We are delighted to be the contributing editors to this year’s Getting the Deal Through – Asset Recovery. Given the international nature of fraud and asset recovery exercises, the ability to act swiftly across jurisdictions to locate and preserve assets, and pursue fraudsters, is fundamental. The hope is that this publication will help with the identification and management of cross-border legal strategies.
In this overview, we reflect upon some of the trends, highlights and developments in relation to fraud and asset tracing. However, overall, the key themes are that the jurisdictions continue to work to develop tools and techniques for combating international fraud, and that the trend for transparency shows no signs of stopping.
New rules on freezing and confiscation orders
In June 2018, the Council of the European Union agreed to new rules in the form of a regulation concerning the mutual recognition of freezing and confiscation orders in relation to criminal assets across the EU. The main features of the new rules include the following:
- a new regulation directly applicable in the EU, covering freezing and confiscation orders;
- a general principle of mutual recognition, ensuring judicial decisions in criminal matters are recognised and enforced by other member states;
- varied types of confiscation in criminal matters such as value-based confiscation and non-conviction based confiscation;
- standard certificates and procedures to allow for speedy and efficient freezing and confiscation actions;
- a deadline of 45 days for the recognition of a confiscation order, and in urgent cases a deadline of 48 hours for the recognition and a further 48 hours for the execution of freezing orders; and
- provisions to ensure that victims’ right to compensation and restitution are respected in cross-border cases.
The Fifth Anti-Money Laundering Directive
Also in June 2018, the Council of the European Union agreed to a proposal for a directive on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing. The main changes to Directive No. 2015/849 (the Fifth Anti-Money Laundering Directive) involve the following:
- broadening access to information on beneficial ownership – improving transparency in the ownership of companies and trusts;
- addressing risks linked to prepaid cards and virtual currencies;
- adding requirements in relation to cooperation between financial intelligence units; and
- improving checks on transactions involving high-risk third countries.
EU member states have 18 months to transpose the Fifth Anti-Money Laundering Directive into national law, though some member states have already done so.
Early 2018 saw a boom, and subsequent slide, in the price of cryptocurrencies, as well as the rapid growth of initial coin offerings (ICO). These very quickly led to allegations of fraudulent activity; for example, two ICOs Ifan and Pincoin – said to be cryptocurrency start-ups from Singapore and Dubai respectively – were later alleged to be multilevel-marketing Ponzi schemes.
As cryptocurrencies (and the platforms and exchanges through which they are traded) are essentially unregulated, there is no method to recover money easily from fraudulent cryptocurrency activity. This has led to the authorities taking action to expand the scope of existing regulation.
For example, in Europe there have been amendments proposed to modernise the Fifth Anti-Money Laundering Directive in light of cryptocurrencies. Essentially, these updates would bring digital currency exchange platforms and wallet providers under the purview of existing legislation.
During April 2018, the Financial Conduct Authority announced that it is working with the Bank of England and the UK Treasury on a discussion paper for cryptocurrencies. It is hoped this paper will discuss the systemic problem of fraud currently present in the cryptocurrency markets.
In July 2018, the United States announced that digital currency fraud will form one of the areas of ‘particular attention’ for a new US anti-crime task force with participation from several government bodies. The Task Force on Market Integrity and Consumer Fraud, which will have the US deputy attorney general as its chair, and associate attorney general as vice chair, seeks to ‘provide guidance for the investigation and prosecution of cases involving fraud on the government, the financial markets and consumers’.
Cryptocurrencies also raise a number of interesting legal questions for civil fraud practitioners (for example, in relation to tracing, and whether they constitute property), which will no doubt be tested by the courts in the near future.
Litigation and legal developments
Ahmad Hamad Algosaibi & Brothers Company v SAAD Investments Company
Ten years of litigation in relation to what has been described by the Cayman Islands’ Chief Justice Anthony Smellie as ‘one of the largest Ponzi schemes in history’, said to have involved nearly US$330 billion, reached a landmark point when the Grand Court of the Cayman Islands handed down a 1,348-page judgment following the trial in proceedings arising out of the Algosaibi fraud. In what was the longest trial in the Cayman Islands’ history (lasting over a year), and said to be one of the largest fraud trials ever litigated, the court found that over 100 banks had been defrauded over two decades.
Freezing injunctions against unknown parties
A recent, novel development in the English courts was the creation of a freezing injunction against unknown persons who had allegedly committed a multimillion-pound fraud by infiltrating the email accounts of the senior management of an organisation, and had then sent payment instructions resulting in money being paid by the company to accounts controlled by the fraudsters.
Although the claimant discovered it had been the victim of fraud, it did not know the identity of the fraudsters. However, it did know the identity of at least some of the bank accounts they had used.
The court granted a freezing order and related disclosure order on the basis of a claim that identified the fraudsters through a description of a class of individuals (ie, the persons involved in the fraud and the transfers) as well as the beneficial owners of accounts to which the payments had been made. It was reported that this was the first such freezing injunction made against ‘persons unknown’.
Within nine months of the freezing injunction being made, a trial against the fraudsters (a number of whom had now been identified) took place and, in September 2018, judgment was handed down and damages of approximately £7 million were awarded.
UK administrative developments
In July 2018, the Ministry of Justice announced plans to build a cybercrime, fraud and economic crime court in London, which is due to be completed in 2025. David Gauke, the Lord Chancellor, stated that the court would send ‘a further message to the world that Britain both prizes business and stands ready to deal with the changing nature of 21st-century crime’. This demonstrates the UK’s seriousness to addressing the challenges of fraud, especially in light of the General Data Protection Regulation and the growth in cyberthreats and crime.
The UK government appointed Lisa Osofsky, a former FBI lawyer, as the new director of the Serious Fraud Office (SFO) with effect from September 2018. Ms Osofsky is said to have prosecuted more than 100 cases for the US government during a 30-year career, as well as having a career in private practice, including at Goldman Sachs and Control Risks. It will be interesting to see whether this appointment results in a more ‘US-style’ approach by the SFO.
Public registers in British overseas territories
The continued focus on transparency saw the UK Parliament include a provision in the Sanctions and Anti-Money Laundering Act 2018 to compel Britain’s 14 overseas territories (including the British Virgin Islands (BVI), Bermuda and the Cayman Islands) to introduce public ownership registers by the end of 2020. If they have not introduced registers by then, the UK government can impose them. The BVI government has announced that it will be bringing a legal challenge to the Act.
Although crown dependencies (the Isle of Man and the Channel Islands) were not covered owing to their different constitutional position, they may well be put under pressure to introduce similar measures.
Panama Papers/Paradise Papers
The fallout from the Panama Papers data leak continues. The Panama Papers are the 11.5 million documents leaked to a German newspaper in 2016 from the Panama-based law firm Mossack Fonseca. The leak detailed the offshore private financial positions of wealthy individuals, multinational companies and government officials. It led to Nawaz Sharif, the former Pakistani Prime Minister, resigning and receiving a 10-year prison sentence; professional football player Lionel Messi being fined and given a suspended sentence; and investigations around the globe into the various individuals named in these papers.
In March 2018, Mossack Fonseca announced it was closing down and, in May 2018, Panamanian prosecutors charged 10 further Mossack Fonseca employees with money laundering.
In June 2018, a new batch of Panama Papers was leaked to the press showing that Mossack Fonseca was unable to identify thousands of owners of companies who were benefiting from its services, meaning that Mossack Fonseca had failed to comply with ‘know your customer’ rules and could be found civilly and criminally liable.
Additionally, legal proceedings for breach of confidence brought by the law firm Appleby against the Guardian and the BBC arising out of the Paradise Papers disclosure were settled in 2018.
Unexplained wealth orders
January 2018 saw the introduction in the UK of new and expansive investigative powers requiring both individuals and corporate bodies to provide information as to how they acquired property. Known as unexplained wealth orders (UWO), these new obligations to disclose information can apply to property anywhere in the world and can be served on persons outside the UK where certain criteria are satisfied. The thresholds are low and, broadly, UWOs can be sought in relation to assets with a value greater than £50,000, where there are reasonable grounds for suspecting that the known source of the person’s lawfully obtained income would have been insufficient for the purposes of obtaining the property, and that the person is one of the following:
- a non-EEA politically exposed person (PEP);
- a family member or connected person of a PEP;
- involved in a serious crime (anywhere in the world) (based on reasonable grounds of suspicion); or
- connected with a suspected criminal.
Although these powers are potentially very wide, to date only a handful of UWOs have been issued. In October 2018, the High Court issued a judgment (National Crime Agency v Zamira Hajiyeva) in which it dismissed a challenge to the first UWO to have been made. However, it remains to be seen how much use will ultimately be made of this tool, but it is certainly a potentially powerful one in the fight against international fraud.
As always, there have been a number of frauds that have made the headlines in the past year, including:
- Nirav Modi: early in 2018, a number of Indian banks, including one of the largest national banks, Punjab National Bank, uncovered a fraud of approximately US$2 billion alleged to have been carried out by the famous jeweller and billionaire Nirav Modi, using fraudulently obtained letters of undertaking. Although Punjab National Bank suffered the brunt of the losses, other banks were also affected including, but not limited to, Allahad Bank, Axis Bank and Union Bank of India. It is estimated that since 2012, bank fraud has cost Indian banks approximately US$10 billion.
- German Ponzi Scheme: in July 2018, the founder of Infinus, a financial services firm, was convicted of fraud by a court in Dresden, which also sentenced four other managers and one employee of the firm for fraud and aiding and abetting fraud. They were accused of defrauding 22,000 investors of €320 million through a Ponzi scheme. The insolvency administrator is seeking to recover approximately €15 million in interest paid to investors.
- Theranos Fraud: in March 2018, Elizabeth Holmes, the chief executive of Silicon Valley biotech start-up Theranos, settled a claim for fraud after allegedly deceiving investors by claiming that the company had developed groundbreaking blood-testing technology. Around US$700 million was raised from investors. As part of the settlement, Holmes returned millions of shares to the company and paid a financial penalty. She is also prohibited from being an officer or director of a public company.