Recent developments in tracing law in the Cayman Islands

A plaintiff’s ability to trace money that has been misappropriated in breach of fiduciary duty has been enhanced by the recent decision of the Cayman Islands Court of Appeal (CICA) in AHAB versus SAAD. [1]

Basic principles

The paradigmatic case

Peter is a director of Puff the Magic Dragon Limited (Puff). In breach of fiduciary duty, Peter asks Puff to transfer US$100 to a bank account in Paul’s name, and the next day Paul transfers the same US$100 to an account in Mary’s name. Puff is able (subject to any available defenses) to trace the US$100 to Mary’s account and assert a claim of ownership if the money is still there. If, while the $100 is in Paul’s account, an additional $100 from another source is paid into Paul’s account and $100 is then transferred to Mary’s account, Puff will be able to trace some proportional amount of money to Mary’s account, namely 50 USD. [2] In both of these examples, “the property to be traced can be identified at every stage of its life course”, which “is a fundamental feature of the doctrine of traceability”. [3]

make deductions

But what if Puff can’t prove that the $100 that was transferred from Paul’s account to Mary’s was the same $100 that was transferred from Puff’s account to Mary’s. Paul? In other words, what if the lead is lost once the money is paid to Paul? Under these circumstances, it might still be possible for Puff to trace his US$100 to Mary’s account if he could identify something from which it could be inferred that the US$100 in Mary’s account was the same US$100 that had been paid into Paul’s account. It could be the closeness of the numbers or the fact that Paul was not known to have another source of money. [4] Other factors could be the proximity in time between the payments and the fact, if it could be established, that Peter had authorized the payment to Mary. [5]

Trace part of the law of evidence

It is important to note that tracing is not a claim or remedy but a matter of evidence. [6] While the onus will initially be on Puff to produce evidence sufficient to establish a prima facie case, if he can do so, the burden of proof will then be on Mary to displace the conclusion which would otherwise follow naturally. [7] The fewer the transactions and the shorter the time between them, the more likely it is that the Court will be prepared to draw the necessary conclusions, and this is especially true if there is no evidence to the contrary, for example that Mary was used to receiving money from other sources.

Inferences

Cases where inferences were drawn

The simpler the case, the easier it will be to persuade the Court to draw the necessary conclusions. In judgments of the English Court of Appeal in El Ajou v Dollar Holdings plc and Relfo Limited (in liquidation) v Varsani, the Court was involved in two payments. In El Ajou v Dollar Holdings plc, the payments had been made within a few weeks of each other; and in Relf, they had been made the same day. In Federal Republic of Brazil v Durant International Corporation, the Jersey Court of Appeal was involved in 13 payments which were made days after the initial fraud.

Drawing conclusions in more complicated cases – AHAB versus SAAD

The Court’s ability to draw the necessary conclusions in a more complicated case was tested in AHAB versus SAAD. [8] This case concerned “thousands of payments over a period of several years between Money Exchange and STCC and between STCC and other companies in the Saad group”, and neither the chief judge, at first instance, nor the CICA felt able to draw the necessary inferences.

Explaining its reasons, the CICA said: “If STCC had had no other source of funds than the misappropriated money from the Money Exchange, it would have been appropriate for the Chief Justice to infer that the monies paid by STCC to other companies in the Saad Group represented the proceeds of these misappropriations.” But that was not the position. STCC had other sources of funding, including loans from third-party banks, borrowings, assets, and trading income. In these circumstances, the CICA concluded that the Chief Justice was entitled not to draw the conclusion that STCC’s money came from the Money Exchange. “The funds could come from the Money Exchange, but they could also come from other sources that … were available to STCC.” [9]

The principle of the “maelstrom” or “crossfire”

How then could Puff be able to trace his money back to Mary’s hands if Peter had been embezzling his money for years but Mary had had a number of other sources of funding? The answer may lie in the “maelstrom” argument that the burden of proof can be reversed if it can be shown that the defaulting trustee commingled the funds held in trust with its own funds, “so that It is the fiduciary’s responsibility to establish which part, and which part, of the mixed fund is its property. This principle was first considered by the English Court of Appeal in Sinclair Investments (UK) Limited v Versailles Trade Finance Limited (in administrative receivership). [10]

At first instance in AHAB versus SAAD, The Chief Justice held that the maelstrom, or “crossfire” argument was limited to cases in which the maelstrom had been created for the purpose of frustrating attempts to trace the relevant funds and that it did not s applied only to the defaulting trustee himself. However, the CICA has taken a different view.

No need for a “maelstrom” to have been created for the purpose of preventing tracing

With regard to the first point, the CICA stated that there was no suggestion in Sinclair [11] “that the fact that the purpose was to aid fraud rather than hinder tracing meant that the burden of proof should not be reversed.” [12] After referring to a statement by Lord Toulson to the Privy Council in During this, [13]

“38. The development of increasingly sophisticated and elaborate methods of money laundering, often involving a network of credits and debits between intermediaries, makes it particularly important that a court not allow a camouflage of interconnected transactions obscures his view of their true overall purpose and effect…”

the CICA said, [14]

“In our view, the intent to aid in the commission of bank fraud and the effect of making tracing impossible are two sides of the same coin. It would be wrong to prohibit the tracing of the proceeds of fraud simply because the fraudster has created a maelstrom and made crossfire to aid him in his fraud, which has the inevitable effect of subsequently frustrating tracing attempts. in many cases to determine the exact intent behind the fraudster’s creation of a maelstrom and the crossfire.”

Principle of the “Maelstrom” not limited to cases where the fiduciary mixes trust and own money

As to the second point, the CICA ruled that the maelstrom or crossfire principle was not limited to cases where the trustee or defaulting trustee had commingled trust money with his own money, but extended to cases where the mixing had taken place in a company he owned or controlled. [15] Additionally, the CICA said there should be no difference that the company’s equity was money borrowed from third-party banks. [16] With respect to monies that were paid by the company, the CICA said the onus to demonstrate that the monies were not the traceable proceeds of trust property rests with the payee, at least if the payee is notified of breach of trust. [17]

In AHAB versus SAAD, the CICA stated that its approach,

“… responds to the need to combat modern methods of fraud and money laundering. It will not be at all uncommon for a fraudster to pay the proceeds of his fraud to a company he owns and controls and for that money is then remitted to a number of other piggy bank companies that he owns and controls, perhaps with many payments back and forth through crossfire If, ​​due to the level of crossfire and the absence of financial records, a maelstrom is created by the fraudster such that it is impossible to trace payments to these companies in the conventional way, it does not seem unreasonable that the onus is on the fraudster’s companies to prove that the particular payments made to them were not the traceable proceeds of the fraud.” [18]

The CICA’s approach depended on the attribution of Mr. Al Sanea’s knowledge to the successor companies. [19] If so, none of them would be a good faith purchase for value without notice (to discontinue tracing) because they would have been made aware of Mr. Al Sanea’s wrongdoing. [20]

Conclusion

The acknowledgment that the “maelstrom” argument is part of the Cayman Islands tracing law and acceptance by the CICA in AHAB versus SAAD that it is not limited to cases in which (1) the maelstrom was created for the purpose of foiling attempts at location and (2) the property remained in the hands of the defaulting trustee is to be welcomed. We consider this will likely enhance a claimant’s ability to regain property in the Cayman Islands when it has been misappropriated by a wrongdoer.

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