Category: Asset recovery

Asset recovery

Asset Recovery tip-sheets

Following the successful launch of our asset recovery blog, we will be publishing a series of tip-sheets on the various types of civil claim that can be made to recover corrupt assets, or compensation for corruption, as well as on key procedural issues that matter in these cases. The tip-sheets are designed to provide an overview of the principal issues. Our self-imposed one page restriction means that we may have to leave some of the detail on the cutting room floor. Our longer briefings will discuss the issues in more detail, but please contact James Maton or Jamie Humphreys if you have any questions about any particular issue.

We will be publishing a new post every Wednesday. Please follow this blog, via the instructions at the top right of this page, if you would like them sent straight to your inbox.

Our first tip-sheet, on the tort of bribery, will follow shortly.

Asset recovery

Using insolvency powers to make claims for fraud: important Supreme Court decision

Companies are habitually used as part of a corruption scheme. Such companies often have only a single director, or a small number of directors, and are beneficially owned by the wrong-doers.

Insolvency powers can be effective tools to obtain compensation for victims of fraud or corruption, in the right circumstances.

A state could, for example, apply to Court for a liquidator to be appointed over a company used for corruption.

Amongst other things, a liquidator is entitled to bring claims against the company’s former directors for their wrongdoing in involving the company in a corruption scheme. Claims can also be made against third parties dishonestly assisting with or participating in that wrongdoing. The intention is to repatriate recoveries to the victim state (subject, of course, to the rights of any other creditors).

A liquidator’s claim against directors could be based on breaches of the obligations (“fiduciary duties”) they owe to act in the best interests of the company. Involving the company in criminal conduct, or other wrongdoing, is plainly a breach of those duties. There are various others claims that might be available, including the powers of an insolvency court to require those knowingly participating in fraud to contribute to the debts of the company.

The effectiveness and availability of the insolvency powers has been confirmed and emphasised by the much anticipated decision of the UK Supreme Court in Jetivia SA & Anor v Bilta (UK) Ltd (In Liquidation) & Others.

The Court decided:

  • Directors could not defeat a claim by liquidators on the basis that the wrongdoing of the directors should be attributed to the company, even where all directors and shareholders had knowingly participated in the wrong-doing. It therefore rejected the directors’ argument that the company was itself a “wrongdoer” and unable to sue its former directors because of the English law principle that a claimant cannot rely on its own illegal actions to make a claim.
  •  The English Courts have power to require fraudulent foreign defendants to contribute to the debts of an insolvent company.

However, the Court also emphasised that victims remain entitled to make a claim against a company that has been used to receive or launder the proceeds of corruption or fraud.   In those circumstances, the acts of the directors are attributable to the company they have caused to be involved in wrongdoing.

Click on the following for: our longer explanation of the case; the full judgment; and a summary of the case published by the Supreme Court.

Asset recovery

Privy Council Clarifies When Innocent Bank is Liable to Victims of Theft

To what extent must a bank make inquiries as to the commercial purpose of a transaction, particularly a transaction involving an offshore structure? And when is a bank liable to compensate a victim of theft for receiving funds deriving from stolen assets and using them for its own benefit?

These were the questions addressed in Credit Agricole v Papadimitriou by the UK’s Privy Council (the court of final appeal for the UK’s overseas territories and Crown dependencies, and for Commonwealth countries that have retained it as the ultimate appeal Court; its decisions are authoritative in English law as it comprises judges from the UK Supreme Court).

It is an important and potentially far-reaching decision.

An honest bank, which had unknowingly received stolen funds and used them to repay itself a loan made to the fraudster, was required to compensate the victim of the theft. It must do so because it failed to investigate the commercial purpose of the transaction under which it received the funds in circumstances where the unnecessarily complex structure and cost of the transaction were indicative of money laundering.

The impact of the judgment may reverberate around the risk departments of financial institutions (or, indeed, other regulated entities). It is relevant where stolen funds, or funds deriving from stolen assets, have been used, for example, (a) to discharge a loan or overdraft, (b) to pay substantial fees for a transaction or (c) where the bank has enforced security taken over a stolen asset.

The case concerned the proceeds of sale of artworks stolen from a private collector. It could equally apply to assets or funds stolen by a public official from a bank, or to bribes, which the bank has used for its benefit, for example to pay fees or to pay-off a loan or overdraft. A bank facing a claim from an aggrieved state could be found liable if it failed to seek an explanation when it had serious cause to question the proprietary of a transaction.

The rationale of the case is not, however, applicable where the Bank has simply received funds into a customer’s account and transferred them away on the customer’s instructions. In those circumstances, a claim would only be available against the Bank if it has been dishonest.

Finally, it is noteworthy that the Privy Council reached its decision applying the standards of money-laundering legislation in place in 2000, not the much higher requirements that apply under the present money-laundering regime.   In our view, this suggests that the courts will apply a much higher standard to more recent conduct.

Read the full article

Anti-corruptionAsset recovery

International enforcement of English asset recovery judgments: an overview

Civil proceedings brought by the state are one mechanism to recover the proceeds of crime, or to claim compensation for corrupt acts: as discussed in our previous post Recovering the proceeds of corruption: an overview.

Typically, substantial corruption cases are international in scope and the proceeds of a corrupt transaction are often laundered through and to countries other than the victim state. This international context means that (1) there are a number of countries in which civil claims can be made; and (2) corrupt assets may be located in multiple countries. It is normally inefficient and costly to bring proceedings in each of those jurisdictions. Instead it is often preferable to make a single claim leading to a judgment which can successfully be enforced in each country where assets are located.

The English courts are an attractive jurisdiction for civil asset recovery cases, as they offer judgments which are enforceable and respected in many foreign countries. Cooley’s briefing “International enforcement of English asset recovery judgments” outlines and discusses the various routes to enforcement of an English judgment abroad. It is available here.

Asset recoveryBribery

Who owns a bribe: the bribed public official or the defrauded state?

A public official receives a bribe to award a contract.  Does the bribe “belong” to the official or to the state that he or she represents?

The answer to the question can matter a great deal to the success of a claim. But the issue has been controversial and the answer was for a long time unclear in English law, particularly in recent years.

The English position has been conclusively resolved by the the United Kingdom’s Supreme Court.  It decided that the bribe belongs to the state. The decision ensures that English law is identical to other major common law jurisdictions.

This is important for a number of reasons:

  • First, if the official becomes insolvent, all of the funds can be claimed by the state in preference to the claims of other (innocent) creditors.
  • Secondly, if the funds are invested in assets that increase in value, such as property in a rising market, the state will be entitled to recover the entirety of those assets.  This means the state takes the benefit of the increase in value. In the absence of ownership, this would be more difficult, if available at all, because the increase in value is not itself usually a result of any wrongdoing.
  • Thirdly, claims based on ownership offer more effective mechanisms to trace and recover funds.
  • Fourthly, a claim by the state may be subject to less onerous requirements that claims must be brought within a certain period.
  • Fifthly, the state may be able to obtain better rates of interest on sums awarded to it. That can make a difference when bribes are substantial and uncovered only after a significant period of time.

Our fuller briefing on the English legal position, linking to the judgment, appears here.

Asset recovery

What do I need to know about POCA?

If you’re a company officer or director and need a quick reminder on your responsibilities under the UK’s Proceeds of Crime Act and the anti-money laundering regime, take a look at our one page tipsheet. We cover the following areas:

  • an overview of the Act
  • the definition of “proceeds of crime”
  • confisction and forfeiture of the proceeds of crime
  • money laundering and related offences
  • reporting requirements
  • the regulatory regime
Asset recoveryBribery

Recovering the proceeds of corruption: an overview

Victim states seeking to recover the proceeds of corruption, or compensation for corrupt acts, may have a choice of mechanisms to do so:  criminal, civil and non-conviction forfeiture.   Each mechanism has advantages and disadvantages, and the “right” route for a particular case depends on the circumstances.   Flexibility is key, and any substantial programme is likely to deploy all of the available mechanisms.  Indeed, many successful individual cases have used two or more mechanisms to maximise recoveries.

Cooley’s briefing, “Recovering the proceeds of corruption: how states can recover stolen assets” outlines and discusses the recovery options, and the factors that a state should consider when choosing between them.  It is available here.