The phrase ‘asset-tracing’ means different things in different contexts. On the one hand, it is used as shorthand for the processes by which misappropriated assets are identified, located and ultimately recovered. On the other, it also has a more technical meaning, pertaining to the legal basis upon which a claimant may seek to assert a proprietary claim over misappropriated assets in the hands of a defendant in common law or in equity. The implementation of the relevant legal principles in formulating a claim for recovery gives rise to a range of practical challenges.
Asset tracing and recovery can be broken down into distinct but potentially concurrent phases:
- Finding assets that are concealed in some way, whether or not they represent the proceeds of the alleged fraud. This may simply be in order to establish that the defendant is a worthwhile target for a claim, or, more fundamentally, it may be to provide evidence that the defendant is indeed implicated.
- Formulating and prosecuting claims for recovery of those assets.
It is here assumed that the circumstances of the case are such as to justify significant effort in both areas. Clearly, this may not always be the case.
Finding the assets
Hunting down the ill-gotten gains of a fraudster is a matter of painstaking research and inquiry combined with adroit use of the available legal weaponry (freezing injunctions, search orders, requests for third-party disclosure etc) in order to gather information and evidence in the UK and, in all probability, overseas – all of this seasoned with the occasional pinch of good fortune.
This is an iterative process: each discovery may open up one or more further lines of inquiry. In one case I was involved with, bank statements and other documents relating to several hundred bank accounts in around 10 different countries had to be obtained and analysed. Each new batch of statements obtained revealed another layer of transactions, the destinations of which were further, in some cases previously unknown, bank accounts. And so it went on until the monies could be tracked to a residual bank balance, or another asset such as a property.
One of the key challenges in tracking down assets is knowing where to start. Early requests for information from a bank through which monies have passed should yield information as to their onwards destination. Use of publicly available information sources may reveal interests in companies, property etc, and in addition, there may be clues closer to home. Obtaining a forensic image of the suspect’s computer hard drive along with a copy of their email account and files on the company local area network can reveal some interesting ‘smoking guns’. So can a targeted examination of the victim organisation’s purchasing and payment data, along with other information related to these business cycles, for example data about suppliers. All of these and more are the stock-in-trade of the well-equipped forensic accountant. As avenues of inquiry, they are capable of generating further investigative leads and uncovering additional, previously undiscovered frauds.
Formulating a claim for recovery
The approach to tracing assets under this second head presupposes that there is some advantage in asserting a proprietary rather than a personal claim against the fraudster for misappropriating assets in breach of their fiduciary duties, or against some other person knowingly in receipt of such assets. The most obvious case is where the defendant is insolvent, in which case a successful proprietary claim will remove the assets claimed from the reach of other creditors. Regardless of the financial position of the defendant, if the misappropriated funds have been invested in some other asset that has appreciated in value, or if the fraudster has otherwise made a profit by use of misappropriated funds, then a proprietary claim provides a means for the victim to recover the profits as well as the funds misappropriated.
The forensic accountant’s contribution to the formulation of a claim will include: analysis of money flows through bank accounts and the related documentation; identification of gaps in the documentation which may form the basis of further requests; and presentation of the results of this analysis, both in writing and – of particular assistance in larger, more complex cases – graphically. In this context, the forensic accountant needs to have a sound grasp of relevant case law and how it translates into practice. It is not enough simply to show that transactions have taken place between two or more accounts. For a proprietary claim to succeed, it must be shown that the funds misappropriated (or their product) remain identifiable in the hands of the defendant. This may involve tracing the proceeds of a fraud through several bank accounts, or even changes of form.
Any analysis of transactions must have regard to a number of important principles, which are briefly outlined below.
Where the defendant has mixed the claimant’s money with their own in a bank account (a ‘mixed fund’), the claimant may seek to trace payments out of that mixed fund to their best advantage. Assuming that there are no competing claims on the fund other than those of the defendant, the order of payments out of the mixed fund once the misappropriated funds have been received into it is broadly immaterial. Clearly, the claimant will seek to trace those payments out of the mixed fund that culminate directly or indirectly in a valuable asset, rather than those that simply dissipate the monies on expenses or failed schemes.
Lowest intermediate balance
Where a mixed fund, or even a fund comprising only monies misappropriated from the claimant, has been partially paid away, the amount that the claimant can seek to trace will be limited among other things by the lowest balance on the account after the time at which their monies were received into the account. New monies not sourced by way of misappropriation from the claimant that are received into the mixed fund after receipt of the claimant’s monies cannot be the subject of a proprietary claim.
The matter of overdrawn accounts is one in which case law has struggled to keep pace with the realities of modern banking.
Traditionally, misappropriated monies paid into overdrawn accounts were deemed to be lost and not susceptible to a proprietary claim to the extent that they did not exceed the overdraft balance. More recently, there appears to be a growing consensus that where loans or overdrafts are incurred in anticipation of, or otherwise in connection with, the subsequent misappropriation of monies, the courts may entertain a claim to trace “through” such overdrafts into the products of the transactions which gave rise to them. This is often referred to as ‘backwards tracing’, because it reverses the chronology applied to a bank account in credit and may provide a means to trace into payments made out of an account before the misappropriated monies were received into it.
In practice, such an analysis can involve the examination of thousands of transactions, all the while taking the above principles into account. Mastering and presenting such a mass of detail is generally assisted by the use of spreadsheets and a variety of graphics, including flowcharts and other visual representations. Of course, the investigation work does not stop with analysing the cashflows. Transactional and other documentation and the nature and destination of cashflows themselves will also provide valuable evidence with regard to other important issues, for example: the state of knowledge of individuals involved concerning the fraud; the identity of the people behind the companies involved; and the control and beneficial ownership of relevant bank accounts.
Will Kenyon is a partner in PricewaterhouseCoopers’ forensic services group