Defrauded in the Bahamas: What is your best option?

Cayman Financial Review
TOPIC: Offshore Financial Centres
By: Edmund L. Rahming
August 8, 2014

Whether a local business company, international business company, trust company or an individual, the instinctive reaction on discovering a fraud is often to call the police. However, in certain circumstances, immediately reporting the discovery of fraud to law enforcement may not be the best course. For business entities, their primary responsibility is to their shareholders and investors, which means maximizing recoveries, minimizing reputational damage and deterring similar future action by others.

For individuals, the desire for immediate response and recovery may not be best achieved by reporting to the regulators or the police. In certain circumstances, civil action may provide the best option to achieving these aims. This does not negate the fact that companies and individuals should consider their social responsibility in reporting illegal acts to the regulators or the police.

The purpose of this article is to provide some guidance as to the options available in the Bahamas to business entities and individuals upon discovering that a significant fraud has been perpetrated against them and the key considerations when responding to the situation. For the purpose of this article, we assume that the business entity or individual either does not have a legal obligation to report the fraud to a regulatory or other body or has complied with that duty.

The options

Victims of fraud generally have three options:
(1)    contacting the relevant regulator or law enforcement agency to commence an investigation
(2)    contacting a commercial attorney to pursue a civil action
(3)    contacting both to pursue parallel investigations and actions

Option 1 – Regulatory and criminal proceedings

Both regulatory and criminal proceedings rely on governmental resources. Regulatory bodies in recent years have been provided greater powers to investigate, confiscate assets, conduct hearings, and impose penalties and imprisonment. The general consensus in the Bahamas is that regulators are becoming more aggressive in their approach to tackling financial wrongdoing. In the Bahamas, there are several authorities that play an integral role in the investigation, prosecution, and deterrence of economic crime. They include the Securities Commission of the Bahamas, the Insurance Commission of the Bahamas, the Central of the Bahamas, the Financial Intelligence Unit, the Office of the Attorney General, the Royal Bahamas Police Force, the Customs Department, and the Ministry of Finance.

Advantages of pursuing a regulatory or criminal response

The advantages of a regulatory or criminal response are powerful and should be considered carefully relative to the loss incurred:

• Regulatory action or criminal prosecution offers the prospect of retributive justice. This is especially compelling when the offender is not financially able to repay misappropriated or stolen assets.
• A regulatory investigation or criminal investigation will cost significantly less for the victim than pursuing a civil investigation and recovery proceedings.
• Regulatory or criminal action may nevertheless result in compensation. The regulators and the police are able to take steps to restrain property (by way of a civil restraining order) and to confiscate such property in the event of a conviction (by way of a confiscation order). The court also has powers to award compensation to the victims of fraud from sums confiscated.

In addition, regulators and law enforcement have wide powers to acquire information and documents. For instance, they have the power to compel witnesses to answer questions and provide information (subject to the privilege against self-incrimination).

Disadvantages of pursuing a regulatory or criminal response

The disadvantages of a regulatory or criminal response are many and again should be considered carefully relative to the loss and other constraints:

• When a fraud or scheme is reported to the responsible regulator or the police, an investigation and prosecution does not follow automatically. Indeed, it may prove difficult to persuade either the regulator or the police to adopt a case for investigation.
• Even where a case is adopted for investigation, there can be a lag of days, weeks or even months between the initial report and formal adoption, although both the regulator and the police have in recent years demonstrated an ability to provide an instant response in certain high-profile cases.
• The victim also has little or no control over the investigation and subsequent prosecution; a regulator may simply use its powers to retrieve information from the licensee and pass on this information to a foreign counterpart that may have its own investigation under way.
• Where a matter is reported to law enforcement, corporate premises may be raided without notice and documentation seized, even where the individual or company may itself be one of the victims of the fraud (such as where its assets have been misappropriated by management).
• A victim’s loss of control also extends to publicity about the investigation. Coupled with the fact that the involvement of regulators and law enforcement significantly increases the prospect of the fraud coming to the public’s attention, this risk factor should be taken into account.

It should further be noted that reporting a criminal fraud matter to a regulator will not result in recovery unless it is referred to the police by the regulator. The Securities Commission of the Bahamas can only investigate and issue fine penalties. In instances involving the police, before a victim can expect any form of recovery or retribution, there must be a conviction, and convictions in criminal proceedings can be secured only where the case is proved to the higher criminal standard (beyond a reasonable doubt) following a jury trial if the matter is contested.

The lengthy criminal justice process in turn affects the likelihood and timing of payment of any compensation to the victim.

Compensation orders are not ordered in high-value or complex cases. Policy and common law considerations are relied upon by courts to confine compensation orders in certain instances to the amount of losses in straightforward cases.

All of these factors are exacerbated when there is a significant international element to the dispute. It may prove difficult to persuade the regulator or the police to take a matter up for investigation at all if the principal suspects are outside the jurisdiction.

Option 2 – Civil proceedings

In contrast to regulatory and criminal proceedings, civil fraud proceedings are commenced directly by the victim without the involvement of a governmental body. The victim first needs to ensure it has standing to pursue the claim. This may involve the shareholders of a fund taking control through directorship of a fund, the beneficiaries of a trust removing a trustee, or the beneficial owners of an IBC ensuring they have ultimate control of the IBC. Once this is done, the victim needs to assess the potential claims. I would recommend an attorney and forensic accountant be hired to assess the potential claims based on the available evidence. Finally, the victim needs to file the requisite court documents (a general writ or a specially endorsed writ or a statement of claim laying out the particulars of the claim) at court and pay a comparatively small court fee.

Once the victim has sufficient evidence to establish the constituent elements of one of the various causes of action that arise under common law in the event of a fraud, it is open to it to commence a civil action immediately. Typically, a civil action will take 12 to 24 months to get to trial, but in the interim, Bahamian courts have broad and highly developed powers to grant invasive and worldwide injunctive relief, including freezing orders, asset and document disclosure orders, search and seizure orders, passport delivery up orders and foreign repatriation orders and can grant permission for the applicant to seek to have such orders recognized abroad.

Further, a Bahamian court may be petitioned by a victim, be it a creditor or member, in securing the appointment of a provisional liquidator on just and equitable grounds to allow for a thorough fraud investigation. This is a commonly used quick and cheap fraud busting tool in the Caribbean that allows for the protection of the assets while the company’s affairs are investigated. Bahamian courts expect strict compliance with all orders and impose financial penalties and even custodial sentences for breaches of their terms.

In certain cases, such orders can be obtained within 24 hours or sooner if there is a clear risk that the fraudster will abscond or dissipate his assets. Even in complex multijurisdictional cases, proceedings can be commenced and freezing orders obtained within a matter of days or weeks.

Advantages of pursuing a civil approach

The advantages of the civil approach are generally the converse of the disadvantages of the regulatory or criminal approach:

Proceedings can be commenced and ancillary orders obtained very quickly, without the uncertainty associated with whether a regulator or criminal authority will adopt the case.

As the claimant in civil proceedings, the victim has considerably more control over proceedings in terms of determining the scope of the claim and dictating the timetable. Civil proceedings also give the victim more control over what information, if any, is released into the public domain.

Civil fraud trials tend to be considerably shorter than criminal fraud cases and come to trial more quickly than Attorney General’s Office-led cases. They are also conducted to a lower standard of proof and before a judge who will determine issues of both fact and law.

The primary thrust of civil proceedings is the recovery of losses. Civil law is designed to better resolve issues of financial loss and is adept at dealing with complex questions concerning interests in property.

There are minimal impediments to taking civil witness evidence abroad and utilizing effective cooperation regimes elsewhere. Bahamian judgments can be enforced in foreign jurisdictions, enabling victims of wrongdoing to seize the assets of the defendant in foreign jurisdiction without the need to re-litigate the case abroad. On the other hand, confiscation orders obtained in criminal proceedings can be registered overseas, but in most cases the foreign government will want to retain a significant share of the assets subject to the order.

The existence of a formal investigation and civil recovery proceedings tends to reduce the likelihood of potentially catastrophic raids by law enforcement agencies.

Disadvantages of pursuing a civil approach

The disadvantages of pursuing a civil action are few but significant to the victim:

• The most obvious disadvantage of civil proceedings is their expense. Civil litigation is expensive, especially fraud proceedings, since the claimant bears the costs of the investigation and proceedings, and the standard of proof for demonstrating fraud is high, albeit not as high as the criminal standard.
• Where a company has been severely defrauded, a motivating factor in pursuing action against the wrongdoer is often retribution. While the outcome of a successful criminal trial may be the imprisonment of the defendant, the most severe outcome of civil proceedings is often the bankruptcy of the wrongdoer and/or disqualification as a director.
• There is also a possibility that, in cases where the victim of fraud takes swift civil action to recover its losses, law enforcement may consider that it is not in the public interest to expend public resources on a criminal investigation where the victim has the means to recover some or all of what it has lost.

Option 3 – Parallel regulatory, civil and criminal proceedings

It is an option to have regulatory or criminal and civil proceedings occur concurrently. One difficulty in such cases is whether the existence of concurrent proceedings will offer the defendant the opportunity to claim that he or she will suffer prejudice by defending multiple sets of proceedings and, on that basis, seek a stay of the civil proceedings pending outcome of regulatory or criminal proceedings. In addition to the risk of stayed proceedings, there are certain practical repercussions of parallel regulatory or criminal and civil proceedings:

Where criminal proceedings take place concurrently with liquidation proceedings, the criminal process is often awarded priority, which can have a prejudicial effect on civil recovery claims and the available actions of liquidators.

Judgment in a criminal matter may be admissible in subsequent civil proceedings which may be powerful evidence for a claimant in the civil proceedings (especially considering the higher standard of proof in criminal proceedings). Similarly, judgment against a defendant in civil proceedings may be admissible in criminal proceedings.

Conclusion

I recommend option 3 which is the conduct of parallel civil and regulatory or criminal proceedings. Companies and individuals that have been defrauded and that are in a financial position to begin the process of information gathering should do so as soon as the fraudulent act has been discovered. They should consider hiring an attorney and a forensic accountant who can assist in gathering relevant information i.e. conducting an investigation, and more importantly presenting the information in a clear and concise way so that it is easy for one to understand the who, what when, where, and how as it relates to the fraudulent act. This information can then be developed further by the attorney and forensic accountant into a potential claims assessment for the ultimate purpose of asset recovery.

Finally, if the results of the investigation and claims assessment are that a criminal act or regulatory violation has occurred and claims exist the matter should be reported to the authorities while simultaneously pursuing civil recourse. The advantages and disadvantages laid out in this article should be carefully considered in the context of the available resources and the loss incurred.

This article is not a substitute for proper advice, which should be taken on specific query with the firm. The views and opinions provided in the article are that of the author and do not necessarily represent the views of the firm.