We use cookies on our website. To learn more about cookies, how we use them on our site and how to change your cookie settings please view our Cookie Statement.
By continuing to use this site without changing your settings you consent to our use of cookies in accordance with our Cookie Statement.
June 2020
Insights/Sovereign Asset Tracing: A Whole New World

Sovereign Asset Tracing: A Whole New World

By Nicholas Peck, Martin Stone & Allison Everhardt

Finding and successfully attaching sovereign assets often seems impossibly daunting. With seemingly endless resources and the protections of legal concepts like sovereign immunity, sovereign states and their leaders are well–insulated from monetary judgments. Now, however, new transparency policies, recent legal decisions in the US and UK, and changes in societal behavior have increased the opportunities for creditors to find and seize sovereign state assets.

Sovereign asset searches fall into two categories: (i) those seeking to identify and recover assets from a sovereign state, typically to satisfy a judgment or award; and (ii) those seeking to identify and recover misappropriated assets from deposed leaders of a sovereign state.

Sovereign asset searches bring specific challenges. As with other types of asset searches, the fundamental step of establishing ownership can often prove difficult. This is particularly true when misappropriated assets are held by relatives, “front” men, and/or “front” companies. As a further complication, a creditor needs to determine whether assets owned by deposed leaders were acquired with misappropriated funds or purchased with legitimately acquired wealth.

When looking for assets held by a current sovereign, immovable assets, such as real estate, are the most attractive as they are usually exempt from state immunity, whereas governments have frequently and successfully argued that liquid funds are not eligible for seizure as they are invested or held for sovereign purposes. Additionally, sovereigns often own significant assets through State–owned entities or other alter egos. Proving that an entity qualifies as an alter ego can be challenging and can lead to years of legal wrangling. Even assets identified in relatively friendly jurisdictions such as the US and UK can be placed off–limits by geopolitical considerations.

Compared to those that target individuals or companies, however, sovereign asset searches benefit from the very thing that makes them seem overwhelming—the sheer volume of assets owned by a state and the difficulty of hiding them. The universe of assets is enormous and can include, among other things, aircraft, gold reserves, shipments of goods, real estate, bank accounts, shareholdings in foreign companies, oil/gas/mining concessions and/or royalty fees, bond interest payments, Internet licensing fees, and patent royalties.

For most creditors, bank accounts remain the most attractive target, but banking privacy laws make it difficult to obtain details about such accounts. Among the few exceptions are accounts used to conduct specific lines of business, such as funding bond interest or paying overseas royalties. Research into banking relationships—including into whether the sovereign’s bank has a US branch or a relationship with a correspondent bank—combined with post–judgment discovery may also uncover important information about a sovereign’s liquid assets.1

Recent developments have also proven helpful. Increased pressure from the international community to track terrorism funding and to assist countries looking to recover misappropriated assets has led to greater cooperation by jurisdictions that have historically provided limited cooperation at best. For example, Switzerland enacted the Restitution of Illicit Assets Act in October 2010.2 As noted in a report issued by the Open–ended Intergovernmental Working Group on Asset Recovery in 2016:3

During the Arab uprisings of 2011, the Swiss government immediately… ordered the freezing of assets of the former rulers involved and their entourages without waiting for requests for mutual legal assistance from the countries in question. Lacking a specific legal basis to do so, this was undertaken as an emergency measure based on the government’s constitutional right to safeguard Switzerland’s interests. As requested by Parliament therefore, the Swiss government drew up a new law on illicitly acquired assets to establish a clear legal basis for its policy on stolen assets.

Similarly, in the UK—where offshore trusts own thousands of high–value properties—it is now much easier to identify beneficial owners through a growing number of specialized databases that have taken advantage of recent disclosure rules.

Courts in the US have also established important legal precedents that may help in dealing with one of the biggest obstacles in sovereign asset searches—proving that an entity is an alter ego of the state. In July 2019, the US Court of Appeals for the Third Circuit upheld a Delaware court’s decision that Venezuela’s state–owned oil company, Petróleos de Venezuela SA, or PDVSA, was, in fact, an alter ego of the Venezuelan government. That landmark decision allowed a creditor to attach PDVSA’s assets—specifically, its US Citgo assets—to satisfy a judgment.4

UK courts have also addressed the extent to which sovereign immunity extends down the chain of state–controlled entities and instrumentalities. A UK Appeals Court ruled in 2015 that the State Oil Company of Iraq’s Ministry of Oil was separate from the Iraqi government on the basis that it was legally distinct, had a board of directors, and that the Iraqi government had no control over its day–to–day operations.5 In other words, by acting through an intermediary, Iraq’s Oil Ministry lost the protection of sovereign immunity.

Changes in social interaction, such as the near universal adoption of social media, have also created new opportunities to identify assets. Those who are wont to post photographs of themselves next to sports cars or wearing expensive jewelry or on trips to exotic locales provide clues to the asset researcher; as do those who catalog the details of their quotidian lives. For example, in a recent asset search, our investigators tracked the Instagram posts of a crew member onboard an oil tanker en route across the Atlantic. By monitoring social media, we knew when the tanker, ultimately owned by the target government, had reached dry dock in western Europe, where it remained for several months, exposed to seizure. Other powerful technologies, some based on data aggregation and algorithms that scan publicly available information, are increasingly commercially available and can provide insights that would have required significant time and investment to uncover through traditional means.

Greater international transparency and cooperation, recent legal precedents, and increased avenues to identify and track assets have combined to render the search for sovereign assets more promising. With the benefit of these developments, creditors who employ experienced investigators no longer face as steep a hurdle in locating and successfully attaching sovereign assets.


1 https://www.law360.com/articles/1132492/finding–sovereign–assets–through–us–banks
2 This act was superseded by the Foreign Illicit Assets Act in 2015.
3 https://www.unodc.org/documents/treaties/UNCAC/WorkingGroups/workinggroup2/2016-August-25-26/V1605154e.pdf
4 For example: https://uk.practicallaw.thomsonreuters.com/w–021–5949
5 Taurus Petroleum Limited vs. State Oil Company of the Ministry of Oil of Iraq.

Contact

Nicholas Peck

Senior Managing Director

565 Fifth Avenue
Suite 2200
New York, NY 10017
T: +1 212 537 5300
F: +1 212 537 5333
npeck@nardelloandco.com

Martin Stone

Partner & Regional Head, EMEA

5 Norwich Street
London EC4A 1EJ
T: +44 (0)20 7079 5900
F: +44 (0)20 7079 5919
mstone@nardelloandco.com

Allison Everhardt

Managing Director

1401 K Street, NW, Suite 725
Washington, DC 20005
T: +1 202 545 3000
F: +1 202 379 3299
aeverhardt@nardelloandco.com

Related practices
OUR FIRM

We've got you covered

EXPERIENCE

We get to the truth before it's too late

CONTACT US

Why risk it?