Throughout the past year there has been a steady trend of debt recovery cases which are accompanied by criminal proceedings. As a result, asset tracing is very important to white collar investigations, particular in so-called money driven crimes.
As our fruitful conversation with partners of AVER LEX Attorneys at Law, Vitaliy Serdyuk and Artem Drozdov revealed, asset tracing and recovery is very painstaking and precise work that needs both strategic thinking and attention to detail. We asked them to go through the existing methods, gaps in the law, obstacles in the system, recent attempts to improve the process.
How does asset tracing work in Ukraine? What does the available practice allow to find and through which registers?
Artem Drozdov: In order to search effectively for assets it is necessary, first of all, to focus on determining the financial standing and business activity of a person, related persons, profit participation rights, as well as the existence of liquid assets and the verification of financial transactions. It is also important at the initial stage to analyze its legal status, in particular: the existence of bankruptcy cases, judicial and corporate extra-judicial disputes, licenses and special permits, arrears in payment of taxes and dues to the state budget, as well as the seizure of property as a consequence of tax debts. This information will allow us to determine the preliminary list of assets belonging to this person: registered real estate objects, including land plots, leased pro-
perty, movable property, shares and partnership rights, etc.
Vitaliy Serdyuk: There are currently more than 50 open registries in Ukraine but, unfortunately, not all of them are useful for asset search. Among those that are really useful are those that contain a list of objects of intellectual property rights included in the customs register; a list of vessels in the shipping register; project "Find out more about your business partner"; database of exporters; The Unified State Register of Legal Entities and Individual Entrepreneurs. When using these registers and databases, you can set the source data for the person who is being requested. Keeping in mind the fact that databases with a large amount of confidential information will never be publicly available, there is a need to apply analytical thinking to understand in what direction to work: with a circle of relatives and people close to business or to pay attention to the nature of the activity of the accused. There are many details that you need to focus on and use in future work.
The National Agency of Ukraine for Finding, Tracing and Management of Assets derived from Corruption and other Crimes (ARMA) recently started its work in Ukraine in the search for assets. How does the Agency fulfill its tracing and recovery function?
A. D.: In fact, this authority does not fulfill an operational-search function, like law-enforcement bodies. The Agency’s main task is to work with databases: fully open, with restricted access, within our country and beyond. In fact, it is totally analytical work.
First of all, ARMA will react to inquiries from law-enforcement bodies, for example, the Prosecutor’s office or the National Anti-corruption Bureau of Ukraine. Having received an inquiry, the Agency can start directly tracing assets (immovable or movable property, shares, money assets) of high-ranking officials in Ukraine and abroad.
For effective fulfillment of the assets tracing function there should be two necessary tools: access to databases and fast communication for operative exchange of data with counterpart institutions in EU states for searching and analysis of information in open sources.
At the moment, the Agency is authorized by three global networks on exchange of information for tracing assets: CARIN net,INTERPOL's Global Focal Point Platform and the World Bank net called StAR. These are information platforms for exchange of data on assets that are subject to arrest.
V. S.: Ukrainian legislation currently provides two methods of forced turning of any assets into state income. The first one is confiscation that is applied as a kind of additional punishment for the guilty person who was punished in the form of compulsory alienated property that became state income. The second is a special confiscation applied to assets derived from the crimes of a guilty person as well as of third parties, who got this property.
In both cases, as a measure of security, the arrest is imposed only on identified assets that can be confiscated only by a court decision and only after the criminal process is completed.
What about the regulation of asset tracing and recovery beyond the framework of criminal proceedings?
V. S.: Rather not “outside”, but “in parallel” with criminal proceedings. First, do not underestimate the negotiation of a voluntary return of assets by a person in respect of which a criminal proceeding has been instituted. Secondly, it is possible to initiate a lawsuit to recover the relevant amount of debt in a commercial court. Within the framework of such a legal process, it is possible to provide an operational security for the claim by seizing the debtor's assets. However, it is possible to carry out an arrest within the framework of criminal proceedings more quickly and with substantially smaller labor costs.
A. D.: With regard to the ARMA, the tracing and returning of assets beyond the criminal proceeding is not regulated at this stage.
The Law of Ukraine On the National Agency of Ukraine for Finding, Tracing and Management of Assets derived from Corruption and other Crimes of 5 January 2017 clearly determined that the Agency will search for property from corruption only under the inquiry of law-enforcement authorities, an investigator, a detective, a prosecutor and a court.
At the same time, the department should form and maintain a public Unified state registry of assets under arrest, and should control the arrested assets, the cost of which exceeds 200 minimum wages.
Also, the above-mentioned Law contains an explanation of the term “determination of assets” activity on ascertaining the fact of existence of assets. This term is used in Article 9 of the Law in the context of functions of the Agency that is obliged to take measures on determining the assets under the inquiry of an investigator, a prosecutor, a court.
As was mentioned earlier, ARMA has access to the registries that are at the command of all state bodies, but the Agency has the right to additionally request information. But we understand that regulatory acts, except for a special law and the Criminal Procedure Code, do not provide separate rights regarding the requisition of information and documents.
V. S.: Thus, we can assume that the Agency will fulfill almost identical functions on searching information regarding those or other assets to those functions that are now fulfilled by the corresponding administrators of the bases of state bodies or bodies of local government.
At the same time, we can assume that regarding the receiving of information, that is not contained in electronic databases, or the access to which is impossible to provide because of the direct requirement of the law (let’s say, bases of the technical inventory bureau), or if the information is contained not in full, ARMA will work in order to provide inquiries and receive responses from such bodies and institutions. And will take corresponding decisions on the basis of information it has received.
What are the most efficient methods of asset tracing in recent Ukrainian practice?
A. D.: There are several methods. The mostly applicable is tracing within a criminal proceeding. But it is quite long lasting and not always effective, taking into account that the person hiding the assets can have necessary contacts in the corresponding authorities. At the same time, it is relatively inexpensive. The main weak point is time, which they need to collect primary information.
And the most effective method is to involve big players like a forensic accounting service. However, forensics are quite an expensive service, that is why Ukrainian banks and companies rarely use it.
But even despite high costs, is it reasonable in the current realities, from your perspective, to attract forensic specialists?
A. D.: The service of forensic accounting includes elements of accounting expertise and investigating services, working around the world. The main advantage of such a method is the fast reaction at the initial stage, availability of access to various sources, prompt collection of information and use of an evidence base in courts.
Forensic specialists have opportunities to investigate different financial flows, track interrelations between different directions and, finally, when the assets are found, to involve specialists that would create an effective scheme of asset recovery.
The only drawback is that this service is expensive. But we should remember, that many big companies practicing forensic, cooperate with the English investment funds that deal with financing international arbitration courts interested in financing forensic. If representatives of the funds realize that there are real chances to determine the assets and to sell them in future, an investment fund covers all the expenses (for lawyers, auditors, litigation). And when a creditor gets recovery from the borrower, the investment fund gets its share. That is why this method can certainly have priority for achieving a result.
It is widely discussed that asset tracing and recovery may last for years.
Do you observe any gaps in regulations that may facilitate the procedure?
V. S.: Recovery and return of assets is a relatively new function for the Ukrainian law-enforcement field. There are certain risks, that the search would not give any results, if the power bodies, for example, the Ministry of Justice, the Fiscal Service, will restrict access to the information at their registries and databases.
In its turn, the state should carry out a regulatory policy, directed at improvement of interaction between state institutions and branches of power.
Also, one of the reasons for the low results of asset tracing and recovery can be the very low level of investigation of economic crimes, where assets were arrested. In order to return the assets, one should prove their criminal origin; accordingly, one needs a resolution from a court. And again, taking into account existing bureaucracy, the process of recovery turns into a long-lasting and exhausting action.
Besides, an independent investigation by the Agency is not regulated. It does not have an opportunity to coordinate the work of the other participants in the process, as it is authorized only to respond to their inquiries.
Last October the Minister of Finance announced that Ukraine plans to join the CRS international standard for tax information exchange by 2020. Do you anticipate improvements for asset tracing and recovery procedure?
A. D.: The standard of CRS reporting provides for an annual automatic exchange of information between the states which adopted it. According to the Standard, financial institutions are obliged to collect and transfer to the taxation bodies of their country information about the financial accounts of clients. Collected information will be automatically transferred to the taxation bodies of the jurisdiction, where the client is a tax resident (provided that between the jurisdictions of the financial institution and an owner of the account the automatic exchange is established). Automatic exchange can allow taxation bodies to receive information about the foreign financial accounts of Ukrainian residents.
Thus, while earlier a business entity was able not to declare incomes from the sale of corporate rights, property sale, purchased abroad; after implementation of an automatic exchange it would be almost impossible to do.
Today, the controlling bodies of Ukraine practically do not have an opportunity to find out about a Ukrainian citizen’s account, opened beyond the country, or about the fact that this person is the owner of a foreign company. When the automatic exchange appears, this information will be directly transferred to the controlling bodies of Ukraine, which will essentially influence the results of ARMA work.
What evidence should be collected to prove the belonging of assets?
A. D.: First of all, it is necessary to analyze in detail the relationship between a person and his counterparties: to determine whether there are counterparties with a dubious station, to check transactions between related persons for violation of
legislation on conventional prices, to identify possible fictional enterprises, as well as one-day large transfers going along the chain.
V. S.: As for collecting evidence, which in the future will be used as confirmation of the ownership of the asset directly to the person, at this stage, many activities, sometimes of a confidential nature, are held. It is necessary to establish connection between the asset and the ultimate beneficiary, and in this chain, as a rule, not one part. This is very patient work, you need to work out every link, conduct a financial, accounting or legal audit.
As a result, it is possible to obtain information on the financial condition of the company, its export-import transactions, settlement accounts, and, if available, identify schemes for “asset laundering” and “treasury group”. It is important to find not only a physical connection, but sometimes a logical explanation of the person’s actions who is trying to hide his property. Sometimes, for the initial development of the direction of work, one inadvertent photo posted to social networks will suffice, against the backdrop of the expensive car, so that the analyst understands in which direction he needs to work.
What measures of criminal responsibility are applied in asset recovery cases?
A. D.: Our practice shows that the active cooperation of creditor representatives with law-enforcement agencies motivates debtors to fulfill their contractual obligations, since conditions are created in which debtors can repay the amount of debt at the stage of pre-trial investigation and avoid criminal prosecution, or minimize criminal and legal risks, for example, avoid seizure of property or an unscheduled inspection.
At the same time, to effectively use this impact tool, it is necessary to determine the direction and qualification of the relevant acts of officials of debtors who may fall under the signs of crimes.
Depending on the specific situation, the corresponding actions may be qualified in a different way. Among the most popular wordings are fraud (Article 190 of the Criminal Code of Ukraine), misappropriation, embezzlement or possession of property by abuse of official position (Article 191), fictional entrepreneurship (Article 205), legalization of proceeds from crime (Article 209) and others.
V. S.: Among the applicable criminal law measures, it should be noted, firstly, that measures to find assets can be carried out by both investigators and defense lawyers in criminal proceedings. Secondly, these are measures to fix this property, for example, seizure of assets with the prohibition of use in some cases. The practice of transferring objects by court decision to ARMA is being actively applied now.
It is necessary to single out the vindication for information and the seizure of property abroad within the framework of international legal assistance. And, again, the recovery of assets, which can take place in a voluntary form on the part of the guilty person himself. This can be expressed in the form of transfer of the seized items to the legal owner and the receipt of property by a court decision as a result of an investigation into criminal proceedings. This is the longest but also the most reliable way.
Do you see any new schemes used by fraudsters in practice?
V. S.: As a rule, these “masterminds” are sure that they are the only ones who possess unique knowledge about the hiding of assets. But frankly, they invent nothing new, but use long-ago worked out schemes. That is why, it does not matter how they foul the trail in registration of their property for third parties or companies, where they, in reality, do not hold any positions, but in fact are affiliated persons, experienced professionals will still determine either an owner-company or an actual owner of the asset, and will obligatorily determine the causal relationship between these elements.
Do you anticipate further growth of asset recovery cases in Ukraine?
V. S.: The problems of tracing and returning lost assets will always be relevant. And the latest legislative changes provide additional tools for the successful implementation of this process. At the same time, the task facing the lawyer is to correctly and professionally use them to achieve results with minimal loss of time.
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