AN A.S. PRATT & SONS PUBLICATION
FEBRUARY 1999
EDITOR’S HEADNOTE: EMPLOYMENT IMPACT: A NEW BANK EXPANSION
TEST
Gerald T. Dunne
WARDING OFF THE MILLENNIUM BUG: A SURVEY OF 1998’S Y2K SOLUTIONS
Marvin E. Jacob, Brenda A. Bachman, and Sondra M. Roberto
INTERNATIONAL FRAUD: FREEZE, SEIZE, RETRIEVE
Eric S. Rein
REGULATION OF MORTGAGE BANKING: A PENNSYLVANIA PARADIGM
Leonard A. Bernstein
COMMONLY NEGOTIATED COMMERCIAL LEASE PROVISIONS
Frank V. Zerunyan
PATENT PROTECTIONS FOR INVESTMENT AND FINANCIAL SERVICE
CONFIGURATIONS
Gary J. Rinkerman and Kenneth J. Sheehan
BANKRUPTCY FOR BANKERS: Courts Generally Are Reluctant to Bar
Creditors From Taking Action Against Non-Debtors, Although Some Cases
May Warrant Section 105(A) Injunctions of Such Action
Neil H. Ackerman
Banking Briefs
Estate and Gift Tax Decisions
INTERNATIONAL FRAUD:
FREEZE, SEIZE, AND RETRIEVE
ERIC S. REIN
As technology evolves at exponential rates, it becomes easier to transferfunds faster
using means undetectable in attempts to fraudulent/y conceal assets. This article discuss es the legal barriers that arise when attempting to recover assets in foreign accounts and
what legal steps can be taken to recover them. The author cites the Mareva injunction
as one means tofreee, and ultimateiy recover, assets in possession of third parties in
foreign countries.
nternational fraud is a successful and thriving business. The popularity of
electronic fund transfers authorized by telephone, computer or facsimile
has caused the movement of money to occur more rapidly. The widespread use of nominee companies and offshore accounts, the increased sophistication of legitimate financial transactions, and the reluctance of bankers and
other professionals from inquiring into the financial affairs have contributed to
the ease and speed with which substantial funds can be transferred from country to country, while concealing the source and identity of those who control
the transactions. Yet, courts are becoming increasingly receptive to the victims H
of fraud, permitting the discovery and recovery of assets.
J
THE FRAUDULENT SCHEME
Very sophisticated techniques have been utilized to conceal assets. For
instance, a fraudster transfers funds to a cooperative business associate who
has an international business. The business associate disguises those funds
as a legitimate-seeming payment to one of his companies. The business
Eric S. Rein is a principal in Schwartz, Cooper, Greenberger & Krauss, Chtd. in Chicago.
Mr. Rein is a member of the Florida and Illinois bars. He is also a founding member of the
International Asset Recovery Group.
INTERNATIONAL FRAUD: FREEZE, SEIZE, AND RETRIEVE
associate then transfers the funds by wire transfer to an offshore account,
commingled with funds for the purchase of legitimate imports. Those
imports’ value are then inflated to conceal the transfer.
Assets have now been hidden. A successful recovery of those assets
requires a focused, but rapid, effort to identify, seize and freeze the assets.
DISPELLING TRADONAL LITIGATION ASSUMPTIONS
In pursuing the objective of discovering, freezing and seizing foreign assets,
two traditional litigation assumptions must be discounted. First, the race to a
domestic judgment is not the first priority. Rather, it can be ineffective and
sometimes detrimental. Often times, while pursuing a judgment, the fraudster
is creating such a tangled web of nominee companies, trusts and offshore
accounts that ability to obtain payment is rendered almost impossible. Thus,
the fraudster will use domestic litigation as a means of delay to his benefit.
Further, a U.S. judgment is not normally recognized nor easily executed
upon internationally. To enforce a domestic judgment abroad, foreign courts
must be satisfied with the enforceability of that judgment and that it was
obtained based on due process. Republic Nat. Bank of Miami v. United States, 506
U.S. 80, 113 S.Ct. 554, 559, 121 L.Ed.2d 474 (1992). Foreign courts can therefore question proper notice, service and the extent and basis of the claim, even
though those issues were overcome before a U.S. court Hence, multi-jurisdictional recovery efforts can get misdirected by procedural inquiries.
In addition, a foreign court can restrict an inquiry based on the nature of
the claim giving rise to the judgment. In dealing with international fraud, an
inquiry needs to be extremely flexible. The fraudster uses nominees, strawmen, and a skein of corporate and trust entities to hide and hold his wealth.
Thus, recovery efforts should be directed to these persons or facades, without the burden of the judgment claim. Claims as enforcement aids cross
foreign borders more easily than judgments.
Second, tracing of assets is not a cause of action or a remedy, but merely a process to identify the recipient of money. The traditional notion is that
money can be followed from object to object. However, the sophistication
of the transfer process and sources of those funds causes assets to change
BANKING LAW JOURNAL
form. Sometimes, only book entries evidence the transfers or transfers get
commingled and used to purchase apparently legitimate physical assets, such
as real estate. Transfers are often concealed by corporate facades and thus,
it is the recipient, rather than the asset itself, that should be the target of
recovery. In practical terms, tracing is often useless.
It is crucial to discove; freeze and seize assets The focus must be on asset
recovery. Thus, a strategy to identify And seize assets promises the best results
DISCOVERY OF ASSETS
An initial review of the transaction and events is necessary. The availability of
witnesses, informants and documents must be determined. Throughout the
investigation, timeliness is an important consideration Documents must be
rapidly identified and secured before there is an opportunity to destroy them.
ACTION FOR DISCOVERY
In international settings, there is available an action for discovery of the
existence of assets founded on the English House of Lords’ decision of
Norwich Pharmacal Co. P. Customs & Excise (’omrs., 3 WL.R. 164 (H.L. 1973),
2 ALL E.R. 943 (H.L. 1973). The discovery method known as Non.vich
Phartracal, coupled with a gag order, offers a means to obtain information by
court order Vthout threat of violating a duty of confidentiality owed by a
third party and notifying the fraudster of the inquiry.
Norwich Pharmacal relief does not create rights in property, but merely a
means to discover the existence of assets. Norwich Pharmacal relief is available against a party who has become mixed up in the wrongdoings by innocently facilitating the fraud. Such relief has resulted in discovering bank
account information, correspondence, checks, internal memoranda, debit
vouchers [Bankers Trust Co. v. Shapira, 1 WL.R. 1274 (1980), 3 ALL A.R. 353
(1980); Arab Monetay Fund P. Hashim, 2 ALL E.R. 911 (1992)], particulars
about companies and trusts formed by a spouse, credit accounts, real estate
properties, automobiles [Mercantile Group (Europe) A.G. P. Ayela, 3 WL.R.
1116 (1993), 1 ALL A.R. 110 (1994)], tax returns [M.N.R. t Huron Steel
INTERNATIONAL FRAUD: FREEZE, SEIZE, AND RETRIEVE
Fabricators, Lt; 41 D.L.R. 3d 407 (1973)] ; and corporate books and records
[Canadian Javelin Ltd. v. Spar/ing, et al, 59 C.P.R.2d 146 (1978)].
In ordering this discovery, courts are most persuaded by a duty to protect
a victim’s interest to insure against crime and fraud. As such, the innocent
party holding the information comes under a duty to assist the victim to give
it and the court full information in order to disclose the identity of the
wrongdoers. Norwich Pharmacal, 2 ALL A.R. at 948. Most importantly, this
information can be pursued and obtained without knowledge of the fraudster to prevent further movement of assets without notice to and beyond
the reach of the victim.
SEIZURE OF ASSETS THROUGH INJUNCTIONS
Once assets are discovered, efforts must be focused on freezing and seizing
them. Through relief known as a Mareva injunction, foreign courts, and
recently United States courts, have issued injunctions to freeze assets in the
possession of third parties in foreign countries.
Since its inception two decades ago, the Mareva injunction conceived in
Mareva Compania Navier, SA v. International Bulk Carriers, SA, I ALL E.R. 213
(1980), has become an important and widely used tool in civil litigation. A
Mareva injunction "enables the seizure of assets so as to preserve them for
the benefit of the creditor, but not to give a charge in favor of any particular creditor." Z Ltd. v. A-Z andAA-LL, 1 Q.B. 558, 573 (1982). This injunction does not create rights in the property, but merely freezes the assets until
subsequent adjudication. Cretanor Maritime Co., Ltd. P. Irish Marine
Management, Ltd., 1 W.L.R. 966 (1978).
To obtain a Mareva injunction, the applicant must show a good arguable
case and a serious risk that the respondent will either remove the assets from
the jurisdiction or dissipate them so as to frustrate any judgment ultimately
obtained. To protect the interests of all parties involved, an applicant must
serve the order expeditiously, abide by any subsequent order of the court
regarding liability to the respondent in damages and indemnify third parties
against expense incurred as a result of the order. See Michael Andrew Skene,
Commercial Ijtzgation Bejiond the Pale, 301 UBCL. Rev. 1,28 (1996).
BANKING LAW JOURNAL
The effect of a Mareva injunction on third parties, especially banks, is that
any prior mandate from the customers (is) automatically annulled when
the bank receives notice of the Mareva injunction." Z Ltd. v. A-Z andAALL, 1 Q.B. at 574. However, the mere existence of the order does not
automatically extinguish obligations to the customer. A Mareva injunction
does not abrogate a bank’s duty of confidentiality, unless the court so
directs. Bankers Trust Co. v. Shapira, I W.L.R. at 1282. A bank is entitled to
meet any irrevocable obligations to third parties, such as those arising from
credit cards, letters of credit or performance bonds. Peter Devonshire, The
Implications of Third Parties Holding Assets Subject to a Mareva Injunction, 1996
Lloyd’s Mar. & Corn. L.Q. 268, 280 (May 1996).
In some jurisdictions, such as Canada, courts prefer a higher threshold
criteria of a strong prima facie case. Edna Financial Serjces, Ltd. v. Feigeiham,
15 D.L.R. 4th 161, 178 (1985). There is great concern that the ordinary
course of business of the defendant and third parties not be impaired.
Accordingly, courts focus on irreparable harm and try to balance the interests by considering the residency of the respondent, the amount and location of assets, the enforcement rights of judgment creditors in the jurisdiction where the assets, the history of the respondent’s conduct in paying
judgments, the amount of the claim, the nature of the transaction given rise
to the claim and the risk of asset disposal or dissipation. Mooney v. Orr &
Dofman, 1 WWR. 517 (1995).
Recently, based upon the successful issuance of Mareva injunctions,
courts in the United States have enjoined the dissipation of foreign assets.
Through the use of Rule 65 of the Federal Rules of Civil Procedure, assets
in Mexico, which were unrelated to the case, were frozen to assure the
enforceability of an eventual money judgment. In Alliance Bond Fund, Inc. P.
Crupo Mexicana DeSarollo S.A., 143 F.3d 689 (2d Cir. 1998), plaintiff bondholders sought to collect bond payments due from a consortium of Mexican
construction companies. Plaintiffs sought to enjoin defendants from assigning or transferring their principal asset, the right to receive certain notes
from the Mexican government, in order to preserve those assets to collect a
potential judgment. The Alliance court upheld the use of an injunction
under Rule 65, where the plaintiffs can establish that money damages will be
INTERNATIONAL FRAUD: FREEZE, SEIZE, AND RETRIEVE
an inadequate remedy due to an impending insolvency of the defendant or
that the defendant has engaged in a pattern of secreting or dissipating assets
to avoid judgment. Alliance Bond Fund, 143 F.3d at 696.
Thus, a Mareva injunction or a Rule 65 injunction is an important tactical
tool to freeze assets to allow a court to adjudicate a claim and in the meantime, prevent the dissipation of assets. By placing the parties in a position
where the status quo is maintained, a Mareva injunction or Rule 65 injunction
may coerce the fraudster into providing security in order to head off irreparable loss and the paralysis which follows the issuance of these types of injunctions. The quid pro quo is the victim’s discharge of the vice-like grip of
injunctions in exchange for payment. See John Arnold Epp, Worldi>ide Mareva
Injunctions in Common Law Canada, 59 A Modern L. Rev. 460, 464 (May, 1996).
CONCLUSION
Recovering assets presents a formidable challenge. Nonetheless, the obstacles are not insurmountable. It must be recognized that international banking has been attracting their lifeblood, money, by offering a more favorable
banking environment. This translates to minimum taxes and maximum confidentiality. International bankers commonly assist their clientele in achieving their confidentiality goals through such legal vehicles as corporations
and trusts. In turn, this leads to a higher infiltration of fraudulently transferred money that always seeks secrecy.
In order to overcome these sophisticated barriers, the urge to run to a
judgment or focus on tracing of assets is not the best approach. Instead,
the inquiry must be directed at all those involved in the scheme, i.e., nominees, strawmen and business associates, and the manner in which all the
wealth is held, not just those assets linked directly to the transaction at issue.
When faced with fraudulent transfers, the victim must move rapidly to
discover, freeze and seize assets. Under Norwich Pharmacal, a victim is in a
better position to locate assets. A Mareua or Rule 65 injunction, in turn, can
freeze the located assets and enjoin their dissipation. The challenge is great,
but can be overcome by identifying the wrongdoers, the property and controlling the assets through injunction.
INTERNATIONAL ASSET RECOVERY GROUP
CHICAGO NEW YORK
180 N. LaSalle Street Suite 2700 Chicago, Illinois 60601
Phone 312-516-4400 Fax 312-782-8416. [email protected]
One Penn Plaza Suite 2414 New York, New York 10119
Phone 212-629-7630 Fax 212-760-2387 . [email protected]