Fraud, Asset Tracing & Recovery

INSOLVENCY AS A TOOL How and when to use in asset recovery

BITCOIN BATTLES Tracing and seizing cryptoassets

Commercial Dispute Resolution COVID-19 FRAUD CDR Recovering assets lost in the pandemic www.cdr-news.com Spring 2021

ESSENTIAL INTELLIGENCE: Fraud, Asset Tracing & Recovery

Contributing Editor: Keith Oliver Peters & Peters Solicitors LLP 4 WELCOME

TABLE OF CONTENTS

EXPERT ANALYSIS

New threats for 2021 and beyond 06 France Andrew Mizner Commercial Dispute Resolution 90 Thomas Rouhette, Nicolas Brooke, Ela Barda & Jennifer Melo Signature Litigation Insolvency used as a tool in asset recovery 10 Andrew Stafford QC & James Chapman-Booth Guernsey Kobre & Kim 100 Simon Florance, John Greenfield & David Jones Carey Olsen Cryptocurrency fraud and asset recovery 17 Syedur Rahman Rahman Ravelli Hong Kong 110 Dorothy Siron Zhong Lun Law Firm Corruption in the pandemic and the importance of 22 asset recovery India Angela Barkhouse Quantuma Advisory Limited 124 Shreyas Jayasimha & Aakash Sherwal Aarna Law Fraud and asset tracing investigations: the role of 28 Ireland corporate intelligence - part II 132 Karyn Harty & Audrey Byrne McCann FitzGerald Alexander Davies & Peter Woglom BDO Japan International civil or criminal law tools that can be 144 42 Hiroyuki Kanae, Hidetaka Miyake & Atsushi Nishitani used to aid in asset recovery Anderson Mōri & Tomotsune Olga Bischof & Theodore Elton Brown Rudnick Confiscation proceedings and civil recovery: 152 Jersey 48 proportionality and abuse of process Marcus Pallot, Richard Holden & Daniel Johnstone Colin Wells 25 Bedford Row Carey Olsen Luxembourg 160 Max Mailliet E2M – Etude Max Mailliet

COUNTRY CHAPTERS Singapore 168 Lee Bik Wei & Lee May Ling Allen & Gledhill Bermuda 56 Keith Robinson & Kyle Masters Carey Olsen Spain 178 Héctor Sbert & Maria de Mulder Lawants British Virgin Islands 63 Alex Hall Taylor QC, Richard Brown, Tim Wright & Switzerland Simon Hall Carey Olsen 188 Dr. Claudia Götz Staehelin, Dr. Florian Baumann & Dr. Omar Abo Youssef Kellerhals Carrard Cayman Islands 72 Jan Golaszewski, Denis Olarou, Sam Dawson & Peter United States Sherwood Carey Olsen 198 Joe Wielebinski, Toby Galloway & England & Wales Matthias Kleinsasser Winstead PC 79 Keith Oliver & Amalia Neenan Peters & Peters Solicitors LLP

COMMERCIAL DISPUTE RESOLUTION CCommercialD DisputeR Resolution 5

PREFACE

It is with great pleasure that we welcome you to Society by Van Dijk, suggested that ‘the monitor the Second Edition of the CDR Essential Intelligence is everywhere…it is not merely a medium for reproduc- Series. Peters & Peters Solicitors LLP has been tion which increasingly dominates mass communication’. delighted to serve again as the Contributing Perhaps this foreshadowed the rise (and rise) of Editor to this all-encompassing and comprehen- ‘Zoom culture’ and the like that we are so heavily sive guide on the practice of global fraud, asset dependent on now. It is consequently ever more tracing and recovery litigation. vital that we adapt to the pace set by the March The past 12 months have been trying for us of Technology. Nevertheless, in 2021 we have all. According to the PwC Global Economic Crime found opportunities to flourish, to effectively and Fraud Survey 2020, 47% of companies world- meet these new challenges head on, and as a wide were victim to fraudulent attacks over the result the fraud, asset tracing and recovery land- past two years. Another report published by the scape has never been busier. Association of Certified Fraud Examiners estimates The intention of this guide, therefore, is to that organisations lose approximately 5% of their provide a clear and cogent overview of the revenue to fraud each year, which taken collec- practice of fraud, asset tracing and recovery tively, amounts to a global figure of over $4.5 litigation in varying countries around the trillion. Compound this growing trend with the world, working towards global innovation and economic uncertainty caused by the COVID-19 best practice through the sharing of knowl- pandemic. A breeding ground for fraudulent acts edge and expertise. We would like to take this now prevails. Fraudsters have been quick to make opportunity to thank the tireless efforts of our use of the international mass migration to online contributing authors, who include some of the platforms. Cyber-criminality is now one of the world’s leading law firms, a wide range of expert most prevalent issues to impact the sector. The practitioners, barristers’ chambers and forensic surge in online commerce, the increasing reli- accountants. Their generous contributions to ance on artificial intelligence and the introduc- this project have created an invaluable holistic tion of virtual justice are but to name a few of the picture of the international legal response, driving forces that have become commonplace which we hope will be useful for our readers over the past year. The 1999 book, The Network both now and in years to come.

Keith Oliver Head of International Peters & Peters Solicitors LLP

CCommercialD DisputeR Resolution

FRAUD, ASSET TRACING & RECOVERY 2021 6 THE YEAR AHEAD

New threats for 2021 and beyond

The pandemic is not the only agent of change keeping lawyers, experts and clients on their toes this year. Technologically sophisticated frauds, cryptocurrencies and increased regulation will all require close observation

COMMERCIAL DISPUTE RESOLUTION CCommercialD DisputeR Resolution 7

Andrew Mizner one of many that capitalises on data exposed by breaches, alongside automated methods such as Commercial Dispute “script creation – using fraudulent information to Resolution automate the creation of an account, [or] credential stuffing – using stolen data”, says Galloway. “The industry is going to have to move away from user- names and passwords. Two-factor authentication is certainly better.”

Regulation Rising Then there are cryptocurrencies. “Cryptocurrency After a turn of events which transactions are a concern from a sanctions no-one could have foreseen when Fraud & Asset perspective,” says Rahman, “cryptocurrency is Tracing 2020 was published, many of the past harder to trace, it is easy to launder many times decade’s business certainties have been challenged, over, and it is by and large independent from most as the pandemic has created global economic government regulations”. uncertainty and led to greater reliance on online Regulators are taking notice of this new world. systems. In February, the United States Department of the There will, of course, be frauds stemming from Treasury’s Office of Foreign Assets Control COVID-19 itself, such as fake treatments, the (OFAC) accepted USD 507,000 settlement supply of fake or non-existent personal protective from BitPay, an Atlanta-headquartered Bitcoin equipment (PPE) and corruption by government payment provider, to settle charges that it allowed officials, all of which are expected to emerge in customers in Crimea, Cuba, North Korea, Iran, high numbers later in 2021. Sudan and Syria to make payments in violations of The increased pressure on online business has US sanctions. also led to greater risks, and in an era when tech- The United Nations has warned that North nology is moving incredibly quickly and the finan- Korea is stockpiling Bitcoin to pay for its weapons cial markets are vulnerable, businesses have to be programme, while it has been suggested that more alert than ever. Venezuela is using cryptocurrency to bypass On top of the existing dangers of ransomware sanctions. attacks and fraud emanating from the dark web, With regulators catching up, companies which one growing threat comes from push apps – mobile operate in this space must be aware of their applications which allow the makers to send noti- increasing liability. “Cryptocurrency moves in fications. Fraudsters are infiltrating businesses and milliseconds, extremely quickly and everybody is using push apps to trick staff into illicit payments, having to play catch up with it,” Rahman continues. explains Syed Rahman, a partner with United When it comes to fraud however, Angela Kingdom firm Rahman Ravelli. “Before you Barkhouse, Caribbean managing director for advi- know it the clients are chasing their tail, because sory firmQuantuma , argues that it is a misconcep- they paid an invoice and it has all gone wrong.” tion that assets can be made to disappear through Perhaps even more sophisticated is what Toby cryptocurrency exchanges. “Transactions are Galloway, based in Texas as co-chair of securi- publicly recorded and available in a ledger and yes, ties litigation and enforcement for Winstead, calls there are ways and means of hiding or obscuring “synthetic identity fraud”. the trail of money flows, but actually they are still “The fraudster uses a combination of real and traceable in very many circumstances,” and good fake information to create an entirely new identity”, firms are finding it easier to quickly identify and combining details gleaned from data breaches trace the assets, whereas traditional fiat currencies with false information and using artificial intelli- are more problematic. gence to create “Frankenstein faces”, combining “facial features from different people. This creates Market Concerns a humongous challenge for businesses that rely on Regulators will also be looking at more conven- facial recognition technology as a significant part tional markets. Rahman warns of rising abuse of of their fraud detection and prevention compliance special purpose acquisition companies (SPACs), strategy”. which allow businesses to bypass the regulatory Although understanding of this area is still requirements of the initial public offering (IPO) developing, it is a fast-growing form of fraud, process. The SPAC shell company goes through 

FRAUD, ASSET TRACING & RECOVERY 2021 8 THE YEAR AHEAD

 the offering, then acquires the company which ever-evolving areas such as cryptocurrency,” he was intended for the floatation, meaning that the says. target company has not had to comply with IPO An advantage of the new technology is its use for regulations. asset tracing. Barkhouse heralds the increasingly While SPACs themselves are nothing new, “you advanced tools that go beyond e-discovery and are going to see a lot of misleading statements to predictive coding. “You really do have to be at the raise funds for the company that they are trying forefront of it as a data scientist to be able to obtain to take public. You are going to see accounting the information, extract it and interpret it in a way fraud because of how the money was raised. that is beneficial for asset tracing, recovery and You are going to see an increase of fraud in the investigations,” particularly as data leaks become share market through SPACs”, Rahman explains, more prevalent. “Data itself is becoming the key to warning investors to beware. investigations. The analysis of data, being able to “At the moment, SPACs are legitimate as they interpret it, and being able to use it in a way that can have been around for a while, but there will be be easily explained for evidence is something that regulatory issues for investors because they almost is moving forward but which I see being enhanced bypass the regulatory points through a traditional further in the next couple of years.” IPO process,” he adds. Clients are making more requests for asset In the US, there is concern about abuse of the tracing before litigation has even begun, “you Coronavirus Aid, Relief, and Economic Security really do need to understand where the money has (CARES) Act and any future stimulus packages. gone and if your alleged fraudsters still have your Already there have been prosecutions for what assets and where they have invested them, rather Galloway calls “the low-hanging fruit” such as than going straight into litigation and paying falsified claims. But those will be replaced by cases expensive legal fees only to find that the assets “that are a little more grey”, such as applicants who have dissipated beyond a reasonable recovery”, “almost qualified for [protection] but fudged some says Barkhouse. numbers to get a loan”, and he expects government Insolvencies will be on the rise following the agencies to proactively prosecute, as they did after pandemic, and while the range of bailout, stimulus the 2008 financial crisis. “There is going to be an and furlough packages may make that less than increased level of assertiveness or aggression [from expected, notes Barkhouse, restructuring could regulators], there is definitely going to be an uptick become very busy: “I expect to see an increase in in enforcement activities.” contentious or dispute-related insolvencies, where Meanwhile, publicly listed companies that companies or investment funds have financial are regulated by the Securities and Exchange exposures and liquidators need to understand Commission (SEC) and also received loans can why companies are in that position, other than as expect scrutiny over whether they met the require- a result of simply operational or working capital ments and filed correct applications. pressures. As a result of that, you will see much The regulatory scrutiny extends into crypto- more dispute resolution and investigations in insol- currencies. In January 2021, the UK Financial vency related matters.” Conduct Authority (FCA) announced that all Finally, with the UN due to meet this year cryptoasset companies must be registered. “This and make firm commitments to anti-corruption year is going to be the year where effectively all measures, 2021 could see a more balanced approach [crypto firms] will have to start putting their ducks between civil recovery and criminal prosecution of in a line, and towards the end of the year or the fraud. Barkhouse hopes for greater scrutiny and beginning of next year you are going to see a lot collaboration between governments, particularly more enforcement from the FCA,” says Rahman. between civil and common law jurisdictions, and That also puts scrutiny on the tracing of cryp- with the private sector on asset recovery. toassets. Rahman highlights Ion Science & others Despite all the potential changes brought by v Persons Unknown in the High Court of England technology, the pandemic and governments, much and Wales, which is considering fraud in relation remains the same, she concludes: to an initial coin offering (ICO) and whether cryp- “Ultimately, setting aside COVID and regime toassets can be considered as common law prop- change, the law is the law, the law doesn’t actu- erty and where they are located. ally change too much, it may be tweaked, may “Courts are becoming increasingly flexible and be improved, but in terms of asset recovery, you they are willing to ensure that they are assisting are still relying on the same principles you used

victims of fraud, in particular when it comes to before.” CCommercialD DisputeR Resolution

COMMERCIAL DISPUTE RESOLUTION CCommercialD DisputeR Resolution Key customers. Critical data. Valuable legal guidance.

International Comparative Legal Guides Data Protection 2020 Read online FREE or order the PDF/print edition

COMPARE & RESEARCH THE LAW, WORLDWIDE.

@ICLG_GLG The International Comparative Legal Guides are published by: 10 INSOLVENCY & ASSET RECOVERY

INSOLVENCY USED AS A TOOL IN ASSET RECOVERY

COMMERCIAL DISPUTE RESOLUTION CCommercialD DisputeR Resolution 11

Andrew Stafford QC place. And, now, the severe disruption caused Kobre & Kim by COVID-19 has presented new opportunities for cynical judgment debtors to seek to frus- trate enforcement efforts across the globe. The judgment creditor’s position has arguably been weakened further by Brexit: the eleventh-hour deal struck with the EU is silent on the question of cross-border recognition and enforcement James of civil judgments, meaning that, for the time Chapman-Booth being at least, it is likely to become more diffi- Kobre & Kim cult, time-consuming, and costly to enforce an English judgment within the European Union. In this article, we address one of the specific tool-sets available to lawyers specialising in judgment enforcement: insolvency tools. It is important to note that the insolvency framework is a targeted vaccine, not a panacea, and so will not be suitable in every case. And, like any hen this article was first specialised tool, it has greater utility in experi- published in last year’s enced hands than those of a novice. To under- edition, masks were stand how, when and where to deploy insolvency the reserve of comic tools, it is important to take account of the alter- book heroes, toilet roll native enforcement mechanisms, and to think was a widely available about the need for recovery strategies generally. commode-ity, and a As we discuss below, practitioners and clients “zoom” referred to a alike should be alive to the (sometimes extraor- spirited weekend drive down a winding country dinary) steps taken by governments around Wlane. The phrase “the new normal” had not yet the world to help shield their businesses from forced its way into the public lexicon, and the knock-on effects of the pandemic, including by closest thing many of us had experienced to a implementing temporary changes to procedures “lockdown” was a “lock-in”. Sadly, the past year under the insolvency regime. These methods has seen life in many respects turned on its head. may tilt the playing field. Each jurisdiction will But some things have not changed. In litiga- have its own specific measures which will need tion, winning a favourable judgment or award is to be identified and navigated. still a high for the lawyer but, from the client’s No claimant should start litigation (or arbitra- perspective, a judgment by itself remains just a tion) assuming that the defendant, if defeated, piece of paper (and an expensive one, at that). will meekly pay up. Some – perhaps many – The client’s objective is to receive money, and will do so. The defendant may be solvent and as swiftly as possible. Yet, collecting that money reputable but, even so, the collection challenges can be as hard-fought, as lengthy, and as costly might incentivise the defendant to hold out for a process as winning the award was in the first a ‘better deal’. Worse, there are some judgment 

FRAUD, ASSET TRACING & RECOVERY 2021 12 INSOLVENCY & ASSET RECOVERY

A final and enforceable judgment will establish the defendant as a judgment debtor, and the claimant as an unsecured creditor. This principle underpins the use of the insolvency process as an asset recovery tool

 debtors which are not reputable, have structured enforcement more than a year before the judg- their assets in a robust manner, and which are of ment is delivered, and sometimes as early as the dubious solvency. For these disreputable judg- pre-action stage). ment debtors, the judgment creditor’s collection Of course, if a pre-judgment freezing order, challenges align with the judgment debtor’s pre- or interim receivership, has already been disposition to hold out. granted by the court, the collection strategy To make things more difficult for the has already been partly addressed – renew the claimant, the judgment enforcement landscape relief so that it operates post-judgment, and is becoming increasingly complex. The Court of (in the case of a freezing order) close in on the Appeal’s recent decision in Strategic Technologies assets identified and frozen. However, this type PTE Ltd v Procurement Bureau of the Republic of of relief is the exception rather than the rule. China Ministry of National Defence [2020] EWCA More often than not, the visible facts have not Civ 1604 has (subject to further appeal) closed warranted the grant of a freezing order or an the door to those hoping to register and enforce interim receiver, yet the client nevertheless has in England a “judgment on a judgment” (i.e., a a legitimate anxiety that the defendant will not judgment obtained by a common law action for pay without a further fight, or that, while the the purposes of enforcement in Commonwealth litigation was still pending, the defendant (now Jurisdiction B of a money judgment obtained in judgment debtor) will have taken steps to render Commonwealth Jurisdiction A). itself more enforcement-proof. And, from a practical perspective, technolog- A final and enforceable judgment will estab- ical innovations such as electronic banking and lish the defendant as a judgment debtor, and the faster payment schemes mean that assets can claimant as an unsecured creditor. This principle be acquired, transferred, and disposed of more underpins the use of the insolvency process as easily than ever before. Consequently, judgment an asset recovery tool. An unpaid judgment debt debtors are able to move their assets further forms the basis of a statutory demand; an unsat- afield, faster, with less effort and in ways that isfied statutory demand creates a presumption of can be more difficult to track using conventional insolvency which may then lead to a winding-up methods. With a click of a mouse, or even the or bankruptcy order. tap of a smartphone screen, a delinquent judgment debtor can acquire a new shell company, Weighing up the insolvency option convert their fiat currency to a readily transfer- When analysing the enforcement options, there rable cryptocurrency, or empty multiple bank are numerous issues to resolve in order to decide accounts in mere seconds. New bank accounts, whether insolvency tools are the right fit. Only perhaps in a jurisdiction with aggressive confi- by working through these issues can a prop- dentiality laws and limited frameworks for judg- erly informed decision about the suitability of ment recognition, might be opened without ever insolvency be determined. Insolvency tools are requiring the judgment debtor to physically step powerful, but they can backfire badly if used foot in the territory. incorrectly. In some cases, such strategies even These types of collection challenges can make if used properly may just be a bad fit. So, for the lawyers’ victory jig short-lived. Telling the example: clients that collection might take some time • Will there be competition for the debtor’s and will involve considerable further expense assets? This question is particularly perti- can quickly sour the client relationship. But nent during times (such as these) of economic that strain can be avoided by strategising about instability. A winding-up order may leave the collection ahead of the judgment (speaking client at the wrong end of a queue of secured from experience, our firm sometimes finds and unsecured creditors, rendering the imme- itself called in to act as specialist co-counsel on diate victory pyrrhic. An existential threat

COMMERCIAL DISPUTE RESOLUTION CCommercialD DisputeR Resolution 13

to the defendant may increase its determi- jurisdictions under the Model Law does not nation to fight to the bitter end. Playing the require reciprocity but, in any event, it has strongman sounds good, but if the strongman been given force in Great Britain by the is Samson you just end up pulling the temple Cross-Border Insolvency Regulations 2006. onto your client’s head. • Is there a robust insolvency regime in the • On the other hand, if available assets are jurisdiction in which the judgment was limited, are there competing judgment credi- obtained? The Court of Appeal’s decision tors further down the collection road? If so, in Strategic Technologies may affect the chosen it may be that insolvency will help to level the strategy, since practitioners may now find playing field for your client. that re-locating a judgment to a location with • Are any of the jurisdictions enforcement- insolvency jurisdiction requires re-recog- friendly (or, indeed, unfriendly)? Some civil nition of the original judgment, rather than jurisdictions provide for pre-recognition recognition of the first recognition, thereby attachment, which can make any insolvency making the process that bit stodgier than strategies unnecessary. Alternatively, recog- some had hoped. nition in some jurisdictions can be so slow • Is the target debtor asset-rich or revenue- or hostile that the assets identified as being rich? If analysis shows that that the target has located within such a jurisdiction may be strong regular revenue streams rather than beyond the reach of a judgment creditor: it piles of cash and property, insolvency would may be that the foreign court would instead likely dam up those revenue streams. Maybe be more receptive to an office-holder, like a garnishment or receivership by way of equi- liquidator, seeking recognition of the insol- table execution would collect the golden egg vency process. Now that the Brexit transition without killing the goose. period has ended, recognition of an English • To what will the debtor better respond? A insolvency process within the European consensual settlement of the outstanding Union will largely be governed by the local judgment debt is always going to be quicker law of each Member State. The exceptions are and cheaper for all parties concerned than an Greece, Poland, Romania, and Slovenia, each international war of attrition, but what will it of which has enacted the UNCITRAL Model take to get the debtor to want a consensual Law on Cross-Border Insolvency (“the Model outcome? In some cases, commencing insol- Law”), which facilitates a more streamlined vency procedures may actually eliminate the process for the international recognition of option of driving the debtor to the settlement insolvency processes. Recognition in these table. At the very least, insolvency brings 

An existential threat to the defendant may increase its determination to fight to the bitter end. Playing the strongman sounds good, but if the strongman is Samson you just end up pulling the temple onto your client’s head

FRAUD, ASSET TRACING & RECOVERY 2021 14 INSOLVENCY & ASSET RECOVERY

 into play an office-holder less vulnerable to additional variable: the changes made to the local commercial pressure points felt by the debtor, insolvency regime as a consequence of COVID- and more focused on the interests of creditors 19. The extent to which the “usual” policies and as a whole. procedures have been departed from, and the • Is the target based in only one jurisdiction duration of any changes, will vary from jurisdic- or does it have assets, interests or affiliates tion to jurisdiction, and it is essential to obtain in numerous jurisdictions? Although a multi- local advice in that regard. But, to give one jurisdictional enforcement effort is naturally British example, the Corporate Insolvency and more complex, the international footprint of Governance Act 2020 temporarily restrains the the debtor creates the opportunity to leverage use of statutory demands as proof of insolvency, differences in enforcement tools as between and requires a creditor presenting a winding-up one jurisdiction and another. However, iden- petition to show that the pandemic is not the tifying the right lever requires not only expe- reason the company cannot pay its debts. The rience and expertise in comparative law, but suspension will last until at least 31 March 2021 also a keen sense of timing and global control (correct at the time of drafting – the period of suspension of the enforcement team. Timing is impor- might be further extended in due course). tant because a step taken in one jurisdiction is likely to have knock-on effects elsewhere. Leveraging cross-border discovery Control is vital because a trigger-happy local Information is a vital commodity in the world co-counsel can disrupt the carefully devel- of asset recovery. In any enforcement attempt, oped global enforcement strategy. the judgment creditor must overcome an imbal- Two points emerge from these typical issues. ance of knowledge: the judgment debtor will First, choosing to use insolvency tools should know where all of their assets are; the judgment not be a reflex decision, but a sensible conclusion creditor will not. Before the judgment creditor reached following a careful holistic analysis of can enforce against an asset, they first need to the enforcement options at the earliest opportu- know that it exists and, just as importantly, they nity. Second, accurate and comprehensive infor- must know where it resides. Information gath- mation about the target is vital – no informed ering therefore forms an important first step in decision can be made without information. any asset recovery campaign. Practitioners must now also account for an Some types of necessary information can be

Information is a vital commodity in the world of asset recovery. In any enforcement attempt, the judgment creditor must overcome an imbalance of knowledge: the judgment debtor will know where all of their assets are; the judgment creditor will not

COMMERCIAL DISPUTE RESOLUTION CCommercialD DisputeR Resolution 15

If the client believes that the defendant has been re-organising its affairs during the pendency of the litigation so as to render itself more enforcement-proof, this may tip the balance in favour of deploying insolvency tools

readily obtained through sources freely avail- If the client believes that the defendant able to the public. Other information can be has been re-organising its affairs during the obtained through post-judgment discovery pendency of the litigation so as to render itself procedures. To that end, a judgment creditor more enforcement-proof, this may tip the may apply for an order requiring the judgment balance in favour of deploying insolvency tools. debtor to attend court to provide information The liquidator has visibility into the internal on oath about their means, or any other matter affairs of the target entity, and the capacity to about which information is needed to enforce a interrogate the directors can uncover activi- judgment or order. If the order is granted, the ties designed to thwart enforcement efforts. judgment creditor can compel the judgment Moreover, the liquidator can hold the directors debtor to provide information about their assets and recipients to account and, where appro- worldwide. priate, can take recovery actions to restore In this context, once again there may be to the company the assets which were placed cross-border opportunities to leverage differ- elsewhere. Sometimes these powers are more ences in discovery procedures. But there is the valuable than the claimant’s capacity to chal- ever-present risk that using discovery proce- lenge transactions as being fraudulent transfers, dures may simply tip off the debtor, with the useful though that power can be. result that it re-doubles its efforts to render its Akin to, but different from, liquidation is assets enforcement-proof. Although claimants receivership. This places in the cross-hairs a are sometimes motivated to seek disclosure of specific revenue stream or asset. The receiver every document under the sun, this strategy is collects a specific asset and handles it in accor- rarely sensible; rarer still is it accepted by the dance with the distribution process sanction by courts. And in some jurisdictions, third-party the appointing court, leaving the debtor entity discovery may require the creditor to indemnify intact. Its availability varies from jurisdiction the third party for the costs of the discovery to jurisdiction. A court-appointed receiver is exercise – this can be a high price unless the an office-holder and acts subject to the bespoke discovery request is accurately made and is powers granted to him/her by the court. As aimed at obtaining a narrow class of highly with liquidation, an office-holder is accorded useful documents. Discovery requests in this considerable respect by the courts. In the right context should be used as a scalpel, and not a case, receivership is the right insolvency tool. sledgehammer. The position of a liquidator seeking informa- Show me the money tion may be very different. As an office-holder, However, office-holders – whether liquidators a liquidator can obtain access to the internal or receivers – cost real money. In the current documents held by the company. The liquidator economic climate, clients are motivated to scru- may be able to summon the directors to answer tinise ever closer the bang for their buck. The questions, and (subject always to jurisdictional expense involved in deploying insolvency strate- differences) may be able to seek post-judgment gies demands an answer to the question – what discovery on a wider and less costly basis. Since are we going to do with all these powers? There a liquidator wields the right to access documen- is no useful purpose in triggering this strategy tation, proportionality is less of a concern – if the client’s objective – getting money in its although economic and strategic factors should hands – is not going to be achieved, or at least nevertheless help shape and narrow what is significantly advanced, by these means. sought. Client buy-in is essential, and many clients 

FRAUD, ASSET TRACING & RECOVERY 2021 16 INSOLVENCY & ASSET RECOVERY

 – financially depleted by the litigation which led Andrew Stafford QC is an English barrister and to the judgment and generally war-weary – may Queen’s Counsel who represents corporations, hedge reasonably disagree with the idea of insolvency funds and high-net-worth individuals in complex, high- value litigations spanning multiple jurisdictions and strategies that promise yet more expense. But that involve significant cross-border elements. He a fully worked-out insolvency strategy might has particular experience in international judgment appeal to the client if the expense is to be met by enforcement, developing and executing strategies a third party. The emergence of funders, willing designed to secure effective collection of awards and in the right case to fund the cost of enforcement judgments, including relating to enforcement against sovereign judgment debtors. In the area of financial on a non-recourse basis in return for a share of services and products, Andrew handles swaps the collections, can often render viable insol- litigation, including matters of currency fixing related vency strategies which would be beyond the to Libor, Euribor and foreign exchange markets. client’s appetite for further expense. From the Andrew also represents clients in joint venture and funder’s perspective, the existence of a valid partnership disputes, as well as in regulatory defence matters involving UK authorities. judgment or award removes several significant A highly regarded appellate advocate and trial contingencies from its calculation of risk. From lawyer, Andrew appears in the Supreme Court of the the client’s perspective (and especially that of United Kingdom and acts in international arbitrations the General Counsel), it takes the expense and on a range of matters, including financial derivatives, risk off the balance sheet – collections can insurance and international commercial fraud. He has been cited by industry publications as “a really good become all up-side once acceptable commercial lateral thinker” and “a great tactician” with “fantastic terms have been struck. courtroom demeanor”.

In our experience, there is no hard or fast rule  [email protected] about when, how, and where, to deploy an insolvency strategy in aid of judgment enforcement. But it should not be used without prior careful James Chapman-Booth is an English barrister who consideration. Whether or not the tool is appro- focuses on cross-border commercial litigation. His experience includes disputes related to financial priate will be determined by the specific facts of products and services, insolvency proceedings and the case at hand: the location, type, and extent of US regulatory enforcement matters. assets; the extent of available information about James studied English law and was called to the those assets; the conduct and sophistication of Bar at the Honourable Society of the Middle Temple. the defendant; the client’s litigation appetite; and  [email protected] wider commercial considerations, are each factors that should be weighed before starting down the insolvency path. Nevertheless, when wielded Kobre & Kim is an Am Law 200 global law firm focused exclusively on disputes and investigations, properly, the insolvency framework can itself be often involving fraud and misconduct. Recognised as

an extremely valuable asset to the client. CCommercialD DisputeR Resolution the premier firm for cross-border disputes, the firm has a particular focus on financial products and services litigation, insolvency disputes, intellectual property litigation, international judgment enforcement and asset recovery, and US government enforcement and regulatory investigations. By avoiding repeat client relationships, and the conflicts of interests that come with them, the firm maintains its independence as advocates ready to litigate against virtually any institution. The firm has more than 150 lawyers and analysts located in multiple jurisdictions throughout its 15 locations around the world.  www.kobrekim.com

COMMERCIAL DISPUTE RESOLUTION CCommercialD DisputeR Resolution 17

Cryptocurrency fraud and asset recovery

Syedur Rahman Rahman Ravelli

ryptocurrency and the use of block- writing, the value of a Bitcoin is currently around chain is becoming increasingly US $35,000. This means that Bitcoin’s market popular in the commercial world, capitalisation (market cap) – the total value of all with more investors now convinced Bitcoin – is somewhere in the region of US $600 that crypto is a long-lasting asset of billion. This is lower than its highest-ever market Cgenuine value. We are seeing organisations, corpo- cap of US $1 trillion, but is nonetheless a strong rate entities and even governments investing in indicator of its progress. Yet the law has still to crypto assets. They do this as a means of diversi- catch up with the rapid emergence of crypto. fying their portfolios or treasuries; using crypto- Unfortunately, there is one aspect of cryptocurrency as a serious alternative to traditional fiat currency that is not quite so appealing – its use is (meaning government-issued) currency. often associated with wrongdoing and fraud. Part While cryptocurrency is increasingly attractive of its appeal is the anonymity that many believe it to many in terms of potential investment, from offers. But it needs to be emphasised that with the a legal perspective (particularly in England and right tools and correct legal applications, crypto Wales) it is still a developing area. At the time of assets can be tracked, traced, identified and then 

FRAUD, ASSET TRACING & RECOVERY 2021 18 CRYPTOCURRENCY RECOVERY

 safely recovered from those who have gained users some degree of privacy not available when them through wrongdoing. But doing this requires acquiring more conventional assets, they are not careful planning, the right strategy and taking the entirely anonymous. It is well known that all trans- right action at the most appropriate time. actions relating to cryptocurrencies are publicly available on the blockchain. By using the correct Pre-seizure planning investigation support and technology, you can Taking the right steps to regain your crypto obtain the right information relating to the bad assets actors involved. The most important factor in any pre-seizure plan- Cryptocurrencies have to be tracked and ning is to remember at all times that the primary traced through the blockchain for any mean- objective is to recover the assets. This may involve ingful recovery to take place. During the course going beyond tracing the cryptocurrencies. In of your initial investigation, the right software and many situations, following the crypto assets into algorithms for tracing the assets must be used so the right exchange will not be enough. There can that you then have an accurate blockchain anal- be scenarios where the proceeds for the fraud go ysis. Such an analysis will prove essential to your into an exchange and are then subsequently trans- enquiries. ferred out to a bank account and then into physical property that is registered in another party’s name, Hosted v un-hosted wallets such as a partner or relative. A hosted wallet is a digital account hosted by a When this does happen, you will need to find third-party, like an exchange. It allows the account and produce the evidence that proves that such holder to store, send and receive cryptocurrency. physical property is also the proceeds of fraud. An unhosted wallet, however, is not hosted by a Finding the money can be difficult, and iden- third-party financial system. tifying any assets it has been used to buy takes The chances of recovering crypto assets increase time and resources. There is nothing that ensures if you can identify them as being in a wallet that is success when it comes to recovering assets more hosted by an exchange. This means that recovery of than pre-seizure planning. Attempting to freeze them can use the traditional process employed for crypto assets takes considerable time and prepara- tracing assets such as, for example, the proceeds of tion. This is not an action that can wait until the fraud when they are deposited in a bank account. last minute. Preparation is required at each and You can apply to freeze the assets in question and every stage of any attempt to recover crypto assets. serve the freezing order on the exchange. Cryptocurrencies are truly global. The bad Un-hosted wallets make anonymity possible, actors that use them to perpetrate fraud or gain leading to difficulties in identifying who is them as a result of fraud may be located in various accessing or controlling the cryptocurrencies in jurisdictions around the globe. This has to be taken that wallet. In this scenario, it is much harder to into account when plans to recover assets are being serve a freezing injunction on a person whose devised. Not all countries have the framework to identity you do not know. It is likely that the defen- deal with freezing crypto assets; which can mean dant or their co-conspirators may have private keys that it often seems like the Wild West when dealing to gain access to the un-hosted wallet in question. with crypto in some jurisdictions. This is one more This then changes the dynamic of the investiga- reason why preparation is key. That preparation tion: a proactive approach will be needed to iden- requires having the right crypto recovery special- tify who has the crypto asset in question, and ists on board and considering whether there is a whether it is in a private wallet or in cold storage need to co-ordinate with foreign counterparts. (i.e. stored in a wallet offline/not connected to the Attempts to regain crypto assets can differ internet). from efforts to locate and regain more traditional assets. Planning and executing an asset tracing and Before takedown – making legal applications recovery plan for them can, therefore, require a Crypto assets move in milliseconds. If you find different mind-set. them at a particular place it is imperative that you ensure legal action is taken as swiftly as possible. Intelligence collection Once the crypto assets are identified, you need The key to successful tracing of cryptocurrency is to utilise the right legal applications immediately. assessing the information available to you, giving The English civil courts have a significant range due consideration to the assets in question and of tools available to judges to act quickly. Some taking all necessary steps to ensure that the investi- of these interim remedies (i.e. those before trial) gations are carried out in a comprehensive manner. include: It is important to dispel the myth that crypto- i) urgent ex parte applications; currencies are anonymous. While they do give ii) proprietary injunctions;

COMMERCIAL DISPUTE RESOLUTION CCommercialD DisputeR Resolution 19

iii) freezing orders / injunctions; iv) the contract is governed by English law; iv) third-party disclosure orders (Norwich v) the contract contains a term giving the Pharmacal and Bankers Trust), made to a third English courts jurisdiction; and party compelling it to disclose certain infor- vi) the damage was/will be sustained within the mation to the applicant to assist in the identi- jurisdiction. fication of the perpetrators; The question of service will also need to be v) “I am Spartacus” orders; and considered. If an order is made to be served vi) other ancillary orders. outside of the jurisdiction, personal service is not When it is an issue that crosses borders and likely to be possible. You will, therefore, need to includes other jurisdictions, it is important to have convince a judge why service by an alternative the proper legal approaches in place to effectively means, for example, via email, is appropriate in the freeze and recover the assets. In the first instance, circumstances. there is a very good chance that the person you The tools for interim relief at a judge’s disposal will go after is “persons unknown”. It is well estab- are certainly powerful. But the criteria that must lished in England and Wales that freezing injunc- be satisfied to secure the interim reliefs are of a tions can be granted against persons unknown. high standard. For example, in order to obtain a However, you will eventually need to find the bad freezing order, the applicant must satisfy the court actor that you can enforce the judgment against. that: When you are assessing who you are going i) it has a substantive cause of action against the after, it is essential to also include the exchanges. respondent; Exchanges often carry out “Know Your Client” ii) it has a “good arguable case”; (KYC) and anti-money laundering checks. iii) there is a “real risk of dissipation of assets”; Information from these can prove valuable in your and attempts to locate and identify who has your assets. iv) it is “just and convenient” to grant the order The next important issue to consider is the need (here, the court must consider: (a) the conduct to clearly define crypto assets before the court. of the applicant (coming to court with ‘clean This is important because this will determine hands’); (b) the rights of, and any impact the type of relief that judges are willing to grant, upon, any third parties who may be affected particularly in an urgent (without notice) applica- by the order; and (c) whether the order would tion. There are various issues surrounding tracing, cause legitimate and disproportionate hard- and a judge will have to be persuaded that there is ship for the respondent). a tracing remedy available to resolve your problem. As such, careful consideration must be given Finally, you will have to consider exactly where when making such applications. the respondent or defendant is in these proceedings. This could involve you needing to convince Seizure a judge to grant the order out of the jurisdiction During takedown – actions after the legal in which the court sits. The majority of crypto applications exchanges are not likely to be located in England Ongoing risk management is key once the relevant and Wales, and the bad actors’ location is not likely applications have been made to the court. Once to be known. For these reasons, innovative legal crypto assets are frozen, you need to ensure that arguments will need to be mounted to persuade they do not fall into the hands of any bad actors. the court to grant orders out of the jurisdiction. When you freeze cryptocurrency, it is important For example, you may need to use the Bankers Trust to ensure that there is no dissipation of assets. jurisdiction to obtain a disclosure order against an You need to plan what will happen as soon as the exchange for service outside of the jurisdiction. relevant orders are served on the parties involved. Here you must show that the case meets the juris- The most important information will come dictional “gateways” as set out in CPR Practice from the exchanges following a disclosure order Direction 6B. The gateways allow English courts and/or Bankers Trust order served outside of the to exercise jurisdiction over foreign defendants, jurisdiction. It may be that you will need to remind where the dispute has a sufficient connection to the relevant exchanges of the severe consequences England. Some examples of the gateways that may for not complying with such orders. It is well estab- be appropriate include: lished that such orders contain within them a penal i) a remedy is sought against a person domiciled notice, which states that it is a contempt of court to within the jurisdiction; breach the order. The result of any such breach can ii) the claim relates wholly or principally to be the company and its directors being liable to property within the jurisdiction; have their assets seized and individuals facing the iii) the contract was made in the jurisdiction; prospect of up to two years’ imprisonment. 

FRAUD, ASSET TRACING & RECOVERY 2021 20 CRYPTOCURRENCY RECOVERY

 After takedown – holding those responsible to S25 of the Act is in relation to interim relief in account support of foreign proceedings. The initial appli- It has to be understood what this should look like. cation in AA v Persons Unknown made no reference The aim is to bring the perpetrator to book as soon to foreign proceedings being issued. This was a as possible. Anyone seeking to do this has to know mistake by the claimants as they were attempting how to proceed. to serve overseas. Furthermore, the claim that In our experience, the exchanges hold crucial was bought in this case was for restitution and a information so that a claim can be made, and claim under a constructive trust. The test that was enforcement action can commence. This is where applied before the court related to a claim for tort. use of a disclosure order is so important. This again was a blunder by the claimants as the In a typical disclosure order, you would expect wrong test was applied. Mistakes like the above the exchange to provide the lawyers with: can sometimes be made in uncontested ex parte • Information regarding any customer hearings such as these. accounts which the crypto assets in question Upon identifying the above pitfalls, the matter were allocated to and/or received on behalf led to negotiations and was concluded by way of of. a settlement. • The names of the account holders for the accounts in which the crypto assets in ques- Conclusion tion are held. As crypto asset litigation is still developing in • Any other information about the account England and Wales, it is currently unclear to what holders, such as residential addresses, bank extent the courts will be asked to grant innovative account details, email addresses and contact legal arguments in order to secure such assets. That numbers. is something that will have to be closely monitored • Any documents supplied when the wrong- on a case-by-case basis. doer opened an account with the exchange. This was highlighted in the recent case of Ion • An explanation of what has become of the Science Ltd and Duncan Johns v Persons Unknown, crypto assets in question. Binance Holdings Limited and Payward Limited; in which the applicants were represented by Rahman Potential pitfalls and defence Ravelli. considerations The case is an indicator of both the courts’ As emphasised earlier, careful consideration must evolving response to cryptocurrency and the flex- be given to any application for interim relief. ibility that courts are willing to extend to assist Rahman Ravelli acted for the defendant – an victims of fraud involving cryptocurrency. international private client and investor – in the It is also a landmark case because it is: leading case of AA v Persons Unknown. This was • believed to be the first case of fraud involving a landmark judgment in England and Wales as an initial coin offering – where a company it was the first case where Bitcoin was defined as looks to raise money to create a new currency property and, as a result, a proprietary injunction – to go before the Commercial Court; was granted over crypto assets. The defence in this • one of the only cases where the court has case argued the defendant was a bona fide, good granted permission to serve a free-standing faith purchaser of the Bitcoin in question. Bankers Trust order out of the jurisdiction The claimant, AA, said it had a claim for against cryptocurrency exchanges; and restitution and/or under constructive trust • the first time that a court has considered the against persons unknown and the exchange. lex situs (location) of Bitcoin. The Honourable Mr Justice Bryan had to assess In our experience, judges in English courts whether it was possible to have a proprietary claim are willing to show that they are prepared to over Bitcoin (and, by implication, any other crypto adopt formidable tools to accommodate cryptoasset). The claimant’s case relied on the fact that currency fraud applications. Yet much will always this was a claim for an interim remedy pursuant depend on the strength of the application you to S25 of the Civil Jurisdiction and Judgments Act make in such cases. This, ultimately, is determined 1982 (the Act). The claimant also stated this was a by the effort and intelligence involved in your

claim in tort where the damage sustained was in preparation. CCommercialD DisputeR Resolution England.

COMMERCIAL DISPUTE RESOLUTION CCommercialD DisputeR Resolution 21

Syedur Rahman’s areas of expertise include white-collar crime, cryptocurrency-related fraud and multi-jurisdictional asset tracing and recovery. He represented clients in the landmark cryptocurrency asset recovery cases AA V Persons Unknown and Others and Ion Science Ltd and Duncan Johns v Persons Unknown, Binance Holdings Limited and Payward Limited. His use of civil recovery proceedings under Part 5 of the UK’s Proceeds of Crime Act (POCA) has seen him record notable national and international successes. He is a partner at Rahman Ravelli and has contributed chapters to books on white-collar crime. He also hosts seminars and speaks at international conferences. His in-depth experience of business crime and multijurisdictional asset recovery cases and his ability to negotiate with investigators have ensured his clients receive the strongest representation. He is proficient in both criminal and civil proceedings and has widely acknowledged expertise in national and international regulatory and compliance cases. The latest edition of the Chambers UK guide ranks Syed as a lawyer to watch, calling him “a very technically gifted lawyer” who “gets on top of all the facts in complex cases”. Chambers has repeatedly highlighted his expertise in POCA work and asset recovery proceedings. The Legal 500 has said he “goes the extra mile to get the best results for his clients”. Its most recent edition says he has “incredible depth of experience when it comes to fraud matters”.