Tracing Proceed of Fraud and Corrupt Enrichment

“TRACING PROCEEDS OF FRAUD AND CORRUPT ENRICHMENT, CHALLENGES AND PITFALLS”

BEING THE TEXT OF A PAPER DELIVERED BY CHIEF GODWIN OBLA, SAN, FCIARB AT THE LAW DIGEST 4TH ANNUAL CROSS-BORDER LITIGATION AND ASSET RECOVERY FORUM 2016

DATE: 3 NOVEMBER 2016

VENUE: LAGOS

INTRODUCTION

Every year, corruption results in the loss of billions of dollars across the world, especially in developing countries in Africa and other societies with weak governance models^[1]. A large proportion of the assets acquired through acts of corruption are never retrieved by victim countries for one simple reason: it is impossible to locate them amidst the labyrinth of complex money laundering schemes designed to mask their origin and destination. Corrupt persons in both the public and private sectors frequently use the opportunities presented by financial services providers and so-called ‘gatekeepers’- principally domiciled in financial centres such as New York, Tokyo and, more recently, emerging hubs such as Panama- to obscure the proceeds of their unlawful activities. The proceeds of criminal conduct are often relocated to these financial centres to thwart or complicate efforts by law enforcement agencies to identify and trace assets acquired in the process^[2].

The success of public corruption, money laundering and most financial crime investigations, therefore, depends largely upon the criminal investigator’s ability to track the ownership trail of money and other assets. Proceeds of crime represent criminal income. They often manifest themselves as stolen funds. However, in more complex financial crimes, the assets to be linked to the offence are more likely to be the product of an intervening transaction and in a fungible form, thus making it easier to move them between locations, or across borders. They can be mingled with others and converted into other forms.  

In addition to often providing evidence of criminal intent and identifying otherwise unknown accomplices, tracking the ownership trail may also lead to the seizure of property constituting illegal proceeds. This process of seizure and recovery strikes at the heart of the whole criminal assets by depriving the perpetrators of the profits of their crime. In the words of Gaspare Mutolo, a mafia don who was collaborating with an Italian anti-mafia commission back in 1992,

“The worst feeling is when our money is taken away from us. People prefer to be put behind bars and keep their money than to stay free without the money! Money is the main thing.”^[3]

As a preliminary activity to the recovery of stolen assets, the identification and tracing of the proceeds of crime and securing the property for final confiscation is an essential part of the process. It is still comparatively rare for investigators, especially in developing countries, to, as a routine part of the investigation of major proceeds-generating offences, ‘follow the money’ and establish what happened to the proceeds^[4].

Consequently, the use of intelligence-based techniques to investigate complex criminal investigations is now becoming increasingly the international norm. It has a particularly prominent role to play in the tracing of the proceeds of serious economic crimes and corruption. In the case of complex economic crime and corruption investigations where there is often a myriad of personalities and different complex financial vehicles often used in overseas jurisdictions, the use of differing forms of intelligence has become a ‘must-have’ tool, and proved critical to initial research into allegations of corruption.

This essay thus seeks to highlight issues relating to the tracing of assets, identify the challenges and proffer working solutions.

THE CONCEPT OF TRACING

The term “tracing” can be referred to 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.^[5]

Tracing in the context of global corruption refers to the identification of proceeds of crime or criminal conduct by the location of assets acquired and investments made with such proceeds.

Tracing as a general term has its origins in common law and equity, however the fundamental elements to be established in the rules of tracing in relation to money laundering are: (i) that there is a transaction involving proceeds of crime and (ii) there is a causal link between the crime and the transaction. Neither is sufficient by itself. As for transactions, it is essential that a transaction occur before tracing can be possible.

THE CONCEPT OF TRACING IN COMMON LAW AND IN EQUITY

Tracing at common law operates principally in the sphere of physical property as subject of a trust. Thus, an owner of property is empowered to trace the legal ownership of his property through an exchange, so long as it does not involve any mixing of such property with another^[6]. However, tracing at common law is only possible where the person trying to trace holds legal title to the property. Secondly, where the property is still identifiable, tracing at common law may lead to a proprietary claim, however where the property has been mixed so that it is no longer identifiable, tracing at common law becomes impossible.

 It follows therefore that it is impossible under common law to trace money into a bank account when that account is credited with both claimant’s money and money from some other source. In the famous case of Taylor v Plumer^[7]  Per Ellenborough CJ stated that, “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.”^[8] 

Stemming from the above, it has also been held in the case of Russell Gould Pty Ltd v Ramangkura^[9] that at common law, it is not possible to trace into an overdrawn account. The New South Wales Court of Appeal held that the single payment sought to be traced concealed two transactions. The first transaction was that the company had discharged a debt owed to its director in the amount of the payment. The second transaction was that the director had instructed the company’s bank to pay the money to the defendant. In terms of an unjust enrichment analysis, since the director had a justifiable reason for the receipt of the money, there could be no unjust enrichment claim against him and the payment could not be traced into the subsequent transaction. However, the Court of Appeal also said that it would not have been possible to trace the value to the defendant because the process of tracing was defeated by the payment into her loan account. Barrett JA (with whom Bathurst CJ and Ward JA agreed) said that the “money had no identifiable existence after the payment” and that no process of following or tracing countenanced by the common law allows to be identified in the Defendant's hands anything that represents that money.