Privy Council hands down landmark judgment in fraud recovery case in favour of the Federal Republic of Brazil and the Municipality of São Paulo

05 August 2015

The Privy Council has handed down its landmark judgment in The Federal Republic of Brazil and another v Durant International Corporation and another [2015] UKPC 35.

The Privy Council's judgment, dismissing the Defendants' appeal, means that the Federal Republic of Brazil and the Municipality of São Paulo, represented by Wragge Lawrence Graham & Co (WLG), are entitled to recover the full proceeds of fraud perpetrated against the Municipality, plus compound interest, totalling more than US$28 million.

The Board of the Privy Council dismissed the Defendants' appeal and held that the courts below were correct in deciding that the principle of backwards tracing is available in certain circumstances.

Background

Since 2005, WLG has been undertaking asset recovery work on behalf of the Federal Republic of Brazil and the Municipality of São Paulo. This work culminated in a judgment in the Plaintiffs' favour handed down by the Royal Court of Jersey in November 2012 (The Federal Republic of Brazil & Ors v Durant International Corporation & Ors [2012] JRC 211).

The Royal Court found that the Jersey bank accounts of the Defendant British Virgin Islands companies held the traceable assets of a fraud (at a value of US$10,500,055) carried out against the Municipality in the late 1990s in São Paulo, Brazil. As the Privy Council later put it, these companies were, at the relevant time, under the practical control of Paulo Maluf and/or his son Flavio Maluf. Paulo Maluf is the former mayor of São Paulo and remains a high profile political figure in Brazil. The total value awarded by the Royal Court in the Plaintiffs' favour was in excess of $28 million. This decision was upheld by the Court of Appeal in March 2013 (Durant International Corporation & Ors v The Federal Republic of Brazil & Ors [2032] JCA 071).

The Defendants applied for permission to appeal to the Privy Council on a limited point of law, namely whether Jersey law recognised the principle of backwards tracing and, if so, whether it applied in this case. If, as the lower courts held, Jersey law did recognise the principle and it applied in these circumstances, it allowed the Plaintiffs to trace the full proceeds of the fraud of US$10.5 million rather than a lower sum of US$7.7 million.

The Defendants were granted permission and the appeal was heard in May 2015. The case raised two main issues:

  1. the last of the traceable payments into a bank account in New York occurred after the last of the relevant payments out of that account into the account of one of the Defendant companies in Jersey; and
  2. the account in New York was a mixed account.

The Privy Council Decision

In a judgment dated 3 August 2015, the Privy Council dismissed the 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 both England and Jersey, which was previously unsettled.

Lord Toulson said at [38] that 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 co-ordinated 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".

Significance of the decision

This complex case is significant for Brazil as it illustrates the country's willingness to stem corruption. Importantly, it shows that the authorities are taking the necessary action and have made significant progress in the fight against political corruption.

More broadly, this decision will have wide-reaching implications on how cases of fraud and money laundering are dealt with in the future: sophisticated fraudsters will no longer be in a position to retain stolen funds merely because they rely upon an accident in timing or they have structured the transfers in such a way so as to avoid detection and recovery of those sums by the victim.

The WLG team representing the Federal Republic of Brazil and the Municipality of São Paulo comprises chairman Andrew Witts, partners James Sidwell, Emma Jordan and senior associate Jennifer Iglesias. Charles Dougherty QC of 2TG acted as lead Counsel on the matter.


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