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Asset Recovery 2017: Roundtable

Who’s Who Legal brings together Jeff Lane at Tanner De Witt, David Mizrachi Fidanque at Mizrachi Davarro & Urriola, Martin Kenney at Martin Kenney & Co Solicitors and Stephen Baker at Baker & Partners to discuss issues facing asset recovery lawyers and their clients in the industry today.

 

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What impact will the Common Reporting Standard (CRS) have on fraud and the asset recovery market in the years to come?

Jeff Lane: The CRS is due to come into effect in Hong Kong in 2018 and will require the financial institutions of participating jurisdictions to conform to certain minimal standards of financial reporting. While banking transparency in lieu of secrecy looks good on paper, in practical terms fraud practitioners may not derive a great deal of benefit from it. As matters presently stand, we are able to access most information with regards to bank accounts, and in particular beneficial owner status, through disclosure orders against banks. If banks are obliged to share that information, there is a danger that fraudsters will be forced further underground to hide their identities, rendering current tracing and recovery techniques obsolete.

David M Mizrachi Fidanque: To a significant extent. This is so mostly from an evidence-gathering standpoint. The CRS is geared more towards tax evasion than recovering the proceeds of civil fraud. The availability of remedies and evidence-gathering mechanisms using administrative “government to government” remedies should expedite investigations which could lead to expedited recovery. However access to such evidence and assets may be restricted to government actors in some countries and thus, in such cases, private recovery may not benefit as much.

Martin Kenney: The impact of the CRS on the fraud and asset recovery market will very much depend on the manner of its application and implementation in practice. The list of so-called “committed jurisdictions” (currently at 50, as I understand it, for those who have committed to start reporting this year – the US conducts exchange of information under its Foreign Account Tax Compliance Act) while comprehensive does not include many of the jurisdictions that we, as asset recovery professionals, know are regularly used in tax evasion schemes. What must be remembered is that the CRS is simply an information standard for the automatic exchange of information. Exchange of information was happening informally and on an as-needed, case-by-case basis prior to its introduction. It will mean that there is a bigger database of available information caught by a wider net; however, for asset recovery professionals the key issue is access to relevant and targeted information and I am not convinced that the CRS will result in improved access to such information. Indeed, the CRS expressly restricts the use of the information received to tax purposes, and prohibits the sharing of information with law-enforcement authorities, which has obvious implications in the fight against corruption and money laundering. Furthermore, even though the CRS aims to impose uniform requirements across participating jurisdictions, in reality each jurisdiction may choose different options; residency definitions and data privacy and protection rules can also vary. Then there are the loopholes for beneficial owners and the potential for the use of so-called active non-financial entities to avoid identification.

Stephen Baker: One impact of CRS is likely to be that fraudsters and those seeking to hide assets will take even more steps to disguise their ownership of them. Where information is transmitted between jurisdictions as to a person’s tax affairs, the sophisticated wrongdoer is likely to be on notice that information may flow back to his home tax authority. Doubtless he or she will want to avoid this attention. Forcing a company to reveal beneficial ownership to a company registry may well encourage a wrongdoer to further disguise his or her ownership. He or she may use straw men or complex structures to help him or her hide. Similarly, CRS – however well-intentioned – may make life more difficult in asset recovery actions.

In a post-Madoff world, are Ponzi schemes still a threat to investors?

Jeff Lane: Of course. It has been nearly a decade since Mr Madoff was arrested for his HK$65 billion fraud, but Ponzi schemes continue to make headlines in Hong Kong. As recently as February this year there were reports of a Ponzi-style scam involving bitcoin in which Hong Kong investors lost approximately HK$3 billion. In March 2017, the Securities and Futures Commission obtained a court order to freeze HK$2.66 million in the bank account of a Mr Valdes in connection with another suspected Ponzi scheme. In a low-interest economy the attraction of better-than-average returns on investment means that fraudsters will continue to be able to operate Ponzi schemes with impunity.

David M Mizrachi Fidanque: That is rather likely. The advent of new technologies and more sophisticated investment schemes could lead to more widespread Ponzi-style schemes, particularly focused on more vulnerable groups such as the elderly and emerging middle classes. I agree with Jeff inasmuch as the prevailing low returns on legitimate investments lures investors towards schemes offering higher returns including Ponzi schemes.

Martin Kenney: Ponzi schemes will endure so long as there is greed and gullibility. All the regulation in the world cannot stop people who prey upon others from doing so, it can make their work more difficult, however as long as there is opportunity and motive fraud will continue to be a problem. Investors can protect themselves by arming themselves with reliable information, by educating themselves, and by being aware of the warning signals or red flags. If something sounds too good to be true, then it most likely is – the same goes for investments. Regulation can go a considerable way towards protecting investors; the lack of effective regulation has been blamed for the global economic crisis. However, we now have a situation where the regulation that has since been put in place is liable to be dismantled under the Trump presidency. If President Trump succeeds in deregulating then investors will need to be their own fiscal policemen, Ponzi schemes will always be a threat, but less regulation will increase the opportunities for Ponzi schemes to operate.

Stephen Baker: Yes. Ponzi scheme is a generic term applied to any form of collective investment fraud in which funds obtained from new investors are used to pay dividends to their predecessors, and in doing so create a false impression of value. While the publicity surrounding the Madoff case has certainly led to heightened awareness and more effective due diligence, fraud of this nature can be so varied and occur in so many different contexts that it remains a very real threat to investors.

To what extent are emerging markets with less robust anti-fraud practices an issue for businesses seeking to invest?

Jeff Lane: Investment decisions necessarily involve the balancing of risk and reward. In emerging markets those risks will be higher, as in a less well developed economy an investor is more likely to be exposed to the possibilities of corruption and bribery, and of their investment being misappropriated by their business partner. The long-arm jurisdiction of the Bribery Act and the FCPA brings obvious and avoidable risks for investors with a presence in the USA and the UK. Finally, every investor will ultimately want to recoup his investment. The quality of the legal system in the investment jurisdiction will dictate whether and within what time frame this is likely to be possible.

David M Mizrachi Fidanque: By promoting a culture of transparency, enhancing judicial remedies and fighting corruption emerging markets can combat fraud. They also need to identify reliable local actors with whom investors may interact with a reduced risk of fraudulent dealings. Perhaps having a “rating system”, which would allow potential investors to vet local counterparts before committing to investing in an emerging market, would go a long way towards solving this issue. We must bear in mind, however, that the enhanced compliance and due diligence measures are good only to the extent they do not unreasonably overburden the vast majority of legitimate transactions so as to render otherwise honest businesses inefficient. It is indeed a very delicate balance but once which we must strive to attain.

Martin Kenney: That depends on whether we are talking about investing in home grown industry in an emerging market or investing in the establishment of foreign branches involving the offering of services and goods in that emerging market. Less robust anti-fraud practices need not be an issue for a business that has its own robust policy and carries out its own due diligence, the onus on any business seeking to invest in an emerging market is to ensure that it has the systems and capacity to deal with challenges that may be unique to that market, that includes dealing with fraud and where necessary educating local employees to deal with such challenges. Investing in home-grown industries presents more of a challenge as the culture of the local population will not necessarily be shared by that of the investor. A culture of responsibility and honesty can take years to ingrain, particularly in parts of the world that have been ravaged by civil war; eroded by corruption and denigrated by poverty. In such a scenario all the anti-fraud practices in the world are unlikely to make a measurable impact if the culture cannot adapt.

Stephen Baker: There is an inevitable risk for any business which invests in an emerging market in which the legal and regulatory infrastructure is ineffective in terms of the prevention of complex fraud. The challenge for investors is to mitigate this risk as far as possible by limiting the exposure of their capital to these fragilities. There are myriad ways in which this can be achieved from arbitration clauses to accountancy practices to information security. If the correct measures are put in place, the risk can be effectively managed – although never extinguished. 

Can litigation best be described as a necessary part of asset recovery, or a last resort?

Jeff Lane: Litigation is the life blood of asset recovery. Due to the speed at which money can be moved between banks, and the ever increasing number of ways fraudsters can operate thanks to advances in technology, obtaining an injunction to freeze the funds as soon as possible after the fraud has been discovered gives a fraud victim the best chance of recovering its funds. Similarly, the ability of the courts to relieve a bank of its duties of confidentiality and to compel disclosure of bank statements and account details enables the victim of fraud to identify those responsible for the fraud and to trace his monies. Asset recovery without recourse to litigation would be almost unworkable.

David M Mizrachi Fidanque: A necessary part of asset recovery. Unfortunately, asset recovery is generally premised on fraud or breach of obligations. Such situations are outside the law and litigation is perhaps one of the most effective tools to amend situations of illegality. Sometimes litigation ends up being not the last resort but the only resort that fraud victims have to recover their stolen or misplaced assets.

Martin Kenney: Generally speaking, and in the ideal scenario, litigation will always be the last resort, litigation generally only becomes necessary when all other avenues have been explored and have failed to deliver. In the asset recovery context, however, the rules of engagement are somewhat different. In very many cases of asset misappropriation it is necessary to preserve the secrecy of an investigation and to do that the assistance of a court is necessary; further, the assistance of a court will in most cases be necessary to access information in the power or possession of third parties. Naturally each case turns on its own facts, as a rule, however, litigation in the sense of access to a court’s processes and powers is a necessary and desirable component of asset recovery. Litigation inter partes – that is, with the wrongdoer – can often be avoided if the asset recovery investigation has delivered enough ammunition to force settlement.

Stephen Baker: In a successful asset recovery action, court proceedings of some nature are a virtual certainty unless the assets are returned voluntarily. The nature and complexity of such proceedings will depend entirely on the nature of the case, particularly the parties, jurisdictions and assets involved. While there are certainly contexts in which assets could be recovered without recourse to extensive civil litigation, for example the repatriation of assets from one sovereign state to another under asset-sharing agreements following criminal prosecutions or deferred prosecution agreements, litigation remains a cornerstone of asset recovery methodology. 

What main challenges do lawyers face in recovering value for their clients in 2017?

Jeff Lane: There are two main challenges. First, fraudsters are using technology to deceive, and are becoming increasingly sophisticated in the devices that they create and use. The use of fake e-mail accounts to imitate in CEO and identity theft cases has now given way to actual email accounts being attacked and controlled by fraudsters, so that the victim is completely unaware and has no means of realising that he is communicating with the fraudster until his money is gone. The quality of some of the frauds we have seen in the last year has been disturbingly good. The second challenge lies with banks. Most in Hong Kong are well versed in Mareva and disclosure order protocol, and willingly assist fraud victims, but some banks still insist on retaining lawyers to regurgitate standard legal advice on what should by now be second nature legal principles. This practice leads to increased recovery costs and delays for the victim – which in the face of their losses, and the burden of legal fees, can actually be fatal to their tracing and recovery exercise. To those banks and their solicitors, I say: “Get with the programme!” After all, Norwich Pharmacal was decided more than 40 years ago!

David M Mizrachi Fidanque: Advancing the interests of private victims and balancing them against the interests of governments. Ensuring that government recoveries are equitably distributed to both victims and public welfare as may be the case. Instilling upon our clients the value of using preventive tools such as enhanced due diligence and strict compliance requirements to prevent situations where their assets are misused or misplaced. We also need to be balanced in our approach and reasonable with our conclusions in order to avoid making any given situation more onerous to the victims than the actual damage suffered.

Martin Kenney: The increasing costs of conducting litigation, the inherent risk of an adverse judgment and clash of jurisdictions are perhaps the most significant challenges facing lawyers today. The risk of an adverse judgment has always been there however as fraud continues to reach across new borders the opportunity for jurisdictions with conflicting interests to “mix it up” also increase. In the bankruptcy content we have a fairly solid body of international treaties and laws that regulate how jurisdictions interact and cooperate with each other in the context of asset recovery, that is not the case however outside the bankruptcy or insolvency context. Increasing costs and aligned to that the uncertainty of recovery makes many clients reluctant to throw what they see as good money after bad, many prefer to cut their losses rather than take on the expense of litigation that does not offer more than a 90 per cent chance of recovery. Litigation funding goes some way towards addressing this challenge, however the industry faces its own challenges in a number of jurisdictions, challenges that are not likely to be resolved over the short term.

Stephen Baker: The main challenges lawyers face in 2017 remain the speed at which value moves between jurisdictions, advances in technology such as cryptocurrencies, slow and under-resourced prosecuting authorities, congested court systems and discrepancies between remedies across different jurisdictions. The abuse of less well-regulated financial centres to launder and conceal the proceeds of fraud remains a significant problem for the international community.

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