The Impact of Intermediary Bank Discovery on Fraud Investigation and Asset Recovery

Byran Perkinson Web

Published on ABI Fraud Website

Introduction

“Let there be an end, a privacy, an obscure nook for me. I want to be forgotten even by God.”[1] This Browning verse would serve as an apt credo for many fraudsters looking to exit the game. The problem is that today the exit always seems to include an “obscure nook”… and a few million dollars of other people’s money. Notwithstanding changes in global legal regimes aimed at increasing transparency, there are still “nooks” around the world where information is scarce and transparency lacking.

Professionals who work in difficult third-world or offshore jurisdictions know how hard obtaining reliable financial information can be. However, there is a way to gain access to otherwise unobtainable information in situations where U.S. dollar (“USD”) wire transfers are used. The information is obtained through discovery from U.S.-based intermediary banks. This article provides an overview of intermediary bank discovery and how it can assist in the fraud related recoveries.

What are Intermediary Banks?  

Intermediary banks are third-party banks used to facilitate an international money transfer and settlement of funds. A transfer through the intermediary bank creates a record of the transaction at the intermediary bank, even if the bank of origination and the beneficiary bank do not maintain or produce records. All bank to bank USD wire transfers clear through intermediary banks located in the United States.

How is Intermediary Bank Discovery Obtained?

The process of obtaining intermediary bank discovery varies depending on the circumstances. When the information is obtained through a U.S. bankruptcy proceeding there are code sections that authorize broad scope discovery.[2] In non-bankruptcy U.S. litigation cases, parties can apply for intermediary bank discovery through traditional federal or state discovery processes. In such cases, the scope of the discovery may be somewhat more restrictive depending on the circumstances. Intermediary bank discovery is also available in conflicts or proceedings outside of the U.S. through 28 U.S.C. 1782.[1] This statute allows for parties in foreign proceedings to obtain discovery from parties within the United States.

Why is Intermediary Bank Discovery a Useful Tool for Fraud Investigators?

The question why this type of discovery would be useful might be self-evident – i.e. knowing that Bank A sent a certain amount of money to Bank B on a certain date – however, there are numerous less obvious reasons such information can be useful.

Financial and Organizational Framework

Often, it can be shocking how little defrauded investors know about their investments. Without having an understanding of all the parties involved it is difficult to identify potential targets for recovery. Identifying parties that have received frequent wires or matching suspected related parties to wire transfers can establish links that assist in identifying recovery sources.

Intermediary wire transfer discovery can provide a rough overview of the company’s financial history. Patterns in the inflows and outflows of funds can provide insight into the company’s operations. If discovery is obtained for a significant time period, the data will provide scale to the operations and clues as to what the balance sheet might look like.

Wire transfer data obtained through intermediary bank discovery was used in the Industrial Carriers[2] case to clarify the company’s corporate structure and financial status. Holland & Knight,[3] counsel to a creditor of Industrial Carriers,[4] obtained intermediary bank discovery via a New York state court action.[5] KRyS Global, financial expert for the creditor, was able to sort and aggregate that data and estimate the amount of funds that had been funneled through various subsidiary entities, and more importantly, estimate the amount of funds that “belonged” to Industrial Carriers but that were still in transit through its myriad shell companies at the time it filed for bankruptcy. Those funds, not surprisingly, never made it back into the bankruptcy estate. This evidence of missing funds was linked to unexplainable deposits in the defendant’s accounts which occurred after the bankruptcy. The Court ultimately made fraudulent transfer and alter ego findings against the defendants and assets were recovered for the benefit of creditors.

Patterns of Fraud

Additional information can be gleaned from wire transfer records beyond just dollars and cents. Many wire transfers include descriptions. Often, in fraud cases, the descriptions are omitted, vague, or completely bogus. Identifying when transfers are clearly being mislabeled or disguised may assist in making the case that the company or individual under investigation is unreliable. Wire transfer data provides a time table for transactions that may be used to rebut statements or claims made by parties in depositions, declarations, or at trial. Culling wire data and connecting the dots may provide investigators with ways to trip up suspected fraudsters and expose misrepresentations. Close review of counterparties to wires may expose relationships with third-parties unknown to investigator that provide potential asset recovery targets or serve as evidence of further wrongdoing.

KRyS Global encountered all of these situations in Industrial Carriers. Wire data revealed dozens of mislabeled transfers, a pattern of omitting labels on key transfers, and certain brazenly false labels. Wire data also provided evidence that contradicted statements made by key parties in the case, which was used in trial to undercut those parties’ reliability. Wire data also revealed the involvement of various money laundering companies that assisted in moving funds and obfuscating the paper trail. This evidence assisted in obtaining a positive recovery for creditors at trial.

Conclusion

Fraud investigators must avail themselves of every possible advantage. In cases involving USD wire transfers an advantageous, creative source of information may be intermediary bank discovery. All fraud investigators should be aware of the process and know how to employ it.

[1] In re: The Petition of Perseveranza Di Navigazione SPA, 13-mc-285 (S.D.N.Y.); In re Petition of Lauritzen Bulkers A/S, 13-mc-201 (S.D.N.Y.); In re The Petition of Olympian Liberty Marine LTD, Case 14-08546 (S.D.N.Y.) Dkt. # 4.

[2] Flame, S.A. v. Industrial Carriers, Inc., Case. No. 13-cv-658 (Dist. Ct. Virginia 2013).

[3] Holland & Knight pioneered the process of intermediary bank discovery and has successfully implemented the strategy in numerous cases including: In re Farenco Shipping Co. Ltd., 11-14138 (REG) (Bankr. S.D.N.Y.); In re Application of the Swifthold Foundation, 15-mc-142 (S.D.N.Y.); In re Petition of Lauritzen Bulkers A/S, 13-mc-201 (S.D.N.Y.); ITC Ships Holdings B.V. v. Astivenca C.A., 57385-2012 (N.Y. Sup. Ct. Warren County); Compania Sub Americana De Vapores S.A. v. Sinochem Tianjin Limited, 55866-2011 (N.Y. Sup. Ct. Warren County); Ocean Invest Corp. v. Mats Hagqvist et. al., 651261-2012 (N.Y. Sup. Ct. N.Y. County); Adrian Shipholding Inc. v. Lawndale Group S.A., 08-cv-11124 (S.D.N.Y.), In re Saad Investements Finance Co. (No. 5) Ltd, 09-13985 (Bankr. D. Del); George A. Grayiel v. Appalachian Energy Partners et al., 158750-2014 (N.Y. Sup.); D’Souza v. D’Souza, DN171984 (Cal. Sup); Gazprombank JSC v. Paushok, 150122-2015 (N.Y. Sup.) and numerous others.

[4] Industrial Carriers was a Ukrainian shipping company, incorporated in the Marshall Islands, that had filed for bankruptcy protection in Greece in 2008.

[5] Glory Wealth Shipping Pte Ltd. v. Industrial Carriers, Inc., 650590-2014 (N.Y. Sup. Ct. N.Y. County).

[1] Browning, Robert. Paracelsus. Effingham Wilson, London. 1835. Pg. 174.

[2] 11 U.S.C. Sections 1507 & 1521; Federal Rules of Bankruptcy Procedure Rules 2004 & 7026.