StAR: Stolen Asset Recovery Initiative

April 2019

Table of Contents: 


Foreword

Setting norms for the return of assets... 

One of the truly innovative aspects of the UN Convention Against Corruption is the fact that it declares the return of assets a “fundamental principle of this convention” and that states commit to affording each other the widest measure of cooperation and assistance to achieve this. It is to make this fundamental principle a reality that the StAR initiative was launched in 2007.

Living up to that principle has proved challenging: On the one hand, the countries affected by corruption, the requesting countries, wish to exercise their sovereign right to decide how to spend the funds. It’s their money - what business is it of outsiders to decide how to spend it? On the other hand, the financial centers of this world, where those funds usually end up, and that tend to do a lot of the work to trace and confiscate them, want to make sure their efforts were not for nothing. They want to have some assurances that the funds will not be “re-corrupted” before they are returned.

It was in an effort to facilitate that process, that in 2017, the co-hosts and focus countries of the Global Forum on Asset Recovery adopted the “GFAR Principles for Disposition and Transfer of Confiscated Stolen Assets in Corruption Cases”. These Principles lay down different norms to govern returned funds, emphasizing the importance of transparency and accountability, while in no way infringing national sovereignty. They highlight the importance of an early dialogue between transferring and receiving countries, and recommend that funds will be used to benefit the populations of the affected states and that non-governmental organizations be involved in the process to foster transparency in the disposition and administration of the funds.

The principles are high level and general in tone, but recently several governments and NGOs have been pushing for the recognition of the GFAR principles at the international level and adoption of more defined rules at the regional and national level. In this first quarter, StAR participated in events at which Transparency International and other organisations sought to use the principles as a basis for enforceable rules. For instance, at a civil society event in Brussels (see further below) TI called on EU Member States to follow the example of countries that have already committed to the GFAR principles and adopt principles for the management, transfer and ultimate use of confiscated property held in EU Member States, which, it said, would be stronger if those commitments were enshrined in EU legislation. At a related event co-organized by TI France and the French Senate, a draft bill tabled by a wide coalition of parliamentarians seeks to address situations where proceeds of crime have been confiscated but their return is not requested or feasible. The bill incorporates several of the GFAR Principles and will be debated in the French Senate on 02 May.

It is exactly this type of change, from high level commitment to firm legal rule, that we aim to effect. We are therefore very happy to see governments and civil society take up this ball and run with it. We hope that many will heed their call and follow suit.

On behalf of the StAR team,
Emile van der Does de Willebois


In Memoriam - Dimitri Vlassis

Dimitri was one of the founders of the StAR Initiative and we relied on his vision and deft political touch. His experience as Secretary of the Ad Hoc Committee that negotiated UNCAC shaped the way that StAR was established - as a partnership that countries could look to for knowledge and support in navigating the tricky waters of asset recovery. He was deeply committed to our work and guided the Initiative through his role in the Management Committee but also as a mentor and friend. Dimitri will be sorely missed, and the StAR team extends its condolences to his family, friends and colleagues across the globe.


Country Engagements

Follow up to the Global Forum on Asset Recovery

  • In Sri Lanka, StAR continued to support the development of an Asset Recovery Strategy/Roadmap. The aim of the strategy is to ensure that all actors engaged in asset recovery in Sri Lanka have a common understanding of the overall objectives and understand each agency’s role and expectations in this system. StAR held further meetings to help finalize a related consultation document, drafted in the previous quarter, that articulates these objectives, analyzes strengths and weaknesses of the asset recovery system, and outlines strategies, time frames and targets to address those weaknesses. StAR is also preparing for a mission to the country in May to conduct consultations on an electronic filing and verification system for asset declarations.
StAR followed up on the development of an Asset Recovery Strategy/Roadmap in Sri Lanka. 
  • In Tunisia, StAR held a training course for financial analysts of Tunisia’s FIU, La Commission Tunisienne des Analyses Financières (CTAF), which focused on improving analysts’ capacity to deal with suspicious transactions. Goals of the training were to enhance detection of transactions suspected to be related to corrupt activities or money laundering and improve their dissemination to law enforcement agencies for further investigation. The training also sought to increase awareness of challenges to international cooperation, as well as knowledge of tools and strategies to overcome those challenges, including relevant UNCAC provisions.
     
  • StAR assisted the National Anticorruption Bureau (NABU) in Ukraine with the follow-up on MLA requests sent by Ukraine to a number of jurisdictions and advised NABU on strategies of overcoming challenges related to the MLA process. For example, it can sometimes be advisable to only request information on a limited number of legal or natural persons to increase chances of the request being executed.    


Other Country Engagements

  • A StAR team traveled to A StAR team travelled to Costa Rica in January 2019 to discuss international standards and best practices in non-conviction based (NCB) forfeiture and support the country’s renewed effort to introduce NCB asset forfeiture. Around 5 years ago, StAR had supported the development of a comprehensive draft NCB bill in Costa Rica though extensive technical assistance. However, after years of controversy over the bill, the legislation was never adopted. In the fall of 2018, the Costa Rican Narcotics Institute submitted a new request for StAR assistance in reviewing the existing NCB bills and promoting the adoption and implementation of legislation on NCB in accordance with international standards and best practices. During the mission in January, StAR met with relevant authorities including the Attorney General’s office to discuss the NCB bill, which has been presented to the Legislative Assembly, and review lessons learnt from Latin American and European Countries that have implemented NCB asset forfeiture.


    Left to right: David Alamos (StAR/UNODC); Costa Rica’s Attorney General Emilia Navas; Emile van der Does (StAR/World Bank); Laura Monge, Head of the Mutual Legal Assistance Unit; Marcela Ortiz (UNODC); and Ligia Cerdas, Deputy AML Prosecutor in the Attorney General’s office
     
  • In February, StAR delivered a workshop on financial investigations to prosecutors from the Attorney General’s office and police in Addis Ababa, Ethiopia. The workshop focused on increasing officials’ understanding of money laundering, the use of financial information, and mutual legal assistance for the purpose of identifying, tracing, seizing, freezing, and confiscating proceeds of corruption.
     
  • In response to a request for assistance from the Anti-Corruption Commission of the Maldives, StAR conducted a scoping mission to the Maldives in February. The team met with many of the agencies engaged in fighting financial crime (such as corruption) and asset recovery, including the Anti-Corruption Commission, the Presidential Commission on Corruption and Asset Recovery, the Financial Intelligence Unit (FIU) within the Maldives Monetary Authority, the Maldives Police Service and the Office of the Prosecutor General.  StAR is currently reviewing the mission findings and assessing available donor funding or synergies with planned World Bank or UNODC projects.
     
  • StAR provided advice to the asset recovery office of Moldova on the use of open source tools for tracing assets abroad. StAR also advised Moldovan authorities on cooperation with other jurisdictions in cases where other countries unilaterally initiate their own criminal or civil proceedings against assets that are suspected of being proceeds of crime, belonging to Moldovan officials or their family members.

    In January 2019, StAR organized a roundtable with Moldovan civil society and media representatives on using publicly available asset declarations to identify potential corruption violations, based on lessons learned from Ukraine. This was also an opportunity for participants to familiarize themselves with the Ukrainian online registry of asset declarations developed by civil society, the registry of domestic Ukrainian PEPs, and a website that provides access to open data from official sources in Ukraine and other jurisdictions.
     
  • A StAR team visited Pakistan in March 2019 to conduct a scoping mission in response to a request for StAR’s advisory and technical support on asset recovery and institutional support for the newly constituted Asset Recovery Unit (ARU). This mission also served the purpose of planning next steps for Pakistan’s second National Money Laundering/Terrorist Financing Risk Assessment. The team met with key counterparts including the new Asset Recovery Unit, the Financial Monitoring Unit, the National Accountability Bureau, and the Securities and Exchange Commission of Pakistan to discuss and assess areas for assistance. Following the mission, StAR issued key findings and recommended actions to the government of Pakistan.


    Posters commemorating anti-corruption work at Pakistan's National Accountability Bureau

 

A serious setback for the fight against corruption in Ukraine:
Illicit enrichment law overturned


In late February, the Constitutional Court of Ukraine overturned Article 368-2 of the Criminal Code, which criminalized illicit enrichment. Ukraine’s illicit enrichment law was passed in 2015 as a condition of receiving loans from the IMF and a precondition for visa-free travel for Ukrainians in the EU. The Constitutional Court struck down the illicit enrichment offense on the grounds that it was unconstitutional. Ukraine’s National Anticorruption Bureau (NABU) strongly criticized the ruling in a statement, calling the decision “politically motivated” and said that it “contradicts Ukraine’s obligations under the United Nations Convention against Corruption, agreements with the IMF and the EU”.[1] The Anti-Corruption Bureau said that the decision would force them to close 65 criminal investigations of alleged illicit enrichment of top officials. The court’s decision triggered a strong negative response from civil society, media, as well as from some Ukrainian policy makers – so far 14 different draft laws re-introducing the illicit enrichment offense have been registered in Parliament.

StAR contributed to an analysis of the impact of the ruling and the drafting of the joint statement by the World Bank and G7 on this topic, and is also providing inputs on the main elements that should be included in new language of the illicit enrichment offense.


Statement by the G7 and the World Bank on the decision by Ukraine’s Constitutional Court to overturn the law criminalizing illicit enrichment

 

Policy Influence and Partnerships

In March, StAR delivered a presentation at a meeting in Brussels organized by Transparency International and the Civil Forum for Asset Recovery (CiFAR) on what the EU can do to improve the fight against grand corruption. We participated in a panel discussion on how the EU can do better at confiscating and returning stolen assets, together with speakers from EUROPOL, the European Commission, and Transparency International. Among other subjects, panelists discussed the use of sanctions and asset freezing as a tool to fight grand corruption and prospects for a possible European version of the Global Magnitsky Act in the United States. The Global Magnitsky Act allows the US government to sanction individuals responsible for gross human rights violations or “acts of significant corruption” and impose travel bans and asset freezes.  (Agenda of the event is available here).
 

StAR participated in discussions on how the EU can do better at fighting corruption through confiscating and returning stolen assets. Photo by: TI EU

At the Global Forum on Asset Recovery (GFAR) in December 2017, which was supported by the StAR Initiative, the two co-hosts (UK and US) and the four focus countries (Nigeria, Ukraine, Tunisia, Sri Lanka) developed and adopted ten principles for disposition and transfer of confiscated stolen assets. Transparency International, in a forthcoming report on enhancing asset recovery in the EU, calls on EU member states to adopt the GFAR Principles and goes a step further in advocating for turning an adapted version of the GFAR Principles into EU legislation.

The main difference between the GFAR Principles and the adapted version proposed by TI lies in that the GFAR Principles cover situations where there is cooperation between requested and requesting jurisdiction over the asset return, while the adapted version proposed by TI would also cover situations where the country holding the assets initiates confiscation unilaterally and cooperation with the country of origin of the funds is not possible. It was suggested that the upcoming review of the 2014 Directive on the freezing and confiscation of instrumentalities and proceeds of crime in the EU could provide an opportunity for achieving this.

The UK, the US, Nigeria, Ukraine, Tunisia, and Sri Lanka adopted the GFAR Principles in December 2017. 

Also in March, StAR took part in a conference on “Concrete modalities of stolen assets restitution: the way forward”, co-organized by Transparency International France and the French Senate. A new draft French law seeks to establish a framework for asset returns in situations where return of proceeds of crime is not requested by the country of origin of the assets. This draft law follows the recent process involving Equatorial Guinea, after a French court convicted Teodorin Obiang, the son of Equatorial Guinea's president, in absentia of embezzlement in October 2017 and ordered the seizure of his properties and assets in France. Two panel discussions addressed lessons learned from past returns and perspectives for future returns for French legislation, respectively, and StAR presented an overview of StAR activities and trends in asset recovery and returns. Other speakers included the former executive director of the BOTA Foundation in Kazakhstan, members of the French Senate and National Assembly, representatives from NGOs in Nigeria and Equatorial Guinea, and others.


At a conference in Paris, StAR took part in discussions over a draft French bill on asset returns in situations where there is no request from the country of origin of the funds. Photo by: Lucia Cizmaziova

Principle 10 of the GFAR Principles calls for the participation of civil society in the asset recovery process, including through fostering transparency and accountability in the transfer and disposition of recovered assets. Following the conference, TI France also hosted a closed half-day working session with civil society on principles for asset return, where StAR provided background on the adoption and implementation of the GFAR Principles and and contributed to an in-depth exercise and discussion of the above-mentioned adapted principles proposed by TI and relevant to the draft French bill. 

StAR also attended a session on the review process and public consultations of the 2009 Anti-Bribery Recommendation by the OECD Working Group on Bribery at the OECD Global Anti-Corruption & Integrity Forum, held in Paris in March 2019.

 Please visit our website for a complete list of StAR publications

Spotlight On

Going for Broke: Using Insolvency Proceedings For Cross-Border Asset Recovery

Barriers to the successful recovery and return of stolen assets are numerous. They can include a lack of political will to investigate and charge corrupt politicians, lack of trust between countries, deficient resources to pursue cases, a lack of effective coordination, differences in legal traditions, and the existence of a global financial system that offers easy opportunities for corrupt officials to move and conceal illicit funds.[1] 

Most commonly, governments use criminal prosecution and confiscation to go after assets of corrupt officials, while the use of civil forfeiture tools is gaining more traction, where available. But the magnitude of the challenges to cross-border asset recovery requires practitioners to employ existing legal tools creatively.

The use of an insolvency framework in the context of asset recovery can offer another civil avenue to gain control of stolen assets held by or on behalf of debtors. Under certain circumstances, insolvency measures can complement criminal law or confer significant advantages over criminal law, such as a lower burden of proof (compared to the criminal process), more control over the process, and an expanded set of potential targets.

While choosing the right recovery approach always depends on the facts of the case and the specifics of the available legal tools in a given jurisdiction, the scenario that is most likely to be well suited for this type of civil remedy is one where a company or other legal person was used as an instrument of corruption or money laundering. For example, in cases in which a company’s only activity was to issue fictitious invoices to justify the transfer of bribes to company directors or cases where a company was used as a pass-through entity to launder proceeds of corruption, it can be targeted through insolvency proceedings.

In most jurisdictions, there are two standard tests for commencement of insolvency proceedings: (i) illiquidity, or the inability to pay existing obligations as they become due in the ordinary course of business and (ii) the balance sheet test, a situation where liabilities exceed assets.

A third method of commencing insolvency proceedings, just and equitable grounds, has evolved through case law in a number of common law jurisdictions, such as the United Kingdom, British Virgin Islands, Cayman Islands. It deserves specific consideration in cases of corruption, embezzlement, or any type of fraudulent activity, because this test can be applied to wind up companies that were created for the purpose of furthering a corrupt or fraudulent scheme, even if they are not technically bankrupt or insolvent.[2]

Though the process varies by jurisdiction, the first step in insolvency proceedings is usually the appointment of an insolvency representative to take control of the debtor entity and its assets and ensure that the value of the entity is maximized for the benefit of its creditors. Under most insolvency laws, an insolvency representative is appointed by either: (i) the court; (ii) the court with creditor input or at the direction of the creditors; or (iii) independent appointing authorities.[3] [4]  *

Once the insolvency process begins, there is generally an automatic or court-imposed moratorium against any action, execution, or other legal process against the insolvent person or entity.[5] If an entity has assets within the jurisdiction in which it was declared bankrupt, insolvency procedures will generally prevent any further diversion of assets out of the insolvent entity.

The effect of such a moratorium internationally is often complex, but the existence of international regimes such as the Council of the European Union’s Regulation on insolvency proceedings[6] and the United Nations Commission on International Trade Law (“UNCITRAL”) Model Law will often give this stay on proceedings extra-territorial effect.[7]

Insolvency representatives are primarily charged with protecting the rights and interests of creditors and injured parties. But there are two types of cases where the powers and tools available to them can be used to identify and retrieve illegally obtained proceeds stolen by corrupt officials – often to great effect: 1) The insolvency representative acts on behalf of an insolvent person or entity that was deprived of assets following corrupt activities conducted by one of its directors or managers (i.e. the insolvent entity is the victim of corruption or fraud). 2) The insolvency representative acts on behalf of a person or entity that perpetrated or assisted in the corruption.

Insolvency representatives generally have the benefit of broad powers to access information and to demand testimony from individuals such as company directors or managers. Powers of the insolvency representative often include the ability to compel the production of books and records, including from the entity’s lawyers and banks. That way, the insolvency representative who is put in charge of the insolvent entity may be able to gain access to privileged materials previously shared with the corrupt entity’s lawyers – and this alone can sometimes change the entire outlook of a case.

The insolvency representative will often conduct or order a comprehensive audit of financial statements and suspicious transactions to find information that can lead to a recoverable asset. Typically, they have a duty to report (to criminal agencies and supporting institutions) any illegal or irregular conduct uncovered in the administration of an entity and thus help in the detection and identification of illicit assets. (In cases of embezzlement of public funds, the main creditor of an entity is the government.)
 
One of the primary functions of an insolvency representative is to maximise the value of a debtor’s entity for the benefit of its creditors. Aside from selling off tangible company assets, maximising value of an insolvent entity also entails the monetization of intangibles, including potential claims for annulment of preference or transactions at undervalue, fraudulent transactions, wrongful trading, breach of duties and damages against persons who have diminished or enabled harm against the debtor’s estate.
 
This means that an insolvency representative is generally entitled to bring claims against a company’s former directors and managers for their wrongdoing in involving the company in a corruption scheme. And while many other legal tools focus on the bribe payers, insolvency mechanisms can be used against an expanded set of targets including bribe takers and third parties. For example, claims for restitution or damages can be made against intermediaries and facilitators that assisted in the embezzlement or payment of bribes. In large public corruption cases, the value recovered from damages claims directed against third party facilitators with deep pockets, who enabled the criminal acts, can be substantial. If defendants or assets are located in a foreign jurisdiction, the powers of an insolvency representative may be easier to enforce abroad than those of a creditor.
 
The pursuit of assets across borders requires careful planning and strategic thinking, especially where applicable laws diverge. As a general rule, the location of assets will determine the applicable law. In certain circumstances, assets located in one jurisdiction may be ring-fenced under local insolvency law for creditors within that jurisdiction in a first priority ranking. 

For standard insolvency processes, as well as for the recovery of assets through these processes, jurisdiction matters significantly—in law and in practice. For example, if the matter is a corporate insolvency case filed against a company incorporated in an offshore jurisdiction, then the offshore law and jurisdiction would most likely apply. However, if the bribe-taking company is incorporated in a country in the developing world, that country’s law and jurisdiction would most likely apply.

Global insolvency systems are at varying stages of development. In many developing countries, outdated insolvency laws remain on the books, and occasionally there is limited or no local experience in conducting insolvency cases.

Common law systems offer the clearest path toward pursuit of asset recovery through insolvency proceedings. The United States, the United Kingdom, and common law offshore jurisdictions that are popular as a repository of value or used frequently in offshore structuring such as the BVI, Cayman Islands, and Jersey often feature the world’s most developed institutional insolvency systems, including highly skilled judges and insolvency practitioners.[8]

Many developing jurisdictions, especially those with civil law heritages, do not have the concept of just and equitable grounds to begin insolvency proceedings, which can present challenges for cross-border asset recovery if the debtor company is solvent. But using an insolvency framework can be a clever strategic move for governments seeking to recover proceeds of corruption in cases where prosecutors can show that the entity is liable for unpaid taxes, or when the insolvency legislation allows prosecutors to request courts to open a bankruptcy case, which is permissible in some civil law countries.[9]


[1] For a full discussion of the types of problems encountered in international asset recovery, see the StAR publication: Barriers to Asset Recovery, (Washington DC, World Bank) World Bank, 2011.
[2] Just and equitable grounds is mainly a common law concept and, while the concept is not clearly defined in many legislative frameworks which provide for it, it has evolved through case law. The qualification of whether there exist just and equitable grounds for winding up an entity is largely at the discretion of the court. For example, in the United Kingdom, winding up orders have been made where a company was formed for fraudulent purposes. For example: Anglo-Greek Steam Co (1866) LR 2 Eq 1; Re West Surrey Tanning Co (1866) LR 2 Eq 737; Re London and County Coal Co (1867) LR 3 Eq 355. Source: https://southsquare.com/articles/just-and-equitable-winding-up/
[3] Assessment of Insolvency Office Holders, Review of the profession in the EBRD region, European Bank for Reconstruction and Development, 55, 2014.
[4] Different jurisdictions have differing approaches to selecting and appointing insolvency representatives, and these may vary depending on the type of insolvency proceedings. In developed jurisdictions, it is common that a professional from an international accounting firms is appointed as insolvency representative. In the public model (more common in developing countries), an employee of the state is appointed as the Insolvency Representative. Some states also allow legal professionals to serve as Insolvency Representatives. Also see: WBG Principles, C.17; The UNCITRAL Legislative Guide on Insolvency Law, United Nations Commission on International Trade Law, 176, 2004; Assessment of Insolvency Office Holders, Review of the profession in the EBRD region, European Bank for Reconstruction and Development, 55, 2014.
[5] A moratorium can sometimes be initiated as early as the presentation of the originating insolvency process.
[6] Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (Recast Insolvency Regulation).
[7] 44 States have adopted the Model Law on Cross Border Insolvency. The new UNCITRAL Model Law on Recognition and Enforcement of Insolvency-Related Judgments was adopted by UNCITRAL at its session in July 2018.
[8] The court system of the BVI in particular has established robust protections for those who have been the victims of fraud and corruption.  Similarly, the courts in Jersey also offer protection where financial services have been misused and persons have been the victims of fraud.
[9] In France or Belgium, prosecutors can directly go to court and ask to open a bankruptcy process. In the U.S. or UK, only the creditor may ask for the case opening.
 

This is an edited excerpt of a forthcoming StAR publication “Going For Broke – Insolvency Tools to Support Cross-Border Asset Recovery”, written by a team coordinated by StAR, in collaboration with the subcommittee on asset recovery at the International Bar Association (IBA).


Looking Ahead

Upcoming global events

UN General Assembly High-level meeting on “International Cooperation to Combat Illicit Financial Flows and Strengthen Good Practices on Asset Return" | 16 May 2019 | New York, USA

UNCAC Implementation Review Group, 13th Session of the Asset Recovery Working Group (subsidiary body of the Conference of the States Parties to the UNCAC) and International Cooperation Expert Meeting | 27-31 May 2019 | Vienna, Austria

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Government of Belgium
Government of Luxembourg
Norwegian Development Cooperation Agency (Norad)
Swiss Agency for Development and Cooperation (SDC)
UK Department for International Development (DFID)
Foreign & Commonwealth Office of the UK (FCO)
U.S. State Department Bureau of Narcotics and Law Enforcement Affairs (INL)

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