Recent events have led to an upsurge in interest in the use of asset tracing procedures against terrorist groups. An asset tracing exercise follows the trail along which assets have passed. Forensic accountants will need to prepare an exhaustive analysis of the transactions along the trail and to consider the passage of the funds, possibly through intermediaries, from source to destination.
The importance of asset tracing
In addition to their part in money-laundering investigations and fraud cases, asset tracing techniques can be important in confiscation proceedings, in which there may be arguments concerning the identity of those controlling assets or in relation to the amounts and/or the location of assets.
Although asset tracing may also be useful in complex matrimonial cases, in which one or more of the parties may go to considerable lengths to conceal their assets, and for commercial disputes, in which, for example, funds may have been moved from a company to a connected party via a circuitous route, this report is concerned primarily with the use of asset tracing techniques in criminal cases.
As a first step, instructing solicitors need to outline the background to the instructions and the objectives of the experts' work. Accounting evidence, then, may be very important in connection with one or more of the following:
- constructing a prima facie case or reviewing critically the prosecution's case
- tracing the movement of assets, possibly with a view towards retrieval
- obtaining relevant court orders
- analysing accounting issues, including the points raised by the 'other side'
- providing evidence to the court.
Establishing the knowledge base
The key to an effective tracing exercise is the sharing of information between the instructing solicitors, the solicitor's client and the forensic accountants. This will ensure that the best possible analysis is available to the whole team. Forensic accountants will need to clarify not only what is 'known' but also what is 'unknown'. Identifying what is unknown in an investigation helps to focus attention, where relevant, on the legal remedies needed to locate missing assets and to bring them under control.
A tracing exercise is, in effect, the tracing of a monetary value. The source of the assets representing that value will generally be a bank account from which the funds have been transferred. The funds may then be turned into other types of asset on their way to their ultimate destination. For example, funds may be used to buy shares which are subsequently sold (ie turned into money again), with the proceeds then being used to purchase properties and businesses. In tracking the first stage of the funds' journey from the source bank account, it will be necessary to identify the individuals or entities to which the payments were made or the bank accounts into which the funds were transferred. Where funds have been transferred abroad, it may be possible to obtain access to the London correspondent accounts of overseas banks to which funds have been transferred and thus to identify the next account to which the relevant funds have been transferred.
Funds may be paid into an account that contains money from other sources, or into which money from other sources is subsequently paid. The legal principles governing the tracing of funds are complex: since Clayton (1816) (1 Mer 572), in which it was held that payments out of an account are deemed to be made in the order of the payments in – ie first in, first out – there have been several court decisions which have set out the rules governing the extent to which funds can be recovered from such accounts.
It is important to note, however, that attempts to trace funds can be frustrated by a number of devices. One of the most simple is the conversion of funds into cash in hand, which can subsequently be spent, used to open bank accounts in names unrelated to those of the individuals or companies in possession of the funds, or converted into other currencies. Funds may also be moved from one jurisdiction to another by way of informal money transfer arrangements such as the 'Hawala' systems used in the Middle East and Asia. Such systems facilitate the payment of funds to another party in another country in local currency, drawn on the reserves of the overseas partner of the individual or entity in the country of origin.
Another way in which attempts to trace funds can be frustrated is by payments to entities in jurisdictions in which it may be difficult, if not impossible, to obtain information about movements on bank accounts or about companies to or from which payments were made.
Although it is important to appreciate that the different circumstances of each case will affect the approach taken, the starting point for the investigative work will be the identification of the information needed to establish the flow of funds. Forensic accountants are likely to need access to a large volume of documentation from banks, which may include:
- returned cheques
- instructions to banks to make transfers
- bank statements
- deposit slips
- advices of transfers between bank accounts
- letters of credit
- documents confirming foreign exchange transactions
- in-house information, such as relevant correspondence or copies of applications to open accounts.
In addition, forensic accountants may require access to documents such as credit card receipts, share transfer forms, loan agreements, trust deeds, declarations of trust, documents evidencing powers of attorney, title deeds, companies' financial statements and annual returns.
Organising the information
It will be essential to organise documentation in a methodical way. In these circumstances, asset tracing exercises are similar to other types of large-scale investigations in which forensic accountants become involved. In particular, the use of databases is likely to be useful in all but the smallest tracing exercises. These can be used to match payee names, to sort transactions by name, size and date and to ensure that all transactions have been accounted for. The process of compiling and interrogating a database may also reveal further information requirements.
There are two principal areas in which court orders relate to expert accountants' asset tracing work. First, expert accountants may be needed to evaluate and present appropriate evidence to underpin an application for a court order, such as a freezing order or a search and seizure order, given that applications for such orders will face rigorous scrutiny. Second, expert accountants' work in tracing the passage of assets can be made easier by court orders, although it may be essential to obtain orders as quickly as possible to prevent assets from being dissipated, turned into cash in hand or transferred out of the jurisdiction. The courts may be used more frequently in particular cases, with parties often returning to apply for variations or extensions of orders.
A swift and carefully planned tracing exercise can yield effective results in many types of case, including those relating to fraud, money laundering and confiscation proceedings. In order to maximise the value which forensic accountants can add to such assignments, it is often necessary to involve them as quickly as possible. This is one area in which time is all-important.
George Sim is a partner at chartered accountants Sim Kapila