Fraud and Asset-Tracing: Trends and Perspectives

Simon Bushell of Latham & Watkins discusses the global trends and perspectives in asset tracing and fraud.


I have been practising international dispute resolution for nearly 25 years, specialising in cases involving large-scale fraud and corruption. Being based in London, I am within striking distance of the Russian, Central Asian and African markets, and also on the doorstep of two of the world’s leading centres for litigation and arbitration: the High Court of Justice and the London Court of International Arbitration. This proximity means that I do not need to review surveys and risk management statistics to be able to gauge the current significance of fraud and corruption in the global marketplace.

There are many factors and indicators which lead me to conclude that the prevalence of fraud and corruption in the practice of dispute resolution has reached another peak. I will confine myself to mentioning one primary factor and also comment on one other recent development which I see as likely to have a major impact on fraud and asset tracing in the months and years ahead. I conclude this commentary with some observations on the increasing significance of international arbitration, and the challenges faced in bringing fraud claims successfully within the limits of the arbitral process.

Aside from the global financial crisis, the single defining feature of the world’s economic barometer over the past decade has been the rise of the emerging and frontier markets. Resource-rich countries in West and Central Africa, Russia, Central Asia, parts of Latin America and the Middle East have been at the heart of a commodities boom fuelled by the rise of the Chinese consumer market. Gaining control of the intensely concentrated exploration and extraction rights in these jurisdictions is often the key battleground, and inward investment, partnership, or other trading relationships centred on these activities carry enormous risk. Poor regulation and lack of transparency are conditions in which fraud and corruption can thrive.

The legal systems in many emerging and frontier markets are often unpredictable, difficult to navigate and prone to state interference and judicial corruption. Largely for these reasons, international contracts associated with emerging and frontier markets are often expressly governed by English law. They may also stipulate that disputes are to be submitted to the exclusive jurisdiction of the English courts, or more often that disputes are to be determined by means of international arbitration with a seat, perhaps, in London.

To illustrate the correlation between corruption and emerging and frontier markets it is worth looking briefly at some statistics available from Transparency International, who publish an annual list of perceived levels of corruption in relation to virtually every country in the world. The list scores countries by corruption levels based on an aggregate of various sources of information, then ranks them from one to 182 (the country ranked one being the least corrupt, and the country ranked 182 being the most corrupt). The Corruption Perceptions Index 2011 demonstrates patterns in levels of corruption and geography suggesting strongly that emerging and frontier resource-rich countries are more prone to corruption than elsewhere.

The following rankings are illustrative:

• Sudan: 177

• Iraq: 175

• Venezuela: 172

• Democratic Republic of Congo: 168

• Russian Federation and Nigeria [placed equally]: 143

The English courts and arbitration centres regularly host disputes involving a power struggle over, or claim to, an economic interest in the natural resources, or other key strategic state interests, of some of the most obscure and remote parts of the world. In my experience, these cases – whether they concern aluminium in Tajikistan, copper in Chile, bank deposits in Kyrgyzstan, steel processing in Ukraine or cement manufacturing in Russia – all have certain common features. Invariably, there is deception in the transfer of economic value out of the business structure, out of the hands of those with legal ownership, and into the hands of wrongdoers who are either in partnership with, or owe other fiduciary-type relationships to, those they are deceiving.

The second common feature is the use of offshore special-purpose vehicles or trust structures. Very often therefore the key to resolving the fraud issue is establishing the connection between the perpetrators on the one hand, and the special-purpose vehicle on the other.

The third common feature is one to which I have already alluded, namely a connection in some way with English law or a connection with England (usually London) which helps to establish English jurisdiction and, crucially, enables the claimant to pursue English law interim remedies and disclosure orders.

For the benefit of anyone reading this commentary who is unfamiliar with English law interim remedies and disclosure orders, they are well worth summarising. They are, in effect, very powerful tools that can be deployed in the English courts by the victim of a fraud. The first of these is a freezing injunction, which is an order prohibiting a party from disposing of or otherwise dealing with its assets. Such an order exists to prevent a defendant from hiding, moving or otherwise unjustifiably dissipating its assets so as to render itself judgment-proof. The English court has the power to grant a freezing injunction both in respect of assets within the jurisdiction of England and Wales but also in respect of assets situated worldwide (where domestic assets are insufficient to satisfy any judgment). The essential grounds which the claimant must demonstrate are that:

• it is just and convenient for the court to grant a freezing injunction;

• there is a substantive cause of action;

• the claimant has a good arguable case; and

• there is a real risk that the defendant may dissipate its assets.

It should also be noted, in passing, that in exceptional cases the English courts have the power to grant interim relief, including freezing injunctions, in support of substantive proceedings brought in a foreign jurisdiction pursuant to Section 25 of the Civil Jurisdiction and Judgments Act 1982.

The second potentially devastating form of interim relief available to a claimant to English proceedings is the search and seizure order. This is a form of mandatory interim injunction which acts as a means of preserving evidence where there is a real risk that, without the order, such evidence would be suppressed or destroyed. Upon execution of the order, the defendant is required to give the claimant’s solicitors access to its premises to search for and seize specified evidence, eg, documents, electronic data, physical goods (ie, in the case of patent or copyright infringement). Although obtaining and executing a search order is likely to be an expensive process, it can give the victim of fraud an exceptional early advantage. Given its draconian and intrusive nature, it is only available in exceptional cases of serious wrongdoing where the evidence is strong.

The third form of relief often deployed by the victim of fraud in his quest for evidence is the third party disclosure order, more commonly known as the Norwich Pharmacal Order or Bankers’ Trust Order (after the two leading authorities in this area). Although often thought of as a form of “interim” relief, these disclosure orders are actually self-standing claims in their own right, available to a claimant directly against a third party who it can be shown has become involved in or facilitated wrongdoing (innocently or otherwise). The most common use of the order is to identify the proper defendant against whom the claimant may proceed, without which information no such claim could be brought. In addition, the Bankers’ Trust variety of the order can be used to compel a third party to provide “full information” to the claimant about the whereabouts and sources of funds or other misappropriated assets, so as to enable the victim to take swift and decisive steps to trace and freeze assets and further unravel any fraud perpetrated against it.

All three of the remedies discussed here are, in a fraud and asset-tracing context, typically obtained “without notice” to the actual or intended defendant, so as to preserve the element of surprise. In exchange for this benefit however, the claimant and his solicitors are under a heavy duty to disclose to the court all material facts, whether or not those facts support its case or that of the defendant. The claimant will also be required to give a cross-undertaking in damages whereby, if the court determines at some point that the order should not have been granted in the first place, the claimant will pay any appropriate sum by way of damages to the defendant.

In my experience, very few of these three remedies are available in either civil law jurisdictions or the United States. This makes them very unique and attractive, and explains, partly, why the victims of fraud look to try to position their claims so as to avail themselves of the English High Court’s jurisdiction.

As well as being host to many disputes involving the emerging and frontier markets (as described above), it remains to be seen whether we will also see a flow of disputes arriving as a consequence of the political turbulence caused by the Arab Spring. In these cases, new interim governments will want to ensure that state assets are identified – especially those maintained overseas – and ownership and control re-established.

As with all investigative processes, it will be a priority to examine any movement of assets in the lead-up to a regime change, the concern being that steps may have been taken to strip assets out of, for example, a sovereign wealth fund into the direct control of now-deposed political leaders, their families and confederates.

It is commonplace for political despots to install their family members in key positions and, in my experience, if and when political turbulence develops, this can create an opportunity (or necessity, in the eyes of those who are politically exposed) to divert assets into so-called “safe havens”.

The question of whether and why London is a “safe haven” is an interesting one. On the one hand, the UK is heavily regulated with high levels of transparency and a well-developed legal system. Thus, anyone wishing to invest here enjoys a high degree of protection. On the other hand, if the person making the investment is susceptible to claims, by either seeking refuge here and thereby becoming domiciled, and/or placing assets in the jurisdiction, then it is equally the case that such claims as may be legitimately brought against that person may well be pursued here and, if appropriate, thoroughly considered and subjected to high degrees of judicial (and public) scrutiny.

The Arab Spring has provided some obvious and clear examples of circumstances in which foreign governments will act to freeze assets believed to be associated with a discredited political regime.

In relation to the revolution in Libya and the ongoing civil unrest in Syria, extensive sanctions have been imposed by the EU. These sanctions mean that institutions such as banks and other professionals are put on notice that it is a criminal offence to deal with or become involved in the transfer of assets associated with named individuals or companies and, moreover, that notice must be given of the existence of any such assets. This exercise is relatively straightforward when, for example, a bank in London holds an account in the name of, say, the Libyan Investment Authority. Upon the recognition of a new interim government, the UK authorities will ordinarily be satisfied that such government can establish itself as having the rightful authority to receive the repatriated assets and be free to deal with them. The exercise is much more difficult, however, where assets are held in the name of special purpose vehicles or administered by trust vehicles. Here identifying such assets, securing them and establishing rights of ownership can be a more challenging exercise for any newly formed government.

Political turbulence on a smaller scale also has a tendency to lead to litigation or arbitration. In the past decade, several prominent political figures have left the former Soviet Union and based themselves in London, sometimes seeking political asylum.

These individuals are invariably accused of fraud and, in response, political persecution is alleged. If the alleged fraudster seeks to base himself here, then he will make himself susceptible to the jurisdiction of the English courts in respect of such fraud claims. The Kazakh-related proceedings against Mr Ablyazov are a good example of this.

I began this commentary by focusing on the impact of the emerging and frontier markets, and noting the tendency of contracting parties to choose English law to govern their contracts. I have also noted the inevitable choice parties make to submit their disputes to international arbitration. If it follows that parties choose international arbitration when contracting in emerging and frontier markets, then it also follows that fraud claims will become subject to the arbitral process increasingly often.

On several occasions I have spoken publicly about my concerns as to the suitability of the arbitral process when resolving fraud claims. I do not suggest for a moment that arbitrators themselves are ill-equipped to grasp fraud claims and remedies, but the process itself has a number of serious limitations. This is not the place for any detailed examination of this issue, but merely to highlight this theme as one which I expect will become increasingly important.

What is clear in my experience is that the arbitral process is rarely the sole forum for a complex fraud claim, and the importance of the concurrent supportive power of the courts cannot be overestimated. Domestic courts can fill the gaps in procedural and enforcement powers, albeit from an essentially non-interventionist standpoint. Given the inevitable involvement of non-parties (from the perspective of the arbitration agreement), alternative concurrent proceedings are highly likely, and probably desirable in one form or another, in order to reveal the identity of those non-parties (perhaps typically an SPV in an offshore jurisdiction) so as to enable further parallel litigation in whatever suitable forum, coupled with appropriate interim relief.

Prosecuting fraud claims and engaging in asset tracing is highly strategic and requires careful planning along with, invariably, the coordination of multiparty, cross-border litigation and, increasingly, arbitration. Experienced, London-based multidisciplined legal teams remain central to any major fraud claims given the complexities touched on in this commentary.

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