Settling debts? Show all your assets

Each year, millions of pounds in damages are ordered to be paid by judges in both litigation and arbitration cases go unpaid, making the court order for the winning side a worthless piece of paper

May 13, 2015

World Finance speaks with corporate investigator Daniel Hall to find out if this is illegal and where the loopholes are.

World Finance: Daniel, hiding assets – is it illegal?

Daniel Hall: Structuring your own affairs is not illegal. It’s like anything, you can have a debt and you can choose not to pay. I think you shouldn’t look away from how it would work in a small claims court almost. If you have a dispute with one of your friends and you owe them £1000 and you choose not to pay, that’s not illegal. They just then have remedies against you, and frankly you scale that up and you’re talking about billions of dollars with sovereign states.

It’s a very profitable enterprise for many facilitators, accountants, lawyers, people who help their clients effectively judgement-proof themselves.

World Finance: Well you specialise in recovering assets that have been hidden by accountants or lawyers of their clients, often sovereign states or multinational corporations, to avoid them having to pay the full costs of litigation arbitration. So who are the main culprits?

Daniel Hall: There’s no single answer to that. There’s a confluence of factors that the reason the world is as it is. I think that what tends to happen is, commercial disputes arise, things change, governments change, and perhaps the new administration doesn’t want to deal with the legacy of the old guard.

World Finance: Does this differ jurisdictionally?

Daniel Hall: Not really, I think what you tend to find if you are, for example, going after the assets of a sovereign state, is some sovereigns are much more amenable to paying their judgements because they want to interact with the capital markets of the world. There are some sovereigns who are perhaps less amenable to doing so, and one has to pursue them and pursue their assets.

World Finance: So can you give me examples of the types of recoveries you’ve worked on?

Daniel Hall: I can’t obviously go into too much detail, but I can kind of broadly describe how one goes about doing this. So for example, if you’re interested in recovering against a sovereign state, what is sometimes a worthwhile enterprise is to understand how it interacts with the real world, and do things that perhaps will cause it political problems which will make it actual kind of, frankly, settle its debts.

So going after various Eastern European countries, what you’re trying to do is identify joint ventures they’re perhaps involved in, where you have assets which sit outside of sovereign immunity, they’re used for commercial purposes, but actually the mere act of freezing, for example, bank accounts or manufacturing interests has a political knock-on effect which means that they have to, as I say, settle their debts.

World Finance: But you’ve actually recovered some unusual things, shall we say. Give me examples of those. 

Daniel Hall: Polo ponies in Argentina. Yachts attached to docks. What’s quite interesting when you’re doing asset recovery is you have to learn to play the man as well as playing the ball. So you have to understand your counterparty, you have to understand what’s important to it, and then act accordingly.

I had a fun case going after a technology entrepreneur who was a billionaire, and was more then capable of paying the $100m judgement that my client had, but he had no intention of doing so until we discovered that he was very much interested in yachting, he’d paid a lot of money to become a member of the Monaco Yacht Club, and so when he came out to race one day and found, effectively, bailiffs on the docks requisitioning his yacht in front of all of his new buddies, it brought him to the settlement table fairly quickly.

World Finance: So when hidden assets are recovered, what then happens? Are they just forced to pay or do they have further penalties?

Daniel Hall: No, it’s always a challenge. I suppose in any asset recovery exercise there are three prongs. There’s locate, fix, repatriate. The challenge is typically understanding where the assets are, how they’re structured, and how one can then pursue them. Sadly, something we’re encountering day in day out is it’s one thing knowing where they are, it’s another thing having the requisite legal system to actually be able to freeze money or halt a manufacturing business.

It’s a challenge, but there’s a bunch of things that one can do to ensure that you bring them to the negotiating table effectively.

World Finance: So how common exactly would you say this type of thing is, and what’s the knock-on effect, who else does it affect? Does affect in terms of taxes, that sort of thing?

Daniel Hall: 30-40 years ago was a different place in the sense of people wanted to settle their debts, and I think people now see it as a debt they now don’t necessarily have to pay because most of the time, corporate transactions are usually set up with Special Purpose Vehicles, and actually if something does go wrong people are sitting there thinking “well what are they going to do pursuing my Seychelles company without any assets?”

Does it have a knock-on effect? Yes, enormously. I think people get put out of business by an inability to collect on debts due to them.

World Finance: If somebody is awarded something in court, and then their opponent, as you say, is hiding assets, they then have to pay you and if they can’t pay that they’re just going to lose out. Is that how it works?

Daniel Hall: That’s one of the biggest problems historically with asset recovery, is you tend to have someone who is usually out of money or at least litigation fatigued, facing the prospect of what is in effect yet another lengthy trial, and I think the offering that Burford have where we’re effectively doing it at risk, we are assessing the judgement scenario or the arbitral award and saying “this is something that we will deploy our own capital, we will fund the recovery.”

Structuring a deal for the judgement holder gets as much money back as possible, we get a return on our investment and ultimately the protagonist loses out.

World Finance: Well you’ve called for greater accountability of accountants and lawyers, but aren’t there already regulations in place for this?

Daniel Hall: Yes, there are regulations where lawyers and accountants and other professionals frankly cannot act illegally or unethically. However, I would like to see things go further. I know of, I won’t reveal them now, of law firms who are currently acting for sanctioned individuals from Russia, for example.

There’s a way of gaming the system, effectively, and I would like to see people cracked down upon harder, because I think that as soon as you do that it won’t become as easy for protagonists to effectively hide their assets in a way that we shouldn’t be doing.

World Finance: So where are the loopholes that need to be addressed?

Daniel Hall: The clearest analogy for you to have in your mind is the one with international tax regulation. There are many parallels with asset hiding becoming effectively tax-structured. It’s a form of jurisdictional arbitrage where what works in one jurisdiction will not work in another, and you have effectively global players who can position themselves accordingly. So they are playing by the rules of each individual jurisdiction but it has an overall holistic effect in making them nearly impossible to pursue.