FORUM: Asset tracing and recovery

February 2013 | SPECIAL REPORT: CORPORATE FRAUD & CORRUPTION

Financier Worldwide Magazine

James D. Ratley moderates a discussion about asset tracing and recovery between Jonathan Tickner at Peters & Peters, Charlotte Haslam at RGL Forensics, and Colette Wilkins at Walkers.

Ratley: To what extent has the demand for greater corporate transparency and governance in recent years led to an increase in asset tracing and recovery services?

Tickner: The growing focus on transparency and governance has been triggered by the ever-increasing scrutiny that criminal investigative agencies, regulatory bodies and politicians are placing on corporates. Corporates now operate in an environment of increasing risk, both criminal and regulatory. Legislation including the US Foreign Corrupt Practices Act (FCPA) and the UK’s Bribery Act carry debarment as a possible sanction following conviction, with potentially devastating economic consequences. Recent banking scandals, including allegations of sanctions busting, and the manipulation of LIBOR and other benchmark interest rates, have led to substantial fines in the US, UK and other jurisdictions. More generally, the 2008 banking crisis has seen enhanced focus by regulators, such as the FSA, on ensuring that financial institutions have adequate systems and controls for the proportionate management of risk. This increased compliance burden has required companies to carry out internal investigations, and use specialist external law firms and accountants, who are in a position to offer specialist asset-tracing and recovery advice in the context of the investigations, where appropriate. But this is generally a by-product not the main driver.

Haslam: In the past, businesses have folded without the prior knowledge of their shareholders, stakeholders and employees, and board members in particular have never really been taken to task as to how or why the company was allowed to fail. Stakeholders and shareholders now demand greater accountability of a firm’s activities and a more practical approach when a problem occurs. Furthermore public interest has also fuelled the demand for companies to be more proactive after detecting a crime. The need for answers has meant that companies can no longer adopt an attitude of lack of information disclosure and efforts have to be made to trace, locate and recover assets. This has led to a significant increase in the use of specialist companies to assist with asset-tracing and recovery.

Wilkins: In our experience the demand for greater corporate transparency has not led to any significant increase in tracing claims and recovery services. The increase in the demand for tracing and recovery services has been caused by a significant increase in the discovery of fraudulent enterprises. As the saying attributed to Warren Buffett goes, ‘you see who’s swimming naked when the tide goes out’. For example, the decrease in available funds for investments subsequently found to be Ponzi schemes without doubt has contributed to an increase in the detection of such schemes.

Ratley: Have you seen an increase in insolvency-related tracing and recovery?

Haslam: Statistics from the Insolvency Service show that in 2009, 19,077 companies became insolvent. This dropped to 16,045 in 2010 with an increase to 16,886 in 2011. Figures for Q1-Q3 in 2012 stand at 12,449. From an investigation perspective, over the last five years, there has been a steady increase in insolvency-related tracing and recovery enquiries. These normally form part of an ongoing litigation case or a fraud investigation. With changes in technology and the specialist techniques of an investigator, this has increased the chances of locating assets and, in turn, has led to a change in attitude by stakeholders and investors looking to get their money back. Putting it down to experience need no longer apply, as there have been many reported cases where assets have successfully been recovered.

Wilkins: We have seen a marked increase in insolvency-related tracing and recovery work. The proprietary remedies of tracing or following assets are proving particularly attractive to victims of fraud where such remedies mean that victims rank ahead of the general body of creditors in an insolvency. Where victims are able to act quickly and obtain freezing and disclosure orders, the chance of recovery increases significantly; seeking orders against third-parties innocently involved in wrongdoing can often also be very effective. The fact that a proprietary remedy may be sought not just against the original wrong-doer, but potentially also against recipients of the proceeds of the fraud, significantly widens the scope of potential defendants and increases the chance of compensation being obtained for the loss.

Tickner: The fallout from the Madoff and Stanford Ponzi schemes continues to see satellite litigation in England and Wales, amongst other jurisdictions, as liquidators seek to trace the available assets for the benefit of victims and creditors of those funds. In early 2013, the UK’s Supreme Court is expected to rule on whether the Antiguan insolvency practitioners, or the US SEC appointed receiver, may establish a preferential claim over the property of the now defunct Stanford International Bank. At the same time, London’s courts have been called upon to unravel a number of high-profile domestic insolvencies, including a number of high street retailers and Rangers Football Club.

Ratley: What trends have you seen in relation to fraud schemes against former lenders and investors?

Wilkins: The number of frauds appears to have increased, but in reality this is likely to be due to an increase in the detection of fraud, rather than an increase in the number of fraudulent schemes being pursued. The global financial crisis is most likely responsible for the increase in detection of fraudulent schemes.

Tickner: In the UK, recent years have seen a rise in Unregulated Investment Schemes, so-called because they fall outside of the regulatory ambit of the FSA.These schemes are commonly marketed through the high-pressure sales tactics typical of ‘boiler room’ frauds, offering guaranteed returns from investments in unusual commodities including carbon-credits, or wine. One particularly prevalent scheme, increasingly attracting the attention of both the FSA and the police, is ‘landbanking’. Investors are invited to acquire small parcels in a larger plot of land, with the potential of a substantial increase in value following a successful application for planning permission. The land is invariably totally unsuitable for development. In 2012, the FSA obtained freezing injunctions against a number of companies operating landbanking schemes and 2013 will see the first criminal prosecutions.

Haslam: A number of fraud schemes happen via the internet. For investors, the chance to make quick money with little effort or risk is appealing. As well as typical Ponzi schemes, a popular example at the moment, would be where an investor is approached to become an affiliate of a company that sells high end products. The affiliate takes the position of an internet supplier and advertises the goods on major auction websites. The affiliate deals with and takes payment from a customer and then transfers that payment to the company. The company is responsible for dispatching the goods to the customer. However the goods are never sent, resulting in the customer taking legal action against the affiliate, and thus the investor, while the company disappears.

Ratley: Are advances in technology and globalisation of business processes creating more opportunities to commit financial fraud?

Tickner: The rise of email and social media means that an unprecedented amount of sensitive personal information is accessible online. Online banking enables significant sums of money to be transferred instantaneously across the globe with a push of a button. These and other technological advances present significant opportunities for those fraudsters able to stay one step ahead of their victims and domestic police forces. So-called ‘cybercrime’ already presents a significant threat to corporates and their customers. In the UK, the National Fraud Intelligence Bureau estimates that over half of all fraud committed is done online. Organised criminal gangs will use the internet to defraud companies and individuals across state borders, requiring a multi-jurisdictional response either from civil claimants or national law enforcement agencies.

Haslam: The processing of illicit payments or transfer of funds across the world is instantaneous and the amount of space available to hold information is limitless. Hacking and other unlawful computer activities make it easier to access the information on a global scale. It is relatively simple for criminals to set up a network of offshore companies for the purpose of laundering money and financial fraud. In some cases well organised criminals will operate within and alongside legitimate businesses, as well as buying the expertise required or investing in the research necessary, to help them combat the threat of exposure. However, in the same way but with respect to law enforcement, by way of such advances come increased security measures, stringent financial requirements, information sharing – particularly in insurance – and legislation used for prosecution.

Wilkins: Advances in technology and globalisation mean that those committing fraud now have access to a much larger pool of potential victims. The more complex a business process, the easier it is to conceal a fraud. The globalisation of business creates opportunities for fraudsters to move money widely, quickly and easily, and technological advances inevitably make fraudulent business easier in exactly the same way as they do legitimate business. However, it is worth pointing out that improvements in technology and retention of data also makes it possible to reconstruct a very detailed trail of transactions and accounting with close examination of electronic records. As many fraudsters have discovered, deleting incriminating material from computer systems is extraordinarily difficult. Advances in technology and the storage of data have made it easier to undertake the forensic analysis necessary to uncover and follow the proceeds of fraud.

Ratley: At the outset, a key step is deciding whether the likely amount of recovery is worth the cost of engaging external specialists. What issues should be taken into account when evaluating the ability to recover assets?

Haslam: As well as consisting of cash and bank accounts, assets can consist of, for example, real estate, artefacts, equipment, jewellery and vehicles. The recovery of assets does not only consist of a freezing order on a bank account, but also applies to the physical removal of the asset from its location. Consideration must be given on both a practical and logistical level as well as a legislative level. For example, is it more cost effective to sell an asset locally for a lesser price than pay the cost to recover it back to the UK to sell at a higher price? Do local laws prohibit the recovery of an asset and what legislation or directives are in place for cross-border cooperation?

Wilkins: While the scale of the fraud will not necessarily match the ultimate recovery, it does often indicate the potential for recovery. For that reason, the extent of the fraud is usually the starting point for considering the level of resource to be deployed in seeking to make recoveries. Other key issues to be considered at the outset are the strength of the case and extent of the evidence of wrongdoing; the likely jurisdictions through which assets might have to be traced; and whether the jurisdictions where assets may be located have a judicial system and lawyers familiar with asset recovery, able to provide swift assistance; the availability of pre-action discovery against third-parties who might innocently have become involved in the wrongdoing, and which would allow valuable information to be obtained before the main proceedings are launched; and the availability of freezing orders to protect assets while proceedings are pursued.

Tickner: Proportionality and commerciality are key factors.The reality is that for a victim to know whether there is any merit in bringing a claim can require a substantial capital investment to fund lawyers and litigation support. The decision whether to proceed with inevitably costly litigation cannot be made without an understanding of where stolen assets are, or the extent to which there are assets generally available either in the UK or overseas that may be available to enforce a judgment recovered. This will invariably require investigation and necessitate court applications domestically and internationally, including in so-called ‘offshore’ jurisdictions, to compel, for example, financial institutions, trustees and fiduciaries to disclose information on the whereabouts of assets and to freeze those assets. All of this will be costly. Potential claimants need to consider whether, given the sums at stake, investing in expensive litigation with no guarantee of recovery makes sound commercial sense. Often, victims can compound their losses by throwing good money after bad, and it is the lawyers’ duty to explore other more cost-effective remedies – such as a criminal complaint – which may be more appropriate in all the circumstances.

Ratley: Given that misappropriated assets are often converted into real property in ways designed to obscure their ownership, what tactics are needed to locate them?

Wilkins: The identification and retention of leading asset recovery professionals in the relevant jurisdictions is the first step to be taken. Such professionals will include forensic accountants, lawyers and, possibly, professional investigators. In jurisdictions such as the Cayman Islands, where the ownership of land is registered and the land registry documents open for public inspection, when searching for real property and the identity of its owner the land registry will be the starting point. If the assets in question might have been transferred into a company, the local companies’ registry should be checked to obtain whatever information is publicly available. If, as in many jurisdictions, the identity of the company’s shareholders is not publicly available information, if there is sufficient evidence that the company has been involved or used as part of a fraudulent enterprise, in some jurisdictions it may be possible to obtain a court order requiring the company’s registered office to provide information to assist in the investigation, on the footing that the registered office provider has, innocently, become involved in the wrongdoing. This can be done before the main proceedings are issued.

Tickner: Sophisticated fraudsters will often seek to hide misappropriated funds through a complex web of trusts and corporate entities. These are invariably held in ‘offshore’ jurisdictions because of the strict laws protecting banking secrecy and commercial confidentiality in those states. It is possible to obtain orders in these jurisdictions to compel trustees in these offshore jurisdictions to disclose information relating to the identity of beneficiaries and ultimate beneficial owners of these vehicles, particularly as pressure increases on offshore jurisdictions to become ever more transparent. Victims of fraud will need to instruct lawyers in those jurisdictions to compel banks and other financial institutions to disclose the identities of those who enjoy ultimate ownership or control of those entities. They may also need to rely on the assistance of investigators to demonstrate to a court any connection between the fraudster and an asset or company putatively held by another.

Haslam: Various tactics are used in order to locate real property. To highlight a few, first and foremost, an initial analysis must be undertaken to formulate an understanding of the persons you are dealing with and how they operate. It would be prudent to complete a lifestyle and business check, pinpointing the places he or she has visited, or has connections with. Review historical records and make use of any financial, human, or open source intelligence. Forensic technology can also play a crucial role, first through the collation and analysis of large volumes of data, and second through acquisition and analysis of deleted and corrupted data.

Ratley: What impact can the jurisdiction (or jurisdictions) in which a claim is brought affect the task of tracking and recovering assets?

Tickner: Choice of jurisdiction is critical in determining the level of control the victim has over the efforts to recover assets misappropriated through fraud. In some states, particularly those following the common law tradition, claimants may themselves rely on civil actions to retrieve stolen assets. The courts of England and Wales are equipped with an extensive arsenal of interim remedies, which can be used to frustrate the fraudster’s attempts to dissipate the proceeds of his fraud. These include Search, Evidence Preservation and Asset Freezing Orders worldwide. All these orders can be obtained without notice to the defendant or third-party. Alternatively, in states where such remedies are not available, claimants may have to invoke the assistance of the state for the recovery of their assets, for example, through a criminal complaint.

Haslam: It is often developed countries where stolen assets are hidden, but unfortunately legal differences across jurisdictions can sometimes hinder requests for assistance. Also, unless evidence is provided linking assets to criminal activity, then recovery may be impossible and there is always potential for ambivalence in the way some jurisdictions regard assets acquired in dubious circumstances. Furthermore, in order to hide assets, attempts are made to disguise ownership behind a trust or other such vehicle, and in jurisdictions where trustees are not regulated by trust laws, then criminals are able to disconnect themselves – in terms of ownership – from an asset, whilst still remaining in full control.

Wilkins: The jurisdiction in which the claim is brought has an enormous impact on the ability to find and recover assets. This will determine whether proceedings can be started and pursued with the speed necessary for successful asset recovery; the availability of experienced judges and counsel; the remedies which might be available – for example whether proprietary remedies are available; the ease with which any judgment might be enforced; and the likely cost of proceedings. Many offshore jurisdictions, including the Cayman Islands, have lawyers and a judiciary familiar with asset tracing and offer a range of litigation options to assist in the recovery process.

Ratley: What legal challenges or impediments might arise when seeking or obtaining information about assets, and enforcing their recovery?

Haslam: It is important to understand the different legal requirements when dealing with a transnational component, a prime example of this is knowing the various data protection laws in the jurisdiction you are working in. Legal restrictions in some countries can even have an impact on the way findings are used in court. Knowing local laws, coupled with international cooperation, will ultimately lead to identifying assets and aid in the recovery process.

Wilkins: Difficulties can arise in connection with service of process, issues of foreign law and conflict of laws, confidentiality laws, recognition and enforcement of judgments.

Tickner: A covert investigation is key to successfully tracing and recovering misappropriated assets. To give the fraudster notice of any contemplated claim will give him the opportunity to put the proceeds of his fraud, and himself, out of reach. In practice, this means that when making applications against banks and other financial institutions for orders compelling disclosure, they must be accompanied by ‘gagging’ orders preventing those institutions from revealing the fact of the investigation to their client. Claimants may find themselves facing insurmountable legal obstacles to recovering their assets, where litigating in states which do not allow claimants to trace the proceeds of any criminality through the hands of third-parties. This makes it all the more essential that victims of fraud choose the most advantageous jurisdiction in which to litigate for the recovery of their assets.

James D. Ratley is president of the ACFE. He works to promote the ACFE to the public and other professional organisations and continues to assist in the development of anti-fraud products and services to meet the needs of ACFE’s members. In addition, he is a member of the ACFE’s faculty, and teaches regularly on a variety of fraud-related subjects. In 2012, was named ‘One of the Top 100 Most Influential People in Accounting’ by Accounting Today.

Jonathan Tickner is an experienced practitioner specialising in large complex commercial disputes, civil fraud and asset tracing cases. He has extensive experience in dealing with multi-jurisdictional emergency procedures including asset freezing and search and seizure orders. Mr Tickner’s work ranges from the conduct of internal investigations, private competition law claims, the diversion of business opportunities and breaches of fiduciary duty to claims involving deceit, bribery and secret profits. He is consistently ranked in leading legal directories.

Charlotte Haslam is an investigator and Accredited Counter Fraud Specialist. She is involved with all aspects of the investigation of fraud and economic crime and is responsible for asset identification, investigative due diligence, evidence and commercial intelligence gathering. She forms part of RGL’s forensic team and analyses information gathered during complex financial fraud enquiries. Ms Haslam also provides investigative support to law firms, internal legal departments of corporations, and public sector organisations involved in dispute resolution and litigation.

Colette Wilkins has been a partner at Walkers since 2009. Based in the Cayman Islands, Mrs Wilkins specialises in litigation, insolvency and contentious restructuring. She has extensive experience in commercial litigation and insolvency, with a particular emphasis on fraud (including asset recovery), corporate governance, hedge funds and liquidations. Mrs Wilkins appears regularly in the Grand Court and the Cayman Islands Court of Appeal, and has advised and appeared in many leading cases.

MODERATOR

James D. Ratley

Association of Certified Fraud Examiners

THE PANELLISTS

Jonathan Tickner

Peters & Peters

Charlotte Haslam

RGL Forensics

Colette Wilkins

Walkers