Collateral Thinking: How Can You Ensure That a Major Debtor Won't Leave Your Business Seriously out of Pocket If It Defaults? Mark Anderson Explains How Companies Are Using Asset Tracing Methods to Manage the Risk
Anderson, Mark, Financial Management (UK)
"Asset tracing" is a term that's usually applied to the process of tracking down and recovering stolen funds stashed in offshore jurisdictions by international fraudsters and errant dictators. Yet, as traditional risk assessment measures and published financial data become increasingly unreliable in these uncertain times, many organisations are using asset tracing methods to improve their understanding of their financial risks and exposures in other situations.
Asset tracing has applications in areas such as:
* Assessing whether an external trading partner has enough assets to meet its obligations under a credit agreement.
* Evaluating actual underlying assets in equity and bond investments.
* Estimating asset values as a precursor to an administrative appointment or legal proceedings.
* Locating assets against which to enforce court orders and arbitration awards.
The complexities of today's global financial system make the tracing and identification of assets much harder than it was in previous economic downturns. This is largely because of the growth in the scale of the system itself, the increased number and availability of offshore jurisdictions and the sheer complexity of credit instruments.
At its simplest, an asset tracing investigation may involve two types of analysis: tracking the money from its last known position to its final destination--which is known as "tracing fund flows from A to Z"--and searching for title to assets held by counterparties--known as "searching for underlying assets at point Z" (see panel opposite page). A successful tracing exercise in a fraud case usually involves painstaking work at both ends of the flow of funds. Often the smallest of leads, derived from a witness interview, document review or external source, becomes the vital link in the chain of evidence. For instance, an apparently throwaway remark about a visit to Spain in a recent fraud case interview led to the identification of significant Spanish real-estate interests acquired using the proceeds of the fraud.
Although such processes can be lengthy, some of these techniques may be used independently and in less complex ways to solve other problems. For example, in order to invoke freezing orders and other legal remedies, a claimant in receipt of a court order or arbitration award will need to demonstrate only that the respondent has title to assets of a sufficient value to satisfy the order or award. Some ingenuity may need to be applied in an international asset search. For instance, it is favourable to identify title to illiquid assets in jurisdictions that are more amenable to judgments from international courts, but once enough assets have been identified and title can be clearly shown, no further work need be done.
Similarly, it may be sufficient for investors in bonds or equities to determine title to underlying assets held by those instruments through research at point Z, instead of embarking on a costly and time-consuming tracing exercise from A to Z. For instance, in a recent project, a client of my firm took control of a portfolio of unlisted stocks and international real-estate assets in an acquisition and sought independent verification that the title to the underlying assets had indeed been transferred and that there were no undisclosed competing claims to those assets. We achieved this through a comprehensive analysis of various ownership records without the need for a detailed interrogation of the managers and administrators of those investments.
In the current market conditions, financial institutions are particularly worried about possible defaults by debtors. This level of concern is likely to continue over the next 12 months. In such circumstances it pays creditors to keep track of any assets provided as security or under personal guarantee by major debtors. This allows them to stay abreast of any ownership or valuation changes, which may be warning signs, and also to enable administrators to move quickly to secure assets if required. …