An Illinois court recently addressed a judgment creditor's efforts to turnover assets in offshore trusts. The Court in Dexia Credit Local v. Rogan, 2009 WL 648634 (N.D. ILL. 2009), determined that under Illinois law, courts will not honor a choice of law provision where to do so would violate Illinois public policy.

There, Rogan created a self-settled trust where the trust documents specified that Bahamian law applies. A self-settled trust is where the settlor is also the beneficiary. This trust had a spendthrift provision where it prohibited the beneficiary's interests from being assigned and from being attached by creditors. Such spendthrift provisions are permitted in the Bahamas. But, in Illinois, and in most other U.S.jurisdictions, it is void. Since Bahamian law is contrary to Illinois public policy, the Court would not apply Bahamian law to the construction and operation of the trust and held that the judgment creditor is entitled to execute on the asset of the trust.

The Rogan Court further noted that with a self-settled trust where the settlor is one of the beneficiaries and contains a spendthrift provision where Florida law applies, a creditor can reach assets up to the maximum amount the can be distributed to or for a settlor's benefit. Thus, a creditor can reach income if the settlor can only receive income or the entirety of the trust if the settlor can receive the entire corpus.

Thus, creditors can reach trust assets in self-settled trusts located offshore, but the extent of that reach is determined by the law of the state where the judgment is being enforced.

Money laundering refers to a process where "dirty" money is rendered clean. The techniques and ways to launder are endless. Nonetheless, the concept is the same. It involves channeling the ill-gotten funds into the legitimate financial system. It then involves obfuscation by employing a series of complex, second-level transactions designed to separate the proceeds from their original origins. This aims to place barriers to link assets with the illicit source. Layering typically involves use of trusts, shell companies and a multitude of accounts. These accounts are frequently held in fictitious names or aliases or in the names of nominees or companies. Insurance and re-insurance vehicles are being used as well.

On May 20, 2009, the Fraud Enforcement and Recovery Act of 2009 ("FERA") was enacted. FERA amends the federal money laundering statute to extend the definition of "proceeds" under that statute to include the gross receipts of illegal activity, rather than just profits derived from it as the original definition described.

 It is a crime to conduct, or attempt to conduct, a financial transaction involving "the proceeds of specified unlawful activity" if the perpetrator knows that the property involved "represents the proceeds of some form of unlawful activity" and a) has the intent to promote the carrying on of the specific unlawful activity or b) has the intent to engage in conduct constituting a violation of the IRS Code or c) knows that the transaction is designed in whole or part to conceal or disguise the nature, the transaction location, the source, the ownership, or the control or the proceeds of the specified unlawful activity or d) knows that the transaction is designed in whole or part to avoid a transaction reporting requirement under federal or state law. 18 U.S.C. Section 1956 (a) (1) (A)-(B). Cross-border transport of such proceeds is also prohibited under Section 1956.

Thus, under the FERA, the proceeds that are the subject of Section 1956 are now gross receipts, rather than just profits. It makes proof of money laundering much easier since proof of ill-gotten funds are easier to develop, than a profit making analysis. For civil litigants, it is now simpler to establish money laundering as the basis of the fraud to convince foreign courts that the cross-border transport of ill-gotten funds should be restrained.

The trust protector is a person who plays several roles. It may bepolicing the trusteeship or enforcing the trusts as if he were the sole beneficiary. A protector can be given the responsibility to supervise and approve trustee actions. Yet, the protector is not the trustee and cannot carry out the functions of a trustee. Consequently, the protector is not accountable to the beneficiaries. A protector instead looks after the interests of the trust settlor in creating the trust.

The protector most often intervenes between the trustee and the the beneficiary, acting as a mediatoror. The protector polices the trustee, overseeing the administration of the trust with the focus on preserving the settlor's intentions. It is said that a protector is really about the retention of settlor influence if not control. Specific powers generally given a protector are:

• monitoring trustees fees
• periodic reviews of the administration of the trust
• power to nominate auditors
• veto power over discretionary payments by trustees
• veto power over sales of shareholdings or trust property
• remove and appoint trustees

It is the last power that has the raised awareness of protectors. When faced with creditor actions, the protector can change trustees to protect the trust assets. In that way, the settlor's intentions are preserved. The trust is removed from the reach of creditors and oftentimes moved from the jurisdiction to make detection more difficult. To reach an offshore trust, a creditor has to know the protective devices employed so that a recovery strategy can be designed to overcome the barriers presented by a protector.

Trusts are meant to protect assets. In reality, the level of protection will depend upon the trust law in the jurisdiction chosen, the physical location of the assets held and the rigour with which a Court may allow such assets to be attacked.

Where the law of Mauritius in the proper law of the trust, the Court there will not vary or consider laws of other jurisdictions.

The Mauritius Trust Act 2001 applies a two year rule. Essentially, no action will lie against a trustee of a trust after more than two years from the date the assets were transferred to the trust. However, a Court may declare a trust void where it is established that the trust was created with the intent to defraud creditors of the settlor of the trust at the time when the trust property vested in the trustee. Moreover, the doctrine of "sham" provides an avenue to set aside the integrity of the trust if it is clear that the settlor established the trust with every intention of carrying on as if the assets were still his own.

Thus, creditors should understand that the use of Mauritius trusts can only be overridden on limited bases.

With ponzi schemes and similar frauds coming to light recently because of the economic turmoil, the availability of pre-emptive remedies to seize assets is an important concern for litigants. Whether one calls them freezing orders, Mareva injunctions, pre-judgment injunctions or some other identifier, orders thatseek to prevent a party from disposing of assets seems to be available in many jurisdictions, usually through ex parte applications. The requirements for obtaining a freezing order differs from jurisdiction to jurisdiction, but the remedy remains the same whether assets are held by the defendant or by third parties.

For instance in Canada, pre-emptive remedies are available ex parte to preserve assets and enjoin further concealment or transfer. Canada seems to have gone further than other jurisdictions by allowing the claimant to participate in the raid to identify and discover evidence at the defendant's or third parties' premises. In that situation, a court appoints an independent supervising solicitor who attends the raid to ensure that rights are not violated and the order is properly followed.

In Argentina, pre-emptive measures are likewise allowed under federal and provincial law. In addition to attachment orders and injunctive relief, courts have allowed Anton Piller type orders to seize evidence to preserve it. All of these measures are available at a third parties' premises.

In Austria, pre-emptive remedies of attachment and restraint orders are available. But, Anton Piller type orders are not.

In the United Kingdom, courts are moreflexible and creative than legal systems where legal systems are defined by statutes. Engish courts are credited with inventing Mareva injunctions, Anton Piller orders and Norwich Pharmacal orders for pre-suit discovery. A further advantage in the English system is that courts can actually tailor make remedies, including an interim order that not only restrains a party from disposing of assets but also orders that party to disclose certain documents  or a search and seizure order that requires a defendant to allow a claimant's solicitor to search the premises and remove evidence. Also, remedies are afforded to parties involved in foreign proceedings, not only those involved in UK proceedings.

The United States is not a litigator's paradise when it comes to pre-emptive remedies. Asset freezes and preliminary injunctions are much more difficult to obtain. Asset attachments can only be ordered if certain statutory criteria are met. Preliminary injunctions, if not permitted under certain statutes, can only be obtained where equitable relief is sought.

On April 2, 2009, the Supreme Court of Canada decided in BMP Global Distribution, Inc. v. Bank of Nova Scotia, 2009 SCC 15 (BMP), the bank is prima facie entitled to recover money paid to a customer by mistake of fact such as a forgery since the account agreement implicitly incorporated common law. The court also determined that the bank could trace the funds through the accounts held by parties related to the customer. Passing through the bank's clearing systems does not break the chain of possession of the funds or eliminate the ability to trace.

This decision is significant because banks are frequently the target of creditors seeking to prevent debtors from dissipating funds which the creditors claim as their own. Court decisions have articulated the importance of a bank complying with valid court orders as soon as it is served.

For instance, in Customs and Excise Comm. v. Barclays Bank PLC, (2006) 4 All E.R. 256,Barclays Bank received by fax two freezing orders and took steps to comply. But, the customers were able to transfer funds out in less than three hours using a "faxpay" system, which allowed withdrawals without reference to a branch. The Court decided that the bank didn't owe a duty to the claimant to stop the fund transfer, but only a duty to the court to comply with the freezing order, along with a duty to its customers under the account agreement.  The bank was not liable because there was no allegation that it willfully ignored or failed to comply with the order.

Moreover, the Bank Act provides that a garnishing order against a bank must be served on the branch where the account is located. In Univar Canada, Ltd. v. PCL Packaging Corp, 2007 BCSC 1605, the B.C. Supreme Court held that even though the account to be garnished was located at a branch outside the jurisdiction, the court could still issue a pre-judgment garnishing order because the bank is located in British Columbia and the location of the account is not determinative of jurisdiction to issue an order.

Hence, a Canadian bank's obligations when served with freezing or garnishing orders are to comply with the order from a court that has jurisdiction over that bank.

Alleged ponzi schemes have permeated the financial landscape. Recovering losses for victimsrequires locating assets of the ponzi schemers or which were fraudulently acquired. Oftentimes, that requires litigation in foreign countries where the assets have been hidden. However, foreign-based litigation does not preclude a litigant from using US discovery in aid of foreign proceedings.

US federal law empowerscourts to permit any interested pary to obtain discovery for use in foreign proceedings from a person located in the district, even if this evidence could not be accessed under the rules of the foreign proceeding. 28 U.S.C Section 1782 (a) does not impose a foreign discoverability requirement nor must the foreign proceeding actually be pending. Section 1782 requires only that the discovery be useful.

In many foreign jurisdictions, discovery can be onerous from non-parties. For instance, in Canada, discovery will only be allowed if a) the moving party has been unable to obtain the information from other persons, b) it would be unfair to require the moving party to proceed to trial without the opportunity to obtain the discovery and c) the discovery will not entail unreasonable expenses or unfairness to the non-party. Canadian courts have viewed the use of Section 1782 favorably in proceedings pending there. In CC Chemicals Ltd. v. Sternson Ltd., (1980) 116 D.L.R. (3d) 239 (S.C.), the court permitted Section 1782 to fill a procedural gap since it did not otherwise interfere with the Canadian action. In Penty v. Law Society of British Columbia, (1999) 69 B.C.L.R. (3d) 159 (S.C.), the court concluded that a Canadian court will generally be reluctant to prevent a party from gathering evidence extraterritorially. Efforts to gather evidence in the US did not present a comity concern nor an overriding issue of unfairness.

From this perspective, Section 1782 offers litigants the unparalleled procedure to obtain discovery from US sources under broader discovery rules and yet still utilize the foreign courts to obtain the remedy over assets located in that foreign locale.

In 2007, the trust law in Guernsey changed to allow non-charitable purpose trusts. Such trusts are enforceable by the appointment of a person who can enforce the trust's terms, an enforcer. The enforcer cannot also be the trustee, but could be connected to the trustee or the settlor of the trust.

A non-charitable purpose trust includes the holding or ownership of property for "any purpose whatsoever, whether or not involving the conferral of any benefit on any person and includes, without limitation, the holding or ownership of property and the exercise of functions." This structure is typically used for holding shares in a private trust company. What is important about this definition, and to asset recovery efforts, is what makes a trust invalid. A trust may not be formed under fraud, misrepresentation or breach of fiduciary duty. It cannot be for immoral purposes or contrary to public policy.

The 2007 law provides that all questions relating to a Guernsey trust is to be determined in accordance with Guernsey law. Hence, when confronted with a Guernsey trust in a recovery effort, one should consider trying whether the trust can be set trust aside for improper formation purposes under Guernsey law.  

With the unfortunate rise in ponzi schemes and frauds on investors such as in the Madoff matter, victims are searching for ways to recover their losses. If assets can be located in English common law jurisdictions, there is a remedy--asset freezing orders.

A freezing order is directed to the defendant personally, whether the assets are in his name or not or owned solely or jointly, and depending on the location of his assets, can operate on a worldwide basis, by prohibiting the defendant from removing his assets and dealing with or diminshing their value, subject to use for living expenses. To get such relief, a claimant a) must have a good arguable case, one more than capable of serious argument,  b)  must be able to show that the defendant has assets in the jurisdiction, c) must present a real risk of asset dissipation if a judgment goes unsatisfied, d) must give a cross-undertaking, and e) must be able to claim it is just and convenient to grant the order.

In the event of non-compliance with the freezing order or associated disclosure, the defendant is at risk of a fine and imprisonment.

Third parties must comply with the freezing order if they have notice. Third parties abroad will be affected if the order is enforceable by courts in that other country or if the court issuing the order has jurisdiction over the third party and is able to prevent acts outside the jurisdiction that violate the order.

Developing the basis for a freezing order and then obtaining one takes understanding and experience. Utilizing counsel knowledgeable on the subject is imperative.

Discovery is an important component to a successful asset recovery. In Jersey, the idea behind discovery is full and frank disclosure to eliminate surprises.

Once pleadings are complete, each party must list the documents in their "possession, custody or power". That disclosure includes documents that will be relied upon, that adversely affect the case or support your opponent's case, and that are required by relevant practice direction. Relevance means information which may enable the party to advance his case or to damage that of his adversary. The obligation of discovery continues throughout the proceeding such that if further documentation comes to light it must be disclosed. The definition of documents is also expansive and includes hard copies and electronic ones.  

Discovery from non-parties is rare. The exception is if discovery is the only means of obtaining the necessary information to proceed against a wrongdoer whose acts are facilitated by the non-party. In other words, discovery will be permitted against a non-party when (1) without the information from the non-party, no action against the wrongdoer could be commenced and (2) the non-party had innocently facilitated the wrongdoer. In Macdoel Investments Ltd. v. the Federal Republic of Brazil (2007) JLR 201, the court reasoned that the power to make such an order is not restricted to specfic kinds of cases and the"determinative question in an individual case would be whether justice required the requested disclosure to be ordered."

Thus, discovery can be an important tool in Jersey to discovering the identity of the wrongdoer and documents that implicate him/her.