Fraud, Asset Tracing & Recovery, Country Analysis, CDR Essential Intelligence – White Collar Crime, Anti-Corruption & Fraud

Emily Parkin

I  Executive summary

Fraud, asset tracing and recovery always present
challenges.  Fortunately, in the U.S., the process is less
problematic because we have the benefit of:

  • established common law and statutory law designed to protect
    against fraud;

  • well-developed case law interpreting the law;

  • a well-trained and educated judiciary;

  • adherence to the Rule of Law;

  • effective criminal law enforcement authorities that assist with
    the pursuit of criminal wrongdoing; and

  • a legal system that protects the parties’ rights while
    providing effective relief to victims of fraud and other
    illegalities.

The system is not perfect, and there are often limitations or
restrictions that make the pursuit of fraud difficult,
time-consuming and expensive.  Nevertheless, the U.S. legal
system is admired as one of the most effective for combatting
fraud.  The intent of this chapter is to give the reader a
better understanding of the U.S. legal framework relating to fraud,
asset tracing and recovery.

II  Important legal framework and statutory underpinnings
to fraud, asset tracing and recovery schemes

The U.S. has federal jurisdictions and 50 states, plus the
District of Columbia, Puerto Rico, and other districts and
territories.  In addition to consulting federal law, one must
analyse the laws of the various other jurisdictions that could
apply.  The state and local systems are beyond the scope of
this chapter, but one should review applicable state laws for any
helpful claims or remedies.

A) Fraud causes of action

1 Common law fraud

The most basic fraud claim is common law fraud.  Common
law, or judge-made law, is the body of law in the U.S. derived from
judicial precedent, as opposed to legal codes and statutes. 
The U.S. traces its common law history to England.  In
general, common law fraud occurs when a party makes a false
representation of fact to another party who relies on the
representation and is injured as a result.  (See, e.g.,
Vicki v. Koninklijke Philips Elecs., N.V., 85 A.3d 725,
773 (Del. Ch. 2014) (citing Delaware law); Cromer Fin. v.
Berger
, 137 F. Supp. 2d 452, 494 (S.D.N.Y. 2001) (citing New
York law).)  The representation must be material and the
injured party must be unaware of its falsity.  (See, e.g.,
Strategic Diversity, Inc. v. Alchemix Corp., 666 F.3d
1197, 1210 n.3 (9th Cir. 2012) (citing Arizona law).)

Less commonly, a claim may exist based on fraud by
non-disclosure, which occurs when a party fails to disclose
material facts that the non-disclosing party has a legal duty to
disclose.  The injured party must rely on the non-disclosure
and be injured as a result.  (See, e.g., Bombardier Aero.
Corp. v. SPEP Aircraft Holdings, LLC
, 572 S.W.3d 213, 219-20
(Tex. 2019) (citing Texas law); Wallingford Shopping, L.L.C. v.
Lowe’s Home Ctrs., Inc.
, No. 98 Civ. 8462 (AGS), 2001 U.S.
Dist. LEXIS 896, *43-44, 2001 WL 96373 (S.D.N.Y. Feb. 5, 2001)
(citing Connecticut law).)

2 Statutory fraud

U.S. federal and state laws contain various types of statutory
fraud.  These statutes were enacted to address fraud committed
in the course of a particular type of transaction (e.g., securities
fraud or real estate fraud).

a) Securities fraud

The most significant securities fraud statutes are found in the
Securities Act of 1933 (the “Securities Act”) (15 U.S.C.
§§ 77a et seq.) and the Securities Exchange Act
of 1934 (the “Exchange Act”) (15 U.S.C. §§ 78a
et seq.).  The U.S. Securities and Exchange
Commission (“SEC”) has supplemented the anti-fraud
provisions of the Securities Act and the Exchange Act with its own
rules, which also provide causes of action.  For example, SEC
Rule 10b-5, codified at 17 C.F.R. § 240.10b-5, supplements
Section 10(b) of the Exchange Act by making it unlawful to make an
untrue statement of material fact in connection with the purchase
or sale of a security (17 C.F.R. § 240.10b-5).

Some causes of action in securities laws provide a private right
of action, meaning that a private party may bring suit based on the
statute; SEC Rule 10b-5 is one example.  Other causes of
action are available only to the government; e.g., claims under
Section 17 of the Securities Act.  (See SEC v.
Pocklington
, No. EDCV 18-701 JGB, 2018 U.S. Dist. LEXIS
227362, *42, 2018 WL 6843663 (C.D. Cal. Sept. 10, 2018) (stating
that no implied private right of action exists for Section 17(a)
claims).)

In addition to the federal securities laws, states have adopted
their own securities regulations known as “blue sky
laws”, many of which allow private rights of action for
injured parties.  (See, e.g., Tex. Civ. Stat., Title 19, Art.
581-1 et seq.)

b) Other types of statutory fraud

States have enacted numerous statutes addressing fraud in
various contexts.  For example, Section 27.01 of the Texas
Business & Commerce Code provides a cause of action and
exemplary damages for a person injured by fraud in a real estate or
stock transaction.  All states have laws prohibiting the use
of deceptive trade practices, including fraud.  (See, e.g.,
Cal. Bus. and Prof. Code §§ 17500 et seq.; 2019
Minn. Stat., Chapter 352D, § 325D.44 et seq.) 
Also, Title 18 of the U.S. Code, as well as the statutes of each
state, make the commission of fraud a criminal offence in many
contexts.  (For example, using the mail to commit fraud is
prohibited by 18 U.S.C. § 1341.)

c) Fraudulent transfer law

The U.S. has a well-developed body of law permitting creditors
to recover fraudulent transfers of money and other property. 
Most states have adopted the Uniform Fraudulent Transfer Act
(“UFTA”) or the more recent Uniform Voidable Transactions
Act (“UVTA”), with minor differences existing between the
statutes enacted by the states.  (See, e.g., Tex. Bus. &
Com. Code §§ 24.001 et seq. (setting forth
Texas’s version of the UFTA).)  The U.S. Bankruptcy Code
also contains provisions allowing for recovery of fraudulently
transferred property, which are generally similar to the UFTA and
UVTA (11 U.S.C. § 548).

The UFTA and UVTA allow for recovery of two types of fraudulent
transfers.  The first type – transfers made with actual
intent to hinder, delay, or defraud a creditor – are commonly
referred to as actual fraudulent transfers.  (See, e.g., Tex.
Bus. & Com. Code § 24.005(a)(1).)  Despite the name,
fraudulent intent is not required so long as the transfer was at
least intended to hinder or delay a creditor’s collection
efforts.  Fraud is, by definition, secretive.  The UFTA
and UVTA provide a non-exclusive list of factors (so-called
“badges of fraud”) a court may consider in determining
whether a transfer was made with fraudulent intent (e.g., that the
transfer was concealed) (Tex. Bus. & Com. Code §
24.005(b)).

The second type of recoverable transfer is commonly referred to
as a constructively fraudulent transfer.  Constructively
fraudulent transfers need not involve actual fraud, but merely
require that the transferor received less than reasonably
equivalent value for the property transferred.  In addition,
constructive fraudulent transfer law has a solvency element: the
transfer must have been made while the transferor was insolvent,
undercapitalised, or unable to pay its debts as they became
due.  (See, e.g., Tex. Bus. & Com. Code §§
24.005(a)(2), 24.006(a).)  Constructive fraudulent transfer
law protects creditors by discouraging a party with limited assets
from transferring those assets away for less than reasonably
equivalent value.

A creditor with a fraudulent transfer claim may sue both the
initial transferee of the transferred property and any subsequent
transferee.  But a subsequent transferee who took the property
in good faith and in exchange for value is immune from a fraudulent
transfer suit.  (Tex. Bus. & Com. Code §
24.009(b).)  In this way, U.S. fraudulent transfer law
balances protecting a creditor’s right to recover property
while protecting innocent third parties who took property without
knowledge of the fraudulent transfer.

B) Tools for practitioners

1 Discovery

Practitioners seeking to trace and recover assets can use the
extensive discovery process allowed in American litigation. 
Litigants may serve requests for production of documents, demand
that adversaries answer sworn interrogatories, and depose
witnesses.  (See, e.g., Fed. R. Civ. P. 30-34.)  Third
parties may be compelled by subpoena to provide testimony or
produce documents.  (See, e.g., Fed. R. Civ. P. 45.) 
Some U.S. jurisdictions permit pre-suit discovery from third
parties.  However, the U.S. lacks a uniform streamlined
process such as the Norwich Pharmacal orders allowed in the U.K.,
which permit the requesting party to obtain a court order requiring
a third party to disclose information or preserve assets or
documents.

The permissible scope of discovery is broad.  Once a
lawsuit has been filed and the defendant has appeared, the
plaintiff can generally obtain discovery regarding any
non-privileged matter that is relevant to a party’s claims or
defences and proportional to the needs of the case. 
Information need not be admissible in evidence to be
discoverable.  (See, e.g., Fed. R. Civ. P. 26(b)(1).) 
Courts in the U.S. also generally prefer disputes to be resolved
after discovery has been conducted, meaning that a plaintiff need
not obtain and plead most of its evidence when it files its initial
complaint.  Some U.S. jurisdictions do require that certain
claims be pled with particularity, including fraud claims. 
(See, e.g., Fed. R. Civ. P. 9(b).)

For these reasons, the discovery process may be the most potent
tool for practitioners to uncover concealed assets.  In
limited circumstances, a party may conduct discovery prior to
filing a lawsuit, though the extent to which pre-suit discovery is
allowed varies significantly between U.S. jurisdictions.  For
example, Texas Rule of Civil Procedure 202 permits pre-suit
discovery to investigate a potential claim, while Illinois Supreme
Court Rule 224 generally allows pre-suit discovery only to identify
potential defendants.

2 Injunctive relief

A party concerned that someone may take steps to shelter or
conceal assets should consider requesting injunctive relief. 
An injunction is an equitable remedy under which a court orders the
enjoined party to refrain from certain acts.  Temporary
injunctions (also called preliminary injunctions) operate to
preserve the status quo until a case can proceed to
trial.  Temporary restraining orders remain in place for only
a brief period (e.g., 14 days) until a request for a temporary
injunction can be heard.  Permanent injunctions permanently
require the enjoined party to refrain from engaging in certain
conduct.

A temporary injunction can serve as an important remedy for a
party who suspects that another party is fraudulently transferring
assets.  The party should apply to the court for a temporary
injunction preventing the other party from disposing of property
without court permission.

Although temporary restraining orders can often be obtained on
an ex parte basis, temporary injunctions typically require
an extended hearing on the following elements: (1) proof of an
underlying cause of action (e.g., actual fraudulent transfer); (2)
a probable right to recover on the underlying claim; (3) probable,
imminent, and irreparable harm to the applicant if the injunction
is not granted; (4) the injury that will occur if the injunction is
not granted outweighs any harm that will result from granting the
injunction; and (5) a showing that the injunction serves the public
interest.  (Paulsson Geophysical Servs. v. Sigmar,
529 F.3d 303, 309 (5th Cir. 2008); Butnaru v. Ford Motor
Co.
, 84 S.W.3d 198, 204 (Tex. 2002).)

An injury is irreparable if the applicant cannot be made whole
with an award of damages against the enjoined party
(Butnaru, 84 S.W.3d at 204).  If the enjoined party
violates the injunction, it may be held in contempt of court and be
subject to criminal and/or civil liability.

3 Receiverships

A more drastic equitable remedy is a court-appointed
receiver.  Under U.S. law, a receiver is a custodian who takes
control of a business or enterprise, generally to preserve its
value.  Both federal and state courts may appoint receivers
and litigants may file applications seeking their
appointment.  (See, e.g., Fed. R. Civ. P. 66 (providing that
an action in federal court in which the appointment of a receiver
is sought is governed by the Federal Rules of Civil Procedure);
Brill & Harrington Invs. v. Vernon Savs. & Loan
Ass’n
, 787 F. Supp. 250, 253 (D.D.C. 1992) (considering
several factors in appointing a receiver, such as fraudulent
conduct on the defendant’s part and imminent danger of property
being lost, concealed, or diminished in value); Tex. Civ. Prac.
& Rem. Code § 64.001(a) (permitting a Texas court to
appoint a receiver in several situations, including for an
insolvent corporation or a corporation in imminent danger of
insolvency, and further permitting a receiver to be appointed under
the rules of equity).)

The scope of a receiver’s powers is established by court
order, meaning that most courts have broad discretion to tailor a
receiver’s powers to a particular situation.  (See, e.g.,
Fed. R. Civ. P. 66 (providing that an action in federal court in
which the appointment of a receiver is sought is governed by the
Federal Rules of Civil Procedure); Brill & Harrington Invs.
v. Vernon Savs. & Loan Ass’n
, 787 F. Supp. 250, 253
(D.D.C. 1992) (considering several factors in appointing a
receiver, such as fraudulent conduct on the defendant’s part
and imminent danger of property being lost, concealed, or
diminished in value); Tex. Civ. Prac. & Rem. Code §
64.001(a) (permitting a Texas court to appoint a receiver in
several situations, including for an insolvent corporation or a
corporation in imminent danger of insolvency, and further
permitting a receiver to be appointed under the rules of
equity).)  Typically, courts are inclined to appoint receivers
only when the person running a business has engaged in fraud or the
value of the business is in serious jeopardy.

Receiverships are potent mechanisms to unwind complex fraud
schemes affecting numerous individuals.  For an example, see
the SEC’s receivership set up to unwind the Stanford
International Bank, Ltd. multi-billion-dollar Ponzi scheme. 
See Securities and Exchange Commission v. Stanford Int’l
Bank, Ltd. et al.
, Case No. 3:09-cv-0298-N (N.D. Tex.). 
A detailed description of this receivership is beyond the scope of
this chapter, but the receivership litigation has resulted in
multiple opinions from the U.S. Court of Appeals for the Fifth
Circuit and the Texas Supreme Court on the subject of the Texas
Uniform Fraudulent Transfer Act (“TUFTA”).  As of
April 30, 2021, the receiver had recovered approximately $937.2
million in funds before deducting fees and expenses.  See
Docket No. 3086.  Additional information is available on the
case docket, the dockets of related lawsuits, and at Hyperlink.

4 Involuntary bankruptcy

Involuntary bankruptcy may be an intriguing possibility for a
party seeking to recover assets.  Most bankruptcies in the
U.S. are voluntarily filed by the debtor.  Section 303 of the
U.S. Bankruptcy Code, however, permits a bankruptcy to be filed by
one or more creditors holding claims that are not contingent as to
liability or subject to bona fide dispute.  (See 11
U.S.C. 303(b).  A single creditor may file an involuntary
bankruptcy proceeding if the creditor’s claim exceeds $16,750;
otherwise, three creditors with combined claims in the amount of
$16,750 or more must sign the bankruptcy petition. 
Id.  The minimum claim amount is periodically
adjusted upward by the U.S. Congress when the Bankruptcy Code is
amended.)  If the bankruptcy is contested by the debtor, the
court will hold a trial to determine whether an order for relief
should be entered (meaning that the case will proceed) or the case
should be dismissed (11 U.S.C. § 303(h)).

Filing an involuntary bankruptcy is a serious act and a
petitioning creditor may be subject to damages and sanctions
(including exemplary damages) if the petition is dismissed or filed
in bad faith (11 U.S.C. § 303(i)).  For a good faith
creditor concerned about preserving or recovering assets, however,
an involuntary bankruptcy has significant advantages.  The
debtor must prepare schedules of assets and liabilities and
disclose pre-bankruptcy transfers of property, with all of these
disclosures being signed under penalty of perjury (11 U.S.C. §
521(a)).  If the court approves, the creditor may examine the
debtor or third parties under oath and obtain production of
documents to determine what happened to the debtor’s
assets.  These examinations are referred to as Rule 2004
examinations, so named because they are authorised under Rule 2004
of the Federal Rules of Bankruptcy Procedure.  These
examinations are commonly granted and have been approvingly
referred to as “fishing expeditions”.

Bankruptcy courts take fraudulent representations and omissions
made in the course of a bankruptcy seriously and Title 18 of the
U.S. Code makes bankruptcy fraud a federal crime.  (See, e.g.,
18 U.S.C. § 157.)  A bankruptcy trustee may file suit to
recover fraudulently transferred property under Section 548 of the
Bankruptcy Code (11 U.S.C. § 548; see also 11 U.S.C. §
544(b), which authorises the trustee to file suit based on state
fraudulent transfer law to the extent a creditor could otherwise
bring such a suit outside of the bankruptcy).  Accordingly,
under appropriate circumstances, involuntary bankruptcies can
provide significant advantages to parties seeking to recover
fraudulently transferred assets.  For an example of a creditor
successfully using an involuntary bankruptcy proceeding to enforce
a judgment in light of alleged fraudulent transfers, see In re
Acis Capital Mgmt., L.P.
, 2019 Bankr. LEXIS 292 (Bankr. N.D.
Tex. Jan. 31, 2019) (confirming involuntary Chapter 11 plan) (full
docket available at Case No. 18-30264).  In October 2019,
Highland Capital Management, L.P., an entity affiliated with, but
adverse to, the Acis Capital Management debtors, filed its own
Chapter 11 bankruptcy proceeding.  See Case No. 19-34054-sgj11
(Bankr. N.D. Tex.).

5 Assistance to foreign tribunals (28 U.S.C. §
1782)

Section 1782 of Title 28 of the U.S. Code permits a U.S.
district court to order a person to provide testimony or produce
documents to assist a foreign tribunal.  The order may be
issued upon request by the foreign tribunal or upon application of
an interested party.  Section 1782 is an important tool for
litigants in non-U.S. proceedings to obtain testimony and
information from persons located within the U.S.

III  Case triage: main stages of fraud, asset tracing and
recovery cases

The following is a general guide to typical stages of a U.S.
proceeding based on a defendant’s fraudulent conduct:

A) Pre-suit investigation

One should conduct as much pre-suit investigation as possible
before filing suit.  Frequently, only limited information can
be obtained before filing.  But at a minimum, a party should
search public records (e.g., prior court filings, lien searches),
which are accessible online.  Internet searches and review of
public social media accounts frequently turn up significant
information that can later be used during lawsuit discovery to
uncover fraudulent conduct or hidden assets.  Parties may also
consider hiring a private investigator or paying an internet asset
search provider if the fees are reasonable.  If the applicable
jurisdiction allows for pre-suit discovery, those tools should also
be considered.  However, because many jurisdictions limit
pre-suit discovery, the party should balance whether tipping off
the suspected fraudster by requesting pre-suit discovery can be
justified by the anticipated benefit from such discovery.

When considering what steps to take before filing suit, timing
is critical.  A party who suspects that its adversary is
fraudulently transferring assets generally cannot afford to take a
leisurely approach to litigation, particularly when assets can
easily be moved.  In such circumstances, a party should
consider moving immediately for a temporary restraining order and
temporary injunction to preserve the status quo.

B) The lawsuit

A “traditional” lawsuit is the most commonly commenced
proceeding, but receivership and involuntary bankruptcy proceedings
can also be considered.  If the defendant fails to appear in
the lawsuit, the plaintiff should move for default judgment. 
(See, e.g., Fed. R. Civ. P. 55.)  If the defendant does file
an answer, the parties then generally proceed to serve
discovery.  The broad scope of discovery, and the various
discovery tools available in the U.S., are an excellent means to
uncover fraud.  If the plaintiff believes that money has gone
missing and can obtain financial records, the plaintiff should
consider retaining a forensic accountant to determine whether funds
were fraudulently transferred.

C) Judgment enforcement

U.S. courts almost never permit a party to recover assets prior
to a judgment being obtained.  A party may obtain a temporary
injunction preventing a defendant from transferring or disposing of
assets.  However, a temporary injunction order is intended
only to preserve the status quo prior to trial, not to
permit a plaintiff to seize assets.  Once a judgment has been
obtained, however, the plaintiff is generally free to enforce it
against whatever property it can locate belonging to the
defendant.  A defendant who wishes to appeal the judgment may
be able to forestall enforcement while the appeal is pending. 
(See, e.g., Fed. R. App. P. 8.)

If the defendant does not appeal, if the judgment is not stayed
pending appeal, or if an appeal is ultimately resolved in the
plaintiff’s favour, the plaintiff faces a daunting task:
identifying assets sufficient to satisfy its claims.  The
plaintiff will usually serve post-judgment discovery requests to
identify assets.  Or, in some jurisdictions, the plaintiff may
request an examination of the defendant, in which the defendant is
required to submit to examination regarding the availability of
assets to satisfy the judgment.

Once the plaintiff has located assets, it can proceed to enforce
its judgment against them, depending on the type of assets
identified.  Frequently, discovery will uncover fraudulent
transfers by the defendant.  In such case, the plaintiff can
sue to recover the transfers.

IV  Parallel proceedings: a combined civil and criminal
approach

Parallel civil and criminal proceedings have proliferated in
recent decades in the U.S.  The U.S. Supreme Court
acknowledged 50 years ago that parallel civil and criminal
proceedings are proper and constitutional (United States v.
Kordel
, 397 U.S. 1, 11 (1970)).  Such proceedings
routinely arise where one federal agency has civil regulatory
authority over a particular category of fraud (e.g., the SEC
(securities fraud), Commodity Futures Trading Commission
(“CFTC”) (commodities fraud), Federal Trade Commission
(consumer fraud)), while the Department of Justice
(“DOJ”) has concurrent criminal jurisdiction over the
same subject.

These complex situations raise a host of issues under the U.S.
Constitution and other federal law.  For example, invocation
of the Fifth Amendment’s privilege against self-incrimination
has vastly different repercussions in the criminal context –
where no adverse inference may be drawn from the invocation –
versus the civil context – where an adverse
inference can be drawn.  (See, e.g., Baxter v.
Palmigiano
, 425 U.S. 308 (1976).)

A) What are the benefits/difficulties of a combined
approach?

Parallel proceedings in which a private litigant seeks asset
recovery while a government agency simultaneously pursues the
fraudsters are also relatively common.  These situations raise
similar challenges and opportunities as in the parallel regulatory
civil and criminal prosecutions.

One issue that may arise in such situations is where a stay of
the civil proceeding is sought pending the criminal
prosecution.  If a plaintiff sues for fraud, and the
government contemporaneously prosecutes the defendant for a crime
arising from overlapping conduct, either the defendant or the
government may move for a stay.  Issuance of a stay will
obviously delay any efforts to recover assets through the civil
action.

If the defendant seeks a stay, he will argue that the civil
action should be stayed until the criminal proceeding is concluded
so that he does not have to choose between testifying (and thereby
potentially waiving his Fifth Amendment privilege in the criminal
case) and invoking the Fifth Amendment (thereby giving rise to an
adverse inference in the civil action).  If the government
seeks a stay of the civil case, it will argue that the criminal
defendant should not be permitted to avail himself of the more
liberal civil discovery procedures for use in the criminal
case.

These questions are highly fact-specific and courts do not
automatically grant a stay on the request of either party. 
Generally speaking, the more the conduct at issue in the civil and
criminal proceedings overlaps, the likelier it is that a stay will
be granted.  Courts also consider prejudice to the parties,
delay, the public interest, and other relevant factors.

B) Civil and criminal asset recovery

There are a number of potential remedies in the civil
context.  The primary remedies in the criminal context (apart
from incarceration) are asset forfeiture and restitution
orders.  The following is a brief overview of various civil
and criminal remedies.

Federal Rule of Civil Procedure 64 authorises remedies relating
to the seizure of persons or property – including arrest,
attachment, garnishment, replevin, sequestration, and other similar
remedies – to secure satisfaction of a potential judgment to
be entered in the civil action (Fed. R. Civ. P. 64; HMG Prop.
Investors, Inc. v. Parque Indus. Rio Canas, Inc
., 847 F.2d
908, 913 (1st Cir. 1988)).  Obtaining these prejudgment
remedies creates considerable leverage.

Other aggressive prejudgment relief includes temporary
restraining orders and preliminary injunctions against further
activity, freezing assets to prevent dissipation of investor
proceeds, and receiverships.  (See Fed. R. Civ. P. 64-66; 28
U.S.C. § 3103 (“Receivership”).)  A receiver is
a person or entity appointed by a court to hold property that is
subject to a dispute, whether the dispute concerns ownership or
rights in the property or claims against the property’s owner
that might be satisfied from the property.  A receiver is
obligated to manage the property, to conserve it, and to prevent
its waste.  The receiver is authorised to receive rents and
other income from the property, to collect debts, to bring or
defend actions related to it, and to receive a fee for doing
so.  A receiver is subject to court supervision and
responsible to the court for carrying out all orders regarding the
property.

Asset freezes, orders appointing receivers, and related court
orders may be enforced through civil or criminal contempt. 
Criminal contempt must be prosecuted by the government or the
court, not the private plaintiff.  Therefore, it is less
useful as a method of recovery than civil contempt.  Criminal
contempt, unlike civil contempt, involves punishment such as
incarceration or fines for doing something prohibited by a court
order.  In civil contempt, the remedy is designed to be
compensatory, not punitive.  So, if a defendant dissipates
assets or refuses to tender property to the receiver, the plaintiff
or receiver can compel compliance by showing – generally by
clear and convincing evidence – that the defendant violated
an order and is therefore in contempt.  If the contemnor does
not purge the contempt, he may be incarcerated pending compliance
with the court order.

In criminal cases, the primary means of asset recovery are
forfeiture and restitution.  Criminal forfeiture is the taking
of real or personal property by the government due to its
relationship to criminal activity, such as when the property is
used in the commission of a crime or was obtained through criminal
activity.  Civil forfeiture is similar to criminal forfeiture
except it is brought against the property itself as an in
rem
action.

Restitution means payment by an offender to the victim for the
harm caused by the defendant’s misconduct.  Courts are
empowered (and often required) to order convicted criminals to pay
restitution.

There are considerable disadvantages to relying on criminal
remedies in asset recovery.  First, the criminal authorities
may not prosecute the offence.  Of course, the victim may
assist the government and encourage prosecution, but there are no
guarantees.  If the government does prosecute, it bears the
burden of proving guilt beyond a reasonable doubt, a much higher
burden than the preponderance-of-the-evidence standard in civil
cases.  Finally, the government will have to distribute the
assets seized or restitution paid.  In practice, this may take
many years.  Because of these disadvantages, judgment
creditors and other victims of fraud should almost always pursue
their own asset recovery in the U.S. through civil proceedings.

C) How does the U.S. view private prosecutions?

Private prosecutions, meaning criminal prosecutions conducted by
private attorneys or laymen, have long been disfavoured in the
U.S., to the point of extinction.  This stands in contrast to
the U.K., where private prosecutions have flourished in recent
years.  Indeed, the U.S. has not permitted private
prosecutions in over 150 years except in exceedingly rare and
unusual circumstances.  For instance, a federal district court
may appoint a private attorney to prosecute a criminal contempt of
court if the executive branch refuses to prosecute. 
(Young v. United States ex Rel. Vuitton Et Fils, S.A., 481
U.S. 787 (1987).)

In practice, this situation is extremely uncommon and not
susceptible to prediction or planning.  Federal statutes
confer the exclusive power to prosecute crimes in the name of the
U.S. on the Attorney General and his delegates.  (See 28
U.S.C. §§ 516, 519; United States v. Nixon, 418
U.S. 683, 693 (1974) (“the Executive Branch has exclusive
authority and absolute discretion to decide whether to prosecute a
case”).)  Thus, private prosecutions are not a realistic
option for asset recovery.

V  Key challenges

Among the key challenges is the cost to pursue and recover
assets from fraudsters.  Cost can be an impediment to
deserving victims and must be managed whenever fraud and asset
recovery are being pursued.  In addition, there are challenges
in exporting recovery efforts outside the U.S.  In many
“less established” jurisdictions, there is an ad
hoc
and lengthy process for judgment enforcement, discovery is
limited or unavailable and the recovery of assets is chaotic and
unpredictable.  Some jurisdictions do not have the necessary
legal framework, experienced and trained judiciary or respect for
the Rule of Law to facilitate the recovery of assets for fraud
victims.  While the concept of a Model Law for cross-border
insolvencies undertaken by UNCITRAL has been successful, recent
UNCITRAL meetings have focused on the need for a Model Law for
asset recovery.  Although this is commendable, it may take
many years to implement.

Other challenges unique to the U.S. are outlined below.

A) Attorneys’ fees

Unlike many jurisdictions, the default rule in the U.S. is that
each party bears its own attorneys’ fees.  This is not to
say that attorneys’ fees are never recoverable in U.S.
litigation if a statute so provides.  (See, e.g., Tex. Civ.
Prac. & Rem. Code § 38.001 (providing for recovery of
attorneys’ fees in certain types of cases, such as breach of
contract cases).)  Parties to a contract are also free to
specify how attorneys’ fees should be allocated in light of a
dispute.  Without a contractual or statutory basis for fees,
however, each party must pay its own fees.  Mounting
attorneys’ fees can prove to be a significant hurdle for a
plaintiff pursuing a lawsuit and attempting to enforce a
judgment.

B) Tracing commingled proceeds

One of the difficulties frequently faced by a party attempting
to recover fraudulently transferred funds is how to identify those
funds when they are commingled with other money in a bank
account.  U.S. courts have applied several tests to address
this issue, with the most widely applied test being the lowest
intermediate balance rule.  This test assumes that the owner
of a bank account preserves fraudulently obtained money for the
benefit of defrauded victims.  Funds from other sources are
presumed to be withdrawn first.  Only if the balance of the
account drops below the amount of fraudulently obtained funds are
the victims’ funds presumed to be gone.  (See
Blackhawk Network, Inc. v. Alco Stores, Inc. (In re
Alco Stores, Inc.
), 536 B.R. 383, 414 (Bankr. N.D. Tex. 2015)
(explaining application of lowest intermediate balance
rule).)  An additional problem arises if funds are spent and
new funds are subsequently deposited.  Courts are split on
whether victims’ funds can be replenished.

C) Exemptions

A common obstacle to judgment recovery in the U.S. against an
individual person (as opposed to an entity) is state property
exemption laws.  The U.S. Bankruptcy Code also contains
federal exemptions for debtors filing for bankruptcy that differ
from state exemptions, which debtors filing bankruptcy in some (but
not all) states can choose to use (11 U.S.C. § 522(d)). 
The goal of exempt property laws is to ensure that creditors do not
leave individual debtors destitute.  The breadth of exemptions
varies significantly by state, with states such as Texas providing
robust protection with respect to real property used as a domicile
and other states providing only a limited homestead
exemption.  (Compare Tex. Prop. Code § 41.001 with Ark.
Code, Chapter §§, § 16-66-210.)

In addition, some states wholly exempt retirement accounts,
certain life insurance policies, annuities, and other financial
instruments, meaning that a plaintiff facing a debtor that has
properly structured his or her limited assets may be out of
luck.  In most states, a transfer of an exempt asset cannot
constitute a fraudulent transfer because the UFTA (in effect in
most U.S. jurisdictions) excludes exempt assets from its
scope.  (See, e.g., Tex. Bus. & Com. Code §
24.002(2).)

VI  Coping with COVID-19

So far, the economic uncertainty resulting from the COVID-19
pandemic has not exposed fraudulent schemes on the level of the
2008 economic crisis (e.g., Bernie Madoff and Stanford
Financial).  Perhaps the most notable (though unsurprising)
development is that government relief programmes intended to
mitigate the economic effects of COVID-19 shutdowns, such as the
U.S. Paycheck Protection Program (“PPP”), have proven
tempting to fraudsters.

On May 17, 2021, the U.S. Attorney General established the
COVID-19 Fraud Enforcement Task Force to marshal the resources of
the DOJ and other government agencies to enhance efforts to combat
fraud.  DOJ Fraud Section attorneys have prosecuted over 100
defendants in more than 70 criminal cases.  As of October 13,
2021, the Fraud Section had seized more than $65 million in cash
proceeds derived from fraudulently obtained PPP funds.  See Hyperlink (Oct. 13, 2021).

VII  Cross-jurisdictional mechanisms: issues and solutions
in recent times

Obtaining assistance in the U.S. on cross-jurisdictional matters
involving fraud and asset recovery can be challenging even for the
experienced practitioner.  This is not because of the lack of
available tools or an unwillingness to assist, but rather
determining what mechanisms are available and best suited for your
situation.  The online resources of the DOJ and Department of
State are an excellent starting point.  (See, e.g., U.S.
Asset Recovery Tools & Procedures: A Practical Guide for
International Cooperation
(2017).)

The insolvency process can be one of the most effective tools to
combat fraud (Jean-Pierre Brun and Molly Silver,  2020. 
Going for Broke: Insolvency Tools to Support Cross-Border Asset
Recovery in Corruption Cases
.  Stolen Assets Recovery
series.  Washington, D.C.: World Bank doc:
10.1596/978-1-4648-1439-9).  As such, it is appropriate to
discuss Chapter 15 of the U.S. Bankruptcy Code, which addresses
cross-border insolvencies.  Chapter 15 is designed to promote
cooperation between the U.S. courts and parties of interest and the
courts and other competent authorities of foreign countries
involved in cross-border insolvency cases while providing for the
fair and efficient administration of cross-border bankruptcies (11
U.S.C. § 1501.  See Chapter 15 – Bankruptcy Basics:
Ancillary and Other Cross-Border Cases (Hyperlink)).

A Chapter 15 case is commenced by a “foreign
representative” filing a petition for recognition of a
“foreign proceeding” (11 U.S.C. § 1504).  The
U.S. court is authorised to grant preliminary relief upon the
filing of the petition for recognition (11 U.S.C. §
1519).  Upon the recognition of a foreign main proceeding, the
automatic stay and other important provisions of the Bankruptcy
Code take effect within the U.S.  The foreign representative
is also authorised to operate the debtor’s business in the
ordinary course (11 U.S.C. § 1520). 

Chapter 15 is the principal means for a foreign representative
to access U.S. federal and state courts (11 U.S.C. §
1509).  Upon recognition, a foreign representative may seek
additional relief from the bankruptcy court or from other state and
federal courts and is authorised to initiate a full (as opposed to
ancillary) bankruptcy case (11 U.S.C. §§ 1509,
1511).  In addition, the representative is authorised to
participate as a party in interest in a pending U.S. bankruptcy and
to intervene in any other U.S. case where the debtor is a party (11
U.S.C. §§ 1512, 1524).

Chapter 15’s use has increased since its adoption and there
is now an established body of case law.  Moreover,
more countries have adopted some corollary of the Model Law on
which Chapter 15 is based.  Importantly, Chapter 15 is being
used more frequently in cross-border fraud and corruption
cases.  See, e.g., In re Comair Ltd. (In Bus.
Rescue)
, Case No. 21-10298-jlg, 2021 Bankr. LEXIS 3137,
*25-30, 2021 WL 5312988 (Bankr. S.D.N.Y. Nov. 14, 2021) (holding
that Section 1521 of the Bankruptcy Code may provide grounds to
conduct discovery to investigate potential causes of action against
a third party to the extent discovery would effectuate the purpose
of Chapter 15).  Accordingly, Chapter 15 must be considered a
formidable weapon in appropriate fraud, asset tracing and recovery
efforts.

VIII  Using technology to aid asset recovery

While there is no substitute for hard work, technology can be
vitally important in pursuing claims for fraud.  A party may
obtain up-to-date information regarding assets and individuals from
public and non-public databases.  Comprehensive online
resources include BlackBookOnline.info, Accurint.com and
TLO.com.  Social media has become a useful tool for
investigators to find out what might otherwise be considered
private information from numerous sites like Facebook, LinkedIn,
Twitter and Instagram.

Various products and providers offer assistance in managing data
and discovery, which can often involve millions of documents. 
Technologies like GreyList Trace (Hyperlink), while new, appear promising and can
provide information on banking relationships that help to focus
investigative resources.  Technology will continue to play an
important, and indeed critical, role in fraud, asset tracing and
recovery in the future.

Conversely, technology is being used more and more by
fraudsters, often making recovery more difficult and
challenging.  The best examples are the fast-paced
developments regarding cyber-crimes and fraud involving
cryptocurrencies.  On the other hand, proponents of blockchain
technology tout its development – and its inherent
transparency and immutability – as a game changer in
combatting fraud through improved identity verification, increased
traceability of products or financial transaction, and similar
potential benefits.  See, e.g., Ross Mauri, Blockchain for
fraud protection: Industry use cases
(July 12, 2017),
available at Hyperlink.

IX  Highlighting the influence of digital currencies: is
this a game changer?

Digital currencies have exploded in popularity since the advent
of Bitcoin in 2008, particularly in the last few years.  While
speculative investment in Bitcoin and other cryptocurrencies
initially received the bulk of media coverage, investors are
increasingly focused on making use of the inherent transparency of
blockchain transactions.  For example, the decentralised
nature of digital currencies means that cross-jurisdictional
financial transactions can, in theory, be conducted without the use
of a financial intermediary (i.e., a bank or other third-party
payment facilitator).

Complex cross-jurisdictional financial transactions often carry
the risk that a third-party payment facilitator will siphon off or
divert funds, leaving the payor and payee to determine in multiple
jurisdictions what happened to the money.  The risk of this
happening is low with an established financial institution, but
even banks risk being hacked – and these types of
transactions often involve multiple intermediaries.  The
transparent nature of the blockchain ledger allows digital
currencies and smart contracts to minimise this risk.  On the
other hand, the anonymous nature of digital currencies is appealing
to entities involved in illicit transactions, such as drug
smuggling, illegal arms transactions, and transfers of stolen
funds.

The SEC, CFTC, Federal Trade Commission, Internal Revenue,
Office of the Comptroller of the Currency, and the Financial Crimes
Enforcement Network (“FinCEN”) (along with various state
regulators) have all focused significant attention on regulating
digital currencies.  One major issue they have confronted is
which agency(ies) have jurisdiction to regulate digital
currencies.

The CFTC has generally taken the position that digital
currencies are commodities subject to the CFTC’s
jurisdiction.  See, e.g., Daniel Roberts, CFTC says
cryptocurrency ether is a commodity, and ether futures are
next
(Oct. 10, 2019), available at Hyperlink.

The SEC has taken the position that digital tokens and other
digital assets are investment contracts, and, therefore, securities
subject to the SEC’s jurisdiction.  This position has been
litigated favourably in federal court.  See SEC Obtains
Financial Judgment Against Kik Interactive For Unregistered
Offering
(Oct. 21, 2020), available at
Hyperlink
.

One area of regulation that may be of particular interest to
fraud and asset recovery practitioners is FinCEN guidance on
virtual currencies.  FinCEN’s primary mission is to
safeguard the financial system from illicit use and combat money
laundering.  As early as 2013, FinCEN issued guidance that
virtual currency exchanges and certain administrators of virtual
currency repository would be considered money services businesses
(“MSBs”) subject to FinCEN’s regulation under the
Bank Secrecy Act.  An MSB that is a money transmitter must,
among other things, implement an anti-money laundering programme
based on a comprehensive risk assessment.

While the extent of FinCEN’s jurisdiction is still being
fleshed out, the extent to which a digital currency seller must
comply with FinCEN’s regulations is an area of concern. 
FinCEN’s increased focus on digital currencies was underscored
by the appointment of its first ever Chief Digital Currency Advisor
in July 2021.  See FinCEN Welcomes First-Ever Chief
Digital Currency Advisor and First Director of Strategic
Communications
(July 6, 2021), available at Hyperlink.

To the extent digital currencies are used as speculative
investments, they are likely not game changers.  Investors
have always speculated and will continue to do so regardless of the
class of asset.  The decentralised aspects of digital
currencies (and of blockchain technology in general), however, and
the susceptibility of these currencies to misuse by bad actors
wishing to remain anonymous, present challenges to regulators, not
least of which is determining which regulatory body has
jurisdiction over digital currencies.

The potential benefits of blockchain technology for participants
in the global financial system means that exponential growth in
this area is likely over the next few years.  Perhaps the most
significant challenge faced by proponents of digital currencies is
preserving the efficiency of blockchain transactions while enacting
additional safeguards designed to allow regulators to identify bad
actors and ensure continued transparency.  Whether this
challenge can be met remains to be seen.

X  Recent developments and other impacting factors

One development that continues to receive attention is the
extra-territorial application of U.S. law, especially as it relates
to avoidance actions.  The Second Circuit Court of Appeals
addressed this issue in the context of the Madoff Ponzi scheme
(In re Picard, 917 F.3d 85 (2d Cir. 2019)).  In
declining to rule that the presumption against extra-territoriality
was applicable, the Court determined that the trustee could recover
a domestic transfer to foreign transferees (so-called “feeder
funds”) under the avoidance powers of the Bankruptcy Code
(RJR Nabisco, Inc. v. European Cmty., 136 S.Ct. 2090,
2100, 579 U.S. 325 (2016) (“absent clearly expressed
congressional intent to the contrary, federal laws will be
construed to have only domestic application”)).  As the
Court noted, under a contrary ruling, fraudsters would enjoy an
easy way to protect their ill-gotten gains (Picard, 917
F.3d at 102-03).

When this ruling is combined with a prior decision in
Madoff on the extra-territorial application of the
automatic stay (Van der Hahn, D. and Wielebinski, J.,
Extraterritoriality Arguments Ruled Extraneous: Second Circuit
Permits Trustee to Recover Fraudulent Transfers from Foreign
Recipients, International Bar Association.  Insolvency and
Restructuring International
, Vol. 13 No. 2, Sept. 2019), it
may be a harbinger of future expansion of the reach of the
Bankruptcy Code in international fraud cases (Picard v. Maxam
Absolute Return Fund, L.P.
, 474 B.R. 76, 84-85 (2012)).

The Stanford International Bank, Ltd. receivership (see Section
II.B.3 above) has resulted in multiple opinions from the U.S. Court
of Appeals for the Fifth Circuit and the Texas Supreme Court on the
scope of the TUFTA.  In 2020, the Fifth Circuit held, after
certifying the question to the Texas Supreme Court, that a
defendant in a fraudulent transfer suit must have conducted a
diligent investigation designed to uncover potentially fraudulent
conduct to be able to rely on the TUFTA’s good faith
affirmative defence.  The court rejected the defendants’
argument that they were excused from investigating fraudulent
conduct if such an investigation would have been futile.  See
Janvey v. GMAG, L.L.C., 977 F.3d 422 (5th Cir.
2020).  For a detailed analysis of the Fifth Circuit’s
opinion, see Joe Wielebinski and Matthias Kleinsasser, Ponzi
Ruling Complicates Texas Fraudulent Transfer Litigation
(Nov.
16, 2020), available at Hyperlink.

Finally, the commencement of the Biden/Harris administration has
resulted in increased enforcement by the SEC and other regulators
with respect to certain issues.  In general, the Trump/Pence
administration oversaw a decrease in enforcement actions by federal
regulators.  For example, a National Public Radio analysis
determined that the SEC brought the fewest insider trading cases in
2019 since 1996.  See Hyperlink.

Under the Biden/Harris administration, the SEC and other
regulators have focused heavily on regulating Special Purpose
Acquisition Companies (“SPACs”) and cryptocurrencies and
addressing cybersecurity risks.  See Soyoung Ho, Swift
Change in SEC Enforcement Under Biden Administration
(Aug. 11,
2021), available at Hyperlink.  The SEC has also sought to
return to an Obama-era policy that required settling defendants to
admit wrongdoing, rather than entering into “no admit, no
deny” settlements.  See, e.g., Dave Michaels, Wall
Street, Companies May Have to Give Up More to Settle With SEC

(Oct. 13, 2021), available at Hyperlink.

Originally published by ICLG

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

https://www.mondaq.com/unitedstates/white-collar-crime-anti-corruption-fraud/1184652/fraud-asset-tracing-recovery-country-analysis-cdr-essential-intelligence-

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