The art of asset recovery

By Roddy Allan Illustration: Gary Taxali THE KEY TO TRACING AND RETRIEVING MISAPPROPRIATED ASSETS IS INGENUITY AND EXPERIENCE ON THE PART OF AN INVESTIGATOR The financial institution agreed to a client's request for special treatment because the client was the son of a well-known wealthy Canadian family. For two years he had been trading through the institution from his home in the Cayman Islands, regularly sending cheques by courier to pay for his trades. So when he asked that the institution recognize his cheques at full value as soon as it received them instead of waiting for them to clear, the institution complied. (It typically takes 30 to 40 days for cheques from the Cayman Islands to clear.) Within 18 months, the playboy client had sent the institution 1,596 cheques for a total of US$720 million, but he never had more than $100 of his own money in his Cayman account. He would send a cheque for US$90 million, for example, instruct the institution to leave US$30 million in his Canadian account to cover trades and wire US$60 million to his Cayman bank account — which it did. Fortunately, a diligent compliance officer uncovered the scheme when the bank was on the hook for only US- $5 million (usually the bank's exposure was US$20 million). The bank retained Irish-based international asset-recovery firm Interclaim to help recover its money. Interclaim engaged a former CIA agent who went to the Caymans posing as an investor. Over many drinks, the investigator, who was wired, got the man to boast about his cheque-kiting scheme. The evidence was used to obtain a Mareva Injunction and Anton Piller Order (see "Following orders,"  on this page) in New York and Florida (where the client had assets) and in the Caymans. Consequently, the client flew to Canada and repaid the institution. "Because the institution had the courage to spend the resources, we were able to get full recovery within 120 days," says Martin S. Kenney, a Canadian-born lawyer who founded Interclaim in 1997. Odds for recovery When fraudsters hide misappropriated assets (such as funds, physical goods, and securities), it can be very difficult to locate and retrieve them –– especially in an electronic age when funds can be moved around the world in a matter of seconds –– but not impossible. And it is rarely a straightforward or inexpensive process (finding $100,000 can be just as costly as finding $10 million). Although some cases are easily resolved, an international asset tracing and recovery assignment is among the most challenging for a forensic accountant. In many such engagements, success requires the additional skills of legal counsel.  Victims do not always choose to take action. Many feel that the odds are against a successful recovery. Why throw good money after bad, they argue? And there is merit to that. 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. But the prospects of recovery are not necessarily bleak. If fraud victims are aware of the many investigative options and legal remedies that can assist them, the potential for recovery can be much higher. In short, a successful recovery effort requires investigative and legal cunning as well as an innovative strategy and, occasionally, some luck. Time is a critical factor. In almost any investigation where losses are sustained, quick consideration should be given to recovery. 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. If the target becomes aware an investigation is being conducted, assets may be moved out of the jurisdiction to impede the victim's recovery efforts for months or years. In most cases, recovery efforts are conducted on a prejudgment basis. However, if the creditor has a judgment in hand, this can be a major factor in determining an appropriate strategy to identify and secure assets. Freezing available assets before the fraudster knows what is happening is a priority. Not only are the assets preserved, but the fraudster's ability to mount a lengthy defence is thwarted. Post judgment, debtors know they are under review. While they can be examined as to the existence and location of their assets, sufficient time may have passed for them to organize their affairs to give the impression they are impecunious. Following orders There are several legal mechanisms that can help in asset recovery work. Application for and use of these orders require the expertise of experienced legal counsel, as missteps in the applications for or use of such orders can result in penalties against the plaintiff. Mareva Injunction restrains a defendant from disposing of assets before there has been an opportunity to adjudicate the plaintiff's claim. Anton Piller Order provides the plaintiff with supervised access to otherwise private premises to inspect or remove items, typically documents and other evidence over which the plaintiff asserts a proprietary claim. Norwich Pharmacia & Bankers Trust Orders, named after two famous cases, can give plaintiffs the right to secretly obtain information, such as a fraudster's banking records, that normally would not be available to investigators. Know your adversary 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 is the fraudster likely to be? If missing, does the fraudster have personal or business connections in other domestic or foreign locations? How sophisticated is the fraudster? Is there evidence to suggest that the stolen funds are more likely to be here or overseas? Does the person's particular lifestyle (a gambling habit, for example) offer any clues as to where he or she might disperse or hide assets? Are there individuals who worked with/ know the fraudster who could provide information on a confidential basis? Are there any easy asset "hits" that can be recovered to fund a broader, more ambitious investigation? If assets are offshore and a judgment can be obtained in one jurisdiction, can it be enforced easily where the assets are located? How will a criminal proceeding influence the fraudster and the outcome? It is critical to understand the personality and character of the fraudster. Often, successful recovery work involves applying pressure to which the fraudster is susceptible. For example, the limited involvement in the fraud of other members of the fraudster's family can be exploited if they are sued as part of the initial recovery effort. At the same time, the nature of the alleged fraud must be determined, as legal proceedings to recover assets will require compelling evidence of the underlying fraud and losses suffered by the victim. Concealment methods Any forensic accountant on the trail of the ill-gotten gains should be familiar with techniques fraudsters use to conceal assets. Some of the more straightforward ones include: laundering money through local and international banks; transfers to corporations, family members or other individuals 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 travelers' cheques to redeposit in other locales; safety deposit boxes. In more sophisticated cases, assets may be concealed in tax havens and jurisdictions with secrecy laws and relatively sophisticated banking systems. These often include very small but rapidly developing countries or principalities — Nauru anyone? Some have legal mechanisms or deficiencies that are to the fraudster's advantage. Devices such as walking trusts (which can be immediately moved to other juridictions in response to investigative inquiries) can be a major impediment to recovery. Discovering where funds or assets may have been secreted requires use of the investigative mentality. Put yourself in the shoes of the fraudster: based on what is known, where could 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 nontraceable forms that are easily exchanged (for instance, gems); unusual patterns of travel by the fraudster to known tax havens; purchase of unusual securities or large volumes of travelers' cheques. It is comforting to know that Canada and the US are among the most creditor-friendly jurisdictions. Asset-related information is more readibly retrievable and available in North America than in any place in the world. As both Canada and the US are technologically advanced societies and open cultures, an unparalleled amount of information on individuals and businesses is available from government records and electronic databases. A vast amount of information is online, if you know 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); oil and gas partnerships; motor vehicle and driver licence registrations; regulatory proceedings and filings; thoroughbred horse ownership; 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 and 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. 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. One ultimate strategy can sometimes break the case: a direct discussion with the suspect, if he or she is available.The objective is to obtain valuable clues as to the use and location of the misappropriated funds. Also, the results from investigations conducted prior to the meeting can provide significant leverage, if used properly. 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 many cases, even a relatively straightforward asset concealment strategy can prevent or, at the very least, significantly delay recovery efforts. At the same time, however, the tracing and locating of defalcated assets has become an increasingly sophisticated business. Developments in technology and communications have given victims and their investigators considerably more information to work with than used to be the case, even 10 years ago. While there can be no guarantees that victims will regain their assets, there have been some spectacular successes in notorious asset recovery cases. The key to success lies in the ingenuity and experience of the investigator and the determination and persistence of the creditor. Roddy Allan, CA•IFA, is a principal of Kroll Lindquist Avey in Toronto and the technical editor for the Fraud column.