British Virgin Islands: Unravelling The Fraudster´s Web: Overarching Goals And Objectives

The discovery of major loss through fraud or deceit can come as a shock. One forensic accountant has said:

Success with concealed asset recovery requires a clear view of the over-arching goal, a well-organized set of objectives calculated to reach such goal, and a continual reference to same. The goal must be worked out in advance, and the means to achieve it carefully reviewed and explained where necessary. Victims and creditors will need to understand the implications of the chosen 'means' and 'objectives' in order that they may make informed decisions about the risks and consequences. A detailed retainer letter should be prepared at the beginning of each assignment, setting-out the principal facts known about the matter to be pursued, the principal goal and objectives, the methods to be used in the performance of the work, a budget, and a description of the rolling phases of work to be completed.

Victims of fraud do not always choose to take action, having considered the options. According to a 2001 PricewaterhouseCoopers Fraud Survey, only one in five victims recovered more than 50% of lost assets. Ernst & Young's 2000 Fraud Survey discovered that victims of a substantial fraud had recovered only 29% of funds within a year.² The prospects of recovery are largely dependent upon proper planning, prioritisation and perseverance, the three 'P's. If creditors are aware of the many investigative options and legal remedies that can assist them, the potential for recovery can be much higher.

Time and secrecy are critical factors. In almost any investigation where losses are sustained, quick consideration should be given to recovery. While the long-term goal will almost invariably be recovery, interim goals are important. Speed and surprise are crucial objectives that must be kept in mind at the planning stages. The element of surprise and prompt action in asset recovery should not be underestimated. The plethora of asset protection mechanisms and the ease with which funds can be moved can confound and add frustration to even the most diligent recovery effort.

Any investigation should remain confidential as long as possible. Only those who need to know should be informed. Select a benign and unrelated pseudonym or code name to identify the matter discreetly. All team members should be instructed to use the pseudonym when referencing the name of the matter to be investigated, in the subject heading to correspondence and emails. If the target becomes aware an investigation is being conducted, assets may be moved out of the jurisdiction to impede the creditor's recovery efforts for months or years. Thus, your immediate objectives must be to proceed with speed, silence and by maintaining the element of surprise, the three 'S's.

Locating Concealed Wealth.

Initially, a key task is to profile the suspected fraudster. A significant amount of valuable information may be generated from the investigation of the fraud itself. Among the questions to consider:

• Where does the fraudster reside? Where is he or she domiciled? Where is he or she now?
  
  

• If missing, does the fraudster have personal or business connections in other domestic or foreign locations? Family, friends and foes (the three 'F's) can be an invaluable source of information.
  
  

• How well-known is the fraudster? How clever?
  
  

• Is there evidence to suggest where the stolen funds might be?
  
  

• What are the fraudster's habits?
  
  

• Are there individuals who know the fraudster who could provide information on a confidential basis?
  
  

• If judgment is obtained in one jurisdiction, can it be enforced readily where the assets are located?
  
  

• Will a criminal proceeding influence the outcome?
  
  

At the same time, the nature of the alleged fraud must be determined. Legal proceedings to recover assets will require compelling evidence of the underlying fraud and losses suffered by the victim. The causes of action that are selected and used to obtain a judgment can have either an enormous positive, or seriously limiting, effect on post-judgment enforcement. Although fraud is more difficult and costly to prove than suing on a promissory note or personal guarantee, a judgment sounded in fraud frequently makes the difference between collecting a judgment or not – as courts are better equipped and more willing to lift multiple corporate veils and grant a medley of extraordinary enforcement remedies at equity, for instance, if a primary fraud has been established.

Locating concealed assets requires knowledge and understanding of the techniques fraudsters use to conceal. Some of the more straightforward ones include:

• laundering money through local and international banks;
  
  

• transfers to corporations, family members or other nominees under their control or influence;
  
  

• transfers to discretionary trusts where the beneficiaries include the fraudster's children or other family members and the trustee is influenced by the fraudster;
  
  

• payments into insurance policies;
  
  

• mortgage paydowns on assets held by other family members;
  
  

• purchase of cashiers or travellers' cheques to redeposit in other locales;
  
  

• safety deposit boxes; and
  
  

• purchase of valuable art and the hiding thereof.
  
  

In more sophisticated cases, assets will most likely be concealed either in offshore jurisdictions, or by means of the establishment of offshore and onshore entities to hold title to wealth onshore. These often include very small but rapidly developing countries or principalities. Many boast legal mechanisms or facilities that are to the fraudster's advantage. Devices such as moving trusts (which can be immediately moved to other jurisdictions in response to investigative inquiries or other 'emergencies'), can be an impediment to recovery.

Discovering where funds or assets may have been hidden requires investigative know-how. Put yourself in the shoes of the fraudster: based on what is known, where would you hide the assets? The following may be indicators of assets in offshore locations:

• transfers or receipts of funds to/from offshore accounts;
  
  

• consultations with offshore counsel or tax advisers;
  
  

• conversion of funds into non-traceable forms that are easily exchanged;
  
  

• unusual patterns of travel or telephone contact by the fraudster to, or with persons in, known tax havens; and
  
  

• purchase of unusual securities or large volumes of travellers' cheques.
  
  

Defining the Manner of Holding of Concealed Wealth.

Once concealed wealth has been located, it is helpful, and sometimes necessary, to link the 'fruits of the fraud' to the fraudster. This will involve trawling through records of many description. It may also require sifting through layers of devices and 'persons,' both legal and natural. While in the initial stages, useful information can be found online, the procurement of the better, more 'protected' or difficult to locate information will require experience and knowledge of where to look and how to interpret the data. Available information (depending on the jurisdiction) includes judgments, liens and bankruptcy filings; property records; business registrations (cross-referenced in various ways); motor vehicle and driver licence registrations; regulatory proceedings and filings; lists of all former addresses; property tax rolls; information relating to divorce proceedings; and details of boat or plane ownership.

However, asset searching of this kind usually reveals only the tip of the iceberg. More sophisticated methods must be used to give the victim confidence that all possible assets held by or under the control of the fraudster have been identified, and linked to the fraudster.

As well as searching public records and databases, methods can be employed to develop intelligence for focusing the recovery effort. Interviews with friendly and unfriendly parties can be very useful. A former spouse, for example, may provide valuable information about the suspect's personal and business dealings.

The use of a pretext or ruse can unearth invaluable information from the fraudster himself. Admissions as to ownership of assets can be obtained if clever pretexts are used. A fraudster generally likes to boast about his wealth if he feels he can trust the listener. The objective is to obtain valuable clues as to the use and location of the misappropriated funds.

In today's world, the reality is that an experienced fraudster has many methods to conceal misappropriated assets and keep one step ahead of his or her victims. In the absence of the type of investigation advocated by the writers, even a relatively straightforward asset concealment strategy can prevent or, at the very least, significantly delay, recovery efforts.

Attribution of Control Over, or Enjoyment of, Assets to an Obligor.

Linking control over, or enjoyment of, concealed assets to an obligor can often be the most difficult part of an asset recovery assignment. Sophisticated debtors and fraudsmen are all too aware of the many hurdles which must be surmounted before a concrete case can be made out to deprive them of the fruits of their fraud. Evidence will need to be convincing, and the trail of proofs will need to be substantially unbroken, if a court is to have comfort enough to reach the conclusions that the victim would have it come to.

Thus, the initial 'ground-pounding' stages and the sifting through of thousands and potentially, in some cases, millions of documents, and the analysis of the results, must be carried out with the utmost attention to detail and conviction. All documentary evidence which is to be submitted to the court must be clear, correct and convincing (the three 'C's). Viva voce testimony should be likewise. In many cases the evidence of investigators will be the crucial missing link – for example where an admission against interest has been obtained by an undercover operative pursuant to a pretext operation, from friends or allies of the fraudster, or indeed the fraudster himself.

Where extraordinary civil search and seizure or secret document disclosure orders have been obtained, and evidence procured on foot thereof, all procedures, both prior to the obtaining of the orders (in terms of making full disclosure to the court), and surrounding

their execution, must be complied with to the letter.³ It is important that the obligor not be given any opportunity to subsequently attack the methods used to obtain evidence, or the use to which it was put. These are factors which are often overlooked in the haste to firstly locate the assets, and secondly to secure them. Many asset recovery exercises have fallen upon a technicality.

Pre-emptive Strikes to Preserve Wealth Pending Final Outcome.

While there can be no guarantees that victims will regain their assets, there have been many spectacular successes in complex asset recovery cases. The key to success lies in the ingenuity and experience of the investigators and lawyers used and the determination and persistence of the creditor.

The following are some of the extraordinary and pre-emptive (or ex parte) measures which may be taken:

• obtaining freezing orders (or Mareva injunctions with world-wide effect), preventing a suspected fraudster and his agents, such as banks, from dissipating assets wheresoever they may be located in the world.
  
  

• Obtaining sealed and 'gagged' disclosure orders against third parties in order to track and recover the proceeds of fraud and serving further freezing orders preventing onward transmission.
  
  

• obtaining civil search and seizure orders (known as an 'Anton Piller' order), on the basis of a showing of a high risk of destruction of evidence, and thus requiring a defendant to permit access to his residential or business premises to allow the plaintiff to search for and seize evidence.
  
  

• where other jurisdictions are involved, seeking appropriate asset discovery or freezing orders either directly through the courts of other jurisdictions, or through the issuance of requests from the principal court involved with the merits of the dispute.
  
  

• obtaining orders requiring the defendant to go on oath about the nature, extent and location of his assets and requiring him to deliver-up his passport and be enjoined from leaving the jurisdiction of the court.
  
  

• consider whether to report the matter to criminal prosecuting and investigatory authorities and assisting in subsequent reports and investigations.
  
  

Once a clear and convincing picture of asset secretion is drawn by the victims' team, a case may put to a court for such basket of extraordinary relief as may be considered necessary in the circumstances. As outlined above, such relief may include obtaining secret third party document disclosure orders, civil search and seizure orders and ultimately freezing orders which have the effect of maintaining the status quo pending a final determination of the issues in the case. It is important to remember in any application for the above pre-emptive forms of relief, that utmost disclosure is the order of the day. As all of these applications ought to be made ex parte, that is without the involvement of the defendant, it is of crucial importance that all material facts are brought to the attention of the court at the time of the ex parte hearing. Again, the importance of this is that any orders obtained on foot of such applications, and, subsequently, the evidence obtained pursuant to same, shall be open to attack in the final inter partes proceedings, if the applicable procedures are not followed to the letter.⁴

Pre-emptive strikes to preserve wealth should be carried-out swiftly and simultaneously. Where those strikes are to be carried-out in different jurisdictions, they should be as closely aligned in point of time as possible, and each order should be sealed and wrapped in a 'gag.'⁵ Any opportunities for tip-offs by one party subject to a freeze order to another must be minimized. The key elements are speed and surprise.

Once the wealth is secured by means of one or more ex parte asset freezing orders (or Mareva injunctions), depending upon the jurisdiction, it will invariably be necessary to inform the defendant within a defined period of time, if indeed he has not already become aware of the fact of the freeze by other means. The victim can then expect fierce litigation in an attempt to thaw the freeze, prior to the ultimate hearing on the merits.

One of the tactical consequences of pre-emptively freezing assets prior to a final hearing on the merits is that the obligor is often placed in a position which may induce a proper settlement. Care should be taken in policing the asset freezing relief. While the obligor is ordinarily allowed a certain 'stipend' for living and legal expenses, it is supposed to be 'reasonable'. There are many documented cases where the defendant has lived the high life and paid out inordinate legal expenses on the basis of the so-called 'allowance' permitted pursuant to a provisional freezing order.

Finally, with the pre-emptive freeze in place, the victim is now in a stronger position to consider its options, secure in the knowledge that the defendant cannot further dissipate assets in an attempt to frustrate his obligations. At this stage, the victim's team must concentrate upon building its case in advance of the final hearing of the merits.

Footnotes

^{1. Allan, R., 'A Rational Reaction Plan – When Your Firm Is Hit By Fraud, Don't Make Any Rash Decisions. You May Be Angry, But Take A Moment And Follow A Few Small Steps,' CA Magazine, September 2002 (Canadian Institute of Chartered Accountants).}

^{2. See, Allan, R., 'The Art of Asset Recovery,' CA Magazine, December 2002 (Canadian Institute of Chartered Acccountants).}

^{3. For instance, in Anglo-Saxon legal systems, there exists an implied undertaking on the part of the applicant to a discovery order not to use any confidential documents obtained therefrom for any other purpose beyond the particular legal proceedings to which the discovery relates (or, possibly, in furtherance of related proceedings). Violation of the implied undertaking regarding confidential documents can lead to a finding of contempt and sanctions.}

^{4. The requirement that there be full disclosure of all material facts affecting an ex parte application, whether helpful or adverse to the applicant, derives from Anglo-Saxon jurisprudence – and is a strict rule followed in all courts in ex parte proceedings throughout the British Commonwealth. In the United States, in general, the rule does not appear to require the party applicant to make full disclosure of material facts at an ex parte application. Rather, as in the instance of Pennsylvania, it is sometimes grafted-on through the application of the duty of candour present in the law of lawyering through the contents of rules governing the ethical conduct of lawyers. For example, Rule 3.3 (d) of the Pennsylvania Rules of Professional Conduct provides: "In an ex parte proceeding a lawyer shall inform the tribunal of all material facts known to the lawyer which will enable the tribunal to make an informed decision, whether or not the facts are adverse." The Comment to Rule 3.3 (d) elaborates on the duty of candour imposed in ex parte proceedings as follows: "[I]n an ex parte proceeding, such as an application for a temporary restraining order, there is no balance of presentation by opposing advocates. The object of an ex parte proceeding is nevertheless to yield a substantially just result. The judge has an affirmative responsibility to accord the absent party just consideration. The lawyer for the represented party has the correlative duty to make disclosure of material facts known to the lawyer and that the lawyer reasonably believes are necessary to an informed decision."}

^{5. Meaning – accompanied by an injunction gagging anyone who has knowledge or notice of the ex parte proceedings from disclosing their fact or nature to another.}

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.