Whether enforcing a judgment or an arbitration award, pursuing commercial debt, or recovering expatriated stolen assets, asset recovery requires time, resources, as well as a tightly managed and thoughtful recovery strategy. Sometimes, the recovery process is relatively linear: after a debtor refuses to satisfy the judgment, the assets of the debtor must be identified and frozen, then seized and recovered.
This is fairly clear-cut when both the judgment and the debtor are in the same jurisdiction and in a country with a strong and reliable judicial system. However, increasingly disputes are cross-border and as a result, the enforcement of an eventual judgment becomes a multijurisdictional process. This introduces not only new challenges and obstacles to the asset tracing and recovery campaign, but also opportunity and potential leverage.
The process is often complicated when assets are purposely concealed, for example by kleptocrats, or protected by sovereign immunity when the debtor is a sovereign. The challenges posed by these two scenarios are distinct from, and often greater than, the challenges posed by traditional asset recovery cases, and the paths to recovery can be different. Ultimate success can take various forms – from going through many staged judicial processes to seize assets in a public manner, to creating and exerting leverage over the debtor to force an early settlement.
What are some of the primary challenges in a recovery campaign involving a sovereign?
The pursuit of a sovereign is unique for several reasons:
- Sovereign immunity: assets owned by the state are protected by sovereign immunity.
- Lack of accountability: the consequences that governments face for not paying their debt are insignificant.
- Pre-existing financial distress: quite often, the noncompliant sovereign debtors already are experiencing financial distress. As a result, they will have implemented asset protection structures, privatization funds, or other types of structures that further complicate asset attachment.
Given these complexities, an effective asset recovery strategy against a sovereign consists of a combination of judicial tools and remedies across multiple jurisdictions as well as other, often nonjudicial pressure tactics, to induce a settlement.
How do investigators decide which assets are worth pursuing?
The first step is to map out the assets that are likely exempt from traditional sovereign immunity protections. There are certain assets classes that might not have the same level of legal protections as others. In addition, depending on where an asset is located, different legal rules may apply.
Some examples of potentially attachable assets include foreign subsidiaries and affiliates of state-controlled entities, foreign-based consumers of state commodities, foreign-based payors of royalties, and foreign-based bank accounts used by the sovereign for transacting internationally. An attractive asset category is the sovereign’s “flagship” assets: overseas investments through sovereign wealth funds, planes, or vessels. These can be some of the most “valuable” assets for a recovery campaign, because of their symbolic value to the sovereign. Even a temporary seizure order can drive the sovereign to the negotiating table.
The objective when tracing sovereign assets is not to necessarily to identify assets that will be seized, but assets that can be frozen. Asset freezing helps paralyze operations, causes embarrassment, disrupts cashflows, and attracts unwanted scrutiny from the media and international regulators. In other words, freezing assets assists in exerting pressure to induce a settlement.
It is also important to gather strategic intelligence that would assist with creating additional leverage against the debtor. For example, uncovering nefarious conduct by government officials and specifically identifying assets abroad owned by these officials that are likely the result of corruption or embezzlement. This results in information that can be leveraged to create pressure on the sovereign through collaboration with law enforcement in the country where the assets are located, and potentially could result in seizure of assets—as they are ultimately assets that belong to the state.
Additionally, it is advantageous to find out what negotiations the sovereign might be in with foreign investors. Informing prospective investors or business partners of the risks of doing business with the sovereign, especially during ongoing negotiations or the sovereign’s campaign to attract foreign investment, can be effective.
What are the unique challenges when tracing and recovering the assets of kleptocrats?
When a sovereign state has “cleaned house” and looking to recover assets which may have been misappropriated and well hidden by members of a previous administration, the challenges are equally distinctive.
These challenges include identifying the right client—making sure the agency pursuing the recovery campaign has relevant investigative and/or enforcement authority. Further, a change of government may create additional political dimensions underlying the recovery and the resulting political instability could interfere with legal recovery priorities and timing. Political alliances remaining from the prior regime can have damaging effects on a discreet investigation, causing repatriated assets to end up in the wrong hands.
When tracing the assets of kleptocrats, the primary goal is to unravel the obfuscated asset protection structures created by the kleptocrats to conceal the stolen assets. The first question then becomes, where are the assets?
Kleptocrats will frequently make use of offshore entities to hide their interests and act as a shield against recovery. Because they provide limited public information about shareholders and directors, offshore entities can be a challenge for investigative agencies to penetrate. What is especially unique about kleptocrats is that they often use proxies to nominally own assets for them, while still leveraging these offshore structures. As government officials, they avoid amassing any assets under their name to avoid having to make relevant local disclosures. In practice, proxies can be trusted friends, lawyers, accountants, or other associates acting as the owner of a particular asset, albeit on paper only. In reality, the kleptocrat and his family are the true beneficial owners, enjoying use of the assets.
The use of proxies also enables easier access to the international banking system for kleptocrats. While kleptocrats and their family members are likely to be flagged during a bank’s onboarding procedure, proxies can often evade these measures, passing off the kleptocrat’s assets as their own. Indeed, proxies are often chosen for their anonymity.
What investigative techniques are most beneficial when looking for the assets of kleptocrats?
Faced with the obstacles of offshore ownership and use of proxies, investigators seeking to uncover the assets of a suspected kleptocrat must adopt creative investigatory techniques. The first step to identifying assets is to remember that kleptocrats will have a circle of people who have benefitted from illicit wealth or assisted with its generation and concealment. While the target of the investigation may be keenly aware of the steps needed to hide assets, immediate family and friends may not have the same level of diligence, leaving open a window of opportunity.
A comprehensive background investigation of the kleptocrat’s proxies can help establish objective evidence to use in court proceedings to argue that the proxy is not in fact the true beneficial owner.
How can these considerations be applied broadly across any asset tracing and recovery campaign?
Though asset tracing and recovery campaigns that involve sovereign states or kleptocrats present particularly unique challenges, there are strategies and lessons that can be applied to the enforcement of a judgment or recovery of a debt of any kind:
- A well-coordinated and precisely timed offensive on multiple fronts, with the use of both judicial and nonjudicial tools, can be the key to inducing the debtor to a settlement.
- Global strategies, valuable intelligence about the debtor, and local legal knowledge and investigative expertise are essential elements of a recovery strategy.
- Applying well thought through, initial leverage can often result in early settlement, without the need to enforce the judgment through seizure.