Loosening Jurisdictional Logjams

Headline after headline began with “Madoff Trustee Sues ...” accountants, banks, companies and individuals across the globe. Irving H. Picard, the court-appointed trustee for Bernard L. Madoff Investment Securities, has been trying to work with governments around the world to discover evidence and locate assets. Many of you have had similar searches, albeit not on a billion-dollar scale. In this column, we look at the difficulties of trying to obtain evidence (and ultimately recover proceeds) of a crime from multiple foreign jurisdictions. 

Picard has a thankless job. He must act as judge and jury, accountant, auditor and fraud examiner while interfacing with U.S. civil and criminal procedures. He must discern those who have recoverable assets and those victims who have a legitimate legal claim to those same assets. Obviously, Picard has his critics. Unfortunately for him, nothing he does escapes the glare of the media and the scrutiny of the victims.

 Let us consider some practical difficulties faced by any examiner in his position. You must first have a thorough understanding of the investment business. Then you will have to discover when the fraud started, its size, duration and players involved. 

Collecting documents in the U.S. might be relatively easy, but what about seizing assets or freezing accounts or securing evidence in the Far East or the U.K.? Then there are all those multijurisdictional disputes over conflicting claims. We’ve heard for years that fraudsters (and all criminals) ignore national boundaries. This historical problem, which encompasses territories, wars, religions and laws, has been addressed by groups of countries, including the notable 1969 Vienna Convention on the Law of Treaties.

MULTINATIONAL JURISDICTIONAL PROBLEMS 

Here’s a practical example of jurisdictional difficulties. Assume a criminal based in the U.K. goes online to his French bank account and transfers 2,000 Euros in seconds to an account in Switzerland. You might think it would be easy for law enforcement to travel to Paris and take a quick statement from a bank employee showing the transfer of funds to the Swiss bank, but that is not the typical practice. 

 Evidence can be obtained from another jurisdiction through four main methods: 1) applications through Mutual Legal Assistance Treaties (MLATs), 2) exchanges through the Egmont Group’s financial intelligence units, 3) informal arrangements, and 4) civil powers. 

The MLAT method can be legally complex and tedious. The U.K.’s Serious Fraud Office actually retains an expert lawyer solely to deal with such requests. The first thing to do is to check whether the country from which you are seeking information has a MLAT with your country. For example, the U.S. has about 55 MLATs, and the U.K. has about 40.

You will then need to establish that the fraud you are investigating is a specific crime in the country from which you are seeking the information. For example, not all countries recognize conspiracy to defraud (the U.S., for example) or some types of false accounting as criminal offenses. The general rule is that the activity being investigated must be a specific crime in both countries.

In the U.K, you then would file an application to the proper prosecuting authority, which in most cases would be the Crown Prosecution Service. Your application must be very specific and contain detailed investigatory questions. If the authority deems the offense to be serious enough and accepts your request, it will draft a Letter of Request, which it will forward to the British Foreign and Commonwealth Office if your request is to a Latin American, Middle East or Far East country. (If the letter is going to another part of the world, you will send it directly to a country’s prosecuting authority.)

The reciprocal authority in the target country will pass the application to its ministry of justice (or the equivalent) and then to a law enforcement agency. An examining magistrate might have to conduct the inquiry if banking or financial transaction material is required because this information is protected under various (often nearly impenetrable) laws.

The inquiry, which probably will not be on the government’s or the law enforcement agency’s list of top priorities, might take several months to complete, translate and wend its way back to the investigator via the same route. If you have further questions, you will need to repeat the entire process for a new inquiry.

EGMONT GROUP AND OTHER METHODS 

In 1995, a group of worldwide financial intelligence units (FIUs), which governments formed to fight money laundering and other financial crimes, met at the Egmont Arenberg Palace in Brussels to establish an informal group for international cooperation. Now known as the Egmont Group, these FIUs meet regularly to find ways to work together, especially in the areas of information exchange, training and sharing expertise, according to the group’s website. 

Sometimes, FIUs and others can arrange to obtain evidence in foreign jurisdictions through informal agreements among countries. Admissibility of discovered evidence will vary depending on methods of exchange and other variables.

Also, investigators can try to obtain evidence through civil powers. Exercise of these powers is usually dependent on the amount of money recoverable because the legal process can be expensive. The success of the civil actions method in the recovery or freezing of assets varies on the locations of those assets.

MARKOPOLOS IDENTIFIES OTHER COMPANIES 

 Madoff had more than 339 “fund of funds” and more than 59 management companies doing his bidding in more than 40 countries, according to the article, “Who Invested with Madoff?” by George A. Martin, published in the summer 2009 issue of The Journal of Alternative Investments. However, these companies were among those that reported their figures to publicly available databases. 

In a recent interview we had with Harry Markopolos, CFE, CFA, the Madoff whistle-blower, he said he identified other companies that worked with Madoff. “I’ve since met with several victims who told me they were approached by ‘consolidators’ who would market to middle-class investors who did not qualify to invest in hedge funds,” Markopolos said. 

“These ‘consolidators’ appear to be unregistered and unlicensed fraudsters who pool small amounts into a large enough sum of money, which would then be sent to a sub-feeder or feeder fund minus their fees,” he said. This is common behavior for fraudsters in the U.K. and Europe involved in high-yield investment schemes, which they say are only available to a few “selected persons” who each have to invest a minimum of a million pounds. Normally, a U.K. solicitor will be included in the group to add verisimilitude to the scheme and who will pretend to collect funds to be pooled for the big investment when the funds actually are being stolen.

 Madoff testified that he acted alone. However, the size and scale of the scheme would suggest that he was being less than honest. So often in fraud cases it is not the facts that are in dispute but the requisite knowledge of facts at the time an activity took place. Picard has already recovered billions of dollars, and not all of this came from Madoff. 

MADOFF’S INTENDED GLOBAL EXPANSION 

 Markopolos mapped Madoff’s activity in his book, “No One Would Listen: A True Financial Thriller.” He identified not only where Madoff had been exercising his fraud but other countries where he wanted to expand. “If you look closely,” Markopolos said in our interview, “you will see Madoff had a lot more European feeders than U.S. feeders. These were organized mainly as ‘offshore’ entities to seek out investors who did not want to pay taxes or who couldn’t admit to how they came by the money.  

 “Madoff’s next frontier was Asia where he had just started to get set up, probably because he had already saturated the Americas and Europe,” Markopolos said. “He had a few feeders operating on mainland China, Hong Kong and Singapore. He also had a Japanese bank offering leveraged structured notes that invested using $3 for every $1 put up by the victim. My guess is that his next stops were Australia and New Zealand, but the scheme collapsed before he could get set up there.” 

Markopolos gave a practical demonstration of countries cooperating through informal agreements. “One European government asked the FBI for my assistance in the Madoff case,” he said. “Of course I was happy to assist and was then told about the ridiculous process required under the Mutual Legal Assistance Treaty between our two nations. Thanks to my military background, I knew all about NATO Standardization Agreements (STANAGs) and MLATs, so I went around all of the bureaucratic procedures and asked the FBI for the requestor’s name and number. Then I called the foreign law enforcement officer directly and offered my assistance.”

FREEING JURISDICTIONAL DEADLOCKS  

Investigators have always been slowed in gathering evidence via foreign jurisdictions’ specific protocols. Few judicial systems were constructed to deal with multiple defendants or complex international fraud cases. 

So law enforcement and fraud examiners have to seek innovative ways to secure admissible evidence from other jurisdictions. I know of an investigator who interviewed a foreign witness via a video link from Japan; the prosecution and the defense accepted the content of the interview, and it was admitted for court purposes. 

Governments might consider whether parts of their MLATs or informal agreement processes could take place via the Internet. Some countries might eventually have to rewrite their domestic laws on the collection and presentation of evidence to expedite jurisdictional matters. The Egmont Group might suggest to the Financial Action Task Force or the Organization for Economic Cooperation and Development (more commonly known as the OECD) that changing domestic laws would allow jurisdictional processes to occur in seconds, not months. Countries might save millions of dollars and catch more fraudsters.

Tim Harvey, CFE, is director of the ACFE’s UK Operations, a member of Transparency International and the British Society of Criminology. 

Richard Hurley, Ph.D., J.D., CFE, CPA, is a professor in the University of Connecticut (Stamford) School of Business. 

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