Recovery of Hidden Assets Offshore 101

The global nature of today’s economy makes the process of recovering the assets of fraud and other business crimes all the more difficult. The legal benefits provided by different jurisdictions are often used illegitimately by individuals to hide the proceeds of fraudulent activities, making it more difficult for the victims of fraud to recover their assets. In this article, Eric Rein discusses the strategies and procedural challenges to asset discovery and recovery.

The global nature of today’s economy makes the process of recovering the assets of fraud and other business crimes all the more difficult.  The legal benefits provided by different jurisdictions are often used illegitimately by individuals to hide the proceeds of fraudulent activities, making it more difficult for the victims of fraud to recover their assets.

Perpetrators of fraud frequently flee or transfer assets to multiple jurisdictions to make it difficult to identify the assets and to recover them.  Fraudsters are sophisticated and intelligent.  They have access to a wealth of information and professional advice, enabling them to obscure and attempt to “legitimize” ill-gotten gains.  They launder money and exploit loopholes.  Simply identifying the wrongdoer is not enough, proving liability and securing recovery are distinct and equally difficult tasks.

The fraudster’s plan is secrecy and evasion.  He creates obstacles for locating assets.  A recovery strategy must:

• Not rush to file suit or obtain judgment. Claims are flexible.  Judgments may restrict your recovery efforts because in foreign jurisdictions they may be more strictly construed and inhibit one from expanding the recovery effort.

 

• Not solely focus on tracing assets. The assets of those complicit in the fraud should also be tracked.  You are not limited to only recover fraudulently procured assets.

 

• Focus on evidence gathering. The key to recovery is through supportable, verifiable evidence.

 

• Not depend on the cooperation of the fraudster. The goals of fraudsters are delay and deception.  Never expect full and complete honesty.

 

• Seek to locate, freeze, and seize assets. Once assets are frozen, the cooperation of the fraudsters is certainly more easily procured.

 

An effective strategy identifies the jurisdictions involved, the targets of recovery, the evidence gathering needed, and how different countries’ laws interact.

There are three obstacles to recovery.  First, the procedural obstacle—there are rights to privacy, due process, protectors for private property, and equal and fair treatment.  It is difficult to seize assets and not violate these rights.  Second, the informal and financial obstacle—the vast majority of asset recoveries involve overseas accounts, trusts, and companies.  Certain off-shore jurisdictions frequently have regulatory setups and secrecy laws perfect to obscure links to money with shell companies and nominee directors.  Third, the political obstacle—some countries’ governments are more supportive of private actions of recovery than others.  Depending on the target of the investigation, the political process could be a difficult barrier to overcome.

Planning, patience, and persistence are essential components of an international recovery effort.  International recoveries must be approached in a systematic fashion.  The objective is to discover, freeze, and seize assets.  The objective is achieved by reversing the litigation paradigm and focusing on recovering first, not last.  Discovery should be through extra-judicial means by way of witnesses, informants, and documents.  Documents need to be rapidly identified and secured before there is an opportunity to destroy them.  Discovery should also be pursued through judicial settings appropriate for the jurisdictions involved.  Many jurisdictions allow for pre-action discovery in order to identify the wrongdoers.

In English common law countries, an action for discovery of the existence of assets is founded on the English House of Lords decision of Norwich Pharmacal Co. v. Customs & Excise Comrs., 3 W.L.R. 164 (H.L. 1973).  Norwich Pharmacal relief is available against a party who has become mixed up in the wrongdoings by innocently facilitating the fraud.  Such relief has resulted in discovering bank account information, correspondence, checks, internal memos, debit vouchers [Bankers Trust Co. v. Shapira, 1 W.L.R. 1274 (1980), 3 A.L.L. A.R. 353 (1980); Arab Monetary Fund v. Hashim, 2 A.L.L. E.R. 911 (1992)], particulars about trusts, client accounts, real estate properties, automobiles [Mercantile Group Europe A.G. v. Aiyela, 3 W.L.R. 1116 (1993), 1 A.L.L. A.R. 110 (1994)], tax returns [M.N.R. v. Huron Steel Fabricators, Ltd., 41 D.L.R. 3d 407 (1973)], and corporate books and records [Canadian Javelin Ltd. v. Sparling, 59 C.P.R. 146 (1978)].  In ordering this discovery, courts are most persuaded by a duty to protect a victim’s interest to insure against crime and fraud.  Most importantly, this information can be pursued and obtained without knowledge of the fraudster to prevent movement of assets.

Seizure also is accomplished based upon each jurisdiction.  Injunctions and statutory freeze orders are the common means to seize assets.  Since its inception nearly three decades ago, the Mareva injunction conceived in Mareva Compania Navier, SA v. International Bulk Carriers, SA, 1 A.L.L. E.R. 213 (1980), “enables the seizure of assets so as to preserve them for the benefit of the creditor, but not to give a charge in favor of any particular creditor” [Z Ltd. v. A-Z and AA-LL, 1. Q.B. 558, 573 (1982)].  This injunction does not create rights in the property, but merely freezes the assets until subsequent adjudication [Cretanor Maritam Co., Ltd. v. Irish Marine Management, Ltd., 1 W.L.R. 966 (1978)].  The circumstances in which a Mareva injunction may be appropriate includes where there is reason to believe that the defendant intends to cheat the plaintiff of the fruits of a judgment [PCW (Underwriting Agencies) v. Dixon, 2 Lloyd’s Rep 197 (1983)].  To obtain a Mareva injunction, an applicant must essentially show a strong prima facie case on the merits and a serious risk that the defendant will either remove the assets from the jurisdiction or dissipate them so as to frustrate any judgment ultimately obtained [Derby v. Weldon (Nos. 3 and 4), Ch. 65 at 76E, per Lord Donaldson MR (1990)].  Recovering assets presents a formidable challenge.  Nonetheless, the obstacles are not insurmountable.  In order to overcome sophisticated barriers, the urge to run to a judgment or focus on tracing of assets is not the best approach.  Instead, the strategy must be directed at all those involved in the scheme, i.e., nominees, straw men and business associates, and the manner in which all of the wealth is held, not just those assets linked directly to the transaction at issue.  The challenge is great, but can be overcome by identifying the wrongdoers, the property, and controlling the assets through injunction.

The confluence between fact-finding and legal principles is unique in this area of practice.  Only experienced practitioners can navigate through the morass to enhance the probability of success for their clients.

Eric (Rick) S. Rein is a partner in the litigation group of Chicago law firm, Horwood Marcus & Berk, Chartered. He concentrates his practice in multijurisdictional litigation, specifically the recovery of foreign claims and assets, and has handled complex international banking and fraud matters in more than 40 jurisdictions. Mr. Rein is a well-sought after interview source on international asset recovery and has authored numerous articles on the subject. You can follow the topic on his blog through www.hmblaw.com.
Mr. Rein can be contacted directly at rrein@hmblaw.com and by telephone at (312) 606-3227.