• 'Mareva by Letter' -- Preserving Assets Extra-Judicially -- 'Destroying a Bank's Defence of Good Faith by Exposing it to Actual Knowledge of Fraud.'
  • November 27, 2006 | Author: Martin S. Kenney
  • Law Firm: Kenney, Martin, & Co., Solicitors - Road Town, Tortola Office
  • Mareva by Letter’ – Preserving Assets Extra- Judicially‘Destroying a Bank’s Defence of Good Faith by Exposing it to Actual Knowledge of a Fraud.’


    1.0       Introduction.


    1.1       The development of the extra-judicial tool commonly referred to in the trade as the ‘Mareva by Letter’ (referred to by the Courts of England & Wales as a ‘Freezing Order by Letter’) illustrates how much the current global banking climate has changed in the past few years.  Before, say, the year 2000, banks would ignore the obvious in relation to the apparently dubious use of a bank account without, for the most part, suffering any adverse consequences.  Some may argue that the events of 11th September, 2001 set in train a process that has made everyone’s business the world’s business.  However, the truth is that successive waves of counter-money laundering regulations had substantially eroded the secrecy bedrock inherent in so much of the world’s banking systems long before then.  A spate of case law and regulations that advocates better corporate governance and cross border cooperation in the fight against economic crime has resulted in the slow but steady undermining of the stoic and uncritical acceptance of client confidentiality.  11th September, 2001 simply hammered home the message that terrorists use legitimate financial institutions to transfer and hold funds that may be used for catastrophically harmful ends.


    1.2       The ‘Mareva by Letter’ involves placing a third-party guardian or holder of assets, such as a bank, on notice that those assets are imposed with a constructive trust in favour of someone other than the party whom the guardian or holder has previously been led to believe is the true owner.  It is also intended to open up a third party holder of assets for a fraudster to the full raft of public law duties to report suspicious dealings with assets and to refrain from knowingly facilitating a money laundering offence.  It is not difficult to conceive of a situation where such a letter could be used to put a financial institution on notice that the funds in question are likely to be used to further the cause of a prospective act of terrorism.  We are here concerned, however, with the use of this device in an attempt to prevent compounding further a wrong that has already occurred, a misappropriation of funds for example.  The ‘Mareva by Letter’ operates so as to set in train an immediate and informal (or de facto) freeze of any assets in respect of which a third party (being neither the guardian or nominal asset title holder) claims an interest.  The process is simple – a freeze may be effected by issuing a letter to the asset holder or guardian in question, informing them of the true origin or beneficial ownership of the targeted funds or assets, and advising them of their potential accessory civil and possible criminal liability in the event of any transfer or disposal of the assets in question.  Such devices may be employed in cases where a victim of fraud suspects that targeted funds or assets may be transferred to another location where it might be impractical to gain access to them.


    2.0       Practical Considerations.


    2.1       In situations where this informal procedure is used, sufficient proof should be provided to the third-party holder of assets to provide comfort that the conclusion being urged upon them as to the origin or provenance of the assets is in fact a reasonable one to be drawn in the circumstances.  Such parties will be acutely aware of their contractual liability to their customer in the event that any attempted transfer of such assets is blocked and it transpires that the basis for such blockage was non-existent or faulty.  Thus, in issuing such a letter, some evidence should be provided to support the conclusions urged and to provide sufficient justification to enable the third-party asset holder or guardian to refuse to relinquish control of the asset for the time being.  The stronger the evidential basis put forward the more comfort is provided to the asset holder and the more likely they are to comply swiftly and without raising a series of questions often entailing unwelcome delays.


    2.2       In many jurisdictions, exposing a bank or fiduciary holder of assets to actual knowledge of an apparent fraud on the part of a customer destroys the defence of good faith (or the defence implicit in the absence of knowledge of fraud). Permitting the transfer of assets or the withdrawal of funds in the face of actual knowledge of an apparent fraud linked to such wealth might expose officers and employees of the bank or any other capital market intermediary to criminal sanctions under anti-money laundering laws. Thus, the utterance of a ‘Mareva by Letter’ can invoke public law duties on the relevant bank or fiduciary holder of wealth. Duties to file suspicious activity reports with local money laundering prevention authorities and to block any movement of funds may well arise. Additionally, civil liability may arise in that the true beneficial owner of the asset in question would be entitled to institute an action based on theories of ‘knowing assistance in the dishonest breach of a constructive trust’ or ‘knowing receipt of trust property,’ inter alia.


    3.0       The Benefits.


    3.1       It will be apparent from the above that the development of the ‘Mareva by Letter’ represents a significant step in the fight against fraud. Based on the author’s experience, it is an invaluable and effective pre-emptive asset preservation measure.  It enables a victim of fraud to better manage the risks of delay and the considerable expense typically associated with an application to preserve assets through freezing or restraining Orders.  It potentially enables a victim of fraud likewise and, perhaps more importantly, to avoid the necessity of posting asset freezing indemnity bonds or security for costs or to support a cross-undertaking in damages. 


    3.2       This device enables the victim of fraud to short circuit the delays inherent in seeking judicially sanctioned injunctive relief within the context of complex, international commercial fraud cases.  Typically, in situations where such relief is sought or warranted, immediate action is required.  In cases where the victim of fraud is dealing with a dishonest obligor with the propensity to transfer and conceal assets, the time taken to prepare and finalize a set of pleadings to ground a series of urgent ex parte asset freezing applications to Courts in what might be numerous foreign jurisdictions may well turn out to be time spent in vain.  There is a risk that by the time a number of freezing orders are made, the subject property may no longer be in the location originally identified.


    3.3       The ‘Mareva by Letter’ also obviates the necessity to incur what often can be very considerable expenditure on up-front legal fees.  The presence of foreign jurisdictions in the asset maze further adds to the potential costs and frustrations involved.  The very fact that ill-gotten property is situate within a foreign jurisdiction necessitates the retention of local Counsel.  In circumstances where the victim’s Counsel does not have a developed relationship with Counsel in the foreign jurisdiction, there will be inevitable delays as introductions are made, explanations provided and a rapport developed.  Conflicts checks can also have the effect of delaying the ability to proceed immediately. Also, in complex international fraud cases, local Counsel will need time to review and become familiar with what are generally voluminous and complex facts.


    3.4       Quite aside from the foregoing, foreign jurisdictions may impose requirements that are difficult if not impossible to comply with.  In such circumstances and in cases where it is feared that the disposal or transfer of assets imposed with a constructive trust in favour of the Plaintiff is imminent, the ‘Mareva by Letter’ method of preserving wealth is an important alternative asset preservation tool.


    4.0       The ‘Mareva by Letter’ in Practice.


    4.1       You have heard me extol the theoretical benefits of this device.  Now you ask – how does the ‘Mareva by Letter’ work in practice?  The writer has used this tool to positive effect in a number of cases.  The following case is described to illustrate how this mechanism can be used.  In a case involving co-ordination with federal criminal authorities in the United States, the Securities and Exchange Commission (the “SEC”) filed an emergency, ex parte application in the U.S. District Court for the Northern District of Texas to halt a long-running offering of unregistered securities through which the defendants, as it was alleged, fraudulently raised at least $160 million from investors associated with evangelical Christian congregations. The SEC asserted that the defendants used investors’ money to make Ponzi payments to other investors and support their own extravagant lifestyles by purchasing items such as expensive homes, a yacht and a helicopter.


    4.2       On 17th November, 2003, the U.S. District Court granted the SEC’s ex parte motion for a temporary restraining order, an asset freeze, and the appointment of a receiver to collect and preserve investors’ assets. In addition to seeking emergency ex parte relief, the SEC sought and obtained orders of permanent injunction, disgorgement plus prejudgment interest, and civil money penalties. On the same day, six criminal arrest warrants issued on foot of a U.S. Grand Jury indictment for fraud were executed by the FBI in Florida, Texas and California – and the key subjects were detained pending their arraignment. Accordingly, they were effectively deprived of the facility to transfer liquid assets.


    4.3       The Receiver’s first task was to quickly review the records of the defendants. Among the records that were seized by the Receiver were the laptops, Blackberries and PCs of the defendants. An enormous store of the defendants’ worldwide banking and investment information was thus secured, examined and acted upon with near immediate effect. The Defendants did not assist the Receiver in this task. Accountings required by the Court were not provided as directed. (The Defendants’ excuse for non-compliance with the order to account was that they were unable to comply while in custody). Intensive efforts were therefore required to locate and recover relevant assets and records.


    4.4       In this case, substantial recoveries were made with what could be considered a minimum outlay within the context of the costs usually associated with a concealed asset recovery exercise of this scale.  Indeed, assets were frozen in multiple locations in the United States; Hong Kong;  Cotonou, Benin, West Africa; Frankfurt; Kent, England; Panama; Greece; Geneva, Switzerland and elsewhere within the space of seven days of commencement of work and without instituting a single legal proceeding abroad.  This would not have been possible in the not too distant past. However, given the wide incidence of modern laws designed to prevent money laundering, the environment of heightened security globally, and the attention focused of late upon terrorist financing, financial institutions are now acutely aware of the need to assess and manage criminal risks.  In particular, where those institutions have been put on actual notice that certain accounts or account holders are ‘suspicious,’ not only are they under a duty to enquire, they now become subject to an effectively self-imposed duty to ensure that assets located in suspicious accounts are not transferred where those assets may be subject to a constructive trust.[1] By way of illustration, according to Martin Brunet’s contribution to Goldspink & Cole, International Commercial Fraud (London, Sweet & Maxwell 2002), Article 10 of the Swiss Federal Act on the Fight Against Money Laundering of 10th October, 1997 requires all Swiss financial intermediaries to promptly freeze any assets that are suspected of being involved in money laundering; and to hold such assets for five days, or for such longer period as may be prescribed by the Swiss Money Laundering Notification Office (the “SMLNO”).  The SMLNO may then exercise its discretion to extend the duration of the five-day freeze indefinitely to allow a criminal money laundering inquiry to be completed, or not.  


    4.5       Between 19th and 26th November, 2003, a series of letters were issued to the legal departments of those financial institutions which maintained accounts on behalf of the defendants or associated entities or persons, globally.  These letters advised the financial institutions concerned of (a) the existence and nature of the SEC proceedings; (b) the existence and function of the SEC appointed Receiver; (c) the basis for the belief that certain accounts maintained by the financial institution contained the proceeds of fraud (“suspect accounts”); and (d) the basis for a belief that the financial institution was a constructive trustee of funds in those accounts. On the basis of the foregoing, the letters demanded that each financial institution ‘not permit the transfer’ of any assets or credit balance recorded on the books of any suspect accounts pending further clarification of the relevant facts.  As a result of issuing these letters (and other communications that transmitted the contents of the Receivership Order – as well as the SEC Complaint and the parallel U.S. Grand Jury indictment), several million dollars of value was constructively frozen, without court order and without the necessity of providing any undertaking or security.  The fact of the existence of the criminal proceedings and the detention of the Defendants provided a sound basis for the suspicion that the impugned bank accounts held the proceeds of fraud. These facts likewise provided the financial institutions concerned with comfort that their actions in effectively freezing client accounts without court order were not only justified but unlikely to be successfully challenged by the account holders in question.


    4.6       More recently the writer has employed this device to secure the freezing of substantial funds in two (2) offshore banks. These funds remain frozen pending the adjudication of a substantive case.


    5.0       The United States and the ‘Mareva by Letter.’


    5.1       It is a matter of some considerable irony that, in the United States, the culture of banks and banking lawyers is to carry on with the legal analytical approach of old – where a bank is thought of as having no duties to third party claimants or victims to a fraud.  Rather, such victims must obtain a temporary restraining order or order of attachment from a Court before funds allegedly linked to a fraud may be ‘frozen.’  The bank may have to report a suspicion to the relevant authorities; but it can ignore the protestations and demands of the victim.  There are, however, instances in the United States where this seemingly hazardous approach has not worked (such as with the Chase & Sanborne litigation of the 1990s). 


    5.2       Other issues to consider include the risk of defamation, prima facie tort and intentional interference with contractual relations suits being launched by an aggrieved fraudster against the victim and his team for issuing a ‘Mareva by Letter.’


    6.0       Conclusion.


    6.1       This relatively new method of asset preservation – the ‘Mareva by Letter’ – marks a milestone in the development of effective remedies in the context of loss occasioned by serious fraud.[2]  Many commentators have argued that the recent spate of global anti-money laundering regulation serves only to increase cost and red tape and produces data that cannot be realistically analysed.  On the contrary, the increased awareness on the part of financial institutions, not only of the indicia or red flags of money laundering or associated ills, but also of the positive duty of those institutions to come to the aid of law enforcement and victims of fraud, has led to the rights of victims of economic crime being vindicated in instances where it previously would have been impossible to do so. This is arguably a testament to the worth of such a regulatory model.  The current global climate is such that jurisdictions that cloud their dealings in secrecy and provide protection to those who seek anonymity in relation to their financial dealings can no longer expect tolerance.  Increased transparency is now seen as a requirement, increased regulation of financial intermediaries has contributed greatly to the ability to access information which hitherto might have been unavailable.  These are all factors which lessen the management burden of an asset recovery exercise and have made the ‘Mareva by Letter’ a cost and time efficient tool.







    [1] A note of caution however is appropriate. The scope of the duty which a bank undertakes to deal with a transaction that it believes suspect has been considered in the English High Court case of Tayeb v. HSBC (2004) EWHC 1529 (COMM).  This case involved a situation where Stg£944,114.23 was sent by CHIPS in relation to a perfectly legal and proper transaction involving the sale of an Internet domain name to a Liberian company. The bank, however, had a suspicion. The bank returned the money to the remitter following the completion of the sale.  The remitter/purchaser of the domain name kept the funds. The bank was successfully sued by the person to whose account the money was sent, the seller of the domain name.

    The Judge said that the bank would not have been guilty of a money laundering offence “merely by accepting a transfer suspecting that it emanated from fraud or other unlawfulness or that it was part of a money laundering operation.” The bank ought to have implemented its suspicious activity reporting procedures (under the Money Laundering Regime) and awaited the outcome. By simply sending the money back the bank failed in its obligations both to its client and to report.  The Court did offer guidance to banks finding themselves to be in receipt of suspicious funds.  If a transfer of such funds is imminent, a bank should (a) sit on any transfer instruction (if possible), (b) report the suspicious activity to the relevant authority, and (c) freeze the amount, but with careful regard for the anti- tip-off provisions of the relevant money laundering law. 


    [2] The author is by no means suggesting that the ‘Mareva by Letter’ is an all-inclusive or self-executing remedy for the recovery of misappropriated assets. To the contrary, it typically only has the effect of affording a victim of a temporary and immediate asset freeze. Recovery most usually still involves the invocation of the full machinery of the judicial process.