In dismissing an appeal from the Court of Appeal of Jersey, the Judicial Committee of the Privy Council has clarified previously unsettled law in relation to the permissibility of "backward tracing" in fraud recovery cases.
Mr Paulo Maluf was the mayor of Sao Paulo from 1993 – 1996. In early 1998, he received a number of bribes relating to a major public road building contract. The payments were deposited by Durant International Corporation (a company controlled by Mr Maluf and/or his son Flavio) into a New York bank account. Payments were made from that New York bank account into Jersey accounts held by the Defendants.
The Claimants sought to trace payments totalling $10.5 million into the Jersey accounts, on the basis that the Defendants were constructive trustees of the funds, which were held by them with knowledge of their tainted origin.
The Defendants' position was that the whole of the $10.5 million could not be traced, for two reasons:
- Some of the payments into the New York account had taken place after the last payment into the Jersey account. To trace those payments would constitute "backward tracing", and it was not clear under Jersey law that this was permitted. (The position in relation to backward tracing is also unclear under English law).
- The New York account was a mixed account, and where a claimant's money is mixed with other money, and drawings are made on the account which reduce the balance to less than the amount which can be said to represent the claimant's money, the amount which the claimant can recover is limited to the maximum that can be regarded as his (the "lowest intermediate balance rule").
It was agreed between the parties that, as a matter of arithmetic, if backward tracing was not permitted and the lowest intermediate balance rule applied, the Claimants would only be entitled to recover $7 million, rather than the whole $10.5 million claimed.
The Claimants were able to recover the entire $10.5 million.
The Privy Council held that it would not be correct to say that there can never be backward tracing, or that the court can never trace the value of an asset whose proceeds are paid into an overdrawn account. It is important to look at the substance of the transaction, rather than the detail of the order in which events occurred. Backward tracing will be permitted where, as in this case, a claimant is able to "establish a coordination between the depletion of the trust fund and the acquisition of the asset which is the subject of the tracing claim, looking at the whole transaction, such as to warrant the court attributing the value of the interest acquired to the misuse of the trust fund."
This decision is not binding on English Courts, and so the issue of whether backward tracing is permissible here remains unsettled. Nevertheless, the Privy Council's decision will be persuasive and can therefore be said to cast some light on this issue.
The Privy Council's decision illustrates the courts' determination to allow claimants redress in cases of increasingly sophisticated and elaborate fraud and money laundering. Lord Toulson highlighted the fact that if steps taken in a transaction are part of a coordinated scheme, the detail of the various parts of the transaction itself, such as the precise timings of credits and debits from different bank accounts, should not matter.