As fraudsters become increasingly creative in dissipating and hiding the proceeds of their illegitimate activities, it is critical that fraud practitioners have a full arsenal of weapons available to them to recover assets for the benefit of victims of fraud. In a recent landmark decision that also has ramifications for any third parties holding assets, the Privy Council (which acts as the highest appellate court for a number of Commonwealth countries) has opened the door for the use of another tool in the perennial fight against fraudsters, namely backward or backwards tracing.
In that case, two BVI companies appealed a decision from Jersey that they were liable to return over US$10 million in bribes paid to the former mayor of the Municipality of Sao Paulo. Proceeds of the bribery were alleged to have flowed to accounts in Jersey via a New York account, and the claimants sought to recover the funds held in the Jersey accounts. The appellants argued that they were not liable for the full US$10 million, because certain proceeds of the bribery were only paid into the New York account after the last payment was made from that account into the Jersey account. To counter that argument, the claimants sought to rely upon a concept which has been the subject of much debate: backward or backwards tracing.
Tracing allows a party to demonstrate what has happened to its property, identify the proceeds of that property and who has handled or received them, and then obtain a proprietary claim against either the original property, an asset substituted for the original property or its proceeds. Meanwhile, backwards tracing involves turning a property interest into (or substituting it for) something which the holder already has.
Rather than necessarily tracing one asset into another, the Privy Council recognised that the substance, rather than the form, of transactions should be examined to establish whether there was a sufficiently close causal and transactional link between the various steps taken. If those steps were part of a coordinated scheme, then the strict order in which the associated events occurred should not matter. As such, the Privy Council rejected the argument that there could never be backwards tracing or that the court could never trace the value of an asset whose proceeds are paid into an overdrawn account. Accordingly, the decision emphasises the need for those holding assets to understand the ultimate source of those assets before dealing with them, in order to seek to mitigate the risk of inadvertently dealing with third parties’ assets.
Insofar as the global battle against fraud is concerned, this is a welcome development with implications across the Commonwealth and it is of persuasive authority in England and Wales. As the UK member of Fraudnet, the renowned worldwide specialist ICC task force for asset recovery (which includes amongst its members local experts in a number of Commonwealth jurisdictions), PCB Litigation is extremely well placed to assist clients with the successful implementation of cross-border strategies for the recovery of assets.