Using civil remedies in corruption and asset recovery cases.

Author:de Willebois, Emile van der Does
 
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Civil law remedies are a credible and effective tool for countries interested in recovering stolen assets--both when criminal procedures are unlikely to yield a result or in addition to such measures. They do not replace criminal prosecutions and confiscation but they complement them by attacking the economic base of corrupt activities and by focusing on victims' interests. While common law offers a wider array of options to exercise proprietary claims on stolen assets, for personal claims both common and civil law systems offer reasonably similar avenues. Jurisdictions should consider increasing their use of legislation and legal concepts dealing with civil measures to recover profits obtained and damages suffered as a result of corrupt activities. Recent success stories involving private civil proceedings illustrate how such a strategic use and combination of available tools can boost asset recovery efforts.

CONTENTS I. INTRODUCTION: WHAT IS CORRUPTION AND HOW DO WE RESPOND? II. TYPES OF ACTIONS A. Proprietary Actions 1. The constructive trust 2. Revindication B. Personal Claims 1. Contract 2. Tort 3. Restitution and unjust enrichment 4. Civil action based on a criminal case III. REMEDIES: HOW MUCH TO SUE FOR AND HOW ARE THE DAMAGES CALCULATED? A. Most Common Remedies Used to Quantify Illicit Profits, Compensation or Restitution 1. Disgorgement 2. Compensation for damages 3. Contractual restitution B. Quantification in Practice and Challenges C. Beyond the Present--Emerging Theories--Punitive Damages and Social Damages IV. CONCLUSION Following the entry into force of the UN Convention Against Corruption (UNCAC) in 2005 and more recently the Arab Spring and a string of scandals in the financial sector, the topic of corruption and its proceeds has steadily risen up the international policy agenda. The G8, the G20, and many regional and civil society organizations, are all putting forward ideas on how best to tackle it. This article aims to provide a modest contribution to that debate by focusing on an often overlooked avenue for going after corruption. Before doing so however, it is important to be clear about the terms, and specifically about the meaning of the concept of corruption.

  1. INTRODUCTION: WHAT IS CORRUPTION AND HOW DO WE RESPOND?

    In essence, corruption is an agency problem: one person (the agent), be he an elected politician or a director of a bank, is supposed to be acting in the best interests of someone else (the principal), be it the people of a nation as embodied in the state or the bank's shareholders as embodied in the bank itself. Instead the agent allows his personal interests to take precedence. The agent is furthering his own interests at the expense of the principal. To be clear, principal-agent in its broad sense is not to be confined to its strict legal meaning, but rather as a sociological description of relationships. Though traditionally defined as "the abuse of public office for private gain," the distinction between public and private sector corruption is really secondary, concerning only how the power is vested. We therefore agree with recent definitions of corruption as encompassing all forms of abuse of entrusted power. In its internal rules on preventing fraud and corruption, the World Bank defines a corrupt practice as "the offering, giving, receiving or soliciting, directly or indirectly, of anything of value to influence improperly the actions of another party," (1) without distinguishing between private or public sector. Similarly, Transparency International defines corruption as "the abuse of entrusted power for private gain." (2)

    The global legal standard for the fight against corruption, the UNCAC, does not contain a definition of corruption itself. Instead, in Chapter 3, the UNCAC lists a whole array of conduct that is considered to be corrupt, including both public and private sector bribery and the embezzlement of both public and private sector funds, (3) thus implicitly endorsing the same idea, namely that corruption straddles both the public and the private spheres.

    In deciding how to respond to corruption, the course of action most often discussed is criminal action. When confronted with an abuse of power, we almost inevitably first look to the state to take enforcement action against the wrongdoer--typically combining a prison term with the confiscation of the profits from the corrupt act. Such action could entail a criminal case by a state against the corrupt defendant or against his assets, or it could entail action in more than one state if the property to be confiscated is located in a state different from where the corrupt behavior occurred. The default inclination is to take criminal action--possibly because of the corrosive effect to society as a whole. We wish to see the harm done to the community redressed and look to the criminal prosecutor to put things right. However, such a response, though understandable, misses an important component of the effects of corruption. Certainly, trust has been betrayed and the transgressor must be held accountable, but in addition corruption causes tangible damage to society as a whole or to a particular person or category of persons. Someone has suffered concrete damages as a result of corrupt acts and needs to receive compensation for their loss. In response to that loss, we should not be primarily focused on criminal trials but should rather direct our attention towards private civil action and restorative justice. (4) This article aims to contribute to the current debate on how to deal with corruption by shining a light on the hitherto underused tools that private civil law can provide in seeking to redress corrupt behavior. It will do so specifically by providing an insight into how private civil action can repair the financial damage suffered by a victim. It will focus, in other words, on the remedies offered by private law to recover assets and obtain compensation from the wrongdoer.

    Of course we do not wish to minimize the importance of criminal prosecutions and confiscation when trying to remedy acts of corruption. Criminal law expresses society's disapproval of the corrupt act and aims at punishment, while civil law focuses on victims' interests and aims at compensation and restitution. An effective response to corruption requires the concurrent use of both criminal and civil law remedies. Civil law remedies can complement criminal sanctions by attacking the economic base of corrupt activities both in the public and the private sector. As Tim Daniel and James Maton point out, "asset recovery efforts need flexibility" and thus a range of mechanisms needs to be employed to achieve the desired result. (5) Recent success stories of asset recovery via private civil proceedings can illustrate how.

    This article provides a brief overview of the way in which civil actions can contribute to the fight against corruption. Apart from the more philosophical reasons why civil remedies merit attention, there are also more practical issues to be considered. Many criminal law systems do yet not allow for the distribution of the confiscated amount to the victim of the crime. Though this shortcoming may be circumvented in eases of public corruption by a sharing agreement between states, this is not possible in private corruption cases.

    In addition, in most grand corruption cases, certainly where serial acts of corruption have been committed over a longer period of time, even if some or all the acts of corruption are proven, it is nearly impossible to trace all their proceeds (i.e., follow funds from their immediate incarnation as the proceeds of a corrupt act onwards along a trail of layered bank accounts and investments). It often happens that some assets beneficially owned or held by the suspect are frozen, but that the paper trail is incomplete (due to non-cooperative jurisdictions or lack of documentation or evidence), preventing the establishment of an evidential link between a specific crime and the assets, which is still required in many systems of law to establish an in rein (or proprietary) claim. In addition, substantial portions of proceeds of corruption are often spent on luxury items which have a high maintenance cost and depreciate quickly. As most criminal law systems do not (yet, we hope) allow for the confiscation of assets which are not related to the crime as replacement value, civil proceedings, by establishing a general claim for damages, can provide a remedy to these problems.

    Finally, civil remedies also allow an injured party to seek full damages from third parties whose forfeitable criminal gains may be negligible. A bank, which knowingly assists in the laundering of proceeds, may have only gained 1%-3% per year on the account used for the laundering of the proceeds. In a criminal case that small percentage would be the only forfeitable criminal gain; in a civil case however, certain jurisdictions allow the bank to be sued for the entire damage that is caused.

    By identifying challenges and best practices and providing many case examples, it becomes clear that civil law remedies are a credible and effective tool for countries interested in recovering stolen assets in the courts of another country, especially when criminal law avenues are either not available or have a low likelihood of success. First, this article provides an overview of the types of actions available to a victim of corruption seeking redress. Then the article details some of the ways in which the monetary awards to be paid to the victim can be calculated.

  2. TYPES OF ACTIONS

    A defrauded principal has different options available to him to recoup some of the losses he has suffered. He may have either a proprietary claim to enforce his ownership rights on a particular identifiable asset or a personal claim against a particular person or entity for damages. (6) The advantage of the former is that a proprietary claim is...

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