Court clarifies law relating to bribery and constructive trusteeship IN Lloyds Trust Co (CI) Limited v Fragoso

In Lloyds Trust Co (CI) Limited v Fragoso(1) the Royal Court recently clarified the basis on which professional trustees hold trust assets that ultimately derive from the proceeds of bribes received by a settlor.

Facts

The trust in question was established in 1999. The settlor, Carlos Fragoso, told the trustee, Lloyds, that the moneys settled into the trust were the proceeds of engineering consultancy contracts.

However, this was not the case. The moneys were instead the proceeds of bribes paid by English construction company Mabey & Johnson to Fragoso in his capacity as an important civil servant in Mozambique. Lloyds did not know that Fragoso held this position.

The true origin of the moneys emerged in 2010, following Mabey & Johnson’s conviction in England for paying bribes in Ghana and Jamaica.

Following an investigation, it was revealed that

Mabey & Johnson had also paid more than £250,000 into a Swiss bank account relating to Fragoso.
In addition, it transpired that Fragoso had been the national director of the National Directorate of Roads and Bridges in Mozambique and had been responsible for concluding a multitude of construction contracts.
Mabey & Johnson accepted that corrupt payments had been made in Mozambique, despite no formal criminal charges being brought in relation to that jurisdiction.

Having subsequently been approached by Lloyds, Fragoso failed to explain the situation adequately, apart from denying that the moneys were derived from bribes. Lloyds applied to the Royal Court for directions, pursuant to Article 51 of the Trusts (Jersey) Law 1984 (as amended).

Decision

Origin of money

Fragoso’s stance was held by the Royal Court to be demonstrably untrue. The factors important to the court in reaching this conclusion were as follows:

Fragoso had lied to Lloyds about his occupation and source of wealth;
There was documentary evidence of bribes;
Fragoso had attempted to stop his family being made aware of the trust; and
Fragoso had failed to provide any subsequent legitimate explanation.
The court accepted that it was impossible to trace the exact origin of all of the moneys settled into the trust.
However, it applied earlier case law(2) which stated that in matters of fraud, where direct evidence is often hard to come by, it is permissible to accept “inferences of fact drawn from positive evidence of other facts”.
In light of this principle and the factors mentioned above, the court inferred, on a balance of probabilities, that all of the moneys settled into the trust represented the proceeds of bribes.

Constructive trusts

Having reached this conclusion, the court then considered the capacity in which Lloyds held the trust fund. The court had to consider two inconsistent lines of previous authority.

First, the court noted the decision of the Privy Council (on appeal from the New Zealand court) in Reid,(3) in which the court had held in particular that the recipient of a bribe received the money in breach of duty (eg, duties owed to a third party such as an employer, if the bribe was designed to influence the exercise of powers arising under a contract of employment).
Therefore, the recipient held the money as a constructive trustee for the third party to which he or she owed the duty.
The constructive trust operated from the moment that the bribe was received.
This meant that the recipient was under a duty to account to the third party not only for the nominal value of the bribe, but also for any profit or increase in value (eg, because it had been invested).
If the property representing the bribe decreased in value, the recipient was obliged to make up the difference because he or she should not have incurred the risk of loss.
Second, the Royal Court noted the decision of the English Court of Appeal in Sinclair,(4) in which the court declined to follow Reid, applying an earlier line of English Court of Appeal decisions that it felt bound to follow. In essence, the court in Sinclair held that there was no constructive trust relationship between the recipient and the third party, only that of debtor and creditor.

In the case at hand the Royal Court chose to apply the principles derived from Reid (ie, that a constructive trust should arise) over and above the competing principles derived from Sinclair. It held that there were strong policy reasons for doing so – namely, “the need to deter fraud and corruption” and to strip recipients who had channelled their ill-gotten gains through Jersey of all benefits.

Unlike the English Court of Appeal decision in Sinclair, the Royal Court was unconstrained by the operation of binding judicial precedent. Under English law, the Supreme Court or legislature would need to intervene for a recalibration to take place (despite a positive acceptance in a recent English decision that Sinclair was “unusual” and “controversial”, and that this area of law required “an overhaul… to provide a coherent and logical framework”). In contrast, the Jersey position was more flexible. In the absence of a ruling of the Privy Council on appeal directly from Jersey, other decisions (including English decisions and rulings of the Privy Council on appeal from other jurisdictions) were at best persuasive. The degree of such persuasiveness could include social and policy considerations particular to Jersey.

Therefore, on a natural extrapolation of the Reid principle, the Royal Court held that Lloyds was holding the trust fund, net of any legitimate costs, on constructive trust for the government of Mozambique, which was the party to which Fragoso owed duties (which he had breached by taking bribes in his official capacity). That declaration having been made, the moneys no longer represented the proceeds of crime and could be paid to the government of Mozambique without further delay.

Comment

This decision is of relevance for professional trustees for a number of reasons:
If a professional trustee becomes aware that a trust fund is likely to represent the proceeds of bribery, it should consider applying to the Royal Court for directions.
The Royal Court has shown itself willing to help professional trustees that find themselves in such difficult circumstances. The decision about how to proceed does not have to be taken alone.
Professional trustees should also consider their obligations under proceeds of crime legislation, including the filing of suspicious activity reports.
Conclusive evidence (ie, beyond all reasonable doubt) that the trust fund is tainted is not required.
The relevant test is whether it is likely to be tainted on the balance of probabilities.
The court recognises the difficulties often inherent in tracing the proceeds of crime and is prepared to infer fraud if necessary. This should inform the stance of the professional trustee at the outset when it is considering the evidence.
Once fraud has been established, the recipient of the bribe will be treated as a constructive trustee from the moment at which the bribe was received. The recipient of the bribe should be precluded from any gain associated with, or arising out of, the bribe.
It follows that the professional trustee is also a constructive trustee. Therefore, a professional trustee should take steps to address the issue immediately on becoming aware of it to negate the potential for any criticism.
The Royal Court is not constrained by judicial precedent in the same way as the English courts. This means that the Royal Court can act commercially and sensibly, taking into account important matters of policy in the decisions that it reaches. Decisions of the English courts are often persuasive, as demonstrated on a number of previous occasions, but the Royal Court is willing to forge its own path if necessary.
This should act not only as comfort to those already operating within Jersey, but also as encouragement to others in choosing Jersey as a place to do business.