Tracing Proceed of Fraud and Corrupt Enrichment

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The position at common law was therefore fraught with significant limitations where the assets to be traced into were acquired with mixed funds.

TRACING IN EQUITY

Due to the complexities and inadequacies of tracing under the common law, the evolution of the concept of tracing became inevitable. Unlike its counterpart at common law, tracing under the equitable principle, one can trace through mixed funds. Indeed, the equitable rules of tracing are designed to deal with the mixing of funds in a bank account, to combat incidences of unjust enrichment that would be created by the strict principle of tracing at common law which permits perpetrators of crime to reap benefits of their actions. This position was aptly stated Per Fox LJ in AGIP (AFRICA) LTD V. JACKSON[10] thus:

“Equity…will follow money into a mixed fund and charge the fund. There is, in the present case, no difficulty about the mechanics of tracing in equity. The money can be traced through the various bank accounts to Baker Oil and onwards. It is however, a prerequisite to the operation of the remedy in equity that there must be a fiduciary relationship which calls the equitable jurisdiction into being…”[11]

However, it is instructive to note that, the equitable rules of tracing require the existence of a fiduciary relationship between the parties as a prerequisite to its application. Hence to trace in equity presupposes that the assets sought to be traced are subject of a trust (whether active, implied or constructive) and therefore belongs to the claimant in equity. Governmental institutions are therefore empowered to recover assets acquired by the improper use of public funds which the government holds in trust on behalf of the citizens.

It becomes necessary to limit this discussion to the specific interventions on the rule of tracing in equity, which are “backward tracing and lowest intermediate balance rule”- both of which are concerned with a series of transactions and the ability to establish a causal link to a defective transaction. It is in expounding the rules guiding the establishment of this causal link that the principles of backward tracing and the lowest intermediate rule became birthed.

THE PRINCIPLE OF BACKWARD TRACING

Recognising the sufficiency of causal links between transactions requires a consideration of the test for causation to be applied to determine whether one transaction causes another. The English principle of backward tracing seeks to expand the frontiers of tracing to allow the claimant to establish a causal link and subsequently to trace the proceeds into whatever it was used for, even if same was owned before the fraud.

As already mentioned, traditionally, English Courts held the view that it was impossible to trace misappropriated money into assets acquired before the money was received. In Re Diplock[12] the English Court of Appeal held that when money is used to discharge a debt, the debt becomes extinguished leaving no traceable proceeds. In other words, tracing would not apply to an overdrawn account; and in Bishopsgate Investment Management Ltd v Homan[13] the Court of Appeal, Per Legett CJ at held that equitable tracing cannot be pursued through an overdrawn account. as ex hypothesi, it cannot be followed into something which already existed. This position led to, inter alia, two bars to tracing:

- The lowest intermediate balance rule

- Backwards tracing.

The act of tracing into an already existent property prior to the receipt of the proceeds of the crime is referred to as back ward tracing and hitherto was rated as impossible.

The term “Backward tracing” or “reverse tracing” describes a situation where the claimant’s property is traced to an asset the defendant already has. A typical situation is where a person engaged in money laundering has initially taken a loan to pay for an asset, then diverted the proceeds of his crime to pay off the loan. In this case, the principle backward tracing allows the State to claim the asset, even though it was acquired with a legitimate loan obtained before the commission of the crime.

Until recently, it had been decided that the principle of tracing backward was impossible. In recent times, however, particularly by the decision of Scott LJ in Foskett v McKeown[14], it was held thus:

“I do not regard the fact that an asset is paid for out of borrowed money with the borrowing subsequently repaid out of trust money as being necessarily fatal to an equitable tracing claim by the trust beneficiaries. If in such a case, it can be shown that it was always the intention to use the trust moneys to acquire the asset, I do not see why the order in which the event happened should be regarded as critical to the claim”

This decision by Scott LJ was the basis for the Decision of the privy council in the recent case of Federal Republic of Brazil & anor v Durant International Corporation and anor[15]which would be considered below.

LOWEST INTERMEDIATE BALANCE RULE

Another major rule in tracing is the ‘lowest intermediate balance rule’ otherwise referred to as the rule in Roscoe v. Winder[16] . This rule simply states that where a mixed fund is dissipated from the account and further money is paid into the account, the claimant/ beneficiary’s money having become dissipated, the claimant cannot claim ownership of the new money.

For better illustration, suppose A mistakenly pays N100, 000 to B, who withdraws that value from his bank account, reducing the account balance to zero, and spends it. B later deposits N100, 000 into his bank account and spends that money to purchase a car. The ‘lowest intermediate balance rule’ means that the transaction purchasing the car is not linked to A’s payment of N100, 000; except B’s later deposit was intended to replace the N100, 000 paid by A. As Campbell J said in Re French Caledonia Travel Service Pty Ltd[17], relying on the case of Roscoe v. Winder[18] that:

“absent any payment of money with the intention of making good earlier depreciations, tracing cannot occur through a mixed account for any larger sum than is the lowest balance in the account between the time the beneficiary’s money goes in, and the time the remedy is sought. In a case where the type of tracing being attempted involves detailed analysis of what has become of the property of a particular beneficiary, and into what other assets it has been converted or mixed, the lowest intermediate balance rule is fundamental to