Although they are sometimes used interchangeably, it is important to note that asset tracking, asset tracing and asset recovery are three distinct terms, which relate to three distinct legal concepts.
This article will illustrate the differences between the terms while providing an explanation of their significance and the situations in which they are employed as legal tools.
Understanding Legal Cultures
First of all, we must take into account that we live in a world with different legal cultures, the most important ones being the legal cultures of civil law and common law.
We also live in a global economy, and so nowadays a debtor may keep their assets literally anywhere in the world. They may also take advantage of the differences that exist among jurisdictions to hide their assets more successfully.
Therefore, when it comes to asset tracking, asset tracing and asset recovery, it’s crucial to clarify the differences between legal cultures in different countries and to be aware of the importance of harmonisation when it comes to the meaning of these three terms across the globe.
What is Asset Tracking and why is it important?
Asset tracking is the most simple form of looking for and locating the assets of a debtor. It is as straightforward as searching for the assets that your debtor has under their own name, such as a house, a car, a company, or any other asset.
The concept of asset tracking is simple but there are challenges around the divergence among jurisdictions, particularly when it comes to the different sources of information at a creditor’s disposal to actually search for assets in the name of a debtor. Not all countries have the same levels of transparency or provide the same tools to creditors.
If we focus on public registries, for example – in some countries there are land registries that are easily accessible and will allow you to determine quickly whether a debtor owns real estate in a certain jurisdiction. On the other hand, there are countries where those land registries either do not exist or are not easily accessible and, as a result, it may take weeks to find out whether or not a debtor has real estate assets in that jurisdiction.
Another example is disclosure orders. In some countries, it is relatively easy to obtain a disclosure order around debtor assets from a court, even before obtaining a judgement. Whereas, in other jurisdictions, it is very difficult, if not impossible, to obtain disclosure orders, whether or not you have a judgement against a debtor.
Therefore, if a judgement exists against a debtor whose assets are stored in a jurisdiction where public registries or disclosure orders are not available, the debtor may easily hide their assets and make that judgement completely unenforceable.
What is Asset Tracing?
When it comes to the tracing of assets, we must consider their transformational quality. Assets transform into other assets, and they also become owned by other people because assets are transmissible.
Asset tracing is the legal concept used by common law jurisdictions for a creditor to examine this chain of transmission. This study of the chain is particularly important in cases of fraud.
Example of Asset Tracing
To illustrate, imagine a debtor is a company director who has managed to divert money from the company they own, and with this money, they have purchased a house. Asset tracing is the tool that common law jurisdictions provide to the company, for them to assert their right over that house since it has been bought with company money.
Thus, provided the company can prove the link between the diverted funds and the house, they will be given a legal action to claim ownership of the house and can use it to recover the losses resulting from the fraud carried out by the director.
Common Law Vs. Civil Law
Now, as has been stated, asset tracing is a concept that is specific to common law jurisdictions. Civil law jurisdictions do not utilize this same asset tracing concept as they are not concerned with particular assets. In fact, they care about the total assets owned by a debtor.
Civil law asserts that a debtor is required to pay their debts with all of their assets – both current and future. Accordingly, a civil jurisdiction will grant a legal action to obtain first and foremost a declaration that a certain person owes you a certain amount of money, and then once you have obtained said declaration, you will be able to chase all of their assets.
Regardless, the outcome remains the same whether you live in a common law or civil law jurisdiction, since if a debtor has assets in their own name, you will be entitled to search for and claim those assets.
However, if the debtor doesn’t have assets in their own name, you must determine why this is the case, and whether you are in a situation of fraud, or insolvency. The legal system must then provide you with the instruments to enforce the judgement, or to deal with the fraud or insolvency for the debtor to pay their debts to the creditor.
What is Asset Recovery?
Finally, asset recovery is the process of returning the assets to their rightful claimant. This may seem unambiguous but can become complicated when the assets are located in a jurisdiction that is separate to the one where the claimant lives. In this case, it must be ascertained whether or not there is a legal basis that allows for the return of assets from one jurisdiction to another.
It must first be established whether courts are allowed to cooperate around the return of assets from one country to another, as this situation is not always possible. An example of this is The United Nations Convention against Corruption that allows countries to cooperate to recover funds that have been misappropriated in cases of corruption. It also allows for the repatriation of those misappropriated funds.
Unfortunately, the same cannot be said for other areas of law where asset recovery is important. For instance, European Union regulations covering certain aspects of asset recovery are only applicable to EU member states. Additionally, the UNCITRAL model on cross-border insolvency that contains provisions around the distribution of assets is only applicable in countries that have adopted this model law.
Operations around asset recovery in pure civil and commercial matters are also difficult because there is no universal treaty covering civil and commercial asset recovery.
Here we have discussed how asset tracking, asset tracing and asset recovery are different and how they are employed in varying ways across legal cultures.
We have also explored the importance of reaching a certain level of legal harmonisation in jurisdictions around these concepts, which are critical for the protection of creditors and debtors around the world.
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