Asset Tracing

Asset tracing can generally be referred to as a practice aimed at locating certain sought assets and identifying their current holder. Rarely do the sought assets need to be located physically (in space) – as the case may be with, for example, stolen goods. Rather, the practice frequently focuses on establishing and identifying the chain of ‘title owners’ through the hands of which the assets were relocated into the possession of their current title owner and [establishing] the end beneficiary of the chain.

The purpose of asset tracing differs from case to case, though usually every purpose would be related to further recovering the traced assets from their unlawful possession and returning them to their rightful owner (asset recovery). Though sometimes assets must be traced in order to ensure that a person has enough assets to meet demands brought against them should they, for example, lose a court case. Therefore, assets are traced to exclude their removal – subsequent concealment through a chain of nominee owners and/or in order to prevent the further use of the said assets for illicit purposes. In the first case the tracing would be employed with a specific disputed asset(s) in mind, whilst in the former asset tracing would be utilized against a specific person or a group. For example, a person might find some funds or cryptocurrencies illicitly removed from their bank account or wallet and would need to recover them. For another example, a certain person might be undergoing a scrutiny or be a suspect in a criminal case and a court would order all or a certain quantity of assets of this person to be located and frozen.

In this regard, the asset tracing can be viewed as a process reverse to the due diligence investigations run as a part of anti-money laundering compliance whereunder rather the source of underlying asset – as an opposite to the current location of the assets – is to be identified.

Historically the assets were habitually traced by law-enforcement agencies, other public authorities investigating a criminal case or fulfilling duties imposed by a court reviewing a civil or commercial case, but recently with the rise of the digital era and formation of the open-source intelligence (OSINT) communities, journalists, bloggers and other independent investigators who investigate bribery and corruption have started to engage in the underlying practice as well. And thus, whilst in the past asset tracing would start following a specific fact [of misconduct, reported/suspected crime, tort, delict or claim etc.], now the said independent actors investigating bribery and corruption might reveal certain well-concealed assets in possession or under control of certain politically exposed persons of so-called PEPs what would be inconsistent with a public asset declaration of this PEP and/or in such amounts that could hardly had been obtained by the said PEP legally. And the said reveal of suspected corruption could then entail and initiate the rather official and formal by contrast procedure conducted by public authorities.

As the current law order dictates the information that court and other public authorities can use whilst building a case exclusively in a lawful way obtained evidence. The information available from official sources (such as public corporate registrars of many jurisdictions) would be immediately admissible as evidence without requiring additional verification (though a formal procedure and due form would still must be abided to). For example, an extract from the registrar would need to be provided in a duly legalized or super-legalized form the certain ‘leaked’ to/by the OSINT community information, that are usually protected by such legal institutions. For example, a bank secret or other privacy protection laws, and thereby is unofficial, would require additional verification and in the best case scenario would provide grounds to start an official investigation of the leak and further direct the official investigators; or as a case may be in the worst case scenario could be construed as an invasion of privacy and defamation that can in return lead into an action being brough against the reporter.

In fact, in the modern world, when assets can be relocated from one jurisdiction to another within a click of a button, thus complicating and prolonging the official investigation, when rapid action is needed and/or the matter is of public interest (e.g. a violation of sanctions imposed against a specific state) the methods of open-source intelligence are proven to be so efficient that a multitude of public agencies mimicking them have been established across multiple jurisdictions. Apart from anti-money laundering authorities, various financial investigation/intelligence units composing suspicious activities reports (so-called SARs) and other analytical bodies can be named as such. In certain cases, such authorities would even be empowered not only to effect investigations (the asset tracing itself), but would also withhold the traced assets and even subsequently, temporarily manage them. For example, the Ukrainian ARMA – Asset Research [i.e. tracing] and Management Agency – is one such authority.

Contrary to the tracing of monies where bank secrecy would warrant a lengthy and exhaustive process involving courts, the tracing of cryptocurrencies is rather simple and not. All the pieces of the relevant information is ‘on the chain’ or is publicly (technically) available through the blockchain ledger. This means that each and every crypto-coin can be traced in time from its current location up to the moment it was mined. From one point of view this makes the process of asset tracing simpler as there is no apparent need to address the court (that the process of disclosing banking secrecy would require), but on the other, it makes painstakingly difficult as the amount of information (or rather technical data) that needs to be reviewed would often be overwhelming for an investigator.

Moreover, as the cryptocurrencies’ industry grows larger and cryptos slowly but surely enter our everyday lives, so does fraud involving cryptos. As mentioned, cryptos depend on a rather complex decentralized technical infrastructure – it exists on another technical level and as this technical level makes some legal institutions technically obsolete or their effect – very difficult to achieve (hence the mentioned issues of bank secrecy) it also provides the means for new types of fraud to fight which the coherent legal infrastructure is yet to make. Exempli gratia the first case of cryptocurrencies’ fraud to make the law happened in 2022 when the first in the world freezing injunction was imposed by a UK court in a case when two NFTs (a type of crypto asset) were purportedly stolen (incidentally – from a lawyer’s crypto wallet) by means of a ‘smart contract’ – a computer program (or protocol) bearing the characteristics of both an ordinary contract and a code that [the code] exists to [and can] automatically self-execute the said contract. Comprehensive and encompassing legislation on the blockchain technology-based products is yet to be properly developed.

As for now, with the rapid globalization and subsequent digitalization of the world’s economy, most of the legal institutions developed to regulate economy in non-globalized conditions have become more and more obsolete not being able to effectively handle the workload and the speed of digitalized economy and therein establish transparency, combat organized crime, terrorism and state-sponsored terrorism.

On the one hand, as I stated before, a multitude of brand-new state authorities with exorbitant global powers is being created across all of the jurisdictions; on the other hand – the amount of fraudulently taken away funds is stable in growth from one year to the next. The US, UK and certain other jurisdictions have passed on the laws granting their law-enforcement agencies global jurisdiction over bribery and corruption crimes, and the same can be to a certain extent be said with regard to fraud cases. The practice of asset tracing is understandably quintessential to both areas.

In this regard, the much-celebrated case of Alex Afolabi Ogunshakin needs to be mentioned. He was a Nigerian national who was extradited in 2023 from Nigeria to the District of Nebraska on a Conspiracy to Commit Wire Fraud Indictment that [the fraud] had allegedly been in effect from January 2015 to September 2016. The indictment was filed in May 2019 in Omaha, Nebraska; the extradition request was submitted to Nigeria in 2020 and granted in 2023. Thus, it took from two and a half to four years to run the complete investigative process from initiating the criminal case to filing the indictment and another four years to bring the indicted into the courtroom – an awkward simultaneously impressive situation and not a result. Ogunshakin, who had been top of the FBI’s Most Wanted List for a few years allegedly engaged in a business email compromise scheme and defrauded businesses in Nebraska and elsewhere of more than six million US dollars.

Ogunshakin and his other Nigerian associates and co-conspirators were allegedly able to successfully pose as various executives of different (US and not) target companies before the employees of the said target companies by using spoofed e-mail accounts, and had allegedly been able to direct the said business employees to effect wire transfers. The business employees believed that the direction to make wire transfer had been legitimate and complied, sending the monies to Ogunashakin. The organized group had managed to affect the underlying crimes while staying in Nigeria and – as another instance of extradition in the related case showed – surprisingly Poland.

In my opinion, the case of Ogunashkin and his associates is an important example of how asset tracing operates on a global scale. As without being able to trace fraudulent funds across a multitude of bank accounts located across multiple different jurisdictions, the case would not have been able to be brought forward. As to how quickly events moved, it took almost 4 years to bring the indicted into the courtroom. From my point of view, it is already impressive that the culprit was extradited regardless of the period of time that this required.

The ‘formal’ part of asset tracing depends heavily on the ability of law-enforcement agencies to obtain evidence ‘officially’ (or as stated before ‘legally’), whose ability depends heavily on the international legal framework for exchange of official information and cooperation on matters of justice. Thus, the analytical state authorities (e.g. the mentioned financial intelligence units or respective units of the tax authorities) rely on the general availability of information such as that obtained via automatic information exchange done in accordance with the Convention on Mutual Administrative Assistance in Tax Matters of 25 January 1988; Foreign Account Tax Compliance Act of 18 March 2010 (FATCA) and other similar instruments.

In this regard, the global trend of legal coalescence of anti-money laundering, tax and currency controls’ legislation and, subsequently, that [the coalescence] of the related law-enforcement infrastructures and compliance practices appears in its’ fullest extent. As the information provided for tax administrative purposes is more and more frequently used to bring up criminal cases of fraud or money laundering (albeit the reservation contained in the mentioned Convention on Mutual Administrative Assistance instrument that the automatically received, taxes-relevant information can be used to initiate criminal prosecution only if the consent of the information-transferring state is granted).

And yet this trend of coalescence is only starting to take form, and legislation has generally only started to be developed to face the modern challenges of digitalized and international fraud and meet the demands of asset tracing practices. However, it remains to be seen how long it will take to bring up and introduce into the world the same level of regulation and law order as existed in times of traditional pre-globalized, pre-digitalized economies.

  • Oleg Derlyuk

    Managing Partner, Stron Legal law firm

Stron Legal Services

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