Setting up the Puzzle — Tracing Funds Dissipated From Banks
Once your claim is confirmed by the court or an arbitral tribunal, how do you turn it into cash? It is quite rare that court judgements or arbitral awards are performed voluntarily in Ukraine. Enforcement is a part of debt recovery, which is often, actually, the beginning, and far from the end, of chasing the debtor. The prospects of achieving success in enforcement are often determined not by the efficiency of such actions themselves. In order not to lose time on a so-called "fishing expedition" in finding debtor’s assets at the enforcement stage, which is often too late, an experienced and far-sighted creditor secures the presence of information about debtors’ assets, and assesses the prospects of enforceability against them, well in advance of a dispute arising. On the contrary, one who fails to prepare for enforcement at the very beginning of the dispute, or even before it, is, at the same time, preparing to fail in debt recovery. However, it is not always possible and feasible to anticipate a dispute and so inspect the likelihood of enforceability against the debtor well in advance. This is often a case, if a fraud took place against a creditor and, particularly, when such creditor is a bank. Among typical situations when the assets are dissipated from the banks are, first, when the bank is being sold, second, when bank management or employees, who are entrusted to hold and manage the assets and interest, abuse their position, and, third, in case of a bank’s insolvency when the state takes control of it.
Asset tracing and recovery, which is a complicated, resource and time-intensive task, is of immense value for any claim for damages caused by fraud. The banking industry, being a risk-taking industry in general, is especially attractive for white-collar criminals, involved in various types of fraud, including asset dissipation and misappropriation. Implementation of these schemes results in losses running into billions of dollars for the banks, their shareholders and clients, whether individuals, small or large businesses, states, taxpayers, and the list goes on.
In light of the foregoing, this article focuses on the problem of asset misappropriation from the banks, exploring common schemes used to carry out a dissipation, analyzing methods and tools used to reveal schemes and trace assets, describing typical situations when such problems arise, and presenting two relevant case studies in this regard, namely BTA Bank v. Ablyazov and VAB v. Maksimov. Finally, the analysis will be concluded by some practical issues that should be kept in mind when seeking ways to trace and recover dissipated assets.
Asset misappropriation is commonly defined as "stealing an asset of a company for personal use at the company’s expense or misuse of a company’s resources".1 Asset misappropriation frauds are generally divided into certain categories, such as cash and non-cash frauds, as well as the frauds that are committed before the assets are recorded, while assets are currently held by the bank or during the process of purchasing goods or services.2 According to the most recent Association of Certified Fraud Examiners (the ACFE) Report to the Nations on Occupational Fraud and Abuse of 2016, asset misappropriation is the most common category of occupational fraud.3 With regard to the banking and financial services industry, in which 369 cases were analyzed by the ACFE, the following most frequent schemes of asset misappropriation are noted:
— "Cash on hand", which includes falsified documentation or reconciliations, as well as petty cash access (17.9%);
— Cash larceny, which means the removal of cash from the bank after its entry into the accounting records, committed through, inter alia, making false voids or refunds (11.1%);
— Non-cash schemes that include misuse or theft of inventory and other assets through, for example, false sales and shipping or submitting falsified transfer documents (10.6%);
— Check Tampering, which involves forging signatures or signing blank cheques to misappropriate assets still takes place (9.5%);
— Billing schemes, which are associated with submission of invoices for non-existing goods or services to the bank or making fictional purchases through shell companies (9.5%);
— Skimming, which is the removal of cash before to its entry into the accounting records, which leaves no audit trail. Typical skimming schemes are, for example, stealing unrecorded cheques or multiple refunds (6.8%);
— Expense Reimbursements, which includes a claim for reimbursement of fictitious or inflated business expenses (5.4%);
— Payroll schemes, which is, inter alia, claiming a payment from the bank by making false claims for compensation (3.8%);
— Register Disbursements, which includes making false entries on a cash register to conceal the removal of funds (2.7%).4
Several methods combined, asset misappropriation takes the form of very complex and sophisticated schemes that are carried out for years and are extremely difficult to trace. Numerous asset-concealing techniques include hiding assets under someone else’s name, paying alleged debts, transferring money to tax havens and trusts, etc.5 For example, in the so-called "Russian Laundromat" scheme, when USD 20.8 billion was laundered from 19 Russian banks, the money went through 5,140 companies with accounts at 732 banks in 96 countries. The scheme was carried out repeatedly via the following steps:
Two companies are established overseas (without any business activity);
One company becomes a creditor of another company;
The debt is guaranteed by Russian companies and the deal involves a Moldovan citizen;
The debtor does not pay, and so the guarantee is called;
A Moldovan court resolves the case and orders the Russian company to pay the amount under the guarantee;
A judicial executor arranges the transfer to an account opened in a Moldovan bank, to which the Russian company deposits money;
Russian money is in the Moldovan bank, now laundered. These funds go through other banks to shell companies all over the world.6
Another example of such a scheme in a recently published review of the Kroll report, which examined large-scale fraud regarding a Ukrainian bank, Privatbank, resulting in a loss of at least USD 5.5 billion, when a "Loan Recycling" scheme took place. Although the details have not yet been revealed, following the general description of the fraud, the scheme included repayment of old loans provided to parties related to former shareholders of Privatbank through the issue of new loans, which in their turn were repaid by using further loans.7
In respect of asset tracing, it should be noted that despite of existence of many different forms and schemes of committing assets misappropriation, the specialists have an impressive toolbox to trace and recover the dissipated assets. The challenge is usually a highly politicized environment in which an investigation is conducted, as usually government officials and members of the banking community are involved in the investigated fraud.
- Association of Certified Fraud Examiners lists the following seven phases of locating and recovering assets: Developing an investigation plan, including the objective, timeline and estimates;
- Collecting relevant information;
- Creating a subject profile for each investigation target, including financial accounts information and criminal records;
- Profiling the subject, including, in the case of business profile, proving illegal payments or attempts to hide assets from accounts and records;
- Analyzing information for leads, electronic data, ownership documents and financial records;
- Conducting interviews;
And, finally, tracing assets.
The methods typically used by investigators and forensics to trace assets include, but are not limited to, the following:
— Forensic accounting and transaction analysis, including piecing together incomplete or deliberately falsified financial records, tracing wire transfer, electronic payment and loan records;
— Search, seizure and analysis of electronic evidence found on corporate and personal electronic devices;
— Fieldwork and interviews with witnesses and suspects;
— Investigation of directorships and shareholdings in companies, media information, bankruptcy status, court judgments and status of asset holdings.8
In this regard, it is important to mention the JSC BTA Bank v Mukhtar Ablyazov case. The BTA Bank was nationalized by the State of Kazakhstan, followed by an accusation made against its Chairman, Mukhtar Ablyazov, of misappropriating the bank’s funds. In 2009, the Chairman fled to England and the bank brought proceedings against him, claiming in excess of USD 10 billion.
On 12 November 2009, BTA Bank obtained a worldwide freezing and disclosure order against the Chairman and the appointment of a receiver over his assets in support of that order. The Chairman failed to comply with it, entering into four Loan Agreements in 2009-2010 and the Bank advanced a claim in court against him. This was followed by a series of global legal proceeding and receipt of numerous other asset-freezing orders, as well as a contempt of court order, which ultimately resulted in the arrest of Mr. Ablyazov in France in 2013. Further episodes of the Ablyazov case saga, includes the following. In 2015 the Bank issued a claim of unlawful means conspiracy against Mr. Ablyazov and his son-in-law, Ilyas Khrapunov, stating that they prevented the Bank from enforcing the judgments against Mr. Ablyazov’s assets, dealings with such assets in breach of freezing and receivership orders. Respondents argued against it, saying that the rights under loan agreements should not be treated as "assets" for the purposes of the order, and the court of appeal sustained their claims. However, the cassation instance partially overturned the appellate decision, holding that the proceeds of these loan agreements should be considered as "assets". To date, the latest step is an appeal filed by Ilyas Khrapunov in the Supreme Court of the United Kingdom.9
Another interesting case in this regard is PJSC Vseukrainskyi Aktsionernyi Bank v. Maksimov & Others. Maksimov was the former President and majority shareholder of VAB, accused of managing assets in breach of worldwide freezing orders granted against him and his companies in support of claims for more than USD 200 million brought in LCIA arbitration proceedings. Apart from obtaining a freezing order against Maksimov, the bank later proved in the Commercial Court in England and Wales that assets held by several English third parties belonged to him and, therefore, are also subject to the freezing order.10
In conclusion, it is beneficial to address certain practical issues with regard to tracing and recovering dissipated assets. The key to success in such cases is often determined by the following three components: (i) professional team, (ii) quick and persistent steps, and, finally, (iii) combining investigation and court/arbitration actions. What concerns (i), the team requires not only lawyers, but investigators, forensic and financial specialists. In relation to (ii), if steps are not taken in time, the prospect of finding money becomes more uncertain. On the contrary, finding so-called "low-hanging fruit" and succeeding in enforcement against relevant assets, helps to invest gained funds in further investigations and enforcements, and the cycle continues until the ultimate goal is reached. Finally, point (iii) means that the creditor’s team shall not only identify the assets, but also find a jurisdiction in which the debtor might be most efficiently "attacked" and the enforcement against revealed assets might be successfully accomplished.
1 Kassem, R. 2014."Detecting asset misappropriation: a framework for external auditors". International Journal of Accounting, Auditing and Performance Evaluation.
2 Albrecht C. et al. 2008. "Asset Misappropriation". Research White Paper for the Institute for Fraud Prevention. Available at http://www.theifp.org/research-grants/IFP-Whitepaper-5.pdf
3 ACFE. 2016. Report to the Nations on Occupational Fraud and Abuse. Available at https://s3-us-west-2.amazonaws.com/acfepublic/2016-report-to-the-nations.pdf
5 ACFE. Data Analysis and Reporting Tools (Presentation). Available at http://www.acfe.com/uploadedfiles/acfe_website/content/review/examreview/03-inv-data-tracing.pdf
6 OCCRP. The Russian Laundromat exposed. Available at https://www.occrp.org/en/laundromat/
7 NBU. 2018. "Kroll confirms: before nationalisation PrivatBank was subjected to a large scale and coordinated fraud, which resulted in a loss of at least USD 5.5 billion". Available at https://bank.gov.ua/control/en/publish/article?art_id=62425322
8 PwC. 2008. Fraud : A guide to its prevention, detection and investigation. Available at https://www.pwc.com.au/consulting/assets/risk-controls/fraud-control-jul08.pdf
9 Supreme court of the United Kingdom. JSC BTA Bank (Respondent) v. Khrapunov (Appellant), UKSC 2017/0043. Available at https://www.supremecourt.uk/cases/uksc-2017-0043.html
10 PJSC Vseukrainskyi Aktsionernyi Bank v. Maksimov and others 2013 EWHC 422 (Comm)
Volodymyr Yaremko, senior associate at Sayenko Kharenko
Vladlena Lavrushyna, junior associate at Sayenko Kharenko