Fraud and asset recovery after Brexit: life beyond Lugano

Fraud and asset recovery after Brexit: life beyond Lugano

Intellectual Property - managing the Brexit transition

A key issue for lawyers following the UK’s departure from the EU was the practical implications of Brexit. However, as a rule, the concerns around this issue were different depending on whether the relevant lawyers worked in private practice or in-house. Private practice lawyers, particularly litigators, were concerned about the potential impact on London’s status as a pre-eminent global dispute resolution centre (see Focus “International commercial litigation after Brexit: uncertainty in a new world”).

Renowned for its high-quality judiciary and court system, England has long been regarded by many as the first-choice location for the resolution of complex commercial disputes, often with an international dimension. Against the backdrop of an established and well-regarded legal system, in which the law is applied rigorously and equitably, England has also demonstrated an ability to adapt its laws to the changing world in which business is conducted. In contrast, these issues are distinct from the immediate concerns of in-house lawyers, who were focusing on ensuring that, insofar as was possible, business could continue as usual.

These differing viewpoints do converge in one area: fraud and asset recovery. Understandably, most in-house lawyers hope never to become involved in a dispute of this nature. However, the agility and flexibility of English courts has long been a great asset to victims of fraud who, historically, have gone to great lengths to establish a connection with England so that the English courts could assert jurisdiction over a dispute. Against this backdrop all lawyers should be concerned about the UK’s exit from the EU and, in particular, the fact that the regimes under the recast Brussels Regulation (1215/2012/EU) and the Lugano Convention no longer apply.

Brussels and Lugano

When the UK departed from the EU, it also lost participation in the recast Brussels Regulation, which allowed for the automatic recognition of English court judgments in EU member states and vice versa. This, in turn, made enforcement of English judgments within the EU easier. This was particularly important for cases of fraud and asset recovery because the recast Brussels Regulation applied to both final and interim judgments (see feature article “International asset recovery: enforcement strategies”). Interim relief, such as freezing orders or proprietary injunctions, are crucial tools in the hands of those pursuing claims against fraudsters. The ability to obtain relief automatically without the need to overcome the usual hurdles involved with enforcing overseas judgments, was undoubtedly a key benefit of the UK’s participation in the Brussels regime as a member state.

The UK was also, through its EU membership, a party to the Lugano Convention, which operates between the EU, Denmark, Iceland, Norway and Sweden. In a similar way to the recast Brussels Regulation, the Lugano Convention provides for the automatic recognition and enforcement of final and interim judgments between the contracting parties. While the UK accepted that it would automatically lose its membership of both regimes when it departed from the EU, many believed that the UK would be able to rejoin the Lugano Convention as a signatory in its own right.

There was a compelling case for this given the relationship and existing trade connections between the UK and the EU, and the benefits to all concerned from maintaining the automatic reciprocal arrangements. The UK formally applied to join the Lugano Convention as an independent state in April 2020, requiring the consent of all signatories to be re-admitted. Denmark, Iceland, Norway and Sweden all agreed to the UK’s application. However, the European Commission formally blocked the UK’s re-admission in June 2021, contending that the UK is “a third country” and the Lugano Convention is not the appropriate judicial framework. This means that the enforcement of UK court judgments in member states has become significantly more complex.

Impact for businesses

For in-house lawyers dealing with cross-border contractual disputes, the impact of the UK’s exit from Brussels and Lugano is manageable. Careful drafting of contracts to include an arbitration clause or an exclusive jurisdiction clause means that enforcement will become more straightforward. In the event that a dispute arises and there is no arbitration or jurisdiction clause, an English judgment can still be enforced in the EU, but it may just take longer and cost more.

However, the real concern arises in situations where fraud is alleged or suspected and so even the most careful drafting and risk management may be of no help whatsoever. Where a company is a victim of fraud, it may not have the benefit of a contract with an exclusive jurisdiction clause. Even in cases where there is a contract, it may not cover the dispute. More critically, time is often of the essence when pursuing fraudsters and attempting to trace assets that can be dissipated across the world at lightning speed. Any delay in pursuing interim relief, or being able to effectively enforce that relief, may prove fatal to the ability of fraud victims to recover any assets.

Disputes and cryptoassets

The English courts and judiciary have proved that they are adept at evolving to maintain the UK’s position as a leading global dispute resolution centre. In recent years, the English courts have responded to the growing number of disputes concerning cryptoassets, which are particularly vulnerable to fraud (see feature article “Tracing cryptocurrency: the challenges of Bitcoin”).

There is now clear case law demonstrating how English courts deal with these type of disputes, including the recognition of cryptoassets as property under English law, guidance on the lex situs or legal location of assets and the ability to pursue injunction relief against “persons unknown” (AA v Persons Unknown [2019] EWHC 3556 (Comm); Ion Science Ltd v Persons Unknown and others unreported, 21 December 2020, see Briefing “Freezing orders: recent key developments”). A High Court judgment issued early in 2022 illustrated the English courts’ approach when a claimant, who claimed to have been the victim of cryptocurrency fraud, was granted a package of relief including an interim injunction and a worldwide freezing order on an ex parte basis against persons unknown (Danisz v Persons Unknown and Huobi Global Ltd [2022] EWHC 280). The court acknowledged the exceptional urgency of the case, stating that “this is a form of transaction whereby, at the click of a mouse, an asset can be dissipated”.

While that may be true of most cybercrime, the ease with which cryptoassets can be transferred and the lack of regulation of cryptocurrency, makes this an area of genuine vulnerability for fraud. The ability to act quickly to prevent fraudulent activity is crucial. The English courts’ approach, and the growing ease with which this type of relief can be obtained, is extremely helpful for potential fraud victims and makes England an attractive place to start legal action.

Effect of Brexit on asset recovery

Inevitably, the UK’s departure from the EU and the refusal to let the UK rejoin the Lugano Convention will have an impact on victims who have obtained judicial relief against fraudsters in the UK. Where a final judgment has been obtained, the position, while not straightforward, is not insurmountable. Firstly, the UK has treaties in place with some countries that provide reciprocal enforcements arrangements, including member states such as Austria, Belgium, France, Germany, the Netherlands and Norway.

The obstacle is that, while Norway has agreed to revive its treaty with the UK following Brexit, the other member states have not similarly agreed. Therefore, the position on the applicability of those treaties is ambiguous and will depend on the view of the local courts. Where there is no applicable treaty, or the position about it is unclear, a claimant can still apply to enforce a UK judgment using the relevant local procedural rules. This is not uncommon in practice and, with perseverance, claimants should ultimately be able to pursue enforcement but it will not be a quick, or inexpensive, solution.

Mitigating the risk

What the situation does highlight is the need for parties to be very aware of the risks of fraud, particularly cyber fraud, and how those risks can be mitigated. Avoiding an unfortunate situation is always better than dealing with its consequences, but in a world where fraudsters’ activities are increasingly sophisticated, even the most cautious of businesses and individuals can fall victim to fraud. Therefore, an understanding of how to act when a fraud occurs is also important.

There are steps that businesses can take to mitigate the risks of fraud and provide a good foundation for online security such as:

  • Ensuring systems are adequately protected from cyber attacks and system compromises, and having robust security software.
  • Providing staff with comprehensive training on how to spot the signs of fraud and how to act if they think they may have been a victim of fraud.
  • Having clear policies in place for how to deal with fraud promptly.

While many businesses will have these processes in place already, ensuring they are up to date and as robust as possible is increasingly important. Solid investment in these areas could help to avoid a later damaging fraud or cyber attack. However, following the UK’s departure from the EU, the situation is more complex. Pursuing the most effective form of interim relief in the event of fraud, and how that will be most effectively enforced, now presents a dilemma and requires further consideration. Where England may previously have been the jurisdiction of choice for parties to pursue interim relief, this may not be the best option if assets have been moved to a member state and there is doubt about enforcement in that country.

It will be crucial to obtain legal advice at the earliest stage possible and establishing legal partnerships in another jurisdiction, including in the EU, will also be important. It may, ultimately, be more effective to commence proceedings in the jurisdiction where the assets are located. This does, however, assume that the victim knows where the assets are located and so it is also critical to gather as much information as possible at an early stage about a defendant and their location, in order to ensure that the best option is taken.

All roads no longer lead to London?

It is clear that England remains an important legal centre, which parties are continuing to choose to resolve disputes. Ultimately, it feels too early to determine whether Brexit will have a significant impact on that in the long term. The immediate effect of Brexit on mutual enforcement in the EU is unhelpful, at least for those that would prefer to litigate in the UK, and it seems inevitable that it will affect fraud victims’ ability to seek effective relief. However, there are steps that can be taken to mitigate the risks and, while fraudsters adapt quickly, legal systems and legal practitioners have also demonstrated the ability to adjust quickly and effectively to the evolving commercial landscape.

This article first appeared in the April 2022 issue of PLC Magazine.

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