remedies, do not exist. Shortly after the Velvet Revolution, Viktor Kozeny and his Harvard Mutual Fund used Investors’ privatisation vouchers to acquire controlling interests in former state owned Czech companies. He then stripped the companies of assets and transferred huge amounts of proceeds to tax havens. The recently post-communist Czech Republic had not yet developed effective insolvency laws and found itself powerless to stop Mr Kozeny. Other kinds of problems can arise in jurisdictions which, on the surface, appear to have no regulations preventing investigative procedures in certain areas. I recently worked on a matter in a Central American country which had no electronic data laws or regulations. Fortunately, prior to proceeding into an electronic discovery and computer forensics phase of the investigation, local counsel informed us that there were no less than five electronic discovery cases making their way to the country’s Supreme Court on the question of a constitutional right of privacy imposing a constructive barrier to many forms of electronic discovery and data interrogation.
Barclay: When you are co-ordinating an asset recovery strategy over several jurisdictions you need to have an awareness of what the advantages and limitations are in each. Different regulatory approaches are perhaps less of a problem for claimants in civil proceedings, but unfamiliar rules about admissibility of evidence, the right to privacy, privilege against self-incrimination and litigation funding can become a problem if you are not prepared to deal with them in advance. Ultimately, your goal is to repatriate the target assets from the jurisdiction you find them in, so your overall strategy is going to have to take account of the types of enforcement remedies which are available there, and what you need to do in order to get them. For that reason, local advice is indispensable, especially at high-level discussions about the overall recovery strategy.
Thorp: For a number of reasons, many offshore jurisdictions provide only limited amounts of information to be made available to public scrutiny, rarely details of ownership and the identities of directors. Claimants cannot mount ‘fishing expeditions’ for information and there is often no statutory provision for pre-action disclosure. Furthermore, civil procedure frequently allows for a defendant to strike out a claim brought, before standard disclosure takes place. This may leave a litigant in a difficult position. First, he may consider that he has been wronged due to the nature of the fraud and second, the material he needs to prove the wrong may not be available until the disclosure stage of proceedings. As a result, asset recovery specialists have turned to relief through the principles in Norwich Pharmacal and Bankers Trust v Shapiro, seeking bespoke disclosure applications to identify wrongdoers and help preserve trust assets before mounting costly litigation.
FW: An important part of the recovery process is accessing account information. Would you say this is more difficult in an offshore context, compared to an ‘onshore’ case?
Barclay: There are naturally exceptions, but generally speaking my answer is no. Many of the established offshore centres follow a common law tradition, and disclosure orders are available to civil claimants on more or less the same basis as in London. Most of the jurisdictions which were traditionally associated with banking secrecy have now modified their stance on that issue. And so far as international co-operation in criminal matters is concerned, offshore bank accounts are increasingly transparent to onshore authorities, who are in turn increasingly happy to exchange interesting information with each other. In some cases, exchange of information between states is now automatic.
Thorp: In one sense, there is no greater difficulty in accessing bank account information offshore than onshore: banks both offshore owe strict duties of confidentiality to their customers but this veil of confidentiality can be lifted in appropriate circumstances by applications based on Norwich Pharmacal/Bankers Trust principles. These allow details of bank accounts and assets to be obtained from banks and registered agents alike. In particular, trust companies frequently hold details of the company’s beneficial owner due to their “know your client” and “anti money laundering” obligations, which may include information about bank accounts from which their fees are paid. This can often be a fruitful source of information for a tracing claim. These principles apply equally both on and offshore. Cross-border insolvency treaties and recognition principles provide further weaponry. For example Chapter 15 relief in the US can be invoked and provide liquidators and other officers with a platform to request and examine payments and receipts conducted in dollars through American based intermediary banks.
Jennings: The ability to access account information is dependent on a variety of factors in addition to local, national and international laws and regulations. Again, competent counsel is invaluable in navigating the very tricky waters associated with accessing accounts. The easiest way to access accounts is with acquired authority or permission. These opportunities should not be overlooked and often provide a quick, easy and low cost way to gain access to account information. An example would be where the account holder is a corporation and the aggrieved party is able to establish ownership or control of the corporation. Another, often overlooked method to gain access to accounts, is to obtain permission from the account holder. This can be done voluntarily or can be ordered by a court. Obviously, executor process is a low risk, but often expensive and time consuming way to gain access to accounts. Barring those methods, and in cases where speed is essential, it is often necessary to demonstrate to a court of competent jurisdiction that the accounts contain the proceeds or were the instruments in a criminal enterprise.
FW: In broad terms, when it comes to multi-jurisdictional asset recovery, how can processes differ across jurisdictions? Are misconceptions and assumptions often made about these differences?
Thorp: Processes can differ radically between common law jurisdictions – such as England, Cayman and the BVI – the US and Canada, and European civil law systems. It is, however, a very common misconception that offshore jurisdictions provide a haven for wrongdoers looking to secrete assets. Indeed offshore jurisdictions and their courts are often better placed and more experienced than their onshore counterparts in tackling and adjudicating matters tainted by fraud. For example, and aside from cross-border recognition of insolvency regimes, it is not uncommon to invoke court to court assistance in bringing essential disclosure to light. Interim relief to freeze assets in aid of foreign proceedings is now commonplace in jurisdictions such as the BVI and Cayman Islands often without the requirement of formal and substantive proceedings being brought locally. This can often extend to judgments or even potential judgments made in jurisdictions within both common law and less well known civil law jurisdictions that are capable, ultimately, of local enforcement. If anything, the onset of the global economic crisis has galvanized a more universalist approach to asset recovery indicative of the English and American Courts approach in cases such as Rubin v Eurofinance.
Jennings: It is often said that ‘Britain and the US are two great countries separated by a common language’. This is also true of processes in multi-jurisdictional asset recovery cases. Certainly common law jurisdictions are very different from civil law jurisdictions in terms of processes, but, even the language used to describe processes can be very different. This often works against you, but can sometimes work in your favour. While working on an investigation in Thessaloniki Greece, I became concerned about due process barriers which could hinder an important discovery process in the investigation. When I posed my concerns to local counsel I was informed that, due to the fact that this was a criminal investigation, the prosecuting judge would simply order the relevant parties to produce the requested materials in court.
Barclay: The principal distinction I would draw is between civil law systems on the one hand, and common law systems on the other. For example, under most civil law systems a victim of fraud has the right to participate directly in criminal investigations, meaning they can obtain access to the police file, examine witnesses, and even seek damages without having to incur all the upfront costs and risks of an independent civil claim or private prosecution. There are downsides of course, and it is not always the most appropriate solution, but the procedure can be extremely useful. It is generally unknown to common law and potentially, therefore, to common lawyers. Assumptions about what can and cannot be done in a foreign country typically occur where there is a combination of inexperience in the team and a lack of co-ordination across the specialists in different jurisdictions. Making a false assumption is the same thing as making a mistake, and this can and does sometimes compromise an overall recovery strategy. False assumptions are entirely avoidable, provided everyone talks to each other and no-one is left out of the loop on critical decisions. Effective communication, from the very early stages, is the key.
FW: Given your experience with fraud and asset tracing cases, what is your advice to companies on establishing an asset protection strategy to reduce the risks?
Jennings: My best advice is to learn all you can about the people you do business with before you do business with them. Over the past thirty years, I have not encountered a contract, business control, trusted intermediary, security procedure, algorithm, or other artificial tool which could prevent the committed fraudster from relieving some innocent victim of their assets. I have often investigated cases where the fraudsters themselves propose elaborate controls or introduce well known intermediaries, such as Lloyd’s of London, between themselves and the assets they hope to appropriate. Of course, they have already studied these and any controls or barriers the victim may have imposed and figured out how to compromise them all. If you do business with the wrong people you will get burned, so do your homework.
Barclay: Prevention is always better than cure. A risk management system which is appropriate to the scale and nature of your business is a must. Even more important than that, I would say, is encouraging an internal culture of awareness, vigilance, and zero tolerance. In case things do go wrong, make sure your internal reporting and investigation procedures are up to scratch, and make sure people know how to utilise them if occasion arises. As ever, your people are the key, and they are your best defence.
Thorp: Companies should implement preventative strategies in relation to employees, including an internal code of practice to monitor emails, telephone calls, and the workplace environment – within the scope of privacy laws – as well as a system to regulate key staff and to identify any suspicious transactions. Such measures frequently enjoy statutory and regulatory guidance. A protocol to enable the identification and reporting of suspicious activity is also vital. To guard against external wrongdoing, comprehensive computer security systems must be implemented. A company’s ability to evidence a fraud, by retaining documents and preserving both electronic and physical records, will be an equally important deterrent, as well as making the asset tracing and recovery process much easier if assets have been removed. Externally, multi jurisdictional joint-venturers must carefully police any transactions as well as contract into deliberate dispute resolution clauses, with consideration of the governing law and the seat of any future conflict.
FW: If a company does find itself the victim of fraud, what considerations should be made when assessing the best means to recover lost and stolen assets that have been moved offshore?
Barclay: Reliable information is essential to any asset recovery exercise but, on the other hand, information can take time to acquire and all the while it is essential to act before assets are dispersed. There is therefore a difficult judgment call to be made about when to apply for injunctions or to do anything else which will alert the suspect. In civil cases, where you are the one who has to make the decision, you should consider carefully the advice of your investigators and your legal advisers in the key jurisdictions. But before you ask them to do anything else, you should ask them to give you a feel for what your options are, how long things might take, and how much they might cost. There are a lot of unknowns in the early stages of an asset recovery action, but experienced practitioners should be able to give you a fair idea of what is likely to be involved and what different procedures may be available to you.
Thorp: The primary factors of any asset recovery procedure are speed and location. Any tracing exercise rarely improves with age. A wronged company will need to quickly investigate and identify accounts, trusts and/or corporate vehicles through which a fraudster may have sought to dissipate assets. Swift and decisive initial action can stun a defendant, not only trapping assets but also promoting early settlement. Personal freezing orders are often accompanied by a cap on an individual’s expenditure and provide a mechanism to police legal fees bringing further pressure to bear. Evidence of loss must summarily be assimilated, as must the intent of the wrongdoer to move assets beyond the reach of standard enforcement regimes.
Jennings: You must gather as much knowledge as you can before developing a plan. In one investigation which I conducted for a lender who believed that they had been lending money to projects in the Ukraine, I discovered that their money had not travelled any further than Boston. The first step is usually investigating the underlying conduct and tracing the proceeds of the criminal activity. The knowledge gained from this undertaking will be extraordinarily useful in creating an effective asset recovery plan. In most instances the knowledge and evidence gained from this work will be required in any venue that might have the jurisdictional authority to grant relief. The next step would be to retain counsel with extensive experience in effecting recoveries in the institutions and countries where the assets now likely reside. The temptation is often to favour speed of action over intelligence gathering and planning, but down that path lies disaster and frustration.
Jon Barclay is a partner at AO Hall in Guernsey, and part of the dispute resolution team in Guernsey. He is highly rated for his presence in court, and has a particular interest in fraud and asset tracing claims, trusts, litigation, and insolvency. Prior to returning to Guernsey in 2005, he practised for several years as an English barrister in the Chancery and Commercial Group, at the leading set No 5 Chambers. Mr Barclay can be contacted on +44 (0) 1481 748921 or by email: firstname.lastname@example.org.
Andrew Thorp is a partner at Harneys. He joined the firm in 2005 and advises on a wide range of multi-jurisdictional commercial and insolvency matters on behalf of major international law firms, banks, in-house legal teams, investment funds and trust companies. Mr Thorp is well known for his cross-border work and has a particular interest in international asset tracing and preservation. Much of his focus is on pre-emptive remedies including freezing orders, provisional liquidator appointments, and discovery orders, often against a background of fraud. He can be contacted on +1 284 494 3267 or by email: email@example.com.
Bill Jennings is a managing director in the Disputes & Investigations practice at Navigant. He has more than 20 years' experience investigating fraud and other financial crimes, forensic accounting, business-controls development, public accounting, and auditing. His case experience includes investigations of securities fraud, embezzlement, commodities fraud, bank fraud, money laundering, health care fraud, purchasing fraud, theft by conversion, and public corruption for corporations, attorneys, the U.S. Justice Department, state and local prosecutors. Mr Jennings writes articles and speaks regularly on fraud topics and other white-collar crime prevention and detection. He can be contacted on +1 404 602 5002 or by email:firstname.lastname@example.org.
© Financier Worldwide