Look Before You Leap Demystifying Cross-Border Recoveries
Look Before You Leap Demystifying Cross-Border Recoveries
By understanding the local jurisdictions and having an established plan of action, litigants will be better-prepared to achieve an international recovery.
Also contributing to this article:
Partner - Horwood Marcus & Berk Chartered
Globalization has created new challenges for parties threatened by, or involved in, cross-border disputes. For example, assets and evidence may be spread across multiple countries and legal systems. In addition, judicial attitudes and procedures vary on key concerns such as reciprocity in the recognition of assistance between courts and litigants.
Internet communication has made electronic transactions seamless and easy, allowing anyone to operate anywhere in the world. Tax havens have enhanced our ability to protect assets via the Internet. As a result, you must be careful about notifying a target of your recovery actions, as the Internet has made it far too easy for targets to communicate and to deploy counter-measures.
There are many obstacles in confronting cross-border recoveries:
- Multijurisdictional complex set of facts
- Disharmony in laws providing access to documents and information in the control of third parties
- Bank, fiduciary, and secrecy laws
- Conflicting laws on setting aside legal fictions
- Laws of trusts
- Insufficient time and experience
Things to Consider
These obstacles require parties to think differently than in domestic litigation. Parties should consider the following as they pursue cross-border recoveries.
1. Do not rush to file suit or to obtain a judgment
International claims are flexible, and judgments may restrict your recovery efforts. In foreign jurisdictions, judgments may be more strictly construed and inhibit the creditor from effectively collecting across international borders. This is unlikely to change in the foreseeable future so recognition and enforcement of a U.S. judgment in a foreign jurisdiction is completely dependent upon that country’s internal laws and procedures. Prejudgment procedures, available both in the U.S. and internationally, allow the litigant to see third-party discovery, whereas postjudgment discovery available in the U.S. may not be permitted in foreign jurisdictions.
2. Carefully think through the appropriate cause of action
Selection of the wrong cause of action can inhibit recovery in a foreign country. Judgments that contain punitive or treble damages may be viewed as penal in many foreign countries and may not be enforced. First consider what causes of action are available in the jurisdictions involved, and then consider what elements will have to be proven to obtain a judgment overseas.
3. Understand that legal remedies and protection vary from country to country
The relationship and impact of any country’s laws on other jurisdictions is important in determining where and how to sue. Advance consideration of the interaction between law and process in the pertinent jurisdiction can greatly enhance recovery efforts. Also, consider whether a judgment in one foreign jurisdiction might be recognized in another foreign jurisdiction to a greater extent than a U.S. judgment.
- Do not focus solely on tracing assets of the wrongdoer. Search for and examine the assets of persons who may have been complicit in the wrongdoing.
- Focus on gathering evidence. The key to recovery is supportable, verifiable evidence. How to gather that evidence is an important element of an effective recovery plan.
- Do not depend on the cooperation of the wrongdoers, as they will depend on delay and deception. Never expect honesty.
- Seek to locate, freeze, and seize assets. In the international context, assets can be frozen prejudgment. Once assets are frozen, the cooperation of wrongdoers is more easily procured.
4. Understand the informal and financial obstacles
The vast majority of asset recoveries involve overseas accounts, trusts, and companies. Certain offshore jurisdictions have regulatory setups and secrecy laws to obscure links to money with shell companies and nominee directors. These jurisdictions share certain core characteristics:
- Little to no income or capital taxation
- Private and flexible corporate structures
- Light corporate regulation
A person can set up a company for approximately $3,000 to $5,000 and can do it from anywhere in the world. While the registered office of the entity must maintain a register of members and directors, frequently these are not available to the general public. Thus, it is difficult to know who owns or directs offshore entities.
5. Understand the political obstacles
Some countries’ governments are more supportive than others of private actions of recovery. Depending on the target of the investigation, the political process could be a difficult barrier to overcome.
Develop a Strategy – At the Beginning
Developing a strategy at the beginning of the process is critical to achieving success when pursuing cross-border recoveries. Simply assuming that pursuing a domestic litigation strategy will result in a successful recovery is likely to lead to higher costs and a lower likelihood of recovery.
An effective cross-border recovery strategy must be cost-effective, and must:
- Identify the jurisdictions involved
- Identify the targets of recovery
- Determine what evidence-gathering is needed, including forensic accounting evidence
- Determine where asset recovery could occur
- Determine how different country laws interact in order to decide where litigation should be instituted
Planning, patience, and persistence are essential components of any international recovery effort. As the U.S. Supreme Court has recognized, cases involving international defendants require “great care." International litigation must be approached in a systematic fashion in an effort to avoid a rush to judgment. Use compulsory preaction proceedings in which the information (often confidential banking information) is obtained in order to have accurate and verified evidence. This information will provide a clear and accurate picture of:
- Who has facilitated the fraud
- Who may be liable
- Where the verified assets are located
- Where those assets have been sent
This is the foundation for a successful recovery strategy.
A critical part of the strategy, which may not always be front and center in domestic litigation, is determining where the assets are located. In many cross-border situations, this may be one of the more difficult questions to answer, and may require the services of forensic accountants and/or private investigators. Forensic accountants can assist with gathering and analyzing financial information, such as financial statements, bank statements, tax returns, and any other available financial information. The proper analysis of that information can lead to the identification of undisclosed business partners, relevant family members, and possibly informants. Private investigators can assist with other tasks, such as gathering other business information, locating specific individuals, and interviewing witnesses.
The overall objective of a successful strategy is to discover, freeze, and seize assets. This objective is achieved by reversing the litigation paradigm and focusing on recovering first, not last. Discovery should be through extrajudicial means by way of witnesses, informants, and documents. Documents need to be rapidly identified and secured before there is an opportunity to destroy them. Discovery should also be pursued through judicial settings appropriate for the jurisdictions involved.
Many jurisdictions allow for pre-action discovery in order to identify the wrongdoers. Such discovery can be sought from an innocent party holding the information who comes under a duty to assist the victim in gathering information to disclose the identity of the wrongdoers. Seizure is also accomplished based upon each jurisdiction. Injunctions and statutory freeze orders are the common means of seizing assets.
Recovering assets presents a formidable challenge. Nonetheless, the obstacles are not insurmountable. In order to overcome sophisticated barriers, the urge to run to a judgment or focus on tracing of assets should be avoided. Instead, the strategy must be directed at all those involved in the scheme (i.e., nominees, straw men, and business associates) and the manner in which all of the wealth is held, not just those assets linked directly to the transaction at issue. The challenge is great, but it can be overcome by identifying the wrongdoers and the property and controlling the assets through injunction.
The Initial Phase Is Critical
The initial planning phase is the most critical. Tactical objectives need to be prioritized. Considerations include the strength of the case, the likely jurisdictions involved, and the accessibility of assets in those jurisdictions. One also needs to have a strong working knowledge of the laws of offshore havens and an understanding of the bureaucracies which make these locales cumbersome and expensive places in which to operate.
The causes of action and identification of the jurisdiction(s) in which to bring the claim must be considered, as selection can have an enormous effect, and a potentially limiting impact, on postjudgment enforcement.
Evidence will need to be convincing. Evidence must be properly procured to avoid a later attack, especially where preemptive seizure methods are used. Such methods could include obtaining:
- Freezing orders preventing a suspected wrongdoer from dissipating assets
- Sealed and gagged disclosure orders against third parties in order to track and recover proceeds of the wrongdoing
- Civil search and seizure orders to prevent destruction of evidence and permitting access to premises to preserve evidence
- Appropriate asset discovery or freezing orders for use in other jurisdictions, or issuance of requests from one court to another
- Orders requiring the defendant to answer under oath about the nature, extent, and location of his/her assets and requiring him/her to give up his/her passport
- Orders compelling the defendant to request third parties to disclose the nature, extent, and location of his assets
All of these methods should be sought ex parte. Where multiple jurisdictions are involved, decisions should be made as to timing and priority, and any opportunities for tipping off the wrongdoer must be minimized.
Cross-border litigation is complex and expensive. In order to avoid surprises and plan for success, those managing such litigation should engage outside counsel and, if appropriate, forensic accountants in a comprehensive discussion of the practicalities of obtaining and using evidence that may impact the case.
“There is no bilateral treaty or multilateral international convention in force between the United States and any other country on reciprocal recognition and enforcement of judgments.” U.S. Department of State, Bureau of Consular Affairs, Enforcement of Judgments, visited July 26, 2017.