Ten years from the financial crisis in the Latin America Southern Cone and the massive fraud that it uncovered, the region still remains a good fishing ground for fraudsters. Alfredo Taullard and Bernardo Porras of Hughes & Hughes discuss the reasons and measures being taken to resolve the problem.
This year marks the 10th anniversary of a very sad moment in Latin American history. A decade ago, in a phenomenon that has since been replicated in regions across the world, a number of banking institutions collapsed, generating a deep economic and, in the end, social crisis across Argentina, Paraguay and Uruguay, affecting the whole of Latin America.
The collapse revealed a hitherto unseen scale of financial frauds, leading to an equally unprecedented scale of asset recovery efforts by practitioners representing the victims, central bank authorities and other government entities.
The outcomes of these actions, most of which are ongoing, have been disappointing due to many factors that have combined to create an environment for expert fraudsters to escape scrutiny. In the course of this article we examine two of the main contributing factors to this state of affairs: national restrictions to asset tracing and a lack of international coordination.
RESTRICTIONS TO ASSET TRACING
On the whole, Latin American countries have been far from friendly places to perform effective asset tracing work.
It would seem obvious that any asset recovery strategy relies upon the identification of, precisely, assets. However, many regional jurisdictions, well into the era of “big data”, do not facilitate ready access to a unified property registry.
For example, Uruguay (like Paraguay and Brazil) still requires that anyone intending to find out which properties a person holds within the country, or within a certain section of it, must first somehow find the piece(s) of land this person owns and obtain the number the registry assigned to it. Only then may they ask for information about ownership.
The result is a not-so-public registry, operating only as a way of confirming information that the asset recovery practitioner has previously garnered from other sources, and therefore it is not a source of raw data. In other words, only those who don’t need to know about ownership are able to find out. To make matters worse, the registry – and this is the case in many other countries of the region, including Brazil – is locally based rather than centralised.
Needless to say, a registry like this can include among its achievements successful protection against countless fraudsters, and it demands tenacity and skill from the practitioner in order to keep track of the assets.
In the specific case of Uruguay there are further noteworthy limitations, such as bank secrecy (Section 25, Act 15.322) which will only subside with an order of a criminal court, a family court in alimony cases or tax authority under very specific circumstances.
In the judicial arena, the situation has also been problematic, since our systems (Civil Code), unlike those of most countries, have not embraced the idea of an ample preparatory phase for the subsequent recovery procedure. Simply, there is no discovery phase.
As we know, in a scenario of fraud, a race is played between the fraudster, who will naturally move at speed to erase any footprint, such as digital evidence and witnesses (who can be objects of pressure that may influence their testimony), and the practitioner, who will need to move even quicker to secure the evidence.
In this context, the opportunity to carry out preparatory measures in a flexible and ample manner is often determinative of the outcome of entire proceedings. However, as expressed above, most regional legal frameworks have a limitative approach, which has been often aggravated by strict interpretation by the courts. Judges will often dismiss pre-action applications off the bat, preferring them to be made during the process itself once the case is in the court’s hands.
A similarly inhibiting factor to recovery has been the lack of adequate coordination between regional jurisdictions. This is not for want of conventions and instruments which have been entered into in good number (Montevideo Treaties on Procedural Matters of 1889 and 1940, Protocol on Preventive Measures of Mercosur, Protocol on Judicial Cooperation and Assistance of Mercosur, Inter-American Convention on Execution of Preventive Measures, New York Convention, 1958, and numerous bilateral treaties). The problem is that application of these instruments varies wildly from country to country with differing levels of rigour and compromise, depending on the jurisdiction.
The lack of any proper coordination reveals itself in different stages of litigious recovery work. At the outset, it affects any notifications or measures that need to be served or taken in a jurisdiction other than that in which the procedure has been initiated.
For example, in practice, a notification issued in Uruguay to a person in Argentina may involve more than a month, and in Brazil at least three months. Needless to say, the same measure would take months when made in another country. This obviously places practitioners in a very disadvantageous situation, as they are up against a fraudster scrambling to move assets and avoid justice.
At later stages, specifically regarding the enforcement of foreign judgments, the situation has not been any better. From a theoretical point of view there is no doubt that foreign judgments are recognised and enforceable in Uruguay, as in other countries of the region. A wide variety of treaties and local provisions address this issue and emphasise the possibility of obtaining said recognition.
However, recognition and enforceability remain points of serious concern. In the case of Uruguay, being a country that uses the civil code system, formalities are given an excessive value. As a result, when facing judgments and documents which do not look familiar, such as those coming from common law countries, the tendency of local courts would be to negatively evaluate them rather than try to comprehend their bases in law. As a result, something that appears at first glance to be a given is in reality almost impossible to achieve. Experience has proven that this is an unwritten rule with a force equivalent to written rules.
Furthermore, in almost all regional jurisdictions, another critical factor must be considered. This is that the recognition would need to go through a preliminary procedure before the Supreme Court called Exequatur, which, although it would appear to be a simple formality, in practice will consume an enormous amount of time – years even (particularly in Brazil).
The list of difficulties in this regard is extensive. To mention a couple of further examples, in Brazil and Paraguay, non-nationals wishing to initiate an action (including an exequatur of a foreign judgment) must first constitute a guarantee called Fianza de Arraigo. In Chile, a foreign judgment would not be enforced unless the defendant was served in Chile during the course of the foreign proceedings, even if a domicile was constituted in other countries and the claims were properly served.
Ten years ago, all these factors converged in creating a perfect storm for asset recovery; as one local saying goes, it was good fishing in troubled waters – for the fraudsters.
The only substantial recoveries at the time came via experienced asset recovery practitioners with the necessary know-how. This involved cunning and imaginative research techniques to extract all possible information from the available documentation that could enable them to move one step ahead of the fraudster.
It also involved the ability to exhaust all available tools before initiating civil procedures, including, when contextual circumstances of the case permitted, seeking measures before criminal courts, which are much more extensive than the ones that their civil counterparts can impose. Moreover, in criminal courts, judges are generally much more decisive and familiar with the specificities of fraud and have the power to overcome the limitations posed by property registries and bank secrecy in order to access information.
After obtaining measures within a criminal procedure, with the information at hand and the fraudster now aware that the party is moving strongly, it is then time to sit together and assess the possibility of reaching a non-judicial solution or initiating a civil claim.
Negotiating these obstacles of coordination between jurisdictions absolutely necessitates a team and a network with solid experience in multi-jurisdictional cases. The practitioner would need to know that, apart from the standard channels to make notifications abroad, during which time he can be assured that the fraudster will evaporate his assets, it is crucial to move swiftly by making, for example, parallel private notifications to the other party or to a third party so to be certain that any subsequent disposal of assets would thus constitute another fraud which will also involve the final beneficiary.
In some cases, this was enough to overcome the problems of coordination affecting ongoing procedures and the recognition and enforcement of judgments. In others, it was vital that parties seeking redress initiate proceedings in the country where they would subsequently try to seize assets, even in cases where judgment had already been entered in their favour overseas.
Where the intention was to enforce a foreign judgment in the region later, it was essential to start reviewing the rules of recognition and enforcement at the first opportunity and to try to incorporate them into the proceedings in order to avoid frustration at the enforcement stage.
Ten years on from the events that caused one of the biggest economic crises in the region, the obstacles for asset recovery remain basically unchanged. Almost certainly, the reason for the lack of response to what had long been identified as a problem can be found in the unparallelled economic boom that the region has since seen. As a result, the possibility of a resurgence of fraud of the scale described has reduced significantly (although many Ponzi and similar schemes are still strong due to the favourable scenario). Therefore the attention of operators has been diverted from improving recognised defects of their systems to other activities.
Notwithstanding the above, it is relevant to note that, as a result of the pressure of other countries in the region, in July 2012 Uruguay changed its legal system of bearer shares and has developed a public Registry, held by the Central Bank, in which holders should be registered (Act 18.930). This information will in principle be available under very restrictive cases but it remains a significant development.
Nevertheless the possibility of a return to a massive fraud scenario with lacklustre recoveries (such as that seen after the 2002 crisis) cannot be disregarded. Any such recurrence would likely be on an even bigger scale, as globalisation has taken several steps forward and economies are more interconnected than before, with internet usage and e-commerce extended to almost all sectors of the population and economies of the region.
This shows that the approaches referenced here, used for years by asset recovery experts, are valid as never before. Good practitioners will deepen their knowledge of other jurisdictions and will seek to establish fluid contact and cooperation with networks in foreign states.
This is the only way to ensure an adequate response to fraud – one that can handle the ever-increasing pattern of asset diversion – and to ensure that scenarios such as the one we are commemorating this year will remain lessons from the past.