Although the unprecedented Covid-19 pandemic continues to cause major disruptions and volatility in global markets, economies, and businesses, at least one group of individuals carries on undeterred: fraudsters, con artists, Ponzi schemers, and their ilk. Indeed, these bad actors are exploiting ever-increasing opportunities at a time when millions of people are seeking unemployment benefits, awaiting government financial aid, and desperately seeking to adapt or reinvent themselves in the face of this quickly evolving landscape. When the 2008 financial crisis exploded, it helped expose some of the largest and most infamous fraud schemes in world history, to wit: Madoff and Stanford. Now, as the tide precipitously recedes, many are predicting that it is a pre-cursor to a tsunami of newly discovered frauds, which will allow even more illicit conduct in the aftermath of this tragedy. While this means that asset recovery practitioners are likely to benefit from an influx of business due to newly dis-covered fraudulent schemes and an increase in related reorganization and liquidation proceedings, these new matters will not come without their challenges.
This article seeks to provide an overview of the developments, hurdles, and trends in asset tracing and recovery in light of the coronavirus. This comes with a warning, however: as our current situation is so unprecedented and dynamic, it seems inevitable that any attempt to make predictions and identify trends carries with it the simultaneous risk of overstatement and understatement. On the one hand, when one is in the middle of a storm—regardless of its size—it is difficult for one to calculate the magnitude of the storm without a point of reference, or without being able to see the edges of the storm. As well, many of us want to understate the enormity of the changes we are facing as a coping mechanism—that is well within the range of normal human reactions to a crisis—but it should be consciously discount-ed as we attempt to make credible predictions and identify enduring trends. What is unique about this situation is that it is global and, even if you live in an area that is relatively untouched, it affects you due to travel, economic, and social restrictions that did not exist a few short months ago.
Cross-border asset recovery practitioners are usually called to arms when (i) there is a high-value fraud or claim where the proceeds of the fraud may be on the move, and which claim has likely not yet resulted in a judgment or arbitral award (although the issues are just as alive in a post-judgment or post-award setting), (ii) the fraudster (or debtor) or its affiliates have an international footprint, but their assets do not appear to be readily collectible where the fraud was committed and/or where the judgment or award would be rendered, and (iii) there is a concern that the debtor will not have sufficient (or any) assets to satisfy the judgment or award, either in the situs of the fraud or in other jurisdictions where the proceeds may have been secreted. In other instances, cross-border asset recovery practitioners may get involved when (i) a foreign company or individual has entered reorganization or liquidation proceedings, (ii) the debtor’s insolvency was a result of a fraudulent scheme (i.e. corruption, embezzlement, or Ponzi schemes), and (iii) the debtor has assets (including third-party liability claims) in other jurisdictions. Oftentimes, the asset recovery team gets involved before litigation is commenced, or while litigation (sometimes horribly misguided litigation) is ongoing to ensure that, as they identify the path to victory for the victims/creditors, trial counsel also consider a viable post-judgment enforcement strategy. In reality, asset recovery practitioners – whether they be investigators, lawyers, or forensic accountants – are pathfinders, and those paths almost always take us into legal thickets that require legal, investigative, and forensic machetes.
One of the first post-COVID-19 challenges we will face as asset recovery practitioners is non-existent or seriously limited personal contact with our clients, colleagues, witnesses, and the actual targets of our investigations and legal proceedings. In actual practice, asset recovery lawyers usually represent individuals or businesses that have been directly victimized by fraudsters, or court-appointed officers (such as trustees, liquidators, or judicial administrators) who are tasked with unraveling a fraud scheme and recovering value for the victims of their estates. Naturally, these clients are keen on avoiding being re-victimized by opportunistic service providers and, as a result, are more reluctant to trust, and ultimately engage, an experienced and vetted asset recovery team. In pre-COVID times, lawyers and other asset recovery professionals would travel across the globe to participate in scoping and tasking meetings with potential clients (including groups of victims, creditors’ committees, and corporate general counsel) to build relationships face to face and establish trust with the potential clients, who are already wary of having been victimized once. Being in the same room makes it easier to gauge a person’s body language, interpret social cues, and build the human capital that enables the asset recovery team to establish a trusting relationship with clients. This is just as true with witnesses, whistle-blowers, and even the suspects themselves who may feel bolder to tell half-truths, obfuscate, and outright lie as they hide behind technology and distance. Face-to-face meetings also enable the asset recovery team to more effectively “whiteboard” the case, engage in the creative brainstorming sessions, and devise a concrete action plan that will lead to meaningful value recovery for fraud victims and creditors.
Today, when travel restrictions are mostly still in place and many of us are still working from home, it may be a challenge to develop a trusting relationship with the client, convey your expertise, and even land the case. Although many practitioners have embraced virtual solutions such as Zoom, WebEx, and other such technology, the reality is that nothing can truly substitute for an in-person meeting, especially when you are trying to convince a person who has been victimized by a fraudster that he or she should invest their resources and place their trust in you and your team to pursue their claim, enforce their judgment or otherwise recover the value stolen. Though asset recovery practitioners should accept, use, and master new technologies that enable them to participate in virtual meetings with potential clients, the most successful practitioners will be those who, pre-Cov-id, were able to establish and develop strong cross-border networks of experienced and resourceful asset recovery professionals, who, in turn, will be able to act as connectors and vouch for their colleagues’ reputation and expertise. For example, being a member of ICC FraudNet (recognized by Chambers as the world’s leading asset recovery legal net-work with more than 75 members in over 64 countries) has enabled the writers to quickly deploy an experienced team of financial fraud and asset recovery practitioners where the potential clients are located or, if at a later stage of the case, in almost any jurisdiction where assets may have been secreted. It is critical that the members of any such network be thoroughly vetted for their expertise and their ability to work in a team, which will lessen the need for face-to-face meetings.
This aspect of Covid-19 also presents another upside. Courts are becoming more nimble and accessible as they move to technology-driven hearings and solutions. This will lessen response times, as obtaining a hearing date and coordinating schedules is less complicated when everyone’s feet are nailed to the floor. More accessible and responsive courts also mean that the cost of asset recovery will go down, as practitioners can focus more on the case and less on travel, which adds to the cost and stress of these heavily front-loaded and time-intensive cases. As well, fraudsters, Ponzi schemers, and confidence tricksters (con artists) are going to adapt, as they too will be limited in their interpersonal contacts due to the pandemic. So we should assume that more and more of this type of fraud will be internet-based, or at least rely heavily on non-personal con-tact based attempts to build affinity with their victims. This requires asset recovery practitioners to become more adept at computer-based forensics. We will also have to lead the charge to make changes to the legal environment that allows a level of anonymity on the internet, which protects, but also exposes, users. Legal regimes will have to evolve to a more balanced state that can protect privacy, but also recognize exceptions when there is sufficient cause to bring down the “wall” to retrieve evidence of fraud and corruption. Today, electronic communications are capable of being embedded with a level of confidentiality that far exceeds that which is available for the otherwise written word.
The coronavirus has also impacted the gathering of intelligence and evidence. In reality, investigations have always, even in pre-COVID times, incorporated a mixture of in-person tactics and electronic data gathering techniques. The current (and future) shutdowns are less impactful when investigators are able to use sophisticated databases. Indeed, investigators continue to make use of personal, financial, real estate, and business-related databases to assess the viability of enforcement strategies. In fact, most clients are now more likely to request comprehensive preliminary asset investigations before deciding whether to commence legal proceedings against a target. After all, without a plan built around value recovery, a plan (or even a judgment for that matter) is just a piece of paper. This situation will hopefully lead to more comprehensive databases now that the economics will favor their creation and upkeep, and will force investigators to use them more creatively to look for intelligence and evidence that assists the goal of the asset recovery plan.
Nevertheless, electronic research alone rarely cracks any case by itself but is most effective when combined with intelligence gathered in person, via interviews, surveillance, and conversations with industry leaders. Before, asset recovery practitioners in a cross-border fraud case would likely have had to travel to multiple countries to interview fact witnesses and experts in person. Now, with travel restrictions in place, most fact-gathering interviews have shifted almost seamlessly to virtual spaces and are progressing as strongly as before (at least with respect to non-adversarial witnesses). Surveillance, however, is trickier. Because the circumstances of the pandemic have forced many to self-isolate at home, in some respects, some targets are easy to locate and surveil. Others, after stealing millions of dollars from their victims, are able to hide behind gates, robust security systems, or in off-the-grid remote getaways. Just recently, a fugitive art dealer, who is alleged to have defrauded numerous art collectors in a form of a Ponzi scheme, was arrested on the Pacific island of Vanuatu! One has to believe that he was limited in his escape route options due to the pandemic and, once “stuck” in Vanuatu, literally had nowhere else to run. Therefore, one positive aspect may be that, with less opportunity to travel freely, many fraudsters and targets of investigations are leaving behind a discover-able digital footprint that will later assist the investigators and asset recovery teams in their enforcement and recovery efforts, as well as to locate the fraudster.
The process of gathering evidence, as opposed to intelligence, is also going to have to be streamlined to allow the leveling of the playing field between victim and fraudster. Typically, victims are disadvantaged by a monstrous information deficit. The fraudster knows exactly what happened and where everything (including the evidence) is located. On the other hand, the victims feel as if they have been run over by a truck and then thrown into a dark room, and have first to find the light switch before they can even begin to “get the license plate” of that truck! That has to change, and courts and governments are going to have to lower the bar to obtain information once the appropriate showing is made of the victim’s status and injuries.
One example of how evidence gathering has been stream-lined in the United States to assist offshore litigation (this is especially true in asset recovery cases) involves the device colloquially referred to as “Section 1782,” which is codified at 28 U.S.C. § 1782. Section 1782 allows interested parties to request judicial assistance from US federal courts to obtain US-style discovery for use in foreign proceedings. As well, the UNCITRAL Model Law on Cross-Border Insolvency (“Model Law”), as codified in Chapter 15 of the US Bankruptcy Code, is another powerful tool for use by victims and of-fice holders who are representing them. The Model Law is very useful in all jurisdictions in which it has been adopted and fully enacted—not just the United States. Among other things, Chapter 15 allows a foreign liquidator or trustee to seek recognition as such in the United States, which enables the liquidator to realize and administer the debtor’s assets in the United States and to take broad discovery relating to the debtor. Both of these devices allow victims and officeholders to obtain documentary and testimonial evidence in furtherance of their asset tracking and recovery efforts and, sometimes, those efforts can be sealed and gagged when circumstances permit, to allow stealthy stalking of the fraudster and the proceeds of the fraud. Asset recovery law-yers are still regularly deploying these evidence-gathering tools, and the effectiveness of those tools has not been diminished by the consequences of the pandemic. To the contrary, because most civil courts have closed for in-person business, judges are deciding Section 1782 and Chapter 15 petitions “on the papers,” and hearings, if and when necessary, are conducted virtually, which translates into reduced fees and costs for the clients as well as demonstrably faster action. Subsequently, when courts authorize the issuance of subpoenas, third-party witnesses, such as banks and other professional associations, have put in place systems to receive alternative service (via mail, for example), which further streamlines the discovery process.
In the short term, courts have been able to adapt and continue delivering justice to their constituencies, but the physical closure of courts for most in-person business also presents obstacles, particularly when it comes to enforcement of domestic or international orders or judgments. For example, except in criminal cases, most state authorities and the US Marshal’s office stopped carrying out seizure orders and, when they start reopening, they expect to have large backlogs. This may present serious difficulties in cases where urgent relief is needed because there is evidence of the dissipation of assets or other circumstances. On the other hand, a slow-down of the courts’ docket may be the perfect opportunity for savvy asset recovery practitioners to take a step back, reassess the objectives, identify new opportunities and targets, and collaborate with investigators, forensic accountants, insolvency practitioners, and others to achieve a full recovery for their clients.
Although uncertainty abounds in the era of the coronavirus, at least one thing is clear: lawyers, forensic accountants, investigators, litigation funders, insolvency practitioners, and other professionals in the asset tracing and recovery field are more likely to achieve substantial recoveries for their clients when they have access to a robust cadre of cross-border professionals and when they (and their clients) are willing to employ tremendous creativity, flexibility, and relentless resolve. While the coronavirus pandemic looks like it is here to stay, and will have an impact on all of our personal and professional lives, we can find solutions, collectively, to limit how fraudsters benefit from the current circumstances, and we can develop new tools to make recoveries more attainable if we creatively apply ourselves as a unified community with an open-minded exchange of ideas.