NICOLAS WOOD ASSET TRACING AND RECOVERY: TOOLS OF THE TRADE The UK is one of the most creditor friendly jurisdictions in the World, particularly in the use of insolvency legislation. Insolvency Practitioners appointed under Court led proceedings, as liquidators of the companies or trustees of individuals, have considerable powers of investigation and recovery of assets. It is possible for the powers of the UK insolvency legislation to be used even where an overseas registered company or overseas resident individual is involved. The winding-up of foreign companies is dealt with in sections 220-221 of the Insolvency Act 1986 (IA 86) and depends on the nexus of the company's business to the UK. It is largely a question of fact and is up to the discretion of the Court. The facts that will influence nexus are: Was there are a place of business or an office in the UK? Is there a bank account in the UK? Are there or were there assets or creditors in the UK? Will the winding-up benefit creditors? Could a claim be brought by the company against a UK insurer? Were any of the directors based in the UK? It is not necessary for the company to have assets in the UK. There are similar tests for individuals. The European regulation on insolvency proceedings has introduced protocols between member states of the European Union. The regulation applies only to proceedings where the
2 debtors' centre of main interest is located in the European Union. This COMI should correspond to the place where the debtor conducts the administration of his business on a regular basis and Article 3(1) states that the Courts of the debtors' COMI shall have jurisdiction to open insolvency proceedings. Article 4 states that the law applicable to those insolvency proceedings is that of the member state in which the proceedings are opened. Due to the extensive powers available from the IA 86 it is advantageous for creditors, in situations where fraud is suspected, to commence proceedings in the UK. Commencing proceedings in the UK jurisdiction, where assets are located outside the European Union is also very helpful, for three main reasons: the UK Courts have comity with most of the major foreign jurisdictions; the UK Courts have been dealing with international fraud for many years and have considerable expertise; and the UK Courts are not averse to handing out world-wide freezing orders INSOLVENCY ACT 1986 (IA 1986) The IA 1986 is a very powerful tool to obtain information, documents and property from defendants and also any third parties that may have had dealings with the defendant. A liquidator steps into the shoes of the directors and is entitled to all information about the company to which the directors would have been entitled. Similarly a trustee in bankruptcy steps into the shoes of the bankrupt and is entitled to all the information to which the bankrupt would be entitled. A liquidator or trustee is also a Court Official which is recognised when dealing with most foreign jurisdictions.
3 The main sections of the IA 1986 dealing with the gathering of information and recovery of assets are: Section 234 - delivery up A Court Order can be obtained for anyone to hand over property or documents to which the company appears to be entitled. Section 235 - Information provision A liquidator can require directors, employees, accountants, auditors, lawyers and advisors to the company to provide any information that he may reasonably require. This section is extremely wide ranging. Section 236 - Interrogation in Court A liquidator may interrogate in Court any person he thinks capable of giving information regarding the business, affairs and property of the company. There is no right to silence and self incrimination is no bar to the requirement to answer the questions in the Court. If there is non compliance the person can be arrested for Contempt of Court. Sections 238 and 239 - Transactions at an undervalue and preferences A liquidator can overturn transactions at an undervalue and any payments that have been made to creditors which have preferred them over other creditors. There are certain rules as to time limits and connected parties. Usually threatening to utilise these sections and bring the matter to Court is sufficient to persuade respondents to surrender documents and provide information, as if the matter has to be brought to Court costs are likely to be awarded against the respondent.
4 Section 423 - Transactions defrauding creditors If a transaction has occurred for the sole purpose of putting the company's assets beyond reach of a creditor or future creditors or prejudicing the interests of creditors. The liquidator can apply to Court to overturn the transaction. A creditor may also apply to Court even if the company is not insolvent and the Court can lift legal privilege to look at the intention of the parties. LEGAL AND NON LEGAL ACTIONS OUTSIDE THE INSOLVENCY ACT Search and Seize Orders Search and Seize Orders are frequently used without notice to the affected party. There needs to be a real risk of dissipation of assets or destruction of documents and requires a claim with a prospect of success. Search and Seize Orders can be over world-wide assets and documents. They can also be used to gain access to computers. Often a Disclosure Order is applied for, subsequent to a Search and Seize Order to force the respondent to disclose the whereabouts of his assets. If the respondent is found to have concealed or not disclosed some of his assets or the Court finds that there must be assets which he has not disclosed, he can be held in Contempt of Court and committed to prison until he purges the Contempt. Norwich Pharmacal Orders A powerful tool in asset tracing is the use of the so called Norwich Pharmacal Orders which enable a claimant to apply to Court to obtain disclosure of third party bank statements. The bank is prohibited from divulging to the third party the fact that these bank statements have been disclosed. Again there must be a real risk of dissipation of assets.
5 Reports to the Money Laundering authorities Reporting the fraud or suspicion of fraud to the money laundering authorities in various jurisdictions is often very helpful in obtaining information. For example if you report to the Financial Investigation Unit in Liechtenstein, in conjunction with a civil action, you are entitled to receive the information and documentation gathered through the criminal investigation by the FIU and use that information in the civil action. In the UK it is important to have a good relationship with the fraud investigation authorities as they may share information that may not be readily available elsewhere. TOOLS There are a number of tools used by forensic accountants to assist in obtaining and analysing documentary evidence and financial data, some of which are detailed below: Computer forensics The use of computer forensic expertise is essential in these days of electronic data storage. It is important that all hard drives are imaged as soon as possible in any investigation in order to preserve and access data. The only way to completely erase data is to destroy the hard drive. The data that can be obtained, reviewed and sorted using computer forensic techniques includes accessible and otherwise inaccessible data on the hard drive. Inaccessible data Accessible data deleted files deleted e-mails data in free space data in slack space e-mails spreadsheets Word documents databases
6 hidden files Internet addresses password protected files programs The use of computer forensic techniques and imaging hard drives means that a vast amount of data is available for scrutinising. This creates its own difficulty in trying to review large amounts of data with possibly limited resources. There are other tools available for data mining which can significantly cut down on the amount of time and personnel required to review the data. It is important that the computer forensic consultants use the methods under the Police and Criminal Evidence Act to image the servers and hard drives so that the evidence can be used in criminal proceedings as well as civil proceedings. Win IDEA One of the most useful data mining tools is Win IDEA which is the windows version of interactive data extraction and analysis. This gives extended functionality and does not interfere with the data that is being extracted and analysed. The programme maintains a full audit trail and it achieves results where paper based data analysis is not appropriate. It is a very cost effective method of analysing transactions such as transactions between bank accounts. It is also useful for searching against specific words and phrases in documents and email traffic. I2 and Peacock charts I2 charts can be used to clearly illustrate connections between different organisations and people. They often produce connections which have not been made by reviewing the
7 documents manually. These are the sorts of techniques used by the police and other prosecuting authorities, and they are useful to support documentary evidence in court. I2 transaction analysis charts can be used to trace assets. Details of a large number of bank accounts and movements of funds can be input into a table which then produces a chart showing the movements between accounts. This enables the monies to be tracked through the maze. Phone records can be input into a spreadsheet. This can then be displayed on a Peacock chart to show the connections between individuals via intermediaries. Document handling Document handling in asset tracing cases is of vital importance for the success and efficient running of a case. It is important to the presentation of case to retain the evidential trail and to preserve the evidence in its original format. Electronic document handling systems should be used to maintain the probity of documentary evidence which can be used in support of criminal and civil proceedings. The efficient use of document handling systems ensures compliance with data protection statutes as well as improving efficiency and giving cost savings. Benfords' Law This is a diagnostic programme which gives the probability of numerical digits appearing in sequences of numbers. This analysis can demonstrate whether a sequence of numbers has been tampered with and is useful in analysing accounting data. Information collection Considerable amounts of information can be obtained using publicly available sources such as:
8 Companies House searches property registry searches internet searches Art Loss register DVLA searches shipping/yacht register media searches An insolvency practitioner acting as liquidator or trustee has the advantage of being able to obtain the following information without the need of a Court Order: information from Tax offices credit reference searches mail redirection Use of Private Investigators In addition to the information that can be obtained from publicly available sources there is further information that can be obtained through the use of Private Investigators (PI). PIs are particularly useful in surveillance operations to determine: whether the respondent has any hidden assets any banks the respondent may be visiting any associates the respondent may be visiting who could be interrogated subsequently There may be legal limitations on the use of information obtained by PIs from activities such as:
9 the obtaining of telephone records the recording of telephone conversations the searching of refuse The use of professional PIs is useful when conducting covert pretext witness interviews. Again there may be legal limitations in the use of this information in Court proceedings. However, it often provides a useful starting point to obtain the information from another source which could be used in proceedings. ATTENTION TO DETAIL Attention to detail is paramount when dealing with fraud. It is the smallest details which often lead to a breakthrough in the discovery of the fraud or the tracing of assets. Some examples I have dealt with: The letter heading on a letter enclosing an affidavit used the incorrect telephone code on the company's headed paper when enclosing a sworn affidavit as evidence that it had been sworn on a certain date. The telephone code had in fact not come into existence until 18 months after the affidavit was supposed to have been sworn. This discovery lead to a whole series of fraudulent transactions and the defendant settled soon after this discovery was disclosed to them. The high delivery charge on an invoice for Harrods BBQ Sauce, obtained through redirected mail, led to the discovery of a residence in Switzerland of a convicted fraudster and subsequently the discovery of a large number of high value items of stamps, coins and antiques. The analysis of photocopied documents and comparisons with original documents revealed evidence of tampering with suppliers invoices which eventually led to a
10 substantial settlement from the defendant. Computer forensic analysis using I2 charts disclosed a circular series of transactions between otherwise un-associated parties. This led to the discovery of numerous bank accounts used for laundering money.