Given the multiplicity of channels available to money launderers and the increasingly sophisticated methods they use to cover their tracks when routing dirty money, claimants in asset-tracing cases face many barriers to recovering funds.
Indeed, electronic banking means that funds transfers across borders and through multiple accounts allow fraudsters to quickly and repeatedly splinter assets into sub-accounts, almost instantaneously. They have many ways to hide money, involving webs of credits and debits between banks and intermediaries.
The use of offshore vehicles is commonplace and many asset recovery exercises will unsurprisingly touch interests held offshore at some stage.
There is a common misconception that when investigators tracing assets encounter electronic transfers to an offshore company, they have reached a brick wall. However, this is not true. The flip side to electronic banking is that it leaves permanent evidential footprints, which are invaluable to the modern forensic investigator. But the digital audit trail left by electronic financial transactions is not the only weapon in the arsenal of the forensic investigator.
The UK Privy Council has overhauled tracing law
When companies are, or might be, insolvent it is usually the objective of the claimant to assert a proprietary remedy over a defendant’s assets. The evidential hurdles to such remedies are high, because granting an effective ownership interest upsets the usual pari passu rule to treat all creditors equally.
‘Tracing’ is the process through which, in the right circumstances, a proprietary remedy can be proved. With the help of forensic accountants, a painstaking link is drawn between the claimant’s property and the eventual assets. It has long been thought that tracing through heavily mixed and overdrawn accounts was impossible. Recently however, the Privy Council in Durant v Brazil allowed a tracing claim through an overdrawn account, deciding that a camouflage of interconnected transactions should not be allowed to obscure the court’s view of their true overall purpose and effect. Henceforth, if the court is satisfied that transactions are part of a co-ordinated and interconnected scheme, it may not matter that a debit out of an account appears in the bank account a day or so before its reciprocal credit in.
This decision may lead to increased litigation against trustees and fiduciaries. It certainly expands the routes to asset recovery and cuts down the ability to defeat tracing claims by passing payments through overdrawn accounts or by purchasing assets with loans subsequently repaid by trust money.
Technology makes complex and persuasive tracing possible
Applying tracing rules to any set of accounts with more than a handful of transactions is almost impossible to do manually and, even if it can be done, is tricky to persuasively explain. Fortunately, modern data analytic tools applied to electronic bank statements now allow programmatic tracing and reverse tracing iteratively through multiple accounts. The parameters of the program can be adjusted to apply the appropriate tracing rules (such as first-in-first-out or last-in-first-out) and the result is a diagrammatic representation that shows exactly where funds in an account originated.
Private prosecutions have come of age
Private criminal litigation is here to stay and, in the right jurisdictions and circumstances, can be a useful alternative (or supplement) to civil litigation. Although having a higher burden of proof, criminal prosecution is generally cheaper and quicker than civil litigation. While prosecutions are certainly a useful deterrent (providing a custodial sentence and a criminal record for the loser), they can also be a recovery mechanism.
Where a defendant has been convicted of a criminal offence and has benefited financially, the court may make a confiscation order. R (Virgin Media) v Zinga approved the use of the draconian powers in the Proceeds of Crime Act 2002 in private prosecutions to deprive criminals of their illegal gains and restore the position of those who have been unlawfully deprived of their assets.
Bitcoin and the future
Criminals are using Bitcoin and other virtual currencies in the belief that it allows them to convert and conceal assets with impunity. But while these transactions do have an added complexity and require specific expertise to trace, the paradox of a cryptocurrency is that its associated data creates a forensic trail. All Bitcoin transactions are public, with their history and ownership being faithfully recorded in the blockchain – a public and continually-reconciled distributed database.
What remains hidden are the true identities of the Bitcoin owners: instead of their names, users have a code that serves as their digital signature in the blockchain. Investigators involved in asset tracing need to be able to tie these codes to the IP addresses of the computers used by the users. This is not impossible (even if masking technologies such as Tor are used) and in the new world of cryptocurrency, investigators can follow the money as civil fraud law adapts to technology.
The author is managing director, global compliance and investigations, Navigant Consulting