UK Privy Council allows backwards tracing of bribes paid to former Brazilian mayor

Thursday, 06 August 2015

The UK's Privy Council has confirmed the legality of 'backwards tracing' as a method of recovering illegal payments after the money has been paid into a bank account, even if that money is then spent elsewhere.

The ruling was made in Brazil v Durant, a long-running legal battle which the Brazilian federal government and the São Paulo municipal authorities have been fighting since 2005. They are trying to recover the USD28 million proceeds of alleged fraud perpetrated against São Paulo by a former mayor, Paulo Maluf, and his associates. These funds represent bribes paid to Maluf in connection with a major public works contract, and subsequently channelled through an intermediary bank account in New York to two British Virgin Islands companies; Durant and Kildare. Fifteen separate payments were made, and the BVI companies claimed that only USD7.7 million of the illicit money could definitely be traced to them, with the remaining USD3 million having no identifiable source because of the complexity of the transactions, which involved debt repayments. The Brazilian authorities argued that money used to pay a debt could in principle be traced into whatever was acquired in return for the debt.

In November 2012, the Brazilian authorities won a judgment from Jersey's Royal Court, agreeing that USD10.5 million of the fraud's proceeds could be traced to the Jersey bank accounts of the two BVI companies, which were under the control of Maluf and his son. The court ordered the companies to pay Brazil more than GBP28 million (Brazil v Durant, 2012 JRC 211). The Jersey Court of Appeal upheld this ruling the following year.

The defendant BVI companies appealed to the Privy Council, the court of last resort for British dependencies and some other Commonwealth countries. The companies challenged the Jersey courts' finding that Jersey law recognised the principle of backwards tracing and, if so, that it applied in this case. About USD3 million of the money sought by Brazil depended on the outcome.

The defendants' case turned mainly on two points. One was that the final traceable payment into an intermediary's bank account in New York occurred after the last of the relevant payments out of that account into the account of one of the defendant companies in Jersey. The second point was that the intermediary New York bank account, held in the name of Chalani, was a mixed account, in that the money claimed to be Brazil's was in fact mixed with other people's money.

This week the Privy Council dismissed the BVI companies' appeal and confirmed that backwards tracing of funds was available, at least in these circumstances. The crucial point was that the claimant has to establish a close causal and transactional link between the relevant payments.

'It is important that a court should not allow a camouflage of interconnected transactions to obscure its vision of their true overall purpose and effect', commented Lord Toulson in the judgment. 'If the court is satisfied that the various steps are part of a co-ordinated scheme, it should not matter that [...] a debit appears in the bank account of an intermediary before a reciprocal credit entry.' (Brazil v Durant, 2015 UKPC 35)

According to law firm Wragge Lawrence Graham, which represented the Brazilian authorities, the PC judgment has clarified the law in this area in both England and Jersey, which was previously unsettled. 'This decision will have wide-reaching implications on how cases of fraud and money laundering are dealt with in the future', commented the law firm. 'Sophisticated fraudsters will no longer be in a position to retain stolen funds merely because they rely upon an accident in timing or they have structured the transfers in such a way so as to avoid detection and recovery of those sums by the victim.'

However, Craig Connal of UK law firm Pinsent Masons said the ruling was 'disappointing' for purists because it implied that every future decision will have to be decided on its facts, with no general rules for guidance.


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