Let’s face it: people lie, cheat and steal. Evolutionary psychologists tell us that this is part of being human, as much as we may try to deny it.
Let’s say that Frank and Bob enter into a copper mining venture in central Africa. Frank, a savvy financial operator, has a cozy relationship with a local mining minister. Bob is a technical expert who knows his way around a copper mine. They move fast: Frank secures a copper mining license and builds the corporate and financial scaffolding for the business; Bob assembles a team of mining professionals and kicks things off on the ground. In a matter of years, they’ve made millions.
But then, Frank exhibits that regrettable human tendency to deceive—in this context, it’s called fraud.
Frank sees an opportunity to increase his stake by seizing Bob’s interest in the business. Frank instructs his tax lawyers to fashion an opaque web of offshore companies and conspires with the mining minister to divert profits to this new structure. The coup de grâce comes in the form of a dubious arrest warrant against Bob (for the attempted bribery of a public official), forcing him to flee the country.
The fraud perpetrated by Frank against Bob is fictional. But the chain of events is representative of a growing problem: ruthlessly efficient frauds are perpetrated in the corporate world—and the wrongdoers often get away with it.
Roads to Nowhere
Sadly, the odds aren’t great for Bob. His likely first move is to lawyer up. His counsel advise him that he has a strong cause of action against Frank and the offshore companies that now derive a benefit from Bob’s former interest in the copper business. Bob’s lawyers launch proceedings and, after a tricky and costly two-year legal battle, Bob walks away with a judgment against Frank and the companies in the amount of $15 million.
But this is not where the story ends happily: Frank, after all, is a fraudster.
And as such, Frank has made himself “judgment proof:” he has created new offshore companies and transferred to them the assets of the judgment debtor companies, including sizable funds from the copper business. Additionally, he’s ensured that his other assets, including villas, yachts and multiple Liechtenstein bank accounts, are not held in his own name but, again, by anonymous offshore vehicles.
By this point, Bob has learned the hard way that a legal “win” doesn’t always mean the real-world resolution of a problem. He has “won” an expensive piece of paper stating that he’s owed money by shell companies and by Frank, who on paper owns nothing. Just as he thought he’d reached the finish line, Bob’s fight has only just begun. He now finds himself in the realm of judgment enforcement and asset recovery, where (paraphrasing Clausewitz) everything is very simple, but the simplest thing is very difficult.
Asset Recovery: A Sisyphean Task
If he wants to see his money back, Bob must accomplish three things. First is a process called asset tracing—finding Frank’s villa, yacht and bank accounts, along with legally adducible documents proving that he is behind these assets (not the offshore companies that own them on paper).
Second, since Frank can sell his yacht or switch accounts at any time, Bob must freeze the assets he’s identified in order to prevent Frank from restructuring them. In this Bob is likely to face an uphill legal battle. Suppose that Bob can link Frank to a company registered in Bermuda, Blue Lagoon Trading Establishment Ltd, which holds $25 million in a Liechtenstein bank account—more than enough to cover Bob’s $15 million judgment.
However, Bob’s judgment might not be enforceable. In a jurisdiction such as Liechtenstein, laws protect local bank account holders. And Bob’s judgment is enforceable against Frank personally, whereas the account is held by the Bermudian company, which has a “separate corporate personality;” Blue Lagoon Trading Establishment Ltd is recognized as a distinct legal person separate from its owner.
Bob might argue that Blue Lagoon Trading Establishment Ltd should share Frank’s liability because Frank and the company are effectively one and the same. But Frank might claim that he is not the only shareholder of the Bermudian company (perhaps his best friend’s son is also a shareholder) and point to the company’s “legitimate” business operations. Or he might produce a promissory note indicating that Blue Lagoon Trading Establishment Ltd owes $25 million to yet another mysterious company, and that this debt has priority over Bob’s judgment. The list of sneaky tricks goes on.
Even if Bob manages to freeze funds, the third phase awaits. Bob might have convinced a judge to restrict the movement of Frank’s cash, but the process whereby the legal ownership of this asset is transferred from Frank to Bob is no less complex than the other hurdles Bob has faced to get this far. Different debtors respond in different ways, one of which is to fight all the more vigorously and unscrupulously.
If Bob is lucky, Frank might offer to settle (say, for 40 cents on the dollar). There is often a persuasive argument to take such deals to avoid risking all in another protracted legal engagement. Frank still ends up with 60 cents on the dollar. Good business in the eyes of the fraudster.
The Dice are Loaded
In the world of asset recovery, a pyrrhic victory is often perceived to be a “good result” by the legal team. Many Bobs recover nothing, and the Franks get away with their wrongdoing.
Why are the odds so skewed in Frank’s favor? Undoubtedly, the Franks operate in a permissive environment that makes it easy to frustrate the efforts of judgment holders. The ease of restructuring one’s financial assets is a major factor. The prevailing offshore company system allows debtors to be nimble, quickly outwitting the cumbersome legal remedies at the disposal of judgment holders. By the time Bob has figured out where Frank’s companies and bank accounts are—and spoken to lawyers in multiple jurisdictions about his options—Frank will have changed his setup.
This environment won’t change anytime soon. Entire industries inadvertently aid fraudsters: corporate service providers, tax lawyers, private bankers and others. In some countries, there is limited political will to make things more difficult for people who abuse the system, and there would undoubtedly need to be concerted international action for any real progress.
But a difficult environment is no excuse for giving up or giving in.
Frank and Bob, meet William… Shakespeare, who explained, unintentionally, why many judgment holders only have themselves to blame for their inability to recover funds, when he put these words in the mouth of a messenger in Henry VI, Part 1:
One would have lingering wars with little cost;
Another would fly swift, but wanteth wings;
A third thinks, without expense at all,
By guileful fair words peace may be obtain’d. (1.1.74-77)
Shakespeare’s messenger criticizes England’s generals, who lost territory (assets, really) during a French rebellion for three reasons. Arguably, judgment holders are unsuccessful at asset recovery for these same reasons.
Some, having secured a judgment, assume their work is done. They fail to understand that judgment enforcement requires a sustained investment, or perhaps they are reluctant to “throw good money after bad.” Their efforts are halfhearted, dragging on ineffectually: lingering wars with little cost.
Other judgment holders have the right attitude but lack a team with the right know-how. These judgment holders would fly swift, but wanteth wings. Asset recovery requires sophisticated investigators able to operate internationally, as well as tenacious lawyers focused on real world results. Both are rare but crucial, and their efforts need to be coordinated seamlessly—easier said than done.
Finally, some judgment holders cling to the belief that the debtor will honor his obligation in the end. The debtor employs delaying tactics and, ultimately, pays nothing. These judgment holders fail because they think: without expense at all, by guileful fair words peace may be obtain’d.
Beating the House
It is possible for the Bobs of the world to come out on top.
Listen up, Bob: if you want to prevent fraudster Frank from getting away with it, make sure your asset recovery effort is well-funded and that you’re fully committed to its success. Hire the very best investigators and lawyers available, and ensure their efforts are coordinated. Arm yourself to outwit and outwait Frank’s delay tactics.
One new tool enabling Bobs everywhere to do just this is the marriage of corporate intelligence and asset recovery with litigation finance. The combination means that a judgment holder like Bob may hire the best team to enforce a judgment now, but pay for that expertise when that $15 million piece of “legal paper” is finally monetized.
With the right ingredients, it is possible to bring tremendous pressure to bear on judgment debtors and recover funds. Get it wrong, and the would-be Franks will continue going forth, and doing likewise.