At its onset, the extreme and sudden nature of the pandemic led governments to enforce nationwide lockdowns, which caused an immediate impact on the economy. In response, governments created economic packages to meet the urgent needs of its citizens and corporations, leading to an unprecedented fiscal bail out; government assistance programmes such as the UK furlough scheme have cost billions (see https://fulcrumchambers.com/new-taxpayer-protection-taskforce-to-investigate-furlough-fraud/).
Pandemics increase the opportunity for fraudsters
Fraudsters are taking advantage of the opportunity that has presented itself with decreased face-to-face interactions, remote working, and potential technological weaknesses, to attack individuals and corporations for illicit gain. In the UK, a survey conducted by PWC found that economic crime reached its highest level in the past 24 months, with 56% of UK businesses surveyed stating that they were impacted by fraud, corruption or other economic crime. From phishing scams, supply chain fraud, and fake charities, organised crime groups are adapting quickly to the pandemic, accentuated by unprecedented changes in work, social and economic conditions.
The UK and other governments have promised to deal with COVID -19-related frauds with prosecution, and indeed we have seen the Coronavirus Act 2020 extend HMRC's powers to pursue parties who have broken the rules governing furloughing, including the ability to pursue company office holders in the case of businesses becoming insolvent, with joint and several liability. However, "the argument often made in critical criminological literature is that the less powerful typically find themselves on the receiving end of the process of law enforcement, while the wealthier and privileged are better able to evade punishment and criminalisation" (Box 1983; Reiman 1979; Whyte and Wiegratz 2016, cited Chistyakova, Y., Wall, D.S. & Bonino, S. The Back-Door Governance of Crime: Confiscating Criminal Assets in the UK. Eur J Crim Policy Res (2019)).
Whilst governments were compelled to act for the health and safety of their citizens to obtain crucial resources such as medicines and medical equipment, the Financial Action Task Force (FATF) identified that as a result of government funds or international financial assistance, there were increased risks of illicit finance and corruption from the misdirection of those funds (FATF Webinars on Money Laundering and Terrorist Financing and COVID-19, (30 July 2020)). The emergency provided opportunities for the corruption and misappropriation of public funds, particularly in procurement and government contracts. This may involve embezzlement of the immediate economic and financial aid that is received, as well as the abuse of emergency procurement processes for private benefit.
It is particularly galling when public officials who have directly or indirectly taken advantage of the urgent roll out of government schemes to create high value contracts, or to procure goods for themselves at the risk of endangering public services and the lives they are meant to protect as public servants. Yet public and private sector participants of a FATF webinar on "COVID-19 and the changing money laundering and terrorist financing landscape" on 30 July 2020, highlighted misuse of government stimulus funds as the third most prevalent COVID-19 related crime after fraud and cybercrime (Financial Action Task Force, FATF Webinars on Money Laundering and Terrorist Financing and COVID-19, (30 July 2020)).
Indeed, we have seen several cases worldwide to date (https://images.transparencycdn.org/images/COVID-19-Documented-corruption-and-malfeasance-cases.pdf), including:
- United Kingdom: Some 50 million masks the UK purchased as part of a US$326 million contract will not be used by the NHS due to fears of defects. The contract was between the British government and provider Ayanda Capital Limited, described as "a 'family office' owned through a tax haven in Mauritius". It is alleged the company has ties to a prominent member of the Conservative Party. (Source: David Klein, 14 August 2020, available: https://www.occrp.org/en/daily/12955-uk-paid-at-least-us-204-million-fordefectivemasks.)
- Brazil: A Sao Paolo Governor is under investigation for a US$100 million contract to purchase 3,000 ventilators at 10 times the usual price from a Chinese company. (Source: Brenno Grillo, 11 May 2020, https://brazilian.report/liveblog/coronavirus/2020/05/11/brazilian-prosecutors-crack-down-covid-19-corruption/).
- Mexico: The son of a Mexican government official was awarded a government contract worth US$1.3 million to provide 20 ventilators - costing US$65,000 each. According to an investigation by Mexicans against Corruption and Impunity (MCCI), the ventilators cost 85% more than the cheapest models previously purchased by the government (see https://mexiconewsdaily.com/news/government-contractor-denies-getting-help-from-his-father/).
- Zimbabwe: The Health Minister faces corruption charges relating to a US$20 million contract awarded to a firm incorporated in Hungary only two months prior. The award is alleged not to have gone through the Zimbabwean procurement registration authority. This follows a suspicious US$2 million payment made to the firm in March, which had been flagged as suspicious by Hungarian authorities (see https://www.bbc.co.uk/news/world-africa-53119989).
Asset recovery must play a bigger part
If governments are to recover economically, it is highly likely that they will need to find revenue from new or expanded resources. This may be through personal or corporate taxes, or by attracting foreign investment. Yet both will be difficult to promote if the government has a lackadaisical response to fraud and corruption within its own ranks. Indeed, curbing fraud and public corruption will be imperative, and to be effective, must also include an element of deterrence, and that inevitably means prosecution and recovering the spoils of those frauds. States need to be alive to the fact that an acquittal of a corrupt public official sends a poor message.
In the immediate term, as societies work to contain the virus while sustaining their economies, the emphasis will be on prevention and reporting. However, lessons learned from the Ebola outbreak showed that traditional anticorruption policies were insufficient in situations of an outbreak to build better economies after the pandemic. Arguably then, tracking financial flows, publicising complaints, prosecution and asset recovery must play a bigger part.
We must include a swift reactive as well as proactive response and follow through on pronouncements to deter fraud and corruption, by implementing and not just threatening redress, and by turning to other civil remedies that are available if criminal sanctions are lacking in their timely response.
There is a dearth of published data on successful asset recovery generally, even more so when discussing the pandemic. Much more can be found on anti-corruption prevention than on restorative justice, and perhaps understandably so; it is a daunting task to trace and find evidence after the event, and as the saying goes, "prevention is better than cure". It is also, quite frankly, easier to measure success; strengthening institutions, improving processes, and providing capacity building against development targets, is an easier goal to achieve than recovering millions of dollars from a corrupt former President and his cronies. But this is exactly where we need to be putting the hard yards in; asset recovery is perhaps the strongest message available that crime does not pay.
Asset recovery tools and tactics
Asset recovery - the process of tracing, freezing, and returning illegally acquired assets to the jurisdiction of origin - requires tenacity and willpower. The key to combatting fraud can be achieved through a mix of intelligence, financial investigation and understanding the legal steps to undertake to maximise the possibility of a recovery, but what is verily needed is a concerted response to combat the threat posed by corrupt political elites and international crime, involving international and national courts, law-enforcement agencies, international financial regulators, professional bodies, private practitioners, and national governments in partnership with each other.
The UN Convention Against Corruption (UNCAC), a tool to assist signatories in combating corruption, largely focuses on criminal mechanism. It has powerful potential for prosecuting the perpetrators of corruption, but onerous requirements for mutual legal assistance, a lack of non-conviction-based recovery procedures and restrictive evidentiary and procedural legislation in either the requesting or requested country can stop a corruption investigation in its tracks. Vast sums of financial assets are stolen from developing countries and hidden in financial centres around the world, but it requires political will and positive responses from both requesting and requested countries to make asset recovery a true success.
Recovery and jurisdiction
Many fraud and corruption schemes involve the creation and use of domestic or overseas companies, for the purpose of receiving or paying bribes, transferring misappropriated assets or holding embezzled funds, which is why using civil remedies may well be the most expedient way to restrain and recover those assets. Indeed, we have used insolvency proceedings to either the entity that committed or assisted in the corruption. In one recent case I advised upon recently, a UK firm had entered high value contracts with two offshore companies for the provision of PPE masks, which never arrived. The company was incorporated in the BVI. Months of prevarications ensued before the UK customer came to the realisation that the funds had never been used to purchase PPE masks, but instead was highly likely to have gone into the pockets of fraudsters.
Despite the shareholders, directors and the assets residing outside of the jurisdiction, which totalled tens of millions of pounds, it was possible to enter a simple debt claim against the company for unpaid services or goods, seeking a winding up to recover debts owed, and then installing a liquidator who, under Statute, could compel the receipt of banking information from its professional service providers, including its bank. The use of insolvency processes and/or the court appointment of a receiver or liquidator (particularly in jurisdictions that follow common law) in this case was particularly advantageous in investigating cases of fraud. Seeking a debt judgment against a company which may have provided substandard goods or has not supplied goods is appropriate for both insolvent and solvent companies. In the case of a solvent company, it would be considered in the public interest for the company in question to be wound up, having been complicit in, or used as a vehicle for, fraudulent misconduct.
A good example of using insolvency to recover assets in a corruption scheme is that of the former mayor of Sao Paulo, Brazil, who stole approximately 20 per cent of funds intended for the construction of a highway around the city. A large amount of the cash had been deposited into bank accounts overseas, and transferred into the control of two private companies, incorporated in the BVI. After uncovering the scheme, the governments of Brazil and Sao Paulo successfully sued the two companies in the BVI. Brazil and Sao Paulo then applied for creditors rights in a BVI court, so that insolvency representatives would be appointed. The BVI court agreed, and appointed insolvency representatives to take control of the companies. They immediately gained access to records and witnesses, enabling them to piece together the remaining assets from what had been stolen, to be returned to taxpayers in Brazil (see https://star.worldbank.org/sites/star/files/goingfor-broke.pdf).
It is a truism, that whilst COVID-19 has changed the world in many respects, what remains the same is the law. What will define our response to corruption in the pandemic will be our selective use of the law to choose the quickest route in recovering stolen government and development funds. The use of MLA requests, bi-lateral treaties, civil remedies and insolvency all lend themselves to obtaining evidence and recovering assets.
Understanding the different elements within an asset recovery strategy determines the potential jurisdictions and remedies that may be available and will be critical.
Depending on the evidence and on the jurisdiction, an assessment may be made on whether to seek assistance from counterparts in criminal or regulatory law enforcement agencies, or to pursue private civil action or use of insolvency mechanisms. In many of our cases, like in the case referred to above, cross-border insolvency treaties and recognition principles have provided significant advantages if there is a debt owed, and in some fraud causes it may be possible to obtain a winding-up or receivership of a legal entity based on a " just and equitable" application, which could provide additional discovery powers regarding its assets. The basis of a J&E winding up, can be based upon evidence that the company was used as a vehicle for fraud or that assets may be dissipated.
One of the biggest problems in recovering assets using criminal law across borders is that criminal procedures have more stringent requirements for the manner in which evidence is obtained, and how it may be used in the requesting jurisdiction, whereas using civil claims to recover the money has the undoubted advantage of requiring a less strict burden of proof than is required in applying criminal law, and claims can be brought in commercial courts. In England and many common law countries, for example, criminal allegations must be proved 'beyond a reasonable doubt', whereas allegations in civil cases must be proved on the 'balance of probabilities'. This can be a useful metric in deciding in which direction to take a case; if a criminal prosecution appears unlikely, perhaps due to lack of evidence, then restitution via civil remedies should be sought, whether that ultimately results in a civil claim for breach of contract or financial misfeasance, or indeed a simple debt claim. I am a strong proponent of justice, but justice takes many forms, and stripping a fraudster of their spoils and returning assets to their rightful place, is surely the most satisfying.
Recovery and reinvestment: a unique opportunity
We face a unique opportunity to fundamentally rethink anti-corruption policies and prioritise the recovery of stolen government and development funds which can be reinvested into healthcare, education, and welfare to support those who need it most in the global recession. States lose significant resources through illicit financial outflows, affecting their capacity to fulfil their obligation to maximise available resources for the realisation of economic, social and cultural rights and to achieve the right to development.
Acknowledging the negative effects of these outflows, particularly in developing countries, States committed, through the 2030 Agenda for Sustainable Development (SDG 16.4) and the Addis Ababa Action Agenda on Financing for Development, to reduce illicit financial and arms flows, and to strengthen the recovery and return of stolen assets. The forthcoming UN General Assembly Special Session (UN GASS) on Corruption 2021, scheduled for April 26-28, 2021, will be important in setting the stage for the expectation of states to combat corruption.
Member States should make firm commitments on taking decisive action to significantly improve asset recovery and return, in particular pursuing corrupt officials that have taken advantage of the pandemic to purloin state coffers. Even more topical in recent times is the repatriation of stolen assets and how they are managed. Kenya's President announced that US$19 million in recovered stolen assets would be used in the fight against COVID-19. As noted by the Basel Institute on Governance, "it illustrates very pertinently that while corruption can kill, asset recovery has the potential to save lives."
How very apt that the assets recovered from corruption which impacts on citizens' rights to education, family, life and health are then used for repairing the harm caused by grand corruption, and for implementing measures to meet SDG16.
Angela Barkhouse is a Managing Director in the Cayman Islands and leads Quantuma's Caribbean and Cross-Border Asset Recovery Groups. She is a recognised expert and "thought leader" in financial investigations, offshore asset tracing and recovery, data analysis and intelligence.
As a cross-border asset recovery specialist. Angela provides project management and litigation support to locate and repatriate the proceeds of fraud and corruption hidden in foreign jurisdictions. Her broad expertise in financial investigations, asset tracing and dispute resolution provide her with the knowledge to derive practical solutions to seemingly complex cross-border issues. Angela has consulted with governments, law firms, banks, corporations, and NGO's. She has led high profile and complex investigations in bribery, corruption, malfeasance, conflicts of interest, embezzlement and stolen sovereign wealth and recovered assets for clients and victims of fraud, corruption and misconduct Recent examples of assignments include acting for a newly elected Government in Asia in investigating money laundering through the central bank with the collusion of high-ranking members of the former government and government agencies.
Angela has also recently led the forensic investigation into the misappropriation of substantial assets by members of a former regime in South Asia through the central banking system and government-owned entities, supporting multi-jurisdictional litigation for both criminal and civil proceedings in claims exceeding $7 billion.