Article: Chambers Guide – Civil Fraud
Fraud, corruption and other financial crimes are serious threats to businesses and wider society. There is nothing remarkable in this observation, and the English courts have long tackled these threats with a proactive and policy-driven approach to civil actions. As Lord Templeman stated in Attorney General for Hong Kong v Reid in 1994: “Bribery is an evil practice which threatens the foundations of any civilised society”.
Fraud finds its home in systems that permit secrecy and anonymity. Advances in technology and international trade have enabled fraudsters to use increasingly opaque and complex techniques. In recent years, we have seen a surge in cases of monies being misappropriated on an industrial scale by senior government officials, ministers and connected parties. The globalisation of finance has allowed such activities to grow to jaw-dropping levels.
Large-scale international fraud could not happen without an expanding network of international third party enablers such as banks, investment firms and other advisers. This development of an ecosystem of culpable third party facilitators demonstrates how vulnerable the global financial system is to fraud and financial crime. While investment firms and banks in the UK are subject to some regulation and enhanced due diligence requirements are in place (e.g. for politically exposed persons), this regulatory environment is far from bulletproof. Moreover, there is a plethora of advisers in both the UK and abroad who are unregulated. The English civil courts provide ways to hold to account parties who facilitate fraud either knowingly or with Nelsonian blindness. However, the system is not without its limitations.
Tackling these challenges requires resource coupled with effective cooperation across jurisdictions between criminal authorities. This article provides an overview of some of the challenges and trends with which civil fraud practitioners are, or should be, grappling.
Fraud without frontiers
In his entertaining work Moneyland (2018), Oliver Bullough made the blunt but obvious point for those practising in this area that “money flows across frontiers, but laws do not”. The use of complex international corporate and trust structures to both commit fraud and hide ill-gotten gains is not new. However, the sophistication and extent of these tactics have advanced.
The English courts are well equipped to tackle the myriad complexities of international fraud and to apply foreign laws where required, provided a good arguable case can be made out against an anchor defendant domiciled in the UK. Recent cases concerning wealthy individuals who spend their time in multiple countries can create complexity in “anchoring” a primary defendant. The English courts have adopted a pragmatic approach to this issue. In Tugushev v Orlov  EWHC 645, the court conducted a fact-based enquiry into the substantive activities and connections of the anchor defendant to the UK, not simply how long that defendant spent in the jurisdiction.
International fraud cases often involve culpable third-party foreign enablers against whom recoveries and evidence can be obtained. The European and common law regimes which permit the joining of foreign third party defendants to an English claim against an anchor defendant are fundamental. It remains to be seen what challenges we will face when the UK leaves the EU.
The current regime allows for the joining of overseas defendants who are necessary or proper parties to an action against a UK anchor defendant. This is an effective way for the English courts to determine issues and relevant parties together, which is crucial in complex international fraud cases and to hold foreign third party enablers to account. However, the issue of engaging English jurisdiction is thorny. It is one of the first milestones in a civil case and is often used by defendants to obfuscate and delay the progression of claims. The courts have expressed some frustration at cases of the tail wagging the dog in this way. In the Supreme Court decision of Vedanta Resources PLC v Lungowe & Ors  UKSC 20, Lord Briggs commented that “despite frequent judicial pronouncements to the same effect, yet again to emphasise the requirements of proportionality in relation to jurisdiction appeals, suggests that, unless condign costs consequences are made to fall upon litigants, and even their professional advisors, who ignore these requirements, this court will find itself in the unenviable position of beating its head against a brick wall”.
Jurisdiction in international fraud cases will continue to test the English courts. Practitioners need to be aware that while the English courts have stressed the need for proportionality and to avoid state trials at an early stage, claimants are expected to present a fair case to satisfy the court that: (a) the claims raise a serious issue to be tried; (b) there is a good arguable case that the claims fall within one or more gateways to permit service out of the jurisdiction; and (c) England is the proper place to bring the claims. Service out applications are usually conducted on a without notice basis, and the recent case of The Libyan Investment Authority v JP Morgan & Ors  EWHC 1452 provides a cautionary tale for those who fail to comply with their duties of full and frank disclosure.
Show me the money
Disclosure and interim asset restraint relief provide vital methods to unpick the carefully laid structures of anonymity and secrecy that fraudsters readily use to hide wrongdoing. The concept of the worldwide freezing order and the disclosure that a party can obtain through this relief are well known. So too is the ability to obtain wider tracing relief in the context of proprietary claims. Case law has evolved to extend definitions in the standard commercial court freezing order to capture the level of opacity that fraudsters use. For example, the Pugachev litigation saw the courts adopt a “trust busting” approach to disclosure by requiring the respondent to disclose the details of discretionary trusts (a structure regularly used to mask the ongoing interests of wrongdoers in valuable assets).
Whilst draconian, disclosure at an interim stage has its limitations. In FM Capital Partners Ltd v Marino & Ors  EWHC 2889, the court confirmed that the assets of a third party, including those of a company controlled or owned by a respondent, do not of themselves fall within the scope of a standard freezing order. Of course, if it can be shown that the company is merely a nominee vehicle for the respondent, there are ways to pierce the corporate veil.
Tapping into the wider third party ecosystem of a fraud is possible through valuable third party disclosure orders. This is an important way to uncover sophisticated methods of concealment, especially in light of technological advancements as to how assets are created and transferred. The emergence and rapid growth of cryptocurrencies over the past 10 years is a good example. Not only have we seen the introduction of a new asset class with characteristics that can be abused by fraudsters, but also a new type of middleman: crypto-exchanges. As true cryptocurrencies are anonymous or pseudonymous, crypto-exchanges are the most important point-of-entry for anyone wanting to pursue fraudsters and the proceeds of crime through assets owned via a blockchain. Reputable crypto-exchanges will comply with the highest anti-money laundering standards, and as such should have details of all their wallet-holders. For any claimant armed with the relevant disclosure order, crypto-exchanges are the most important source of information for identifying wrongdoers.
In principle, Bitcoin and other true cryptocurrencies can be traced with relative ease through their respective blockchains (provided tools to scramble wallet identities with tumblers have not been used) when compared with tracing through traditional bank accounts. The latter requires multiple Bankers Trust orders, a cumbersome process that can often result in the fraudster remaining one step ahead.
In contrast, if a cryptocurrency is tracked rapidly to an exchange wallet, claimants have a better chance of identifying and securing cryptocurrencies by obtaining orders for the disclosure of the identity of a wallet holder, via the crypto-exchange. The English courts have adopted a progressive approach to this development. For example, in 2018 the English courts imposed a freezing order against “persons unknown” (in the case of CMOC Sales & Marketing Ltd v Persons Unknown  EWHC 2230). More recently, the courts have recognised that cryptocurrencies may constitute personal property and therefore be amenable to proprietary injunctions and remedies (for example, asset preservation orders over Bitcoin in the case of Robertson v Persons Unknown).
However, where a stolen cryptocurrency is not sent to an exchange wallet, claimants and the courts will have to develop more innovative tactics. Most cryptocurrencies are only pseudonymous. Wallet-holders can be identified but not necessarily quickly and at a significant cost, though both speed and cost will inevitably reduce as the technology develops. Further, while court orders can already be written into transactions on the Bitcoin blockchain, effectively giving notice to the fraudster and publicly tainting the Bitcoin, this does not prevent transfers by anyone happy to take the tainted coins. That said, if wallet-holders can ultimately be identified (still a big “if”), and if stolen coins can be tainted by asset restraint orders, then the ability of anyone to pass title in Bitcoin may be severely hampered, increasing a claimant’s prospects of recovery.
When dealing with fraud cases, knowledge is power. Gathering evidence through early relief and pursuing the wider ecosystem of third parties involved in fraud will remain a cornerstone of this practice area. This requires international cooperation and judicial support. The English courts remain proactive, but the ability to secure international cooperation can present challenges. Mutual cooperation between the UK and Europe may be tested in the context of Brexit, and dealing with cases touching jurisdictions that do not readily enforce English judgments and orders remains problematic.
Parallel criminal proceedings in the context of civil asset recovery will continue to present opportunities and challenges for civil practitioners. In particular, the issue of gathering evidence and sharing information in multi-jurisdictional parallel proceedings requires careful thought. In the UK, the Unexplained Wealth Order as a state civil recovery tool with extraterritorial effect may offer some scope for cooperation with civil asset recovery practitioners, but this tool simply has not been used enough to judge its efficacy.
Pia Mithani, Mo Bhaskaran, Marc Jones