The pursuit of non-performing loans, especially where fraud is involved, often appears to be a tricky undertaking – to the point that some may decide to avoid it. But with the application of specialist knowledge and expertise, it is much less of a challenge than might be anticipated. Angela Barkhouse, managing director and lead of our Cayman business and a leading expert in cross-border asset recovery, considers the key issues.

A global issue

Non-performing loans (NPLs) are loans already in default or where the borrower is about to default. And they can cause a lot of problems. For instance, they adversely affect bank stability and growth, and reduce economic efficiency. An increase in NPLs means higher capital requirements for banks to absorb potential losses. It also results in funding, management, and administrative costs, which are usually transferred to the borrowers, e.g. households and the private sector. This slows credit and GDP growth even further.

Due to the seriousness of this issue, policymakers, bankers, and international financial institutions, including the IMF and the World Bank have joined under the Vienna Initiative to identify ways to tackle NPLs. Due to the global pandemic, the issues of NPLs and their impact on the bottom line is highly likely to increase.
 
Why non-performing loans arise – and when a tougher stance is required

As companies fight to survive, we have seen much restructuring of companies, changes of exposure (e.g. debt for equity, the sale of debt to third parties and forbearance), administrations and liquidations − in some cases, ending decades-old, popular brands.
 
We are working closely with a number of businesses to help them find a way out of the financial crisis caused by the pandemic, by offering advice on ‘financial fortitude’. This includes providing practical and purposeful information to business owners, tailored to their individual requirements, to enable them to bounce back. We have a proven track record of successful collaboration with banks, borrowers, regulators and NPL investors in NPL workouts, sales and turnarounds.
 
But where NPLs are due to fraud or willful default, a much more robust response is needed. Fraud exposed by the pandemic becomes not just an economic issue but a moral issue too.
 
After all, the public are already suffering under the weight of uncertainty and financial strain. So, it cannot be right that they should also contribute towards the recovery costs of fraudulent behavior through tax hikes, rising interest rates or higher financial penalties.

Options for pursuing fraudulent, offshore NPLs

While we have assisted with a wide range of fraudulent NPL cases, some of the largest fraudulent schemes we have come across involve funds passing through special purpose vehicles (SPVs) which are held offshore.
 
In our experience, clients often mistakenly believe that bank ‘secrecy’ and a lack of public information means that there are few options available to investigate a fraud and recover assets when they pass offshore. However, our expertise in financial investigations, banking investigations, asset tracing and asset recovery means that we are easily able to identify potential avenues for successful recovery.
 
For example, we may propose the use of international legal remedies to determine a successful strategy, such as Norwich Pharmacal, or Bankers Trust Orders, which are widely available in jurisdictions such as the British Virgin Islands, the Cayman Islands, Bermuda, Hong Kong and the Channel Islands. These remedies uncover details of bank accounts and assets from banks, auditors and registered agents, which may be critical in finding key information in the investigatory and asset-recovery process.
 
Alternatively, we can propose the use of insolvency mechanisms − a tried and tested method, which is appropriate for both insolvent and solvent companies. Furthermore, it can be incredibly cost-effective in investigating cases of fraud or misappropriation of loans. The lender takes action as a creditor for the return of the funds owed to it, and upon appointment, liquidators are afforded wide-ranging powers. They have the authority of the court to compel directors and third parties to provide critical information which may identify wrongdoing.

Achievable outcome

The costs of recovery can be borne out of the liquidation estate, i.e. from the very SPV or entity that defrauded a client. This ensures that corporations can focus their capital resources on the business itself, maximising profits for shareholders and promoting growth, rather than spending time in unfamiliar legal territory, or mired in potentially costly and lengthy civil proceedings. The outcome is instead achievement of significant risk transfer and capital optimisation. Even where initial funding of the cost of recovery does not appeal, it should be noted that a plethora of third-party litigation funders are waiting in the wings to finance a recovery claim in return for a share of the reward, at no cost to the client.
 
We have often seen financial institutions hesitate about seeking to recover assets offshore, due to perceived problems of doing so, but it is not as difficult as they believe. The fact is that successful asset recovery via offshore jurisdictions is achievable. And with an ever-increasing desire by third parties to fund such claims, thereby removing any additional financial risk, it should be a more straightforward financial option to pursue than financial institutions might anticipate.

The European Bank Coordination “Vienna” Initiative is a framework for safeguarding the financial stability of emerging Europe. The Initiative was launched at the height of the first wave of the global financial crisis in January 2009. http://vienna-initiative.com

Building financial fortitude: more support for advisers and businesses
For more information, insight and support on the key issues businesses and professional advisers are facing please go to our Building financial fortitude hub at www.quantuma.com/fortitude. There you will find a series of video interviews, articles, and further support from experts across our firm.