A black hole, according to Wikipedia, is “a region of spacetime from which nothing, not even light can escape.”
From a financial perspective, many consider that when money goes offshore, it enters a black hole. Bank secrecy, public corruption and the constant barrage of films and books which put the offshore in a bad light contribute to this image. But is it the truth?
When it comes to identifying and recovering concealed assets and proceeds of crime, a professional with experience and expertise in tracing assets in an offshore environment is often a critical part of the team needed for a successful recovery. For those willing to side-step the myth and pursue an aggressive recovery strategy, insolvency practitioners and corporate recovery professionals working in the Caribbean have the necessary tools and skills often needed in these types of cases and bring to the table their knowledge and experience in such matters.
In Cayman and in the Caribbean generally, insolvency practitioners and corporate recovery professionals have been on the front lines of investigating fraud and obtaining recoveries in cross-border litigation. Cases like Madoff, Parmalat, IPOC and BCCI have grabbed the attention of crime fighters and international headlines over the past two decades.
When dealing with these cases, particularly where there is fraud or criminal activity, those investigating fraud find they need to come up with original, creative, and often unconventional ways to identify and recover assets. This approach is particularly necessary when dealing with cross border matters where the laws from one country to the next are different and there is usually a complex web of offshore vehicles, trusts and foundations.
There are of course various civil interim legal remedies available to those investigating fraudulent behavior. These include discovery orders (aka Norwich Pharmacal orders), freezing orders (aka Mareva orders), injunctions and search orders (aka Anton Pillar orders). While these orders provide powerful and effective pre-emptive relief, due in part to their draconian nature, the legal hurdles to apply for these remedies are often quite high. A victim must demonstrate a good and arguable case on the merits, show urgency and a real and substantial risk that assets may be dissipated or moved in the absence of the order. Further the victim may be required for some of the remedies to provide a bond in case of harm or injury to the party he is seeking the remedy against.
Thus there is a financial burden as well. Many attorneys both on-shore and offshore are well-versed on these topics, and it is not my intention to go into greater detail other than to make one aware that these remedies are available and if sufficient evidence exists, one would be well-minded to consider these rights and reliefs.
In reality however the evidence that is required often does not exist. This is because the person committing the fraudulent behavior is the only person (except those aiding and abetting him) who has this information and if he is clever at all, he will not have left much of a trail for the victim to follow. The victim is left to hunches or premonitions, often the result of gut feelings, experience and knowledge of the fraudster, and certain ‘red flags’ and subtle changes (and sometimes not too subtle) in the fraudster’s daily routines, habits and general day to day lifestyle. It can be something as small as increased business trips to certain locations, or something more prevalent as a new purchase of an expensive item outside of the wrongdoer’s financial means. But these fall short of evidence when considering the above remedies and therefore those remedies are often not an option to trace and recover assets.
Does that mean that the victim is in dire straits? Not necessarily.
There are other effective approaches, when applied with the appropriate amount of pressure and determination, may either give the victim the tools to consider the above remedies or at least create a greater balance when negotiating a resolution of the wrong in either commercial or financial terms. When the fraud is perpetrated on a cross-border basis, a fraud investigator might, wearing his hat as an insolvency practitioner, also seek court recognition as a foreign representative to gain access to the powers and reach of the onshore courts in pursuing claims and furthering investigations. In the United States, this is done pursuant to Chapter 15 of the U.S. Bankruptcy Code. Such recognition can be used by the fraud investigator as a sword in furtherance of asset recovery and as a shield to asset protection.
The below scenarios will provide some thoughts on unconventional approaches involved in identifying and pursuing assets for victims of fraud.
Water water everywhere …
Several years ago my firm was appointed by the regulators in the Cayman Islands to investigate a hedge fund structure managed out of Canada. The hedge funds were unable to satisfy redemption requests and there were concerns by investors that the funds were in financial difficulty. Allegations were surfacing that the manager may have defrauded investors. Our mandate was to ascertain whether the funds were conducting their affairs in a fit and proper manner.
It didn’t take long to uncover that circumstances were not as they had been represented to investors. A primary portion of the funds’ assets, over 90 percent, were invested in private companies whose primary objective was to bottle and distribute glacier water in Iceland. A physical check of the plant found it was only a parking lot outside a small village in Iceland. Interestingly, despite a complete lack of physical and operational facilities, the materials disseminated to investors indicated the value of the funds had increased more than two-fold in just two years. Fraud is the explanation for this apparent contradiction.
The investment manager was imaginative if nothing else. First, his background was that of a dentist. He developed the idea to set up a hedge fund after attending an investment conference. He was attracted to the notion that you could get investors to give money without the requirement to pay interest, provide security or personal guarantees. This seemed the perfect playground to raise money quickly with little risk or obligation to repay it. Second, the companies that controlled the water bottling and distribution facilities were managed and controlled by the investment manager himself. By putting those companies in yet another offshore jurisdiction, he was able to add a layer of complexity making his fraud harder to detect. As there was no transparency into the companies in which the funds invested their monies, the investment manager was able to determine the value of the investments to be used in calculating the net asset value to investors.
His reports to investors in the fund were based on financial projections, taking into account future sales of bottled water once the facilities were built. As such the value of the investment reported was much larger than the subscriptions originally received. But in fact, these were speculative at best and it was uncertain whether sufficient funds would ever be collected to build the facilities he relied upon to calculate the values.
So not only were there no earnings to support the increased value, the investment manager, as is often the situation in funds, had a contract allowing him to charge management and performance fees to the funds. The increased value meant that he was entitled and paid himself a hefty fee. In fact, so successful was his valuation, he basically removed most of the principal paid into the funds, leaving nothing for investors to recover when they redeemed.
Conducting a reconciliation of what happened to investors’ funds was the first priority. Ultimately through an arrangement with the receiver appointed in Canada, working with the regulators, and pursuing discovery in the United States (using the Chapter 15 recognition referred to above), we were able to bring pressure to bear on the principal. He provided us with a full accounting for the funds he collected from investors and those he stole, and paid some of the money back.
You can lead a horse to water …
Another example of the use of insolvency and asset recovery specialists in the offshore world is a case involving the prosecution of a person charged for money laundering under the Proceeds of Crime Act. In this case the plaintiff, the attorney general, went to court to appoint our firm as a receiver over the perpetrator’s assets until a decision had been rendered on the money laundering charges.
We had limited information on the defendant’s assets. We were aware that he had a property in the Caribbean and the attorney general had access to some bank information which he forwarded to us. With the assistance of a private investigator, we learned that he was involved in a casino in Colorado and various penny stock transactions in the U.S. and Canada. A chance piece of information from an informant identified additional information (and assets) and, together with financial analysis we conducted, suggested that at least in certain time frames, the perpetrator might be involved in a pump and dump scheme. We understood that the defendant, who was hiding in South Africa to avoid extradition, might be traveling to the United States and we, together with the attorney general, made plans to serve him with subpoenas and other legal documents when he arrived in the States.
We received a call from the Federal Bureau of Investigation days before we were planning to serve the defendant. We were requested in strong terms not to serve the defendant and to cease any efforts to pursue the inquiries we were conducting. While we were not privy to the discussions on what was going on (the attorney general communicated with the FBI directly), the defendant was never served. We were later informed unofficially that the defendant had key information which the FBI had determined critical to an investigation it was conducting into a mafia organization. One of the rumors conveyed was that this group, taking a page from the first The Godfather movie, had sent a strong message to his adversaries by leaving a dead horse in the adversary’s front yard.
War of the roses
Some of the most difficult cases to deal with are divorces. Depending on how much time the marriage has been in trouble and how much money is at stake, a husband can take steps to hide assets and avoid a paper trail. Throw in the emotional aspects, and possibly the intangibles like who gets access to children and a dramatic change in lifestyle, these situations tend to heavily litigated and draining (emotionally and financially).
Insolvency practitioners and those who pursue asset recoveries can play various roles in divorce proceedings. Not only can they bring their expertise and experience in fraud investigation, forensic accounting, asset recovery and procurement, but they can also provide the opportunity to bring in someone who is independent and objective from the adversarial parties, not emotionally connected to the outcome. The work they conduct will be discrete and confidential. This can, at times, be just as important as the principal role of the exercise of identifying and procuring assets. In addition many insolvency practitioners have on-staff or have access to business valuators and those with expertise in damage quantification. This can be particularly beneficial when the issue is attempting to determine the value of the husband’s business or investments.
In our view, our role in these cases is to provide greater transparency to the victim (usually the wife) and to bring the parties to a situation where they can negotiate a settlement out of court that is sufficiently satisfactory (although making neither happy with the result). The below sets out a couple of cases where we have been involved and have provided value by getting the two parties to come to a resolution of their dispute.
The first case involves a person of Asian descent who created a European alias to conceal his heritage. At the time of his original divorce, he swore a statement that he had no assets and the wife received nothing. The ex-wife didn’t trust him however and a few years after the divorce she used the internet to research her ex-husband and discovered that he had made an application to a fast food franchise disclosing his net worth in excess of $30 million. The ex-wife, armed with this information, obtained an injunction against the husband and we were appointed receiver over the ex-husband’s assets and provisional liquidator over certain related corporate vehicles.
As receiver and provisional liquidators, we obtained a discovery order against the attorneys and bankers of the corporate vehicles and the defendant. Using our fraud investigative and forensic accounting skills, we identified a number of assets offshore. The case eventually settled with the ex-wife receiving millions of dollars.
In another case, the husband, who was working a family business, had income which was substantial during the marriage but once divorce proceedings commenced, his reported earnings were substantially diminished. The wife was of the view that the husband was colluding with his family to avoid any payment while the proceedings were afoot and that once the divorce was finalized, the husband’s compensation would return to normal.
The husband argued the diminished earnings was strictly due to change in economic circumstances in the market and the family business was suffering as a result.
Our firm was retained as an independent expert to review the financial performance of the company and the husband’s remuneration prior to and subsequent to the divorce proceedings. One of the interesting aspects of the engagement was that the parties agreed we would conduct the financial analysis but that we would neither be able to retain the records or report on previously undisclosed financial information in our report.
The first issue was addressed by reaching an arrangement with the company’s legal counsel to hold the documents and analysis in trust for the expert. The second issue was resolved by providing sufficient ratio and comparative analysis in the report to assist the court and the adversarial parties to get a sufficient understanding of the financial performance of the company and remuneration of the husband. This included an assessment of whether the explanations provided to the SJE for variances and discrepancies were credible or not. This case settled days after the report was released.
Given the nature of tracing and collecting offshore assets, there will be minimal documentation. This frequently means that the information and documentation that is required to pursue certain draconian legal remedies does not exist and that those pre-emptive rights and reliefs are not available. Getting an insolvency practitioner or those with experience and capabilities in tracing and procuring assets could add value to the litigation, by either bringing in higher assets to the victim, lessening the need to continue litigation, and incur the costs related to it, or at a minimum provide peace of mind that what is being offered is the best one can obtain.