The Privy Council has for the first time validated, albeit cautiously, the existence of the doctrine commonly known as 'backwards tracing'. The doctrine operates in certain cases of fraud or breach of fiduciary duty, where the victims seek to trace and recover the proceeds of the fraud or breach, but where no direct connection can be established between the funds lost by them and the funds or other assets which are then found in the hands of the perpetrators.
The judgment in Federal Republic of Brazil et al v Durant International Corporation et al  UKPC 35, was handed down on 3 August 2015 and concerned an appeal from the Court of Appeal of Jersey. The facts were no longer in dispute by the time the matter reached the Privy Council. Essentially, the proceedings concerned a claim brought by the Municipality of Sao Paulo against two BVI incorporated companies (Durant and Kildare) which held bank accounts with financial institutions in Jersey. The companies were connected to Paulo Maluf (the former mayor of Sao Paulo) and his son Flavio Maluf. Paulo Maluf was found to have received more than US$10 million in bribes in connection with a major road building contract in Sao Paulo.
The plaintiffs sought to trace into funds held by Durant and Kildare in Jersey in order to recover the proceeds of these secret payments. The funds had been transferred through a bank account in New York (the 'Chanani account'), where they were mixed with other funds before reaching Jersey. The Royal Court of Jersey had held at first instance that Durant and Kildare were liable as constructive trustees for the whole amount of US$10,500,055.35 which could be shown to have flowed into the Chanani account. The difficulty here was that only US$7.7 million of this sum could be directly identified in the Durant and Kildare accounts. The decision of the Royal Court was upheld on appeal, and the defendants then appealed to the Privy Council on the basis that they could only be held liable for the lesser sum of US$7.7 million.
The Privy Council noted that the question of whether or not backwards tracing should be permitted was one of judicial policy. Traditionally the view of the English courts was that backwards tracing could not exist because the whole concept of tracing involves identifying a new asset as a substitute for the old. Where that link cannot be shown, a conventional tracing claim will fail.
In Federal Republic of Brazil, the Privy Council has now held that 'the development of increasingly sophisticated and elaborate methods of money laundering, often involving a web of credits and debits between intermediaries, makes it particularly important that a court should not allow a camouflage of interconnected transactions to obscure its vision of their true purpose and effect'.
Where a court is satisfied that the various steps are part of a co-ordinated scheme, it should not matter that (either deliberately or because of the mechanics of the banking system) debits and credits in the various accounts do not necessarily directly correspond to each other.
The Privy Council went on to reject the argument that there could never be backwards tracing, or that the court could never trace the value of an asset through an overdrawn account. What is however required is 'a co-ordination between the depletion of the trust fund and the acquisition of the asset which is the subject of the tracing claim, looking at the whole transaction, such as to warrant the court attributing the value of the interest acquired to the misuse of the trust fund'
Clearly this exercise will be heavily fact specific in each case, and it remains to be seen how much further the limits of the doctrine will be pushed over time.
A link to the judgment can be found here: https://www.jcpc.uk/cases/jcpc-2013-0069.html
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.