In cases involving fraud, corruption, and intentional asset dissipation, legal practitioners often find themselves advocating for clients who have suffered substantial losses, only to face the harsh reality that victims frequently recover little to nothing. According to the Australian Competition and Consumer Commission (ACCC), scams cost Australians over $2 billion in 2021 alone, with 56% of those who lost money unable to recover any of it,^[i] a statistic that underscores the pervasive challenge of asset recovery in a landscape riddled with evasion tactics.

High-profile cases illustrate how the trail of money can vanish into intricate webs of offshore accounts and shell companies: “Money can travel where it wishes, while law enforcement stops at a country’s borders.”^[ii] This outlook fosters a reluctance among victims and counsel to pursue claims, as the prevailing belief is that recoveries are elusive.

Effective recovery depends on a multi-faceted investigative process, leveraging forensic accounting, open-source intelligence, and legal tools to identify relationships and reconstruct the true flow of value despite deliberate obfuscation.

The Complications of Funds Tracing

Funds tracing is not limited to following a linear path of bank transfers; rather, it often requires uncovering intricate networks of related party dealings. In many cases, illicit funds are deliberately routed through spouses, children, close associates, or entities with overlapping directorships. Shelf and shell companies, trusts, and opaque partnerships are frequently deployed to disguise beneficial ownership, making it appear as though funds have been legitimately transferred.

Tracing is further complicated by the diversion of funds into alternative asset classes. Common strategies include the acquisition of real estate, luxury vehicles, bullion or cryptocurrency, or the rapid transfer of value into overseas jurisdictions beyond the immediate reach of domestic regulators and courts. Each of these transactions adds another strand to an already tangled web, requiring investigators to move beyond traditional techniques.

However, there is a path forward to a meaningful recovery: assembling the right multidisciplinary team—including forensic accountants and investigators with global networks—who perform this work routinely, anticipate fraudsters' tricks, and employ a multi-faceted investigative strategy from the outset.

Early Intervention Can Be Critical to Successful Tracing

Success in asset tracing begins with robust evidence gathering. An overreliance on traditional discovery processes may be futile in fraud and corruption cases, as perpetrators are unlikely to voluntarily disclose incriminating details. Law enforcement can be a viable option, but with limited resources there is a higher risk of dissipation of assets by the time they have the resources to act. Exploring the available civil options is key to maximizing recoveries.

In Australia, search and freezing orders may be secured where there is evidence of fraud and a real risk that the respondent may attempt to hide, move, or dispose of assets.^[iii]

Search Orders

In our experience, the swift procurement of search orders, including laptop and phone imaging, serve as a vital springboard for deeper inquiries. Prompt access to devices allows investigators to uncover networks of close personal or business connections facilitating transfers, and to identify applications linked to:

• Cryptocurrency exchanges and wallets
• Domestic and international banking platforms
• Online gambling accounts
• Encrypted communication channels

Physical searches of the homes and businesses of the persons of interest can also establish the presence of hard wallets, password safes, and recovery phrases for cryptocurrency storage—often the only means of accessing otherwise irretrievable digital assets. Capturing this information at the outset not only preserves fragile evidence but also establishes the roadmap for subsequent subpoenas and freezing orders, maximizing the likelihood of successful recovery.

Freezing Orders, Bank Statements and Accounting Records

With the intelligence gathered from search orders, teams can then pursue subpoenas for bank records and secure freezing orders to preserve assets, setting a proactive tone that maximizes recovery potential from the very start.

Analysis of bank statements allows for iterative requests for documents and data as new leads emerge. Ideal data sources include:

• Bank statements for transaction reconstruction, providing a chronological series of events to investigate
• Accounting records, such as the bank account general ledger data. With the prevalence of accounting software platforms, automated bank feeds can streamline access to bank statement information, potentially bypassing the need for bank statement retrieval and reducing the need for manual data input.

Analysis of transaction data alongside open-source intelligence can identify related parties through examining networks and connections. A key focus in funds tracing is identifying transfers to previously unknown accounts and potential asset purchases. Each identification results in additional discovery requests.

Insolvent Entities

When an insolvency practitioner in Australia is appointed over an insolvent entity, their duties include collecting books and records and investigating the examinable affairs of the entity. They can seek approval for a public examination, which is considered a valuable investigative tool.^[iv]

In a public examination, a person who is examined is “obliged” to answer questions that the court directs the person to answer unless they have a reasonable excuse. This is different from civil court, where there is protection against self-incrimination, i.e., “the right to silence.” The obligation to answer questions increases the likelihood that critical information to locating assets can be ascertained.

The investigator plays a critical role in developing a sufficient evidentiary basis for legal practitioners to obtain search and freezing orders, as well as approval for public examinations.

Cryptocurrency

Crypto crime is evolving and escalating, with an estimated $51 billion flowing through illicit crypto wallets in 2024.^[v]

Cryptocurrency poses a particular challenge for asset tracing. While many blockchain ledgers are transparent, offenders exploit privacy-focused tokens, decentralized exchanges, and “layering” techniques across multiple wallets to mask their identities.

Tracing crypto assets often requires advanced forensic tools and methodologies to identify wallet clustering.^[vi] Unlike traditional banking, where accounts are tied to verified identities, the anonymous nature of blockchain increases the difficulty of linking wallets to real-world individuals. Nonetheless, by combining on-chain analysis with related party investigations and asset-purchase tracing, investigators can improve prospects of recovery in even the most complex schemes.

Tracing Commingled Funds: Insights From Australian Case Law

Once equipped with the right information, funds tracing can be presented as evidence in court to secure assets. Funds tracing can involve thousands of transactions spanning hundreds of bank statements. However, it can be further complicated when "dirty" (tainted) funds are commingled with "clean" (untainted) funds.

Australian courts apply equitable principles to funds tracing, with methodologies selected based on case specifics. Forensic accountants, guided by lawyers, can use various funds tracing methods depending on the jurisdiction and the circumstances pertaining to each case. Five approaches are explained below:

Lowest Intermediate Balance Rule (LIBR):

• This tracing method, developed in England in 1915, caps claims at the lowest account balance after the traced deposit. This ensures claimants cannot receive more money than the amount that logically “survived” the mixing.
• The LIBR method assumes traced funds survive only up to the lowest account balance post-deposit, unless the intent to replenish tainted funds is proven through other supporting evidence. It has been commonly applied in cases brought by the United States Department of Justice.^[vii]
• Relevant Cases:
  • Re French Caledonia Travel Service Pty Ltd (in liq) [2003] NSWSC 1008, stated that "the aim of tracing is to identify property which is still in the hands of a defendant, and which can be seen to be in substance the property of the plaintiff, no more than the lowest intermediate balance in a mixed account can meet that test."^[viii]
  • ASIC v Letten (No 7), referenced Law Society of Upper Canada v Toronto Dominion Bank (1998) 169 DLR (4th) 353, noting LIBR's complexity: "No authority has ever applied the lowest intermediate balance rule in circumstances involving the rival claims of trust beneficiaries… This, I suspect, is because although LIBR may be 'manifestly fairer' in the pure sense of a tracing analysis, it is manifestly more complicated and more difficult to apply than other solutions."^[ix]
     
• Advantage
  Prevents overstatement of the recoverable amount by establishing a clear cap on claims, promoting certainty; assumes the wrongdoer spends their own funds first, thereby preserving the claimant’s funds.
   
• Disadvantage
  Can be arbitrary if balances fluctuate artificially and is ineffective for overdrawn accounts.
   
• Considerations
  Previously this approach was ideal for simple beneficiary-trustee disputes; however, evolving technology such as AI can now automate tracing and calculations.

Pro-Rata (Pari Passu) Allocation:

• Distributes remaining funds proportionally among claimants, ignoring deposit order.
• Relevant Case:
  ASIC v Letten (No 7) chose to apply pro-rata as this method was practical and less costly compared to other methods which "involve[d] considerable time and expense."^[x]
   
• Advantage
  Equitable for simultaneous losses; cost-effective in complex cases or where records are limited.
   
• Disadvantage
  May disadvantage earlier contributors as it assumes equal risk-sharing.
   
• Considerations
  It is often the default method for high-volume transaction scenarios where detailed tracing is uneconomical, such as in Ponzi scheme wind-ups.

Hybrids (e.g., LIBR-Pro-Rata or The North American Model):

• This approach combines methods for nuanced allocation, such as capping via LIBR then applying pro-rata, or prorating losses after each misappropriation. (The North American Model is also known as the Rolling Charge Method.)
• Relevant Case: 
  Rejected in ASIC v Letten (No 7) as a result of its "complexity and cost associated with its application."^[xi]
   
• Advantage
  Flexible for multi-party disputes.
   
• Disadvantage
  Increases analytical complexity.
   
• Considerations
  Evolving with case law as courts prioritize fairness; evolving technology aids in simulation and the application of methodologies previously deemed too complex and costly.

First-In, First-Out – FIFO, also referred to as Rule in Clayton’s Case:

• Assumes withdrawals deplete the oldest deposits first. This method is largely rejected in equity for mixed trust funds because of its arbitrariness.
• Relevant Case: 
  Rejected in ASIC v Letten (No 7) as "Recent Australian authorities have declined to apply Clayton’s Case in circumstances where (as here), beneficiaries’ moneys have been deposited into a mixed fund."^[xii]
   
• Advantage
  Systematic for running accounts (such as bank statements) as it provides a chronological rule-based approach to allocate outflowing funds.
   
• Disadvantage
  Unfair in multi-beneficiary scenarios as it assumes funds from earlier claimants are utilized first.
   
• Considerations
  Rarely applied as more equitable methods are preferred.

Backward Tracing:

• Traces funds retrograde, linking later transactions to earlier assets if intent is shown, e.g., discharging a loan with trust money.
• Relevant Case:
  While not an Australian case, Federal Republic of Brazil v Durant International Corporation [2015] UKPC 35 applied backward tracing to recognize claimant funds into an overdrawn account where they could provide evidence that the funds were linked to bribe payments.^[xiii]
   
• Advantage
  Counters fraudsters' sequencing manipulations.
   
• Disadvantage
  High evidentiary threshold for intent.
   
• Considerations
  May be useful in sophisticated schemes, like layered crypto transactions.

Assemble the Right Team

Experienced practitioners bring not only technical expertise but also the ability to leverage advanced technologies—such as AI-driven analytics and the application of tracing rules like the Lowest Intermediate Balance Rule (LIBR) —to resolve matters once considered too complex.

Engaging specialist forensic accountants and investigators ensures that appropriate methodologies are applied effectively, rather than cases being prematurely abandoned when they reach apparent dead ends.

How Alvarez & Marsal Can Help

A&M has exceptional global capabilities and access to sources on the ground including Europe, select countries in the Middle East and Africa, the Americas, Asia, and Australia, and most offshore banking jurisdictions. We build investigative teams around each case with support from our in-house experts around the world. Our team collaborates with diverse teams, including lawyers, insolvency practitioners, litigation funders, communication specialists, forensic accountants, and corporates.

For lawyers, partnering with forensic accountants not only strengthens evidentiary positions but also enhances outcomes in high-stakes litigation. Early engagement and methodological awareness are key to navigating these complexities effectively. A&M’s global disputes and investigations expertise and resources position us to guide you through these challenges.

The views and opinions expressed in this article are those of the authors.

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