PARTICIPANTS: ADRIANA PUGLIESI (Moderator and Professor of Commercial Law at FGV-SP); ANDREW WITTS (Debater and partner at Gowling WLG); HENRIQUE FORSSELL (Debater and partner at Duarte Forssell Advogados); KEVIN HELLARD (Debater and partner at Grant Thorton); NYANA MILLER (Debater and partner at Sequor Law).
SUMMARY: 1. Introduction. 2. Brazil as a leading jurisdiction in terms of laws, precedents and technology. 3. US Discovery and the use of information in Brazilian proceedings. 4. Chain of control and elements of the fraud. 5. Difficulties of the public sector in dealing with cross-border asset recovery proceedings. 6. Questions. 7. Conclusions.
On April 14, 2023, TMA Brasil held an in-person event of the series “Café Internacional SP”, which had as the subject “Transnational Insolvency and Alternative Measures for Asset Recovery Abroad”. The debate was moderated by Dr. Adriana Pugliesi, Professor of Commercial Law at FGV-SP, and had as debaters Drs. Andrew Witts, partner at Gowling WLG, Henrique Forssell, partner at Duarte Forssell Advogados, Kevin Hellard, partner at Grant Thorton, and Nyana Miller, partner at Sequor Law, and as rapporteur of the debate, Ivo Bari, partner at BVZ Advogados.
Dr. Adriana Pugliesi started by stating the importance of the subject, whereby attorneys and other professionals that come in contact with the matter have a series of material questions, and perhaps a false perspective that recovering assets abroad (that are moved from one jurisdiction to another, by the debtor) is a challenging thing to accomplish for the creditors.
2. BRAZIL AS A LEADING JURISDICTION IN TERMS OF LAWS, PRECEDENTS AND TECHNOLOGY
Passing the explanation to Dr. Henrique Forssell, Dr. Forssell pointed out that the matter is, in fact, quite complex and demands a lot of resources, as well as an interdisciplinary team (not only lawyers, but also judicial administrators, forensic experts, accountants, etc.). Explained that strategy is fundamental, given that the various proceedings underway in different jurisdictions are helpful amongst themselves (key evidence from one jurisdiction may be used in another jurisdiction, for example). Stated that, from a Brazilian standpoint, our market is one of the best in the world, both in terms of legal certainty and the quality of the law and the judges, as well as the technological tools available in the Courts.
According to Dr. Forssell, Brazil is on its way to have the best legal resources available in the world. Dr. Forssell pointed out that the Courts of São Paulo and the STJ (Superior Court of Justice) have issued judgements that are effective and favorable to asset recovery, particularly in insolvency proceedings.
One of the key issues is in regard to access to documents. Brazilian Courts have said a number of times, that files and documents of the debtor (including of tax nature) could and should be used in order to detect fraud and identify assets that should be recovered. It has been correctly decided that judicial files can be accessed by the judicial administrator/creditor in order to effectively safeguard the rights for the assets to be properly recovered. Juxtaposing to other jurisdictions, Dr. Forssell explains that Brazilian Courts favor the disclosure of said information and documents, whereas other Courts give more restricted access, creating a more significant obstacle to overcome, with higher thresholds to be met in regard to due process and burden of proof when identifying the fraudster. Brazilian Courts are more well balanced when pondering over debtor and creditor rights. Legal grounds for insolvency and asset recovery, Brazil is quite well (statutory and precedents).
In regard to technological resources of the Courts, Dr. Forssell points out that Brazil has by far one of the best systems for identifying and freezing assets. Powers of attorney, companies, connections, IQ charts, etc., are all available for giving data to the party. Given that putting data together is the key for effective asset recovery, this is fundamental for the efficient working of the proceeding in a given jurisdiction: identifying where the assets are, what measures were taken to try to hide the assets and who are the parties that helped put this fraud together. According to Dr. Forssell, it is not just about going after the assets, but also suing responsible parties that assisted in the fraud.
Concluding, Dr. Forssell states that based on the statutory provisions available, Court precedents and technology, this package puts Brazil at least on the top 5 jurisdictions that give to the practitioner tools for effective asset recovery.
3. US DISCOVERY AND THE USE OF INFORMATION IN BRAZILIAN PROCEEDINGS
As highlighted by Dr. Forssell, given the significant business ties between Brazil and Florida, there are a series of transnational insolvency proceedings arising from Brazil that have ancillary judicial measures taken in Florida. Dr. Nyana Miller confirms that a number of cases in Florida have relations with Brazilian individuals, entities and proceedings. Dr. Miller acts in taking the judicial measures available (US discovery, etc.) in order to identify and attach the applicable assets.
Dr. Miller explains the way in which US discovery works, whereby there is a filing before the Court, but most of the proceedings are conducted privately, by the law firm, before banks, real estate companies, accountants, etc. They deal directly in receiving the documents and performing the applicable depositions. In general, proceedings are not under seal, being transparent. The financial documents obtained, however, are not available publicly. Until the point in which the documents are used to make a claim, these stay only between the lawyers and the judicial administrator.
A key point is that documents obtained in US discovery can be used in Brazilian proceedings. Given that there are cases in which funds or assets have gone through the US, but the perpetrator of the fraud is in Brazil, it is fundamental that the US discovery findings are available to be used to base a Brazilian claim. There are no material restrictions on jurisdictions that that evidence can be used. Dr. Forssell agreed that US discovery has that advantage, in which US is more flexible as to where you can use the information.
4. CHAIN OF CONTROL AND ELEMENTS OF THE FRAUD
Dr. Kevin Hellard is the head of insolvency at Grant Thorton UK, also including offshore matters (Cayman, BVI, Singapure, etc.). Dr. Hellard spent many years investigating cross-border frauds, and from experience agrees that Brazil is a reliable and effective jurisdiction.
Dr. Hellard points out that the matters being discussed are usually significant frauds, and the activity is challenging, because usually the counterparty is well-funded, sophisticated, two-steps ahead, and has collaborators in the fraud.
Dr. Hellard states that there are usually two perspectives in which to remedy the applicable frauds: the first being to fix the mechanisms that allowed for the fraud to happen (thereby impeding the fraud to occur again) and the second being to recover the assets that were illegally obtained. The second perspective has gained importance, whereby an industry of recovery professionals has been created.
In continuance, Dr. Hellard mentions that one of the fundamental mechanisms to effectively build and implement an asset recovery strategy is to analyze the chain of control of the assets that have been subtracted. The bottom-line being that if the fraudster has taken an asset, he will want to retain control of said asset. Therefore, if the investigation focuses on the chain of command, usually the fraudster can be found and a better strategy for taking back control can be devised.
Uses the example of Vietnam jurisdiction. If the asset which one wants recovered is a chain of hotels in Vietnam, which is controlled by a company in the BVI, it would be a better strategy to try to take corporate control of the BVI entity, thereby creating a corporate waterfall of command (director and insolvency appointments) ultimately leading to the asset being effectively recovered, in comparison to a less effective strategy of litigating in Vietnam to try to obtain direct control of the asset.
In conclusion, Dr. Hellard also states that there are usually three elements to a fraud: (i) something that has been taken, (ii) someone that has taken it, (iii) someone who has helped take it. Dr. Hellard points out that the third element is useful in many cases, because it can assist in making more people liable for the fraud and, therefore, increasing the chances of a successful indemnification claim to be brought against an increased number of people.
5. DIFFICULTIES OF PUBLIC SECTOR IN MANAGING CROSS-BORDER ASSET RECOVERY PROCEEDINGS
Dr. Andrew Witts starts by saying that the Courts in Brazil have materially developed in the last twenty years, being perceived internationally as a reliable and effective jurisdiction. Dr. Witts agrees with Dr. Forssell’s comments in regard to Brazil being a leading jurisdiction worldwide. Dr. Witts states that the Brazilian Judiciary has been in a development path even before the UNCITRAL Model Law was adopted. Gives the example that UK Courts have a good view of proceedings that are brought on by trustees coming from Brazil and have an assumption that Brazilian Courts are well instructed when authorizing said proceedings to be brought on.
Dr. Witts focuses on one example, which is the Maluf-case, in which the Municipality of São Paulo tried to recover assets that had been internationally evaded by means of fraud. Dr. Witts congratulates the City of São Paulo, because of the difficulties in which the Public Sector has when undertaking a project of this nature, including of expenditures and mandatory disclosures to the public. The Maluf-case is an example of a successful proceeding in which analysis of the control structures (as mentioned by Dr. Hellard) were crucial to identifying where to take control of the asset back. And, once control is taken back, how to effectively repatriate the assets.
6. QUESTIONS
How long from the day you file a discovery do you have access to the full documentation you are trying to obtain?
Dr. Miller: At the beginning of discovery, it is relevant to identify who holds the information we want. If an impartial institution (banks, for example), the response usually is between 30 to 60 days. On average, two to three months should be sufficient, but if a legal issue arises and there is the need for a hearing, it would tend to take longer.
Dr. Forssell: Interesting to understand in US discovery is that everyone needs to help the Court understand what happened. There are continuous requests for information which need to be disclosed, in order to fill the gaps of understanding. An interesting case mentioned by Dr. Forssell was of a Brazilian target that had a global art collection. The insurer of the artwork became a target of the discovery, thereby being required to disclose information regarding the collection that would be subject to the asset recovery.
Dr. Forssell further points out that every financial transaction around the world, usually passes through the US. Therefore, an effective strategy is to request information from the US clearing house, whereby to identify the international transfers of funds.
Another key point made by Dr. Forssell is to not only go after the apparently high value assets, because there are a series of transactions and companies that have a small face-value, but there can be material assets hidden behind these structures and companies.
Dr. Hellard adds that one of the ways that fraudsters use to hide assets is to leave companies to fall of the register. Therefore, apparently no one would retain control of the company, however, in fact, the fraudster remains in control of the company. You can have corporate vehicles that are no longer in existence, but when subject to investigation, they own or control substantial assets.
How do you connect the debtor and the asset?
Dr. Hellard: Challenging but getting better. BVI for example has become more transparent in regard to revenue services. There are different sources of information that need to be used to establish links. For example, you obtain information that a company owns a yacht. Then, you can complement this information with social media pictures of the debtor using that yacht, in order to establish the link and effective ownership. Quite often social media (including of children of the debtor) is very helpful in establishing the links between debtor and assets.
How do we structure costs and funding for asset recovery projects?
Dr. Witts: Sensitive matter, because often the victim is reluctant to further invest in asset recovery, after already having been harmed by the fraud. There are solutions, such as engaging professionals that are willing to work on risk (being compensated by the results of the recovery) as well as professional funding for the projects. You can go to the market, for example, to obtain insurance products, to hedge risk and exposure of the project. Projects need to come with funding solutions, so there has to be an understanding in regard to the investment on the case.
Piercing the corporate veil is a fundamental element that is advantageous in these structures and makes the professionals more comfortable in working on an at-risk basis. It increases the chances of obtaining the frauded assets back, without the need to only litigate against the debtor itself (which would in most cases no longer hold the sought after assets).
Insolvency proceedings in this regard are fundamental in two levels: (i) to ensure that you can pierce the corporate veil and have other fraudsters liable for the fraud, and (ii) once you have the veil pierced and recognized abroad, there is more chances that once you find assets under the name of the individuals, you will be able to take control and repatriate these.
How do you prove that the assets originate from the insolvent company?
Dr. Forssell: First, you need to prove there is a fraud, then, who is the beneficiary of the fraud. With this, you need to find information in regard to the transfer of the assets or funds. Usually, you can find this by means of dividend payments, loans to shareholders, simple transfers which do not have underlying documentation, and out-of-market transactions (such as a company paying an overprice for an asset of a shareholder).
Thereafter, there is the need to establish the link (documents, social media, etc.), demonstrating that in fact the debtor (or the people that have been reached by the corporate veil being pierced) is controlling the frauded assets. Once the link has been successfully established, in practical terms, the burden shits and the debtor now has the need to prove that the assets have not come from the fraud, and not the other way around.
Dr. Hellard: When there are documents that present step-by-step the route that was taken by the asset, it is less challenging. But often there are gaps and there is no documentation to be found in one or more steps. The appropriate strategy when there are gaps is to work backwards from the current status and towards the original ownership. With this, the objective is to find sufficient proof to meet the initial burden and be able to satisfy the Court that the reasonable explanation for the missing gaps are of debtor’s fault.
How cooperation between jurisdictions is working?
Dr. Witts: In an informal way, recognition and cooperation have been working well. There are letters of requests for cooperation exchanged between jurisdictions. Now that Brazil is formally within the UNCITRAL model, overseas liquidators will come to Brazil to obtain information and documents.
Dr. Miller: American Courts are increasingly recognizing that Brazilian Courts are very serious in insolvency proceedings, and I have seen American judges agreeing to act upon request from Brazilian Courts and that US discovery documents being used in Brazilian proceedings.
How does Brazil compare to other jurisdictions in terms of duration of proceedings and reliability of the Courts?
Dr. Witts: I believe the system works, two exceptions being that everything gets appealed, and specific cases in which it takes longer than needed because of a certain Court not necessarily moving the case forward. However, whenever needed, we are heard, so overall it works.
Dr. Hellard: My personal experience is also good, proceedings I have been involved the outcomes were correct and reliable.
Dr. Miller: There are tremendous regional differences, but the Courts that usually have the significant insolvency cases, are the most sophisticated and used to dealing with international bankruptcies. It may be a cause of worry when cases come from a Court that is not used to heading cross-border insolvency cases, but the majority comes from Courts that have handled a series of cross-border cases. It is the same in the US, whereby certain District Courts are not that used to insolvency cases, whilst others are more specialized and accustomed to these proceedings.
7. CONCLUSIONS
Dr. Forssell concludes by stating that overall international asset recovery proceedings emanating from Brazil are efficient, Courts are favorable to said measures and the technology available in Brazil is world leading. If there is a takeaway in something that could be improved is that, when not dealing with the merits of the case, Brazilian system could do better in not letting every decision being subject to so many opportunities to appeal.
