The European Lawyer

31 Jul 2010

International Fraud and Asset Tracing - Foreword

Editors:

Peter Burrell

Partner, litigation & arbitration division,

Email: peter.burrell@herbertsmith.com
Direct Line: +44 (0)20 7466 2113
Web:

Simon Bushell

Partner, litigation and arbitration
Herbert Smith
Email: simon.bushell@herbertsmith.com
Direct Line: +44 20 7466 2024
Web:

In one form or another, corporate fraud is maintaining its spot towards the top of any boardroom agenda. In the late 1980s and early 90s, the victims of corporate fraud were often the banks – BCCI and Barings being classic examples. These catastrophic events spawned litigation – mostly against auditors but also, notoriously, in the case of BCCI, against the Bank of England as the supreme banking regulator (at the time). They also prompted a variety of other regulatory investigations and proceedings, including statutory inquiries, criminal and disciplinary proceedings.
Other collapses or major frauds such as Maxwell or Polly Peck also prompted litigation coupled with investigations – this time brought, for example, by the Department of Trade and Industry. Serious Fraud Office prosecutions also followed.
Since then, the regulatory environment has become much tougher with a greater risk of enforcement action. London now has the all-powerful Financial Services Authority. US regulators, in the shape of the SEC and Department of Justice, have increased their enforcement activities. As a result, investigations into potentially fraudulent activity can occur at any stage regardless of whether an event has brought about a collapse. An expectation has also evolved, particularly in the US and the UK – although we also see this trend extending into other jurisdictions – that in response to an incident, a responsible board will conduct an internal investigation. Sarbannes Oxley has had a clear impact in this area, along with the importance attached to good corporate governance, of which an internal investigation is seen as part and parcel. Frequently, those investigations might be carried out within the corporation itself as part of a ‘self-cleansing’ exercise, which is part of a bargain hoped to be struck with the regulators on avoiding an investigation that goes beyond what is carried out internally. The message is simple: come clean, sort out any mess, take any necessary medicine and hope that in the process you do not make yourself a target for litigation, or that you do not uncover a trail of evidence behind you which any claimant can adduce in support of civil claims. One of the key issues to manage in that context is the question of legal privilege in the results of an internal investigation. If it is waived to assist the regulators, can it still be asserted against a subsequent claimant?
The other new feature in the evolving world of corporate fraud, is the international dimension. Everyone marvels at the pace of technological change, making it quicker and simpler to break down the barriers which exist across international borders and continents when dealing, for example, in financial instruments. As a consequence, in order to unravel the fraud, all too often the company’s investigation has to be managed across borders where different legal regimes apply, which may hinder or assist the investigation. In some jurisdictions, data protection laws can frustrate even the most soundly based internal investigations, hampering a company’s ability to gather relevant evidence. The increasing importance of human rights legislation and the protection of employment rights also have to be taken into account; gone are the days when the parent company can simply send its investigators into the overseas subsidiary and seize the relevant records. The different application of legal privilege across borders can also create a treasure trove of disclosable documents, not only to litigants but also to a regulatory authority against whose compulsory powers there may not be an effective claim of privilege. The lack of clear recognition of privilege for documents created by in-house lawyers in European Commission investigations, is just one such example. Regulators have also responded to the increased international threats, with much greater co-operation across borders and the ability to use their powers to assist overseas investigations. But that is not the only issue.
The rapid growth of the BRIC countries (Brazil, Russia, India and China) in the past 5-10 years has caused huge changes to the global economy. One such change is the rise in prices of commodities such as oil, gas, electricity, copper, steel, aluminium and nickel, caused by the substantial increase in consumption by these countries. These price rises coupled with demand have led producers to venture into developing countries, and to be prepared to pay higher prices and for the rights to pursue exploration, extraction and processing.
As is clear from the Transparency International Corruption Index, developing countries often have a corruption problem. The United States and the UK have onerous criminal laws which impose liability on US and UK-based corporates and individuals who involve themselves in corrupt activities abroad. Indeed, in the UK a person who benefits from corrupt activity abroad and in so doing receives the proceeds of crime thereby commits a money laundering offence. Invariably, these things become disclosable either as part of a formal reporting regime or because they may amount to market sensitive information, or both.
In these situations, the tendency is to explain to the relevant authorities that a problem has been identified, but to refrain from details on the basis that it is too early to reach any conclusions. That an internal investigation is underway is what the regulator wants to hear.
Litigation is the next big question. Will the corporation caught up in the fraud become a target or is it in some way a victim that might want to take action to recover its losses? If the corporation is likely to be a target, then it will want to limit the amount of unhelpful material it is required to commit to writing, or otherwise protect such material from becoming disclosable in litigation. It might also seek to prepare a case that in fact someone else was responsible for, or materially contributed to, the losses incurred by the claimant – typically the corporate’s auditors (but not necessarily). These contribution claims in effect blame the auditors for failing to detect the fraud, and the auditors typically rebut these allegations by saying that they in turn relied on the directors of the company for information and that the directors (or some of them) were concealing a fraud.
If the corporate is the victim of any fraud, then it might want to pursue the wrongdoer. This depends on whether such a person can be identified and also whether monies misappropriated can be traced into someone’s hand – if not the fraudster himself then someone who has received the monies in circumstances where there is liability imposed as an accessory or possibly a trustee.
All of this activity requires co-ordinated investigation and appropriately planned litigation response. Publicly profiled litigation may be a way of prolonging unwelcome focus on issues which deflect from the core business. Yet recoveries (or steps taken in that direction) may be necessary for the protection of shareholders’ wider interests. Of course, those committing fraud are unlikely to make the tracing of their activities simple; by crossing borders, the issues become more complex, costly and time consuming.
This book, of which we are the principal editors, seeks to place these issues into context. We hope that it will become essential reading for anyone looking for solutions to corporate fraud and the collateral issues which come with it.
The Editors would like to express their considerable gratitude to Herbert Smith Associates, John Corrie and Laura Durrant for their assistance in co-ordinating this book and with the preparation of the English chapter. We also extend our thanks to the editorial team at the European Lawyer for their assistance.

Simon Bushell and Peter Burrell
London
October 2008