ICC Commercial Crime Service

Brazil’s Victory Strikes a Blow for Victims of Government Fraud

Amidst this year’s all too frequent news reports of massive government frauds in countries from Moldova to Guatemala, there was good news for taxpayers and governments -- a landmark court victory in the UK in the largest corruption and asset recovery case ever undertaken by the Municipality of Sao Paulo and the government of Brazil outside of Brazil. More importantly, this judgment will have a significant effect on the law of civil fraud internationally.

The decision in the case, The Federal Republic of Brazil et al v Durant International Corporation et al, entitled the Municipality of Sao Paulo and the government to recover, through the principle of backwards tracing, the full proceeds of fraud perpetrated against the city of São Paulo, plus compound interest, totaling more than US $28 million. The principle of backwards tracing comes into play in somefraud cases where victims seek to trace and recover the proceeds of fraud, where no direct link can be established between the stolen funds and money or other assets discovered in the hands of the perpetrators.

Decided in August of this year by the Privy Council, the case has changed the law in Jersey (a crown dependency and the largest of the Channel Islands) and arguably, in England as well. The Privy Council’s Judicial Committee is the court of final appeal for the UK overseas territories, crown dependencies and Commonwealth countries.

The case, involving Paulo Maluf, the former mayor of the City of São Paulo and one of the country’s most high-profile political figures, and his son Flavio, illustrates the global nature of financial crime. In March 2009, the Municipality of São Paulo commenced proceedings in Jersey against two British Virgin Islands companies, which were under the practical control of Paulo Maluf. The basis for the claim was that more than $10 million received by the defendants constituted the proceeds of fraud, as a result of a multi-million US dollar 'kick-back' scheme arising from a large construction project in São Paulo. The suit claimedmore than US$10 million plus interest, which Paulo had received in bribes related to a road construction project, on the grounds that the defendants were liable in knowing receipt and/or restitution on the grounds of unjust enrichment.

The Royal Court of Jersey handed down judgment "unhesitatingly" in favour of the Municipality and the Brazilian government. The defendants appealed the judgment. The Court of Appeal then dismissed the defendants' appeal on all grounds, including their argument that backwards tracing, which had not been previously applied or established in Jersey law, could not be applied.

The defendants applied to the Privy Council for permission to appeal. The appeal was granted, but only in relation to a limited point of law, namely whether Jersey law recognised the principle of backwards tracing and if so, whether it applied in this case. The appeal was heard on 7 May 2015.

On 3 August 2015 the Privy Council handed down its judgment. The Privy Council dismissed the defendants' appeal and held that backwards tracing is available in certain circumstances, namely when a claimant can establish that there is a close causal and transactional link between the relevant payments. This judgment has clarified the law in this area in Jersey and arguably in England as well, which was previously unsettled.

Lord Toulson said it is "particularly important that a court should not allow a camouflage of interconnected transactions to obscure its vision of their true overall purpose and effect. If the court is satisfied that the various steps are part of a coordinated scheme, it should not matter that, either as a deliberate part of the choreography or possibly because of the incidents of the banking system, a debit appears in the bank account of an intermediary before a reciprocal credit entry".

While the ruling did not swing the doors wide open to permit backwards tracing worldwide, in this global economy, we are all connected. Likewise are our finances, and the shared threat of cross border fraud. The victory for Brazil and its taxpayers is arguably one that everyone should celebrate.

Andrew Witts is the Chairman of Wragge Lawrence Graham & Co, which represented the government of Brazil in this landmark case. He specialises in fraud and international asset tracing, with particular experience in running complex, multi-jurisdictional cases. His work has encompassed a wide range of trust litigation matters in most of the off-shore jurisdictions. Andrew is one of the founder members of FraudNet. He is acting in major litigation arising out of the Madoff affair, and continues to advise the Government of Brazil in the Paulo Maluf case and the liquidators of Stanford International Bank (Allen Stanford).





ICC FraudNet is an international network of independent lawyers who are leading civil asset recovery specialists in each country. Recognized by Chambers Global as the world’s leading asset recovery legal network, our membership extends to every continent and the world’s major economies, as well as leading offshore wealth havens that have complex bank secrecy laws and institutions where the proceeds of fraud often are hidden. Founded in 2004 by the Paris-based International Chamber of Commerce (ICC), the world’s business organization, FraudNet operates under the auspices of the ICC’s London-based Commercial Crime Services unit.