Exercising restraint

The Cayman Islands' court of appeal has given judgment in an important case that sheds light on the purpose of the Proceeds of Criminal Conduct Law (PCCL) and restraint orders, in particular the effect of a restraint order where funds claimed by a creditor are suspected to be illicit.

In the case, the Federal Trade Commission in the US issued a complaint in the California Court alleging that Kenneth Taves defrauded credit card holders of millions of dollars by an internet fraud.

A permanent receiver was appointed over the assets of various companies controlled by Taves, and he wrote to EuroBank Corporation in the Cayman Islands alleging that monies had been unlawfully transferred to its accounts owned by Taves and others. EuroBank was subsequently wound up subject to the supervision of the court.

The crown then obtained restraint orders, and Taves and certain employees of EuroBank were charged with money laundering. Subsequently the bank was also charged with the same offence. On 10 April 2000, the US court ruled that Taves and his wife had received more than $40m (£24.7m) from the internet fraud, and the receiver was authorised to take all steps necessary to locate and liquidate their assets in order to compensate the victims. It was found that $25.3m (£15.6m) of the proceeds of the fraud had been routed through various accounts at the bank.

Taves pleaded guilty to the charges in California, and the crown was granted an order restraining EuroBank and the liquidators from disposing of, or dealing with, any of the relevant funds.

The receiver applied to intervene in the winding up and also the PCCL proceedings for discharge of the restraint orders.

The discharge of the November restraint order was appealed, and during this action the court of appeal considered the purpose of the PCCL. The PCCL was designed to enable the grand court, in any appropriate case, to order the confiscation of the property of an offender convicted of an indictable offence from which he benefited. Also, to prevent removal of assets, the PCCL allows the court to make a restraint order against the property of a person charged, or about to be charged, with any such offence. Such orders are made ex parte by application from the crown whenever it appears to the judge that there are reasonable grounds for doing so.

The court found that confiscation orders are limited by the extent of the offender's realisable property, and also limited by the benefit derived from the offence by the convicted person. Benefit is defined in the PCCL as comprising the value of the property obtained as a result of, or in connection with, the offences committed.

Section 17 of the PCCL subsections 1 and 2 state: “Where realisable property is held by a company and an order for the winding up of the company has been made or a resolution has been passed by the company for the voluntary winding up, the functions of the liquidator (or any provisional liquidator) shall not be exercisable in relation to: property for the time being subject to a restraint order made before the relevant time; and any proceeds of property realised by virtue of section 10(8) or 12(5) or (6) for the time being in the hands of a receiver appointed under section 10 or 12.

“Where, in the case of a company, such an order has been made or such a resolution has been passed, the powers conferred on the grand court by sections 10 to 12 or on a receiver appointed by the order shall not be exercised in relation to any realisable property held by the company in relation to which the functions of the liquidator are exercisable: so as to inhibit him from exercising those functions for the purpose of distributing any property held by the company to the company's creditors; or so as to prevent the payment out of any property of any expenses (including the remuneration of the liquidator or any provisional liquidator) properly incurred in the winding up in respect of the property.”

Regarding restraint orders made in respect of the property of a company which is subsequently wound up, Section 17(1)(a) states that the functions of the liquidator are not exercisable in respect of any property that is the subject of a restraint order made before the commencement of the winding up.

In the EuroBank case, the restraint order was made after the winding up order. The receiver claimed the funds in connection with restitution to the victims. At first instance the restraint order was discharged on the basis of a perceived conflict between the terms of the order and the requirements of Section 17(2) of the PCCL. The judge ruled that the order inhibited the liquidators from exercising the functions of their office for the purpose of distributing the property of the company by way of dividends to a creditor of EuroBank, in this case the receiver.

However, the crown argued that it could never have been intended to allow assets that were the product of money laundering to be returned by the liquidators to the perpetrators of crime under the guise of creditors. It stated that 'creditors' only refers to legitimate creditors.

The court said a claim involving crime can never give rise to a judgment against an alleged debtor, hence the claim is bound to be rejected. Furthermore, when a company is in liquidation, the liquidators will reject any unlawful claim and have no duty to pay any part of the assets of the company to any such creditor.

The court held that a restraint order can restrain payment from suspected illicit funds that would never have been the subject matter of a judgment against the company concerned.

The receiver's claim was against the Taves' for misappropriation and only if that claim was successful would the receiver be entitled to pursue EuroBank for funds in the Taves' account. Because of this, the receiver was not a lawful creditor of the bank, but it was, at most, a contingent creditor. The people the receiver represented were victims of the Taves' fraud and not of the bank's alleged offence.

The court at first instance found that the value of property obtained by an offender in connection with the commission of an offence cannot, in the ordinary connotation of that phrase, be confined to the gross profit that the offender obtained as a result of its commission. This was upheld by the court of appeal.

The court said that money paid into a bank becomes the property of that bank, while the depositor only has a contractual right to recover an equivalent amount in due course, with or without interest. If EuroBank had received tainted money in connection with a money laundering scheme to which it was party, the whole amount so obtained must be regarded as its benefit of the offence for the purposes of the PCCL.

Diarmad Murray is a litigation partner at Walkers in the Cayman Islands