Tracing the proceeds of money laundering

Peter Doyle QC examines the complex question of equitable tracing in cases of money laundering.

Recently [1] the Privy Council heard the appeal of two defendant companies from the decision of the Court of Appeal of Jersey who upheld the decision of the Royal Court of Jersey that they were liable as constructive trustees to pay to the plaintiffs $10.5 million representing bribes paid to X in connection with a major public road building contract. Each of the defendant companies was at the material time under the practical control of X and his son.
X, or others acting on his behalf, received 15 secret payments. Funds equivalent to 13 of them were converted into $10.5 million and paid into a bank account (“F”) under the control of X’s son. Six payments totaling $13 million were paid out of F into the first defendant’s bank account in Jersey. Subsequently four payments totaling $13.5 million were paid out of the first defendant’s account into the second defendant’s account also held in Jersey.
The plaintiffs claimed to trace the amount of the bribes totaling $10.5 million to the first defendant’s account and thence to the second defendant’s account.
The claim was by no means straightforward.
The defendants contended that the total amount which could properly be traced to them was limited to $7.7 million.
They argued (i) that the last three of the original six payments into the F account, identified as the proceeds of the bribery, had come after the final payments from that account into the first defendant’s account. It was submitted that those three payments could not be traced to the defendants as there was no doctrinal basis for “backward tracing” and (ii) that the F account was a mixed account and that where a claimant’s money was mixed with other money and drawings were made on the account which reduced the balance at any time to less than the amount that could be said to represent the claimant’s money, then the claimant could only recover the maximum that could be regarded as representing his money. This was “the lowest intermediate balance” principle.
The defendants argued that on two occasions payments had been made from the F account to the first defendant’s account of sums which exceeded the maximum that could be said to come from the earlier bribes and therefore had to have come from other sources.
The Board acknowledged that the defendants’ twin arguments had a common and simple logical parentage. The doctrine of equitable tracing engaged rules intended to determine whether one form of property interest (A) was properly to be regarded as having been substituted for another (B). That meant that one first had to identify A and decide what had happened to it. If A had ceased to exist it could not metamorphose into a later property interest. Thus, if money in a bank account had dwindled from £1000 to £1, A=£1 because £999 had ceased to exist and it was only that £1 that was capable of becoming B. That reflected “the lowest intermediate balance” principle. Similarly, a property interest could not turn into or provide a substitute for something which the holder already had; the later acquisition could not be the source of the earlier. That reflected the “no backward tracing” principle.
The Plaintiffs countered by submitting that money used to pay a debt could in principle be traced into whatever was acquired in return for the debt.
The Board rejected this submission as a statement of general application stating that the courts should be very cautious before expanding equitable proprietary remedies in a way which might have an adverse effect on other innocent parties.
However, the Board recognised that there might be cases where there was a close causal and transactional link between the incurring of a debt and the use of trust funds to discharge it.
The development of increasingly sophisticated and elaborate methods of money laundering often involving a web of credits and debits between intermediaries made it particularly important that a court should not allow a camouflage of interconnected transactions to obscure its vision of their true overall purpose and effect.
If the court was satisfied that the various steps were part of a co-ordinated scheme it should not matter that either as a deliberate part of the choreography or possibly because of the incidents of the banking system, a debit appeared in the bank account of an intermediary before a reciprocal credit entry.
What mattered when making equitable remedies available to a party was the substance of the transaction in question and not upon the strict order in which associated events had occurred.
The Board therefore rejected the submission that there could never be backward tracing or that a court could never trace the value of an asset whose proceeds had been paid into an overdrawn account.
However, it was for the claimant, looking at the whole transaction, to establish a co-ordination between the depletion of the trust fund and the acquisition of the asset which was the subject of the tracing claim such as to warrant the court attributing the value of the interest acquired to the misuse of the trust fund.
As in many cases the testimony of the trustee, if available, would be of little value, the outcome was likely to depend on inferences from the proven facts. In the present case the Royal Court and the Court of Appeal had been justified in concluding that the necessary connection between the bribes and the receipts by the second defendant’s account had been proved.
Peter Doyle QC

[1] Federal Public of Brazil and Another v Durant International Corporation and Another (Judgment August 3, 2015)