Who’s Who Legal brings together Andrew Bodnar of Matrix Chambers, Bernd Klose of kkforensic Rechtsanwälte, Colette Wilkins of Walkers, Edward H Davis Jr of Astigarraga Davis, Stéphane Bonifassi of Lebray & Associés and Stephen Baker of Baker & Partners to discuss levels of work, the impact of technology on this area, changes to the legal market and future developments in their jurisdictions.
Edward H Davis Jr
Lebray & Associés,
Baker & Partners,
WWL: Practitioners we spoke to around the globe have reported a busy year, with many attributing this to improved economic conditions, leading to increased investor willingness to recoup losses or low returns. How has the level of work you have seen compared to previous years and what are the key factors behind this?
Andrew Bodnar: There has been a definite uptick in the amount of work coming through, which may be partly due to improved economic conditions, and partly due to lock-ins, redemption suspensions and other emergency measures imposed by investment funds during the crisis expiring. In the UK, it may also be that the coming into force of the Bribery Act in 2011 is feeding through to increased corporate awareness of losses; the systems and controls companies must now put in place to prevent bribery will often flag fraudulent payments just as readily as corrupt ones, and whistleblowers of course feature fairly regularly. What I have perceived is that the primary driver of asset recovery work is no longer insolvency.
Bernd Klose: Indeed, the last year has been a busy one, with increased numbers of cases but also seen the increased willingness of victims to recoup losses. The increased numbers of cases in general might relate to the fact that defrauded investors take more risks in what could be called the “grey capital market” due to the lowest ever interest rates and their willingness to invest in more risky investments.
The willingness of the institutions and companies to recoup losses is certainly connected to improved economic conditions and the fact that – at least for Germany – the use of civil remedies to recover assets is starting to be seen as more effective than going down the criminal proceedings route.
Colette Wilkins: We have certainly seen an increase in contentious litigation, both as regards the issuing of new proceedings and an uptick in the activity on previously dormant or slow moving proceedings. The key factor here is healthier returns and a more buoyant market generally mean both an increased ability and willingness to take positive steps in respect of not only unsatisfactory investment performance but also perceived injustices.
With improved economic conditions comes an increased expectation from investors of significant positive returns and an increased appetite for risk, which contributes to an expansion in the volume of asset recovery work on a number of levels. Principally, there is a greater reluctance to accept poor returns and willingness to commit more readily available resources in pursuit of misappropriated funds than might be the case in less favourable market conditions where there may be an aversion to “chasing losses”. However, with an increased appetite for risk comes a corresponding expansion in the opportunities available for unscrupulous attempts to attract investment and an increase in the situations from which assets may need to be recovered. While poor market conditions often result in the exposure of existing fraudulent schemes, they are less fertile ground for the creation of such schemes in the first place; it may be that the cycle has moved beyond this phase and caution is required because the less scrupulous may well be increasing their activities.
Edward H Davis Jr: The asset recovery work that our firm is doing is booming this year. It is shaping up to be our busiest year ever in our firm’s asset recovery group. It is always hard to determine the causes for an “up cycle,” but in this case I would attribute it to two factors. First, there was a lot of pent-up demand for asset recovery services. Second, we are starting (just) to see the dividends from intense educational efforts that have occurred over the past five to 10 years regarding the availability of focused private asset recovery efforts. This is still a relatively new area of specialisation in both the legal and accounting worlds. Another reason business is up is that funders have really come into the area in a big way, breathing life into worthy cases that would otherwise have suffocated due to lack of funding.
Stéphane Bonifassi: I would not say that this year is particularly busy as far as France is concerned. It is just slightly more active than the previous one. Companies are still reluctant to advertise the fact that they have been victims of fraud. As far as trustees in bankruptcy are concerned, one should notice that it is a closed profession in France. As such, they still need to be educated on the issue of fraud and they need to realise that they are in a key position to effectively obtain redress for fraud victims. For now, they remain focused on their core activity of liquidating regular companies, which is admittedly a busy activity these days. What brings life to the asset recovery market in France is the increased activity of third-party funders. They are certainly assisting in bringing claims that would have been left aside in the past.
Stephen Baker: We have had a very busy year. We are doubtful as to whether that has necessarily been driven by improved economic conditions. We have been instructed in substantial litigation undertaken by defrauded creditors seeking to pierce the veil of Jersey entities. That seems to be connected to the influx of funds from Eastern Europe and further afield. We have also been instructed in cases involving political corruption. Those cases turn on the political will of the complainant. Victim governments are becoming increasingly aware of the activities of previous regimes. They are being encouraged by supranational bodies and law enforcement agencies to recover what is rightfully theirs. Furthermore, civil suits have been bolstered by the perception that larger institutions have been successfully, and visibly, pursued in the courts. The increasing availability of litigation funding by third-party providers has meant that cases which would not have been heard, have been properly resourced and pursued.
WWL: Have you seen any changes to the type of asset recovery cases you have seen in the past year? What impact are technological advancements having on this sector in regard to both the style of fraud and the recovery of assets?
Andrew Bodnar: These are two different questions. As to the type of cases, a few years ago the primary driver of asset recovery was insolvencies, but I have detected a return to victims of fraud pursuing their losses directly. There appear to be more false invoicing and other record-keeping-related frauds, perhaps because of the increased scrutiny of systems and controls which international businesses must now put in place in the UK. On the question of technology, the use of hacking techniques, particularly operating from remote locations (often on a different continent to that in which the fraudulent activity is taking place) is becoming increasingly prevalent. The “dark web” remains an area of concern, and I am sure that, problems for Bitcoin notwithstanding, we can expect to see an increase in virtual currencies. Increased regulation and control of the internet is also a factor; the Google “right to be forgotten” litigation could well prove to make the lives of asset recovery lawyers more difficult.
Bernd Klose: The increased use of the internet influences the type of asset recovery cases most. Investors are defrauded from the very first moment of contact with fraudulent companies, with the help of faked internet sites and such contact being limited to correspondence via e-mail. Surprisingly, a large number of victims tend to see the internet as a source of valuable and accurate information. They do not take into account that fraudsters are in a position to fake and deliver any information that supports their position as fraudsters. Moreover, the fraudsters increase the use of electronic banking and in doing so add more layers between themselves and the victim.
Colette Wilkins: The advancement and universal availability of technology inevitably leads to a greater sophistication in both the commission of frauds and also the concealment of assets, with what might previously have been comparatively simple matters to unravel now taking on new dimensions. The increased potential for the swift movement of assets has increased the need for even swifter restraining actions and also emphasised the importance of maintaining confidentiality for as long as is possible: once a fraudster is alerted to the existence of asset recovery efforts, the transfer of funds out of reach is now easier than it has ever been.
Even with the recent technological advancements, however, in our experience the classic Ponzi scheme remains the most popular type of fraud – with ever-increasing borrowing or fraudulently obtained investment being used both to maintain the fraud and obtain increasingly large sums of money.
The concealment of assets is generally being achieved by use of increasingly complex offshore structures in a variety of newly emerging jurisdictions which have yet to develop the sophisticated legal systems now available in jurisdictions like the Cayman Islands and the British Virgin Islands.
In terms of the common technological tools available to asset recovery lawyers, we have also witnessed a greater appreciation and willingness of our clients to invest in e-discovery platforms, which are becoming increasingly customary, and allow large quantities of data to be analysed more efficiently by adopting enhanced techniques to trace the flow of funds.
Edward H Davis Jr: Yes, particularly in the field of representing offshore liquidators or insolvency practitioners who are pursuing assets diverted abroad from their bankruptcy estates. This area has been increasing as there is a growing awareness among insolvency practitioners around the world that assets and their proceeds can be successfully pursued and repatriated to their estates. We have also been doing more in the matrimonial field in assisting women whose former husbands diverted assets abroad rather than pay court-ordered support or property settlement awards. Corruption work is also up slightly (but nowhere near where it should be) as there have been changes in several governments recently which led to the initiation of investigations leading toward potential asset recovery cases which hopefully will be brought soon.
The biggest technological advance that has assisted in this field is the emergence of forms of artificial intelligence that allow the culling of enormous amounts of physical and electronic data. This analysis is critical to create leads relating to asset disposition and the location of evidence to establish the elements of various claims as part of the asset recovery process. It is also critical to create the evidence to defeat the inevitable lie-ridden counter-attack from the fraudster.
Stéphane Bonifassi: Some jurisdictions that belonged to the asset hiding magic circle have improved their record and as a result have been replaced by others where it remains extremely difficult to obtain information. Fraudsters are becoming more and more aggressive in defending their cases and it remains to be seen whether the judiciary is doing enough to help fraud victims. The signals are mixed but I would say that there is a favourable trend within the French judiciary to help victims. I wouldn’t say that technological advancements has made a tremendous change to the kind of cases that are brought in court. True, there are frauds that are purely internet-based but generally they make many victims for limited amounts. In the absence of efficient aggregation mechanism for such claims, it is difficult to bring them forward.
Stephen Baker: The availability of litigation funding has meant that people who are without substantial resources are not without remedy against deep-pocketed defendants. This is changing the balance of power in the asset recovery arena because institutions that are at fault can no longer throw money at a case with the intention of exhausting the resources of the complainant. Though the frauds [have] become more complicated, and the methods of hiding the proceeds more elaborate, the profile of the typical fraudster and fraud remains fairly constant. We have also locally seen very significant activity at a governmental level in non-conviction-based forfeiture. Technology continues to assist the fraudster with speed of movement of value between jurisdictions and putting distance between himself and the victim. However, it also enables the recovery of a wealth of electronic evidence. This is particularly useful when recovering material from corporate service providers where the imaging of computers can be crucial.
WWL: Several of our sources have commented on an increased openness of both courts and governments in using private practitioners to recover assets in recent years. In this the case in your jurisdiction? Has it impacted on the legal market and if so how?
Andrew Bodnar: A few years ago fraud and corruption cases often featured something approaching a contest between public law enforcement agencies and private practitioners. That contest has undoubtedly been resolved and prosecutors are now very much more open to working with private practitioners to secure recoveries. At the same time, private practitioners more readily engage with prosecutors. The result is unquestionably a much better focus on the needs and interests of the victims of fraudulent activity.
Bernd Klose: The German market has yet to see an increased openness of both courts and governments in using private practitioners to recover assets. As Germany is a civil law country, one of the main obstacles to increased cooperation between courts and governments and private practitioners is the fact that the applicable laws do not provide such possibilities.
However, what is to be observed is the fact that the courts and the public prosecution service are much more open to a cooperation with victims in criminal proceedings to recover assets. At the site of the public prosecution services the inspection of their files for the victims is granted more often and at earlier stages of the criminal proceedings. In respect to the courts it has to be detected that the courts are nowadays much more likely to allow civil claims to be filed within the criminal proceedings than years ago. Both the public prosecution services and the courts have realised that the recovery of assets and the compensation of victims is an inherent part of their obligations.
Colette Wilkins: To date, this trend has not been reflected in the Cayman Islands legal market, although that may be more symptomatic of the essentially private nature of asset recovery work within the jurisdiction rather than indicative of any entrenched governmental or judicial view.
However, the power of the Cayman Islands Monetary Authority to appoint Controllers of regulated entities for the purposes of asset recovery and investigation has been used increasingly in recent years and this is a trend that we expect to see continue.
Edward H Davis Jr: While I agree that strides have been made leading to a greater openness among courts and governments in using private practitioners to recover assets, we still have a long way to go. Many courts still see the asset recovery aspect of a case as a “post-judgment” issue which, of course, means that the game is largely lost before it begins as fraudsters and corrupt actors have a significant advantage to secrete their stolen gains. Fraudsters exploit gaps – gaps in time, gaps in regulations, gaps in laws, gaps in vigilance, gaps in knowledge, gaps in integrity, etc. Therefore closing the time delay between the commission of the bad acts and the tracing and trapping of the stolen assets and their proceeds is one of the most critical aspects of effective asset recovery.
As for governments, many instinctively cling to old methods of recovering assets solely through the criminal system. I liken this to the old saying: “To the person who only has a hammer, everything looks like a nail.” To be sure, the criminal system is very good at obtaining criminal convictions. However, other than in so-called “victimless” crimes (eg, illegal gambling, drug smuggling, prostitution, etc), the common law criminal system it is largely ineffective in tracing and trapping stolen assets. What little effectiveness is inherent in the common law criminal system with regard to asset recovery only decreases as you cross national boundaries. This is not to say that the criminal system never works with regard to asset recovery as the civil law criminal system can be quite effective in pursuing assets but they usually grossly undervalue the amount to be recovered. However, the criminal system should not be used to the exclusion of using civil asset recovery practitioners if for no other reason than the criminal process can’t sue facilitators and aiders and abettors for damages. Many times this is the biggest recovery available. This is why I believe we should be talking about “value recovery” and not “asset recovery”.
Therefore, the answer is a guarded “yes”, as many have begun to realise the power of asset recovery when properly done by experienced practitioners. However, the process of educating victims – be they individuals, business entities, bankruptcy estates or governments – about the use of private practitioners to recover assets remains a necessary and ongoing process.
Stéphane Bonifassi: This cannot be said of the French government and courts. To the contrary, in criminal proceedings, investigating judges used to appoint forensic experts in the past. For budget reasons they now mostly rely on the police. A specific section of the police is in charge of collecting information for asset recovery cases, but their workload is huge and unless the case is a high-profile one, the results of their investigation will be limited. In addition, the appointment of receivers is not usual for the collection of government claims. But it is true that foreign governments, either directly or indirectly through the appointment of receivers, do hire private practitioners to recover assets located in France.
Stephen Baker: Yes. Although requests from foreign governments and courts using the criminal law are still routed through the Jersey authorities, the most sophisticated jurisdictions will instruct local counsel. There is, furthermore, an increased understanding that the traditional restrictions applied in the common law world on the use of material generated in criminal proceedings and being used in civil proceedings, must be and are being loosened. That understanding means that there is an increased willingness for governments to involve private practitioners. The obvious benefits of using the civil law to recover assets, which include a reduced standard of proof and more relaxed rules of evidence, are becoming more generally accepted.
WWL: What are the main changes and challenges you foresee for private practitioners in this field for the near future? How will you and your firm meet these?
Andrew Bodnar: As technology increases and the laws of many countries start to catch up, there will be greater need for practitioners to understand issues surrounding regulation of the internet and privacy. The increased harmonisation between the criminal and civil processes means that the divide between “criminal” and “civil” practitioners will have to come down, and practitioners will need expertise in both. This is likely to be more of an issue for common law jurisdictions, where the two have traditionally been very separate, than civil law countries that have had the concept of the “civil party” to criminal proceedings for many, many years. I have the luxury of already straddling this divide, as do others within Matrix. Matrix also has strong media and information and employment law teams, enabling us to put together the right team for these cases.
Bernd Klose: All cases of any significance in recent years are multi-jurisdictional cases. Not only to establish cooperation with highly qualified and ethical high-standard professionals around the world as necessary, but also more than basic knowledge of the remedies available in other jurisdictions and their handling from the very first moment of getting on a case. It therefore remains vital for any serious practitioner in asset recovery cases not only to invest into an international network of likewise qualified specialists but also to educate its own staff about remedies available in other countries and best practices.
Colette Wilkins: As always, the principal challenge for any firm acting on behalf of plaintiffs in this field is to try and remain ahead of the curve in terms of the methods used by fraudsters to misappropriate and conceal funds in order to develop effective strategies to combat them. We see cross-border cooperation between specialists as absolutely essential in achieving this, both in terms of intelligence-sharing in relation to new developments and restricting the number of jurisdictions to which the fraudster can effectively resort. Coordinated expertise can greatly reduce the options and time available for the concealment of funds, significantly aiding recovery efforts. In this regard the expertise provided by the international network of lawyers who are members of FraudNet (founded by the International Chamber of Commerce in 2004) can be invaluable, since the 69 members who specialise in asset recovery can coordinate asset recovery efforts across the globe. International cooperation in insolvency proceedings is also critical to ensuring that insolvency practitioners have the advantage over fraudsters, and we are seeing a number of significant cases relevant to common law practitioners in this developing area of law.
Edward H Davis Jr: I think the biggest challenge is also the biggest change and that is the marked increase in practitioners who are now identifying themselves as asset recovery practitioners. On one hand, this is a good development and a positive change; on the other hand, this growth brings with it what I think is a normal developmental challenge that all emerging fields face. Essentially, the field is beginning to be a victim of its early successes. Many newcomers to this field are attracted by the potentially lucrative remuneration that can be earned in the asset recovery field. However, despite potentially large platforms with which to market their emergence into the field of asset recovery, they will not have the experience in successful asset recovery. This will likely result in a short-term decrease in the success rate in asset recovery cases as the process shakes out the experts from the dabblers. This will be a challenge to the development of the practice as victims will have to wade through some negative press and may be exposed to less than effective representation leading to ineffective asset recovery cases. There may be a short-term perception that the process is not working correctly. In reality this is a normal stage in the development of any emerging practice. In time, the market will sort this out and true experts will be recognised so that the public can choose experienced professionals to guide them through a very complex and sometimes frustratingly slow process.
Stéphane Bonifassi: We need to keep on educating those who are in a position to assist victims. The judiciary is crucial, being in a position to help the victims primarily in accessing the relevant information. Judges must continually be made aware of the difficult task of victims and of the complexity of the schemes put in place by the fraudsters. If there are too many hurdles to collect information, cases will not succeed. Although the French judiciary seems to be moving in the right direction, the asset recovery community needs to insist that their help is needed. My firm is taking part in this effort. Similarly, trustees in bankruptcy in France should be made aware of their unique potential role in the assistance of fraud victims. Also, a message needs to be sent to fraud victims that it is worthwhile to initiate a recovery process if they go to the right professionals. In that respect, it is important to categorise asset recovery specialists, as the bad handling of cases by professionals who are not asset recovery specialists gives out the wrong message. In that respect, the creation of a new “forensic experts” category in Who’s Who Legal: Asset Recovery is an important step. Finally, third-party funders are a great help for victims and their importance should be emphasised.
Stephen Baker: The main challenges are that victims – be they individuals, corporates or governments – are still of the opinion that offshore is in the “too difficult” box. Often victims give up before seeking information and remedies. The reality is quite different in that many offshore financial centres are only too willing to help in order to demonstrate their commitment to combat financial crime. This, coupled with litigation funding from third parties, means that justice is accessible. Our challenge is to convince people that this is the case.