What states should know about proprietary claims to corrupt assets
What is a proprietary claim? A proprietary claim is a claim to own a specific asset or sum of money. It can be a free-standing claim or a remedy available if the state can establish certain other claims, for example a claim for bribery or for knowing receipt (as discussed in past tip-sheets here and here). A proprietary claim can be contrasted with a claim for compensation (damages). So, for example, a victim state can claim the return of a stolen asset, or compensation for its value if the asset cannot be found.
When does a proprietary claim arise? A proprietary claim will arise where a state's property has been stolen, or wrongfully transferred away, such as property sold below market value as a result of bribery.
Can a proprietary claim be used to reclaim a bribe? Yes. In English law (and in many common law jurisdictions), a state also has a proprietary claim to a bribe or secret commission paid directly or indirectly to a public official. This means the bribe is the property of the state, as are any assets acquired by the public official using the bribe.
What is tracing? Tracing is a process by which a state can identify and locate property that has been stolen. The process allows the state to follow an asset which has moved from owner to owner or which has been converted from one form to another (e.g. cash used to acquire a property, in a simple example). A claim may be available to recover an asset from a subsequent owner or which has been converted into a different form.
What happens when an asset is traced to a good faith purchaser? Tracing will fail where the asset is purchased by a "bona fide purchaser for value without notice" of the state's claim. It is for the person asserting this defence to prove that their purchase was made for market or appropriate value, in good faith and without notice of any existing claim to the asset.
Will suspicious circumstances give notice of a prior claim? A recent decision of the UK's Privy Council emphasised that a proprietary claim is available against an innocent bank which had failed to make enquiries as to the legitimacy of funds it had received in circumstances which should have alerted it to the risk that the funds were tainted. We discuss the principles behind this decision in our briefing on the case here.
What are the benefits of a proprietary claim? There are a number of important advantages that a proprietary claim has over a claim for compensation, for example:
1. Priority over other creditors
If the defendant becomes insolvent, a proprietary claim will give the state priority over the defendant's unsecured creditors. That is critical when there are insufficient assets to meet all claims.
2. Benefit of any increase in value
A proprietary claims means the state "owns" the asset or sum claimed, together with any increase in the value of that asset. Therefore, if the funds are invested in assets that increase in value, such as property in a rising market, the state will be entitled to recover the entirety of those assets. In the absence of ownership, this would be more difficult, if available at all, because the increase in value is not itself usually a result of any wrongdoing.
3. Equitable right to trace and follow
Claims based on ownership offer more effective mechanisms to trace and recover funds.
4. Longer limitation periods
Corruption is often discovered, or acted upon, many years after it took place. That can be an obstacle to claims for compensation which have to be brought within certain periods. There may be no limitation period for proprietary claims, or a longer period in which a claim must be brought.
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