A great deal of assets traded for business or personal use carry a hidden risk of being one day revealed to be of a criminal origin. A penthouse in New York bought with corruption money, a mining business in a developing country taken from original owner by intimidation and corrupt justice, a corporate asset embezzled against the will of the shareholders: examples are many.
A popular belief among businesspeople and private investors is that acquisition of such assets is generally safe if at the time of acquisition they had no easy way of knowing that the asset was crime-tainted. No litigation, no media reports of a police investigation: nothing to suggest that there is a crime trail behind.
This view is reasonable, but only to a certain extent. Although it is true that law generally protects innocent acquirers for good value, the devil is in the detail and, depending on the applicable law, the position of the purchaser may be not so certain.
Risk of Criminal Prosecution
Many countries have on their penal statutes a crime of wilfully acquiring stolen property or other proceeds of crime. Specific formulas vary from legal system to legal system but usually this covers a situation when someone purchased (or otherwise acquired) an asset while knowing or reasonably suspecting that the asset is crime-tainted.
Do not confuse this with ‘money laundering’, as laundering requires an intent to conceal the criminal origin of property – for oneself or for someone else who committed a crime. Acquisition of criminally obtained property is simply agreeing to acquire something while knowing that it is derived from crime.
The key condition to prosecution here is obviously the knowledge factor. The investigation will probe whether the buyer of the property was aware how the seller acquired it. In some legal systems the criteria is even more lax. For a successful prosecution the law enforcement needs to prove only that the owner was reasonably suspecting the criminal origin of the property.
Prosecution Risk Is International
Let’s take a hypothetical example of an offshore company being used to acquire an asset which has a criminal trail in some other country. Typically, the buyer’s home country (the offshore centre) will show no interest in pursuing criminal prosecution of the purchaser. However, the foreign country where the crime was committed may still prosecute the buyer’s officers and beneficiaries – even if they had never set foot on that country’s soil.
Extraterritorial application of criminal law is a complex subject. For the purpose of this brief review it suffices to say that many countries’ penal codes contain a provision allowing prosecution of crimes committed overseas by foreigners if nationals of the prosecuting country were affected by the crime.
Take this example from the Russian Criminal Code (part 3 of Article 12):
“Foreign nationals and stateless persons who do not permanently reside in the Russian Federation, if they committed a crime outside of the Russian Federation, shall be subject to criminal liability under this Code if the crime is aimed against the interests of the Russian Federation or a citizen of the Russian Federation or a stateless person permanently residing in the Russian Federation (…) unless such foreign nationals / stateless persons were convicted of that crime in a foreign State (…)”
A criminal probe opened against a foreign national residing abroad would involve a call for international assistance by the prosecuting authority. In cases involving crimes with no political or military element such assistance is usually granted by the requested states, even in the absense of bilateral / multilateral legal assistance treaties. A notable exception is extradition of own nationals – this is typically prohibited by Constitution. However, should the prosecuted person leave his/her own country, an international arrest warrant or a direct request for assistance may trigger extradition.
Risk of Asset Loss Through Litigation
A logical by-product of criminal investigation under the circumstances described above is litigation for the arrest and eventual return of the asset to the crime victim or for its confiscation. This may be pursued by a private litigant (e.g. previous owner of the asset from whom it was stolen/embezzled) or a State authority, such as an Attorney-General.
The classic defense to such litigation is the ‘bona fide acquirer for value’ argument: the owner will seek to prove that it purchased the disputed property for full market value and in good faith, i.e. not knowing or having valid reasons to suspect its criminal origin.
Litigation of this kind can go on for years – especially if a private party is interested in the return of the asset and is ready to mount a well-funded legal assault supported by evidence. Regardless of outcome, the risk of the asset owner is that until the proceedings are over the asset will remain frozen by the court.