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The Optimal Balance Between Direct (Civil) Recovery and (Criminal) International Cooperation Strategies for Asset Recovery

Guillermo Jorge, Governance Latam

"In this article, I describe the main strengths and weaknesses of MLA-based and direct asset-recovery strategies and conclude with my take on the conditions under which each type of strategy should be advanced."

Guillermo Jorge

Transnational asset recovery has grown as a complex legal discipline demanding proficiency in specific aspects of civil, commercial, and criminal substantive and procedural laws; cross-border insolvency law; mutual legal assistance (MLA); and international cooperation. Besides, it requires professional capacities to provide investigative and forensic services in multiple jurisdictions in a coordinated fashion.

Victims of fraud, whether individuals, companies, or even governments affected by corruption, are usually confronted with the question of what constitutes the right litigation strategy to recover stolen assets that have been expatriated. Although the question is usually framed in terms of whether it is more convenient to pursue civil or criminal avenues, there is a second, important dimension: choosing between exciting simultaneous proceedings in all jurisdictions where relevant assets are located (exercising direct recovery actions, as provided for, eg, in the United Nations Convention against Corruption (UNCAC), article 53), or litigating primarily in one “main proceeding”, usually a criminal case against the fraudsters, at the jurisdiction of origin (attempting transnational recovery through international cooperation and MLA, as provided for in the UNCAC articles 54/55).

The question specially arises in civil law countries, where victims can be parties to criminal proceedings (as querellante, parte civile, actor civil) and are able to require an ample spectrum of measures directed at tracing, freezing, and confiscating the proceeds of crime. In common law countries, by contrast, the victim has no participation – or even access – to criminal proceedings; the government controls the prosecution; and the compensation to victims is dependent on specific victim statutes that, generally speaking, do not guarantee adequate compensation in all cases. In this legal tradition, pecuniary and patrimonial claims are all resolved through civil (private) law.

In this article, I describe the main strengths and weaknesses of MLA-based and direct asset-recovery strategies and conclude with my take on the conditions under which each type of strategy should be advanced.

The ups and downs of government-to-government assistance and direct recovery litigation

The arsenal of remedies that many jurisdictions have gradually established in compliance with anti-money laundering, anti-corruption and anti-terrorism global standards (proceeds of crime statutes, immediate freezing orders, in rem, non-conviction and value-based confiscation, reporting obligations of financial intermediaries and other gatekeepers, etc) has made it attractive for practitioners in civil law countries to rely on the powers of criminal authorities to trace, freeze and confiscate assets. At least at first sight, in most civil law countries, government-to-government international cooperation could be seen as a cost-effective strategy, since it would avoid the need to litigate, and thus to hire local attorneys in each relevant jurisdiction. Experience tells, however, that entirely relying on international cooperation in criminal matters as a recovery strategy might only work in very limited circumstances.

In cross-border cases, prosecutors need to resort to MLA requests – the official channel designed to obtain evidence abroad through the mediation of central authorities. An appendix to extradition law for almost two centuries, MLA has been neglected as an autonomous discipline up until the last globalisation. Since then, international organisations sponsoring conventions against transnational crime and corruption have invested considerable resources to make MLA proceedings feasible for asset recovery purposes, most notably after 2005, when the UN Convention against Corruption placed asset recovery as one of its fundamental principles.

In 2011, the StAR Initiative – a joint effort of the World Bank and the United Nations – identified 29 institutional, legal and operational barriers that prosecutors regularly face when resorting to MLAs for asset-recovery purposes. Some of those barriers may be overcome. For instance, as a result of more than 15 years of continuous international efforts, central authorities have been established in most jurisdictions and many of them have developed and strengthened their respective networks. By the same token, the development of alternative channels to obtain evidence abroad, most notably among financial intelligence units (FIUs), has also been a remarkable development of the last decade.

While such progress should not be underestimated, most of the identified barriers arise from the fact that MLA is too narrow a proceeding to accommodate the complexities involved in any asset recovery process – finding 29 barriers may be an indication of that.

An overarching difficulty lies in the structure of incentives set for prosecutors and official investigators. Since criminal law is – and will always be – primarily domestic, they have all the incentives to prioritise local cases, for which they are accountable to their constituencies. As a result, it is highly unlikely that authorities in the requested countries devote the significant multidisciplinary resources required to trace proceeds of a crime committed in the requesting jurisdiction.

The consequences can be shown in a few examples. Under MLA law – bilateral or multilateral treaties, as well as most domestic legislations – requesting states shall identify, to the greatest extent possible, the specific proceeds of the offence that are allegedly located in the requested state. This condition is almost impossible to fulfil without prior investigative and forensic efforts, based on information previously provided by third parties (financial institutions, law firms, accounting firms, public registries). This is precisely the type of assistance that requesting states expect to obtain from foreign authorities. However, in practice, it is highly unlikely that requested authorities will have devoted the necessary investigative and prosecutorial efforts to carry this out in a timely fashion.

Something similar occurs in the area of repatriation. The requested state will usually require the requesting state to trace the confiscated asset back to its legitimate owner. That entails proof of the origin of each cent held in a bank account or used to buy the asset in question which requires, in turn, retracing each and every transfer from all the jurisdictions involved. The usual delays of MLA proceedings – a minimum of two years on average per jurisdiction – makes this requirement almost impossible to fulfil before the case exceeds the statute of limitations.

Similar negative outcomes may also be expected:

  • when the requested state does not provide for quick freeze or restraint mechanisms;
  • when, in lifting bank secrecy, the requested state requires the requesting state to provide information only available from the requested state;
  • when the requested state does not recognise the confiscation mechanism exercised in the requesting country;
  • when the defendant in the requesting state is a legal person and the requested state has not established legal persons’ criminal liability;
  • when immunity laws or the statute of limitations prevent the execution of the requested measures; or
  • when the requested country’s domestic law does not provide for the recognition of foreign confiscation or restraint orders.

Overcoming such obstacles will require the homogenisation of criminal law on a global basis to an extent that is not foreseeable in any near future. They currently leave very modest room for a successful MLA-based asset recovery strategy. In my experience, MLA requests are a powerful recovery tool provided that:

  • the proceedings at requesting and requested states take place in civil law jurisdictions – where the victims are parties to the criminal case and are able to control it to a certain extent;
  • the proceeds of crime have already been identified in the requesting state and traced back to their legitimate owner; and
  • a conviction in the requesting country is foreseeable in a short period of time, so to allow confiscation and repatriation of assets frozen through MLA.

Unfortunately, such conditions are rarely present in transnational fraud and corruption cases.

By contrast, direct recovery strategies have usually obtained better results. A coordinated legal strategy in each of the relevant jurisdictions advances the victims’ rights at a priority basis – aiding foreign victims becomes a domestic, not foreign proceeding.

The availability of remedies that were developed in the context of commercial litigation to facilitate assets tracing and recovery, especially in common law jurisdictions, is ample enough to accommodate the complexities of asset recovery, using domestic law in each relevant jurisdiction. Examples of such remedies includes ex parte disclosure orders to obtain documents and materials in the hands of third parties who have negligently participated in the wrongful acts of others (Norwich Pharmacal/Bankers Trust orders); ex parte orders directed to search premises of third parties (Anton Piller orders); injunctions designed to restrain the defendant from disposing of, or dissipating, his or her assets (Mareva injunctions); seal and gag orders restraining all persons having notice of the proceedings from disclosing or communicating the fact or nature of the proceedings; private mechanisms directed at obtaining temporary freezing (eg, the so-called Mareva by letter, directly sent to financial intermediaries); and the use of insolvency proceedings to take control over corporate vehicles created to hide and manage the proceeds of crime.

Of course, direct recovery strategies are costly – undoubtedly more expensive than MLA-based strategies. They require the hiring of private attorneys, forensic and investigation services, and the covering of litigation costs associated to civil proceedings (eg, undertakings, injunction bonds). In this context, gradually but consistently, third-party litigation funding services have emerged as a market solution to victims that cannot afford such costs, promoting cost-effective alternatives by which the direct recovery strategy’s costs turn to be just a portion of the value recovered after the deployment of successful efforts in multiple jurisdictions.

Beyond asset recovery: value recovery as part of direct recovery strategies

Experience shows that, quite frequently, actual asset recovery is impossible – eg, when fraudsters have consumed part of their ill-gotten gains in a lavish lifestyle. How can value that has been lost and wasted by fraudsters be returned to victims? A path worth exploring – one that has brought justice to many fraud victims around the globe – is that of chasing compensation not only from the fraudster, but also from third parties that have aided and abetted him or her: financial and professional intermediaries such as banks, other financial intermediaries, corporate service providers, public notaries and even law firms may be ordered to compensate the damages suffered by the victims of their clients.

MLA-based strategies are scarcely useful to follow this path, mainly because, even when prosecutors are open-minded enough to pursue not only punishment but also confiscation of the proceeds of crime, criminal jurisdiction is usually limited by the principles of either territoriality or nationality. This leaves aiders and abettors that laundered the proceeds of crime abroad out of the reach of prosecution and international cooperation through MLA. While in civil law countries domestic criminal law might help to overcome this jurisdictional barrier – eg, by charging aiders and abettors with money laundering – it must be recognised that criminal law is not well equipped to build robust claims of damages.

Civil litigation is the avenue that victims at the country of origin dispose of to claim damages against aiders and abettors of their offenders in foreign jurisdictions. Civil litigation to claim damages against them is usually a necessary complement to asset recovery strategies, either through MLA or direct recovery, although it is often much easier to coordinate with the latter rather than the former, because of the different level of control that victims have in each case.

***

Current trends in asset recovery show the emergence of a new, almost autonomous discipline that requires of the deployment of multiple legal avenues to be effective. The question is not so much whether to advance criminal or civil proceedings, but whether to deploy a coordinated strategy issuing claims in the different jurisdictions where the assets or evidence are located, or to rely on a centralise law enforcement efforts in the country of origin. As shown, MLA-based strategies might help freezing already identified assets in a foreign jurisdiction. It is usually too cumbersome a strategy when assets abroad still need to be identified and traced, and is of no use in complementing assets with value recovery from abroad. In the vast majority of cases, in which not all dots are connected, local counsel pursuing evidence and direct recovery remedies in each relevant jurisdiction will produce much larger and faster results for victims.

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