"Backwards tracing": An important step forward in tracing funds internationally

In The Federal
Republic of Brazil and another v Durant International Corporation and another
(Jersey) [2015] UKPC 35, the Privy Council confirmed that “backwards
tracing” may be permitted as a means of asset recovery.  In broad terms, the court was prepared to
take a pragmatic view as to whether funds in Jersey could be said to constitute
the proceeds of the bribes that had been paid in Brazil.  This was despite technical difficulties in
terms of proving the chain of transfers leading to the Jersey bank account.  In our view, this represents an important
step forward, with judges in the highest common law court recognising that
courts need to be flexible in applying legal doctrines when faced with complex
international structures and frauds.

The defendants were appealing a decision from the Jersey
Court of Appeal, in relation to the proceeds of bribes allegedly paid to a
former mayor of Sao Paulo.  Dismissing
the appeal, the Privy Council found in favour of the claimants, the Federal
Republic of Brazil and the Municipality of Sao Paulo, determining that the
defendants were to pay to the claimants the $10.5m held in a Jersey bank
account.

Looking at the
substance of the transaction

The appeal before the Privy Council concerned whether the
claimants could rely on the equitable doctrine of “tracing” to follow
the alleged proceeds of bribes.

Before the Jersey Court of Appeal, it had been established
that the illegitimate funds were first paid into a New York bank account and
subsequently transferred to Jersey. On appeal, the defendants argued that not
all of the $10.5m could be traced because the last three payments into the New
York account occurred after the corresponding deposits into the Jersey account.
They argued that to permit such funds to be traced would be to permit
“backwards tracing”. 

In other words, the defendants argued that assets already
held by a party cannot be identified as being the same assets (for the purposes
of tracing) subsequently transferred to that party. If this was correct, then
the last three transfers into the New York account could not be equated with
the last three payments from the New York account to the Jersey account.

The Privy Council dismissed the appeal and rejected the
defendants’ argument that there can never be backwards tracing.  Delivering the leading judgment, Lord Toulson
held that, rather than focussing on the order in which the events occurred, the
court should look to the substance of the transaction. The key concern is to
identify and punish fraudulent transactions. If the claimant can satisfy the
court that certain transactions are part of a coordinated scheme, such that
there is a close causal connection between the fraudulent payment and the
acquired asset, then backwards tracing may be permitted.

Tracing back to UK
assets

The Privy Council’s decision is not binding on the English
courts, but will be highly persuasive throughout the common law jurisdictions.
As such, it is likely that where a victim of fraud can establish the necessary
causal and transactional link backwards tracing may be permitted under English
law.

This could provide assistance where normal tracing is
prevented by banks’ administrative processes, for example where one bank
records a credit to an account before another bank records the corresponding
debit.  This will be welcomed by
claimants seeking to trace funds that have been transferred through a number of
accounts and entities internationally.