English Courts: The International Policemen for Fraud

The English Courts provide a very attractive forum in which victims of fraud or other wrongdoing, including Latin American States, governmental and private companies, as well as individuals, can recover their assets, illegally taken beyond frontiers and passing in any way through the English financial system, and pursue those directly responsible for their losses and also those who have lent their assistance to the perpetrators of fraud or wrongdoing.

In a recent case before the Court of Appeal in London, the English Courts were described by a litigant as operating as an international policeman for fraud. Although the litigant concerned (a Turkish national alleged to have stolen US$200,000,000 from a United States corporation) did not mean this as a compliment, the English Court of Appeal did not deny that the English Courts had assumed this role.

Cases such as the one referred to above are not unique in the London Courts. At present there is litigation pending before the London Commercial Court between an Israeli national and a Russian national concerned with the ownership of shares in various Russian aluminium companies worth US$4.35 billion and in the past litigation in the London Courts has concerned the location of assets looted from the Republic of Haiti by its former President.

What then has placed the English Courts in the front line of the fight against international fraud and money laundering? A combination of factors has served to place the English Courts in this position. First, London is the biggest financial centre in the world. Sooner or later misappropriated money is likely to pass through London on the way to its final destination. Second, the English Courts have traditionally asserted jurisdiction over individuals and companies which are present not just within England but also anywhere in the world (subject to satisfaction of various jurisdictional requirements). Third, judgments obtained in the English Courts are enforceable throughout the 27 countries of the European Union (and also Switzerland) and, pursuant to bilateral agreements, in various countries throughout the world as diverse as Australia, Botswana, Fiji, Norway and Papua New Guinea and in off-shore financial centres such as Bahamas, Cayman Islands and Gibraltar. Fourth and, perhaps, most importantly are the legal weapons available to the English Courts in fighting international fraud which are unique in the major jurisdictions of the developed world.

The English Courts have power to make orders: freezing the assets of a Defendant within England and in an appropriate case worldwide (“freezing order”); requiring a Defendant to give disclosure of the whereabouts and amount of his assets within England and worldwide (“disclosure order”); ordering a Defendant to permit a Claimant access to his home and office to enable the Claimant to remove relevant documents and other material such as computers on which might be stored relevant information for the purposes of the Claimant pursuing his claim (“search and seize order”); ordering a non-party, typically a Bank or other financial institution, to give disclosure of the balances and historical movements on bank accounts in the name of the Defendant or controlled by him (in addition other information, if relevant, may be sought revealing other accounts held by the Bank in the Defendant’s name or on the Defendant’s behalf in the names of others) (“third party disclosure order”).

All of these orders a backed up by the English Court’s powers to enforce its orders by way of contempt of court proceedings in which a party disobeying an order of the Court may be fined, sent to prison, or both.

The freezing order is commonly used by Claimants in cases of international fraud in combination with a disclosure order to freeze the assets of a Defendant within England and also worldwide and to require a Defendant to disclose in a document made under oath (and therefore subject to penalties for perjury if it is found to be untrue in whole or part) the whereabouts of his assets in England and worldwide up to a specified sum. One eminent Judge of the English Court of Appeal in a judgment in 1998 stated that “such orders are nowadays routinely made in cases of international fraud”. By contrast with other major jurisdictions, such orders are not available to Claimants in the United States (because prior to judgment in a case they are deemed unconstitutional: Grupo Mexicano de Desarrollo S.A. v. Alliance Bond Fund Inc. 527 U.S. 308 (1999)); and the worldwide version of such orders (in practice the most useful form) cannot be made by, for example, the courts of France, Germany, Spain, Italy, Luxembourg and Belgium. The English Courts also have power to make a freezing and disclosure order against a Defendant in support of proceedings in other countries even where the English Court has no primary jurisdiction over the Defendant himself.

Freezing and disclosure orders are typically made by the Claimant at or before the issuing of proceedings and in the absence and without the knowledge of the Defendant. In cases of urgency an application can be arranged with the Court within a very short time-span and on occasion such orders may be granted over the telephone. Judges are available to hear applications seven days a week, 365 days a year.

In order to obtain such a freezing and disclosure order the Claimant must show that he has a “good arguable case” and that there is evidence that unless restrained from doing so the Defendant will dissipate or otherwise conceal his assets in order to frustrate the Claimant effectively executing any judgment he might eventually obtain. In practice these requirements are not difficult to satisfy in cases of international fraud. Once made the order is must be served on the Defendant and will usually be served on Banks and other financial institutions and others believed to be associated with the custody or control of the Defendant’s assets. The order operates on third parties if they are subject to the jurisdiction of the English Courts. However, the order may be notified to Banks not subject to the jurisdiction of the English Courts, for example Banks located outside England, and in practice such Banks will typically comply with the freezing order (even though they are not obliged by the terms of the order to do so).

An additional order which is not unusual in cases where a Defendant is a foreign national is an order that the Defendant surrenders his passport. The purpose of such an order is to ensure the Defendant’s continued physical presence within England pending his compliance with the freezing order and, in particular, the disclosure order. By compelling the Defendant’s continued physical presence in England the English Court ensures that non-compliance with its order can be effectively punished by the imposition of a fine or by imprisonment or both.

The search and seize order is also of great effect in cases of international fraud where it is feared that evidence or property relevant to a claim will be destroyed by a Defendant and that by doing so the Defendant will frustrate or otherwise prejudice the Claimant’s claim. An application for a search and seize order will be made in the absence and without the knowledge of the Defendant. The order will usually authorise the Claimant’s lawyers accompanied by court-appointed neutral lawyers (known as the supervising solicitor) to attend the Defendant’s premises and require entry and the surrender of the property (documents, computers and so on) which are referred to in the search and seize order. The order may also be made in relation to premises outside England (this is because English orders operate against the Defendant himself and not against the property or other assets subject of the order).

The third party disclosure order is again usually applied for in the absence of the third party against whom it is sought, typically a Bank or other financial institution. The order is made against the Bank, for example, on the grounds that it has become “mixed up” in the wrongdoing of the Defendant and that the Claimant needs information in the possession of the Bank in order to advance its claims against the Defendant. Such orders are particularly useful where money has been misappropriated and the victim wishes to pursue proprietary remedies against the Defendant which enable the victim to follow the money itself rather than merely having a remedy against the Defendant (who may well be insolvent). A disclosure order can give the Claimant a means to trace misappropriated funds through one bank and then a succession of such orders enable the Claimant to trace the money through successive banks until it is located (and then made the subject of a freezing order). It is not unusual for a Court to insert a “gagging” provision in a third party disclosure order which operates to prevent the Bank from informing anyone (including its customer, the Defendant) that is has been ordered to disclose detailed information relating to the Defendant’s bank account (and other documents relating to the Defendant’s dealings with the Bank, such as know your customer forms details of present addresses). As with freezing and disclosure orders and search and seize orders, disobedience to a third party disclosure order makes the Bank or other third party liable for contempt of court with potential penalties of a fine or imprisonment or both.

These orders, the speed with which they can be obtained and the scope of their operation provide a formidable arsenal at the disposal of a Claimant who has been the victim of fraud.