There are, broadly, three ways for a State to recover the proceeds of corruption:
confiscation of assets following a criminal conviction;
forfeiture of corrupt assets as the proceeds of crime through statutory civil recovery proceedings brought by law enforcement agencies in the absence of a criminal conviction;
private civil proceedings, that is a civil claim brought directly by a State or one of its agencies seeking to recover corrupt assets or compensation from wrongdoers.
Each of these mechanisms could potentially be deployed in the victim State that has suffered the corruption, or a foreign state to which assets have been laundered or which has some other connection with the corrupt scheme. Some believe that a State should recover corrupt assets only through using criminal procedures because it best serves the public interest to see criminal mechanisms used to deal with criminal behaviour. There is considerable force in the argument that criminal conviction and confiscation should be the preferred method of dealing with corruption. However, it is also true that there are a variety of circumstances in which the criminal or civil forfeiture route may not be available or practicable or able to succeed. Many of those reasons are explored in our Guidance Note on civil and criminal mechanisms to recover the proceeds of corruption available here.
In the right cases, civil proceedings may be the best option and perhaps the only one. However, a major perceived impediment to a State bringing civil proceedings is the cost of lawyers, accountants, investigators and third party experts that may be necessary in any substantial asset recovery exercise, particularly in the international context. These can generate significant costs, which can at the very outset deter civil proceedings being instigated, even where the projected costs are a relatively small proportion of the assets being claimed.
Private sector costs can cause understandable difficulties for political decision-makers who will have to justify the use of the public wallet to fund civil proceedings. It is not easy to reconcile the sometimes slow process of the Courts with an ever increasing demand for immediate results.
Third party litigation funding of claims by States to recover corrupt assets may provide a viable solution to the problem of legal costs, although it will not be without its critics and challenges, both for the State and the funder. This Note considers the prospect, where available, of litigation funding in asset recovery cases and contains an interview with Harbour Litigation Funding on the subject matter.
Litigation funding (or legal financing) is an arrangement whereby a third party funds in whole or in part the legal costs of a party to litigation or arbitration; such funding is predominantly for claimants but may also be available to counter-claimants. If the funded party is successful in the case, the funder is entitled to a share of the recovered sums. That share is contractually agreed at the outset. If the funded party does not prevail, then the funder will not recover any of the sums invested. It is essentially a high-risk form of investment, which can be extremely beneficial to both the funder and the party being funded.
The funding of litigation by a previously unconnected third party has existed for centuries. It was considered a criminal offence in the United Kingdom until 1967 under the Anglo-Norman term “champerty”. While champerty remains as a tort, the recent Jackson reforms in the UK have made it clear that as long as a funder does not control the conduct of a piece of litigation, it will not fall foul of the tort of champerty. The Jackson reforms in relation to costs generally and funding specifically have seen a dramatic increase in the use of litigation funding by claimants ranging from the insolvent to FTSE 100 companies.
States wishing to bring civil asset recovery cases will often have to contend with the fact that the funding will be coming out of the nation’s pocket, until and only if proceeds are recovered. This can act as a bar to States that are not able to use precious and limited resources to self-fund litigation. In addition, there can be a fear when considering spending public funds on asset recovery litigation that “good money is being thrown after bad”, as the State could essentially end up suffering a second financial loss (of its costs) if the case is unsuccessful. The easy way out for political decision-makers is sometimes to take the path of likely less resistance - seeking to draw a line under historic wrongdoing, and avoid the public scrutiny of an asset recovery programme with its associated risks and long tail.
The advantage to a State seeking to recover misappropriated assets of using litigation funding is that it will only have to pay if the case is successful and assets are recovered. It is not therefore at financial risk if the proceedings are unsuccessful. The disadvantage, usually, is that it will have to pay more on success than would have been incurred funding its legal team on a traditional basis, but equally in those circumstances it would have taken 100% of the financial risk of loss.
There are a number of schools of thought on the ethics of States using litigation funding. There is an argument that, as litigation funders will take a portion of the recovered sum, this is essentially money being taken from the wronged State, and most importantly the real victims of corruption, its people. However, conversely, the fact is that where criminal mechanisms are not viable, many States are simply not able to countenance self-funding asset recovery cases, or are not inclined to expend their limited resources towards doing so, meaning that no sums at all are ever recovered. The argument could perhaps be best encapsulated by the old adage “a percentage of something is worth more than 100% of nothing”. For those States where the criminal route is impracticable, litigation funding does offer a means of at least recovering some assets back, which may not have previously been an option. It should be recognised, however, that funding of claims by states carries substantial risks to those advancing the money. For example, a State’s political will to pursue an action may dry up, leading to the derailment or even abandonment of proceedings. Funders will typically wish to address these risks in the contractual arrangements agreed at the outset.
We spoke to Susan Dunn and Frances Wacher of Harbour Litigation Funding, a UK market leader, to find out more about the funding of asset recovery cases from a funder’s perspective.
Interview with Harbour Litigation Funding
- Would you expect Litigation Funders to be interested in funding Governments to bring large scale asset recovery cases, and what criteria would you expect them to apply when taking on cases?
Yes, we would expect funders to be interested in such cases. We at Harbour apply the same basic criteria to all types of cases that we review. We look at the claim value; the estimated costs; the merits of the claim; recoverability; and the experience of the legal team running the claim. All of these would apply to large scale asset recovery cases. In Government cases which can often involve fraudulent individuals, funders will likely have to look further into the recoverability element at this initial stage, i.e. finding out, as much as it is possible to do so, what jurisdictions it is thought the assets are in and understanding what barriers there will be to recovering them (i.e. the provisions of national law on enforcement, political risks or any beneficial ownership issues).
- Acceptance of a case by a litigation fund will usually depend on a positive opinion by Counsel. But it is often said litigation risk is not the biggest concern when handling asset recovery matters for governments, it is the political will of that Government to pursue the claim and concerns about that ‘will’ diminishing with time or after regime changes. How would a third party funder protect itself from this sort of potential eventuality?
The short answer is that a funder cannot fully protect itself from such a risk. Litigation funding is a high risk investment business so we are not averse to taking on cases with an element of the unknown. Taking leaps of faith is part of what we do. However, there might be possibilities for putting in place political risk insurance, which could be investigated if the need arose. When looking at cases that could involve political risk, in addition to the criteria above we are likely to want as much information as possible on the history of the particular government making payments, and what the nature of the risks are. We would, in certain circumstances, look at getting advice on those risks from an expert.
- Cases of grand corruption often involve assets spread across a number of jurisdictions – could funding cover cases involving proceedings in a number of countries?
Yes. At Harbour we fund cases internationally, including the US, Canada, Hong Kong, the Channel Islands, Paris, Bermuda as well as the UK, so we are used to finding ways of becoming comfortable with funding in new jurisdictions. That is not the case with all funders, but a few have a good international appetite.
- To what extent would funders require due diligence to have been undertaken as to the location of recoverable assets before committing to funding? Would funding be available for the asset search?
Funders like Harbour are used to taking litigation risk (which can be considerable) but we do not like to take recovery risk – we are happy to pay for freezing orders and the appointment of interim receivers but we need to do so in the context of having identified the assets we believe will satisfy the amount claimed. At Harbour, we receive over 40 new enquiries each month, most of which do not have doubts about recoverability. However, if it is a case of adding to a body of work that has already been done in order to provide the funder with an added layer of comfort on points that are of particular concern to them, then this may be something that a funder is prepared to pay for. It will, as always, depend on the nature of the claim and the assets involved.
- Asset recovery cases can have a long tail - would investors be dissuaded from encouraging their funds to support asset recovery actions where defendants are sometimes prone to strongly fighting cases and dragging out the proceedings for as long as possible?
Most funds will have portfolio parameters in place, and if there is a very real risk that a case will take a considerably long time to complete (more than 3 years), then this may be a problem for the funder when looking at committing their funds. However, we are not shy of taking on cases against defendants who fight cases strongly or who use delay tactics. This is the case with a great deal of the claims that we fund. What is important for us is that the legal team who are running the claim for the claimant have the right experience to tackle such situations, and that all relevant information about the potential duration of proceedings has been given to the funder up front when the decision to invest is being made, and so that if a case is funded there are as few nasty surprises as possible.
- What sort of returns would investors expect to recover in large-scale asset recovery cases of this type?
The more relevant questions for claimants and their lawyers is what does a funder typically charge. We charge based on the economics, i.e. the costs in relation to realistic claim value. If you want to know the returns on our funds you will need to be an investor in our next fund!
- Are asset recovery litigation investments offered on a capital protected basis, or always ‘at risk’?
When we agree to fund a case, we do so on the basis that if the case is lost and/or no recoveries are made, then we lose everything that we have invested, so no, we do not invest on a capital protected basis.
- What risk exposure would you expect the legal and other advisors on asset recovery matters to take in principle i.e. should they also have ‘skin in the game’ so to speak?
We do not expect or require the legal and other advisors on cases we fund to take on any risk. However, we are always happy if the legal team offers to work on either a conditional fee or Damages Based Agreement basis as it indicates the legal teams’ confidence in the case. We recognise though that not all firms are well placed to offer such terms.
Litigation funding of claims by States is presently rare. However, litigation funding has been successfully provided in the context of defrauded companies seeking to recover assets that have been squirrelled away by its executives. Litigation funding for States that are the victim of corrupt officials can work equally well. Where States are unable to secure donor aid to support asset recovery initiatives using civil mechanisms, and criminal mechanisms are unavailable, third party litigation funding may offer a viable financing route for asset recovery through civil proceedings. In the right circumstances, and on the right terms, it could ensure the recovery of assets which otherwise would never have been claimed.