TRACING PROCEEDS OF FRAUD AND CORRUPT ENRICHMENT: CHALLENGES & PITFALLS
CHIEF GODWIN OBLA, SAN,FCIArb.BEING A PRESENTATION AT THE LAW DIGEST 4THANNUAL CROSS-BORDER LITIGATION AND ASSET RECOVERY FORUM 2016 HELD IN LAGOSDATE: 3 NOVEMBER 2016
Asset recovery has become a topic of major prominence in the world today, especially with the surge in transnational financial and economic crime and the increasing complexity of commercial transactions used to conceal the proceeds of such crimeCorruption continues to be a global issue. Acts of corruption are concealed by the laundering of the proceeds by complex layers of bank transfers with the aid of the heightened level of financial intelligence.http://www.kaieteurnewsonline.com/2012/08/25/corruption-a-global-issue/The laundering of criminal proceeds involves concealing the source of illicitly-acquired assets. In developing countries, including Nigeria, corrupt persons in both the public and private sectors often conceal illicit funds in offshore financial centres around the world.Tracing is at the initial stage of asset recovery. Fundamental towards recouping the monies or assets that the monies might have metamorphosed into.The cross-border passage of criminal money is facilitated by the global shadow financial system comprising tax havens, secrecy jurisdictions, disguised corporations, anonymous trust accounts, fake foundations, trade mispricing, and other money laundering techniques.
Due to the complexity of these crimes, the use of intelligence-based investigation techniques is fast becoming the norm in the identification of proceeds of crime.In the case of complex corruption investigations where there is often a myriad of financial vehicles across jurisdictions, the use of financial intelligence to “trace” assets has become imperative in unmasking the labyrinth of transactions and locating the proceeds of crime.This presentation attempts a comparative discourse of the applicability of the principles of assets’ tracing in Nigeria & other jurisdictions; whilst highlighting the challenges and proffering applicable working solutionsThe structure adopted in this presentation is to start with a general conversation on tracing, and then proceed to a discussion of issues affecting assets forfeiture through tracing in Nigeria.
TRACING AT COMMON LAW
The term “Tracing” has its roots in English common law. It can be described as tracking or following up, step by step, by patient inquiry or observation; or searching into; examining and inquiring into with care and accuracy; finding out by careful inquisition; or a legal inquiry.Lord Millett: “Tracing is neither a claim nor a remedy. It is merely a process by which a claimant demonstrates what has happened to his property, identifies its proceeds and the persons who have handled or received them, and justifies his claim that the proceeds can properly be regarded as representing his property."Tracing at common law is only possible where the property is still identifiable. However where the property has been mixed so that it is no longer identifiable, tracing at common law becomes impossible. It was therefore impossible under common law to trace money into a bank account when that account is credited with funds from different sources.EllenboroghJ in Taylor vPlumer(1815) 3 M & S 562- “at common law it is not possible to trace through mixed funds, thus where the asset can no longer be ascertained to represent the original property, perhaps where the subject is converted into money and mixed with other monies, the rule of tracing at common law becomes extinguished- this is because money has no ear-mark and thus cannot be distinguished within a mixed fund.”While the principles of tracing at common law do not extend to mixed funds for the purpose of recovery of same, it does not preclude tracing into a mixed fund for the purpose of establishing unjust enrichment by virtue of the said fund.
TRACING AT EQUITY
Due to the inadequacies of tracing under C.L., the concept of tracing in equity have come to be preferred. Unlike its counterpart C.L., tracing under the equitable principle is far more flexible. Tracing through mixed funds is allowed.It is agreed that the equitable rules are in fact designed to deal with the mixing of funds in a bank account, to combat incidences of unjust enrichment that would be created by the strict principle of tracing at common law, thereby allowing a fraudster to reap the benefits of his act.AGIP (AFRICA) LTD V. JACKSON (1992) 4 ALL ER 385thus: “Equity…will follow money into a mixed fund and charge the fund. There is, in the present case, no difficulty about the mechanics of tracing in equity. The money can be traced through the various bank accounts to baker oil and onwards”Tracing in equity is concerned with a series of transactions and the ability to establish a causal link to a defective transaction.the specific interventions on the rule of tracing in equity are the concepts of “backward tracing” and “the lowest intermediate balance rule”.
The principle of backward tracing seeks to expand the frontiers of tracing to allow the claimant to establish a causal link and subsequently to trace the proceeds into whatever it was used for, even if same was owned before the fraud.Before now, in the UK, equitable tracing could not be pursued through an overdrawn account. It was also not possible to trace misappropriated money into assets acquired before the money was received.The term “Backward tracing” or “reverse tracing” describes a situation where Claimant’s property is traced to an asset the defendant already has. A typical situation is where a fraudster takes a loan to pay for an asset, then diverts trust property to pay off the loan. Strictly speaking, the beneficiary’s property has been dissipated: it has been used to extinguish a liability. However, backward tracing allows the beneficiary to claim the asset acquired by the fraudster with the loan money.This principle has been affirmed very recently in the case ofFEDERAL REPUBLIC OF BRAZIL & ANOR V DURANT INTERNATIONAL CORPORATION AND ANOR (JERSEY)  UKPC 35which will be discussed subsequently.
THE LOWEST INTERMEDIATE BALANCE RULE
Also known as the rule inROSCOE v. WINDER 1 Ch. 62.This rule simply states that where a mixed fund is dissipated from the account and further money is paid into the account, the claimant/ beneficiary’s money haven become dissipated, the claimant cannot then claim ownership of the new money. This is because, upon the dissipation of the mixed fund, the trust money is effectually extinguished.For better illustration, suppose A mistakenly pays N100, 000 to B, who withdraws that value from his bank account, reducing the account balance to zero, and spends it. B later deposits N100, 000 into his bank account and spends that money to purchase a car. The ‘lowest intermediate balance rule’ means that the transaction purchasing the car is not linked to A’s payment of N100, 000; except B’s later deposit was intended to replace the N100, 000 paid by A.The focus in the lowest intermediate balance rule upon B’sintentionemphasises the underlying concern of tracing rules is to establish a causal link between two or more transactions. It requires that the latter transaction would not have occurred ‘but for’ the earlier defective transaction.Both principles of backward tracing and lowest intermediate balance emanate from the equitable remedy of tracing and have over time become intertwined.
THE PRINCIPLES OF EQUITABLE TRACING APPLIED TO ECONOMIC AND FINANCIAL CRIME
Proceeds of economic crime often manifest as assets. In more complex economic crimes, the asset to be linked to the offence is more likely to be the product of an intervening transaction.Tracing is premised on the assumption that through transformation, the origin of assets as criminal income can be concealed and they can be easily and speedily moved between places, or across borders. They can be mingled with others and converted into other forms. This makes the task of identifying the original assets difficult for law enforcement agencies.One method of concealing the origin of illicit funds is to manipulate the timing of payments between certain accounts such that monies are credited to an account after an equivalent or related amount has been debited from that account. Under the old position on tracing established in the English case ofFoskett v McKeown, such monies cannot be traced.This attitude was however revisited by the Privy Council in the case ofFederal Republic of Brazil v Durant International Corporation et al UKPC 35
THE DECISION IN FEDERAL REPUBLIC OF BRAZIL V DURANT INTERNATIONAL CORPORATION
The Privy Council noted that the question of whether or not backwards tracing should be permitted was one of judicial policy. Traditionally, the view of the English courts was that backwards tracing could not exist because the whole concept of tracing involves identifying a new asset as a substitute for the old.The Privy Council has now held that'the development of increasingly sophisticated and elaborate methods of money laundering, often involving a web of credits and debits between intermediaries, makes it particularly important that a court should not allow a camouflage of interconnected transactions to obscure its vision of their true purpose and effect'.Where a court is satisfied that the various steps are part of a co-ordinated scheme, it should not matter that (either deliberately or because of the mechanics of the banking system) debits and credits in the various accounts do not necessarily directly correspond to each other.
BRAZIL v DURANT (Contd.)
Previously, the 'lowest intermediate balance' principle had limited a claimant's ability to trace funds into a bank account to the lowest balance held between the date of misappropriation and the date on which the claim is brought, even if funds were subsequently paid into the bank account so as to restore the balancein this case, the council took a practical approach and recognised that sophisticated money launderers "often involve a web of credits and debits"between intermediaries and are able to "camouflage (…) interconnected transactions to obscure (…) their true overall purpose and effect.“By holding that the rules of equitable tracing should be more flexible – focusing on the substance of a transaction rather than its form – the law is better equipped to deal with complex schemes designed to launder moneyThe test proposed for backward tracing is broad, and will inevitably mean more discretion on the part of judges. In this respect, the Privy Council’s decision suggests a change of emphasis – from legal certainty to the need to fight fraud in the modern world and uphold fiduciary duties
DOES/CAN TRACING WORK IN NIGERIA?
Legislation which provides for the tracing, freezing, seizing and forfeiture of funds or other assets derived from corruption is a powerful weapon in anti-corruption strategies because it targets the essential motive of corruption- economic gain.Currently, Nigeria appears largely to be operating a “Conviction-based Asset Forfeiture Regime” which makes final forfeiture subject to a conviction on the predicate offence of money laundering or economic crime.Nigeria has invested in a wealth of Anti-money laundering laws to curb the prevalent menace of corruption and unjust enrichment including:EFCC ACT, 2004-This is an act which establishes the economic and financial crimes commission saddled with the responsibility of investigating and prosecuting financial crimes.Section 28of the Act-Where a person is arrested for an offence under this Act, the Commission shall immediatelytraceand attach all the assets and properties of the person acquired as a result of such economic and financial crime and shall thereafter cause to be obtained an interim attachment order from the Court.Money Laundering (Prohibition) (Amendment) Act 2012
TRACING IN NIGERIA (Contd.)
NIGERIAN FINANCIAL INTELLIGENCE UNIT REGULATON, 2015- NFIUis the Nigerian arm of the global Financial Intelligence Units (FIUs) domiciled within the EFCC as an autonomous unit. The NFIU core mandate states that it is a“national center for the receipt and analysis of: (a) suspicious transaction reports; and (b) other information relevant to money laundering, associated predicate offences and terrorist financing, and for the dissemination of the results of the analysis to law enforcement and anti-corruption agencies.”RECOVERY OF PUBLIC PROPERTY (SPECIAL PROVISIONS ACT)- makes provisions for the Investigation of the assets of any person who is alleged to have been engaged in corrupt practices, unjust enrichment of himself or any other person who has abused his office or has in any way breached the code of conduct for public officers.Treaties:1. United Nations Convention against Illicit Traffic in Drugs and Psychotropic Substances, adopted in 1988 (1988 Vienna Convention), has specific provisions pertaining to Mutual legal assistance.
TRACING IN NIGERIA (Contd.)
2. UN Convention against Transnational Organized Crime (UNTOC),3. UN Convention against and against Corruption (UNCAC),4. The Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime.5. The AU Convention on Preventing and Combating Corruption; - objective the promotion of the regional co-operation agenda, providing improved mutual law enforcement assistance, including extradition, investigations, confiscation and the seizure and repatriation of proceeds of corruption within member states.6. The Stolen Asset Recovery Initiative (StAR)-The Stolen Asset Recovery Initiative (StAR) is a partnership between the World Bank Group and the UNODC that supports int’l efforts to end safe havens for corrupt funds.StARworks with developing countries and financialcentersto prevent the laundering of the proceeds of corruption and to facilitate more systematic and timely return of stolen assets.7, The Financial Action Task Force (FATF) is an independent inter-governmental body that develops and promotes policies to protect the global financial system against money laundering, terrorist financing and the financing of proliferation of weapons of mass destruction. The FATF Recommendations are recognised as the global anti-money laundering (AML) and counter-terrorist financing (CFT) standard.
CHALLENGES TO THE APPLICATION OF PRINCIPLES OF TRACING IN NIGERIA
There is no legislation in Nigeria currently that supports the principles of backward tracing or lowest intermediate balance.NOTE: Third Party Rights; Innocent purchaser for value still protected.Currently, tracing and forfeiture of illegally-acquired assets is generally tied to specific offences under different legislation i.e. predicate offence must be established.FRN v. YAHAYA(supra).NOTE:Backward tracing does not rely on conviction on predicate offence.Lack of accurate statistical data on disbursement and use of public funds.NOTE:ByS. 86of the 1999 CFRN, the Auditor-General of the Federation ought to lay Report at NASS annually. In the past, such Reports have led to the ‘discovery’ that the NNPC ought to refund over$ 1.8 billionetc. This Report is not laid frequently enough, and when laid, is hardly comprehensive enough.False depositions on Asset declaration forms, which therefore makes it impossible to discern properties owned by public officials at the time they enter into office and what they have acquired after their tenure. NOTE: There is a Bill for an Act to make all assets declaration by public officers public.
No central and easily-accessible Properties’ or Funds Transfer Register. In the UK, the Clearing House Automated Payment System (CHAPS) processes trillions of GBP in funds transfer and asset purchases via a transparent and accessible system.Weak mutual legal assistance regime.EFCC can only freeze funds in accounts by a Court Order (DANGABAR v. FRN)or place temporary “Stop Order” for 72 hours-S. 6(5)(b) MLA 2011. Persons can quickly transfer funds before Order is obtained or as soon as “Stop Order” expires.
There is no known statute or judicial decision by which the principles of backward tracing and lowest intermediate balance can be applied in Nigeria.What appears to apply is a conviction-based forfeiture of assets traceable to proceeds of crime or illicit activity. Unclear what happens where proceeds now mixed with other legitimate/innocent funds.Nevertheless, the existing legislation allow for funds and assets illegally acquired to be forfeited to the State in a wide variety of cases.More legislation and judicial activism may be required to apply backward tracing, in view of the effects on innocent 3rdparty purchasers for value.Nigeria may however apply under relevant Mutual Legal Assistance regimes to take advantage of backward tracing and confiscation in jurisdictions where they apply e.g. UK, US, even though principle not recognized under Nigerian Law.
Amendment of EFCC Act, MLA, ACJA and relevant statutes to include provisions on backward tracing.Training of judicial officers to apply principle to the exclusion of 3rdParty interests. Balance should determined by Judges on a case-by-case basis.Multi-agency collaboration for prompt sharing of financial intelligence.NFIUmust be better staffed and equipped. Data Protection Unit/ Agency may be established to centrally store data.Establish aProceeds of Crime Recovery and Management Agency (PCRMA)and pass the proceeds of Crime Bill which is pending before the NASS. PCRMA will have authority to enhance the effectiveness of investigations and tracing proceeds of crime, and have custody of confiscated and forfeited assets. This will require the Agency to manage those assets and to maintain an inventory of all assets concerned, with details on their location, value, condition and link to judicial proceedings.Increased budgetary allocation to the EFCC and ICPC to enable them effectively carry out extensive (and expensive) tracing. ALTERNATIVELY: Agencies can retain a percentage of recovered monies to fund their operations.
Adoption of the Funds Settlement system used in the UK e.g. the Clearing House Automated Payment System used in the UK for funds transfer and exchange electronically monitors all payments made in and out of the UK. In2015alone, CHAPS recorded transactions worth over£ 68 trillion.All of these transactions are available for scrutiny.The Auditor-general’s report which is required to be brought before the NASS at regular intervals and whose purpose would have been to ascertain any loopholes in the nation’s expenditures and income, has been neglected. Resuscitating this provision entrenched in Section 86 and 125 of the Constitution of the Federal Republic of Nigeria would no doubt aid the accountability in government