UNCAC, Asset Recovery, and the Perils of Careless Legal Analysis

A little while back I posted a critical commentary on the Stolen Asset Recovery Initiative’s Left Out of the Bargain report.  The report described – and implicitly but clearly criticized – the fact that although the U.S. and other “supply-side” jurisdictions had recovered substantial amounts of money in settlements with bribe-paying firms, only a relatively small percentage of those settlements were transferred to the “demand-side” countries where the bribery took place.  These demand-side countries (which the report, to its credit, carefully avoids calling “victim countries”) are the ones that are “left out” of the “bargain” (that is, the settlement) between bribe-paying firms and supply-side governments.

I read the report as calling for, among other things, greater redistribution of settlement proceeds to demand-side governments, and expansion of the ability of those governments (or private parties) to pursue “follow-on” actions.  My main criticism was that the report neglected to consider the effect that either change would have on the incentives of firms and supply-side enforcers.  Two of the report’s authors, Ji Won Park and Jacinta Odour, posted an interesting reply to my post, which I recommend (along with my rejoinder, which can be found in the comments section of the original post).  But although the main focus of my critique and their response was the incentives issue, our exchange also revealed an important difference of opinion regarding the meaning and significance of the UN Convention Against Corruption, particularly its provisions on asset recovery.  It’s that issue that I want to explore here.

In my original post, I remarked in passing that the StAR report “elides … the distinction between asset recovery actions—in which a country seeks the repatriation of assets stolen by the country’s own nationals (usually former officials or their family members)—and actions for penalties or disgorgement brought against a firm or individual for allegedly bribing foreign officials.” In their response, Park and Odour “disagree that the [Left Out of the Bargain] study does not distinguish between repatriation of assets stolen by public officials and monetary sanctions imposed in foreign bribery settlements.”  The report does this, they say, “through the lens of UNCAC.” They explain that UNCAC Article 51 (the first Article in Chapter V, on asset recovery) states that “[t]he return of assets pursuant to this chapter is a fundamental principle of [UNCAC], and States Parties shall afford one another the widest measure of cooperation and assistance in this regard.”  Park and Odour then declare that this obligation to assist in the return of assets “applies not only to the mandatory return of assets that proceed from embezzlement and misappropriation […] but also to proceeds of corruption from other offences covered by UNCAC (such as Article 16 on Foreign Bribery) and compensating victims.”

If I’m reading this right, Park and Odour seem to be suggesting that, for purposes of States Paries’ obligations under UNCAC Article 51, there is no significant difference between stolen assets recovered in a forfeiture action, fines recovered in anti-bribery enforcement actions, disgorged profits, compensatory damages, and the like; they are all “assets” within the meaning of Article 51 – which implies, presumably, an undifferentiated obligation to “repatriat[e]” (in Park & Odour’s word) both stolen assets and “monetary sanctions imposed in foreign bribery settlements.”

I don’t believe this assertion can withstand close legal analysis, and I certainly think it is misguided as a matter of policy.

Let’s start with some basic legal principles.  There are at least four ways (as relevant here) that a government might get its hands on money that is, in some sense, the product of corrupt activity:

  • Forfeiture/confiscation: The government can seize property that has been obtained through illegal means, including stolen assets deposited in foreign bank accounts. Typically some other party (often, in the case of embezzled public assets, another sovereign) will have a legitimate prior claim on these assets.
  • Punitive Fines: Fines are penalties imposed by a sovereign in response to an offense against the sovereign’s interest; their primary purpose is deterrence (general or specific), and perhaps also condemnation or retribution.
  • Compensation: When there is an identifiable victim of an unlawful act, the law may allow that party to seek compensatory damages in a civil action; sometimes instead of, or in addition to, private compensatory remedies, the government in a public enforcement action may order a wrongdoing to make restitution payments to an identifiable victim.
  • Disgorgement: The principle that no person (or entity) should be allowed to profit by its own wrongdoing may sometimes justify a disgorgement remedy, in which the wrongdoer must surrender any ill-gotten proceeds of its unlawful activity.  Disgorgement shares some characteristics with fines, in that part of the idea is to deter and punish, and also shares some features with compensatory remedies like damages or restitution, in that the objective is, in a sense, to “undo” the wrongdoing.  But disgorgement is nonetheless different from both.  It differs from punitive fines in that the appropriate punitive fine may be greater or less than the gain the wrongdoer realized.  And it differs from restitution in that the amount the wrongdoer gained may not equal the harm to the victim, so the two remedies are not always linked; sometimes restitution is possible and appropriate even when there are no grounds for disgorgement, and vice versa.

Chapter V of UNCAC is concerned primarily with the first category—stolen assets that are, or should be, confiscated and returned to their rightful owner.  This is implied by the language in Article 51, quoted by Park and Odour: “The return of assets pursuant to this chapter is a fundamental principle of [UNCAC]” (emphasis mine).  “Return” of assets implies rightful ownership by the party to whom the assets are returned.  But it makes no sense to talk about “returning” punitive fines to the government of the country where the corruption took place.  Those punitive fines are rightfully the property of the sovereign government whose law was offended–for example the U.S. government when an entity that availed itself of U.S. markets violated U.S. law.  Of course, the demand-side jurisdiction has every right to enforce its own law, and impose its own punitive fines.  This can lead to legitimate questions about how to balance separate sovereigns’ independent interests in enforcing their own laws with the interest in avoiding duplicative, potentially excessive punishments.  But there is no reasonable interpretation of UNCAC that would count these punitive fines as assets to be “returned.”

The idea that the obligations under Article 51, and Chapter V more generally, are restricted to those assets over which another entity would have a prior claim is bolstered by examining the remaining articles in the chapter.  Article 53 deals with “Measures for direct recovery of property” and specifically addresses actions to establish legitimate title to stolen property (parts a and c), and to award compensatory damages to States Parties harmed by corruption offenses (part b).  Likewise, Article 57, on “Return and disposal of assets,” deals primarily with confiscated assets where the requesting state can establish prior ownership, though in parts 3(b) and 3(c) it also touches on the possibility that state may make compensatory payments (though this is clearly left to the discretion of the requested state, in contrast to the return of stolen property, which is obligatory).  Articles 54 and 55 likewise deal exclusively with confiscation actions directed at identifiable stolen assets.  Articles 56 and 59 call for various forms of international cooperation and intelligence sharing in connection with the other provisions of the chapter.   And Articles 52 and 58 call on states to set up legal mechanisms to identify and track illicit asset flows in their jurisdictions.

So it seems crystal clear that viewing the different forms of monetary recovery “through the lens of UNCAC” does not support the conflation of punitive fines with confiscated assets.  UNCAC Chapter V clearly calls for international cooperation with respect to the return of the latter, but says nothing whatsoever about the appropriate distribution of the former.

Restitution and disgorgement present slightly more difficult cases, but only slightly.  I think the best reading of UNCAC, and in particular Articles 35, 54(b), and 57(c), is that States Parties are obligated to provide a mechanism by which victimized parties (individuals or states) may seek compensation, and that States Parties may also (in their discretion) return confiscated proceeds of crime to states or individuals that can establish that they were harmed, even where they don’t otherwise have a claim on the property.  Of course, it’s worth pointing out that many jurisdictions, including the U.S., already provide for exactly this.  But for there to be a proper restitution order, there must be an identifiable victim who can establish, with reasonable precision, the magnitude of the injury.

As for disgorgement, the difficulty here is that although a successful disgorgement action establishes that the defendant has no right to the ill-gotten property, it’s not always clear who does have a right to that property.  And whether or not we are comfortable with multiple sovereigns imposing separate punitive fines for the same wrongful conduct, multiple disgorgement orders are even more problematic: presumably once the defendant has disgorged its illicit profits, the purposes of disgorgement have been fully served.  One might plausibly argue that all parties with a legitimate interest affected by the wrongful conduct have a right to some portion of the disgorgement.  One could just as easily say, though, that the first party to successfully secure disgorgement can retain the full amount.  In any event, in those cases where no party can establish its entitlement to compensatory damages, UNCAC does not tell us how disgorged proceeds should be disposed of.

Where does that leave us?  To my mind, it suggests a couple of conclusions.

First, if the StAR report meant to assess whether UNCAC’s provisions were being honored, its calculation of the proportion of recoveries “returned” to the demand-side countries (which Park and Odour’s response to my post call “victim countries,” even though the report itself explicitly disavows that language), punitive fines should have been excluded, and disgorgement should probably have been excluded as well.

Second, it seems that there is an interest in some quarters in pressuring DOJ and other supply-side enforcers to share their foreign bribery settlements with developing countries, and there is a movement afoot (which has perhaps influenced StAR) to squeeze that agenda into the “stolen asset recovery” framework, perhaps leveraging the prestige and legitimacy of UNCAC in the process, even though it doesn’t really fit.  One sees this in the StAR report itself, in the section on the UNCAC framework.  After two pages of utterly reasonable and accurate summary of Chapter V’s provisions on asset recovery (entirely consistent with everything I said earlier in this post), the report suddenly declares that:

[I]n light of the possibilities for countries to take advantage of the various options opened by the convention to recover assets, concerns have been voiced as to whether—and how—settlements [in foreign bribery cases] can have an impact on those possibilities. Against this backdrop, settlements appear to be an important tool that requires careful analysis in the context of UNCAC.

This passage seems to me to be a total non-sequitur.  The report nowhere explains the basis for the “concerns” that have been raised about how anti-bribery settlements might impact analytically distinct asset recovery actions, nor does it explain how anti-bribery settlements might require “careful analysis in the context of UNCAC” (presumably UNCAC Chapter V), given that UNCAC Chapter V is not relevant to most of the remedies at issue in these settlements.

To my mind, attempting to shoehorn this separate agenda — pressuring supply-side enforcers to share settlements — into a stolen asset recovery framework is a very bad idea, not only because of the incentive effects I discussed in my earlier post, but because it dilutes what should be StAR’s laser-like focus on the very real problem of stolen asset recovery, and leads to distorted and tendentious readings of UNCAC. UNCAC reflects a broad and welcome consensus on the evils of corruption and sovereign nations’ responsibilities to cooperate in combating it, a consensus grounded in a careful balancing of the interests of the various States Parties. Were StAR’s interpretation to gain traction, that balance, and the consensus underpinning UNCAC, could be lost — at great cost to all.

4 thoughts on “UNCAC, Asset Recovery, and the Perils of Careless Legal Analysis

  1. Excellent points all around — but having made a compelling argument for distinguishing stolen assets from punitive fines, I would argue that disgorgement remedies still resemble the former more closely than the latter. Particularly for things like concessions, a firm that pays a bribe likely doesn’t retain any “assets” it secured corruptly (which may not even be tangible, but could be a right to provide a service or something of that nature), but rather converts these assets into business opportunities. As a result, the host country’s asset is gone, sold and dispersed on the market — and what’s left is the profit gained through the commercialization of these assets. Drawing a boundary between “stolen assets” and the illicit profits from these assets guarantees that a large proportion of the economic loss from corruption can never be retrieved. It is true that “it’s not always clear who does have a right to that property,” in the sense that identifying victims of corruption can be thorny — but maybe what we ought to do is look at what asset or right was misappropriated in the first place, and act accordingly. In urging cooperation in this area, I think the drafters of UNCAC intended signatories to take work together to solve these evidentiary puzzles in order to make reasonable allocations (which, as you point out, the US has done on a discretionary basis), rather than treating them as an individual party’s burden that, regrettably, may end up as an excuse for a finders/keepers approach.

  2. Dear Professor,
    I read with great interest you blog post on the scope of Chapter V of the UNCAC as I have been examining this question in great detail too over the last few years and although you have raised many relevant points, I disagree with your conclusion. More precisely, I disagree that the obligations under Chapter V are restricted to those assets over which another entity would have a prior claim. Likewise, I disagree that foreign bribery settlements are not included into the asset recovery agenda as provided by the UNCAC – noting that the question I’d like to address here is not so much whether if it is a good idea or not to include them into the asset recovery framework but rather whether if such a reading is in line with UNCAC provisions.
    Let me explain myself.

    Most likely emboldened by the media reporting on the ill-gotten gains of corrupt dictators just as the confusing language of the convention (using alternatively the terms “asset”, “property”, “proceeds of corruption”), there has been for too long a global misreading of what precisely entails asset recovery under the UNCAC: What is asset recovery? What are the assets to be recovered? How proceeds of corruption are to be recovered?

    I’ll try to address these 3 questions.

    Contrary to common belief, asset recovery is not only about recovering stolen/embezzled public funds stashed away by corrupt agents or confiscating the lavish properties they illicitly acquired abroad; the process (as provided for by the UNCAC) involves “any proceeds of offences established in accordance with this Convention” (Article 3 – Scope of the convention) that have been transferred abroad that is to say: “any property derived from or obtained, directly or indirectly, through the commission of an offence” (Article 2. (e) – Use of terms). This definition therefore includes (at least does not exclude: “Ubi lex non distinguit, nec nos distinguere debemus”) assets of private origin and in particular the proceeds of active bribery that is to say all the assets derived from the commission of this offence such as the illicit profits, benefits or advantages of monetary value gained by companies as a result of paying a bribe to a foreign official. In other words, the scope of the convention is not – as you suggest (Cf. “assets over which another entity would have a prior claim”) – restricted to stolen or embezzled funds over which foreign governments can establish prior ownership but encompasses any and all proceeds of corruption: in fact, Chapter V is applicable (and ought to be applied) in any court or out of court proceedings involving proceeds of corruption – including proceeds of active foreign corruption (here again: “Ubi lex non distinguit, nec nos distinguere debemus”).

    Shouldn’t this legal analysis of the convention suffice to convince you, let me remind you the wording of the Technical Guide: “In spite of the fact that an interpretative note to the Convention indicating that the expression “fundamental principle” would not have legal consequences on the other provisions of chapter V of the Convention (A/58/422/Add.1, para. 48), article 51 is a statement of intent indicating that any doubt concerning the interpretation of provisions related to asset recovery should be resolved in favour of recovery as a core international cooperation objective of the Convention”. (UNCAC Technical guide, page 191)

    Your misreading of the convention on that point – shared by many others – results as I already mentioned from the fact that most if not all the attention (both political and media) has focused for long on recovering the stolen assets of kleptocrats (giving the impression that the scope of the UNCAC was limited to those ill-gotten gains – an analysis that suits many governments by the way).

    While more and more foreign bribery settlements were negotiated abroad, the debate over the scope of Chapter V resumed and the issue was ultimately addressed during the last Conference of States Parties that took place in Panama in November 2013; you’ll find below relevant excerpts from the Resolution 5/3 on asset recovery (full resolution available here: http://www.unodc.org/documents/treaties/UNCAC/COSP/session5/Resolutions_and_decisions.pdf).

    “Noting proactive efforts made by some States parties to sanction their domestic entities for offences specified in the Convention, through both confiscation and monetary sanctions or other legal mechanisms, and acknowledging the benefits of early and proactive information sharing, consistent with domestic law and the requirements of the Convention, in furthering enforcement

    Recognizing the critical importance of effective international cooperation in efforts to combat corruption, particularly with respect to offences specified in the Convention with a transnational element, and encouraging continued cooperation by States parties, consistent with the requirements of the Convention, in all efforts to investigate and prosecute natural and legal persons, including the use of other legal mechanisms, where appropriate, for specified offences in the Convention and recover assets related to the same, consistent with chapter V of the Convention,

    26. Urges States parties to consider the use of the tools set out in chapter V of the Convention when resolving cases involving offences outlined in the Convention, including transnational bribery;

    29. Calls upon States parties to share with the Secretariat best practices for the efficient resolution of criminal offences specified in the Convention, and requests that the Secretariat collect and disseminate such information to the Open -ended Intergovernmental Working Group on Asset Recovery and to States parties;

    37. Encourages States parties to share approaches and practical experience for the return of assets, consistent with article 57 of the Convention, for further dissemination through the Secretariat;”

    Although the language is poor (and therefore the exact meaning of this resolution may not necessarily be obvious to those who did not attend the CoSP), it means that foreign bribery settlements should not be regarded (anymore) as a UNCAC-less area: the inclusion of language about settlements in transnational bribery cases in the resolution (implicitly referred to as “other legal mechanisms”) was indeed the main point of Nigerian draft resolution on asset recovery but also the main point of contention with the US (which also tabled a resolution on asset recovery).

    Now, the fact that foreign bribery settlements are included in the asset recovery framework does not mean per se that foreign governments are entitled to the payments made under them. This brings me to the next question: how proceeds of active foreign bribery are to be recovered by a foreign government?

    The difficulty here is that no public money was ever involved; therefore foreign governments cannot establish prior ownership over such proceeds of corruption.

    The answer is in UNCAC Article 53.b): this article – which provides for direct recovery of property through compensation claims – was precisely established to provide a concrete remedy to states harmed by corruption in situations – such as bribery or trading in influence – where the proceeds of corruption involve funds of private origin to which the state was never entitled to (Cf. Technical Guide; p. 203).

    Damages are regarded as a basis for returning proceeds of corruption and compensation claim is the one and only way to recover such proceeds – it being specified that UNCAC Article 53 does not provide for a right to restitution but for the right to seek recovery of proceeds of corruption by making compensation claims.

    Therefore, I totally agree with you that foreign governments are not entitled to the punitive fines that are imposed on companies (these are not even proceeds of corruption), or the disgorged profits (at least not directly); and I would also add to the list the confiscated/forfeited assets (unless foreign governments can establish prior title/ownership over these illegal assets of private origin).

    Likewise, you are right: StAR’s calculation may be regarded as distorted since basically they compared the volume of payments made by or imposed on companies to sovereign governments (all types combined: fines, confiscated assets…) to the volume returned to foreign governments.

    Should one discredit this study for all that? I don’t think so because StaR’s report has the merit of reminding that foreign bribery settlements are not out of the scope of the UNCAC and that more effort is needed in this area.

    In fact, to properly assess whether UNCAC’s provisions were being honored, StAR’s experts should have estimated the volume of damages that foreign governments could/should have claimed in the course of foreign bribery settlements reached these last thirteen years and then compared it to the actual volume of damages foreign governments got – which would have been almost an impossible task…That being said, I believe that, even if such a calculation had been applied, findings would have likely be the same given the low level of enforcement of Article 53.

    Indeed, notwithstanding the fact that some jurisdictions do not recognize foreign governments’ standing– in a blatant violation of UNCAC provisions –; another shortcoming results from the fact that most often states are simply not aware of the existence of proceeds of corruption abroad (nor of legal proceedings involving said property taking place in foreign jurisdictions). In fact, even though some pieces of information may be reported in the media; information is often not easily accessible to enforcement authorities in other countries. UNCAC Article 56 which encourages States Parties to proactively share information “on proceeds of offences established in accordance with this Convention to another State Party without prior request, when it considers that the disclosure of such information might assist the receiving State Party in initiating or carrying out investigations, prosecutions or judicial proceedings or might lead to a request by that State Party under this chapter of the Convention” was clearly included to address this situation.

    You suggest that the US honor their obligation under the UNCAC 53 because they provide for mechanisms by which victimized parties (individuals or states) may seek compensation. No doubt that tools exist but are they actually implemented? How often have they been used in foreign bribery settlements? Rarely according to the author of this post. Likewise, how often have the US facilitated foreign governments’ actions towards direct recovery of property by providing them with information in line with Article 56?

    The US are clearly not an isolated case. The full implementation of Article 53 (including proactive information sharing in line with Article 56) raises two main obstacles:
    • The first obstacle relates to the technical difficulty encountered in many jurisdictions in identifying/recognizing, quantifying and ultimately repairing the damage caused by corruption. Since the UNCAC provides absolutely no guidance about it [1], many jurisdictions – for fear of having to deal with this complex technical issue – make the choice of not implementing the provision at all…
    • The low level of implementation of Article 53 is further explained by concern about the money being recycled through corruption. A legitimate concern which however leads to the situation where the citizens of these countries are doubly penalized for corrupt behavior of their public officials and governance failures.

    These are, I believe, two key issues that need to be addressed. A word to the wise…

    [1] However, it is worth noting that UNCAC’s Technical Guide addresses the issue: “In relation to the issue of types of damages to be covered, States Parties need to decide whether requesting States Parties may claim only material damages or also loss of profits and non-pecuniary loss. Loss of profits may be recognized when it is demonstrated that the revenues or profits of the State were diminished as a result of the corrupt deal. Non-material damages or non-pecuniary loss are related to institutional damages produced by corruption. One of the main consequences of corruption is that it severely undermines the legitimacy of the institutional system. As those damages, however, are difficult to quantify, compensation may also consist of contributing to institutional programmes, building anti-corruption capacities and so forth. Moreover, the consequences of corruption may also consist in including indirect damages caused by the act of corruption, such as environmental damages when allowing infrastructure works without proper environmental impact studies, contamination of natural resources, damages to the health of the population when allowing disposal of toxic waste and the like.” (Page 203).

    • I probably don’t have time or space here to respond to all the points made in your very detailed comment. That said, my main reaction is that I’m not sure that we disagree as much as you think we do, either about the policy issues or the interpretation of UNCAC:

      First, probably the most important part of my argument, and my biggest quarrel with the StAR authors, has to do with the treatment of punitive fines. My claim is that such fines are NOT “assets” that may be subject to UNCAC’s asset recovery provisions, and therefore failing to redistribute fines to so-called “victim countries” does not contravene UNCAC. You say explicitly that you agree with this.

      Second, I think we both agree that UNCAC does indeed require the return of assets over which some party (including another government) has a valid prior claim.

      Third, I wholeheartedly agree that UNCAC requires states to create appropriate mechanisms to ensure compensation is paid to those parties that can demonstrate that they have been injured by corruption — that is, compensatory damages or restitution remedies should be made available. We may differ somewhat on exactly what these mechanisms have to look like, and whether the existing mechanisms under, say, US law are adequate — though nothing in your post seems to establish that these mechanisms are not adequate under UNCAC. The fact that we haven’t seen lots of damages/restitution remedies paid to demand-side governments may have a lot more to do with the fact that these governments typically cannot satisfy the minimum requirements for restitution, according to fairly conventional legal criteria.

      Fourth, I acknowledge that the trickiest question concerns how to deal with disgorgement — when a firm has ill-gotten gains due to its corrupt activity, it must surrender those gains (that part is relatively uncontroversial), but who gets the disgorged assets (that’s the hard part)? You may well be right — indeed, I think you are right — that these disgorged profits count as “assets” derived from corrupt activity. But that doesn’t tell us which party (or parties) have a right to those assets, and UNCAC doesn’t either. After all, the provisions of UNCAC that StAR’s experts and your comment emphasize discuss the RETURN of assets (not the redistribution of assets) — and return implies a rightful prior claim. If the criteria for showing actual victim status/demonstrable injury have not been met, then it seems to me UNCAC tells us nothing about how those assets should be apportioned.

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