Who Owns A Bribe?

Secret commissions and bribes have unfortunately become an increasingly common feature of doing business in certain parts of the world. The Jersey and UK courts have now provided the answer to the vexing question of who owns a bribe. Once established, ownership gives rise to an ability to trace the proceeds of a bribe or secret commission into the hands of a third party. That calls for an understanding of the different approaches to tracing, particularly when Jersey's differs from that adopted in the UK.

On 16 July 2014, the UK Supreme Court handed down its judgment in FHR European Ventures LLP v Cedar Capital Partners LLC ("FHR").1 This decision settles a long-running argument as to whether a principal has a proprietary or a merely personal claim against an agent who takes a bribe or secret commission. The significance of the distinction between a personal and proprietary remedy is twofold; if the agent becomes insolvent, the principal will maintain priority against the body of the agent's unsecured creditors to the extent of the asset over which a proprietary interest is claimed. Secondly, a proprietary remedy permits the principal to trace the proceeds of the bribe or secret commission into the hands of a third party. The issue in FHR was decided last year by the Jersey Royal Court, in Lloyds Trust Co (Channel Islands) Ltd v Fragoso ("Fragoso").2 In that case, the settlor of a trust, Carlos Fragoso, had told the trustee when he settled funds in 1999 that the assets were the proceeds of his work as a civil engineer in the US and Africa. It emerged in English criminal proceedings that the UK construction company, Mabey & Johnson, had bribed Mr Fragoso to secure construction contracts in Mozambique. The Jersey trustee became aware of the English criminal proceedings and conducted its own investigation, leading to the filing of a suspicious activity report with the Jersey Joint Financial Crimes Unit. Lloyds asked Mr Fragoso to provide evidence of the source of the funds that it was holding as trustee, but he failed to do so. The trustee then sought directions from the Jersey Royal Court as to what it should do. The Royal Court, having heard evidence that large "commission" payments had been paid to Mr Fragoso, found, on the balance of probabilities, that all of the funds within the trust represented the proceeds of bribes received by him in his position as a public official for Mozambique. Despite the paucity of the evidence, the Jersey court made clear that it was willing to draw appropriate inferences, for example, in circumstances where Mr Fragoso, as a full-time public official, could not possibly have set up the trust from his earned income. The Jersey court was faced with a choice between following a line of legal authority in English law3 that the commission payments were not the property of the Mozambique Government and that the Government merely had a personal right of action against Mr Fragoso or, following the Privy Council decision of Att‐Gen (Hong Kong) v Reid4 on the same point, that the Government did have a proprietary claim to the trust assets. The court declared and directed the trustee to hold the trust fund for the benefit of the Government of Mozambique and not Mr Fragoso. Having surmounted the threshold of establishing a proprietary interest (by way of constructive trust) in the bribe or secret commission, the possibility of tracing the proceeds then arises. The decision of the Royal Court in Federal Republic of Brazil v Durant Intl Corp,5 which was referred to obiter in Fragoso, significantly restated Jersey's rules on the practice of equitable tracing in support of a proprietary remedy. The combined effect of the Fragoso and Durant decisions is to enable defrauded principals better to recover assets misapplied by their fiduciaries through the Jersey courts. BACKGROUND TO THE SUPREME COURT'S DECISION

FHR European Ventures LLP ("FHR") purchased the share capital of Monte Carlo Grand Hotel SAM from Monte Carlo Grand Hotel Ltd. Cedar Capital Partners LLC ("Cedar") acted as FHR's agent in negotiating the purchase. Unknown to FHR, Cedar had a contract with Monte Carlo Grand Hotel Ltd under which Cedar would be paid a fee of €10m following the successful completion of the sale and of the share capital in Monte Carlo Grand Hotel SAM. FHR sought recovery of the €10m as an undisclosed secret commission contrary to Cedar's fiduciary duty as agent for FHR. THE FIDUCIARY NATURE OF AGENCY

In Jersey law, as in English law, an agent owes a fiduciary duty to his principal because he is someone who has undertaken to act on behalf of his principal in a particular matter in circumstances that give rise to a relationship of trust and confidence. An agent must not make a profit from this trust and must not place himself in a position in which his duty and interest conflict. A fiduciary who acts for two principals with actual or potentially conflicting interests without the informed consent of both is in breach of the obligation of undivided fidelity. Informed consent can only be effective if the agent gives full disclosure to each principal. An agent who receives a benefit in breach of his fiduciary duty is obliged to account to the principal for such a benefit and to pay a sum equal to the profit by way of equitable compensation. The rule that a fiduciary must not profit from his trust can be traced back to the 18th century English case of Keech v Sandford6in which a trustee held a lease on trust for a minor beneficiary and having failed to negotiate a new lease on behalf of the beneficiary, the trustee negotiated a new lease in his own name for himself. The beneficiary was entitled to an assignment of the lease and an account of profits made by the trustee. The effect of the judgments in Fragoso and now in FHR is that where an agent acquires a benefit as a result of his fiduciary position or pursuant to an opportunity which results from his fiduciary position, he is to be treated as having acquired the benefit on behalf of his principal. The benefit is beneficially owned by the principal and not the agent. This produces a two-pronged approach for a plaintiff who may pursue a proprietary remedy in addition to his personal remedy for an account. The principal may elect which remedy he wishes to pursue. THE ARGUMENTS

The Supreme Court heard arguments from leading English counsel as to the correct treatment of bribes and secret commissions paid to agents. On behalf of Cedar it was argued that a bribe or a secret commission cannot be subject to a proprietary remedy in favour of a principal because it cannot properly be described as the property of the principal in the first place as it did not flow from an asset beneficially owned by the principal nor was it an asset that was intended for the principal that had been diverted from him. Nor can it said to be derived from an activity of the agent which if he chose to undertake it for himself in his own interests, he was under an equitable duty to undertake for the principal. On behalf of FHR it was argued that an agent ought to account in specie to his principal for any benefit he has obtained from his agency in breach of his fiduciary duty—the benefit is rightly to be regarded as the property of the principal. Equity should not permit the agent to rely on his own breach of fiduciary duty to justify retaining the benefit on the ground that it was a bribe or secret commission. The court must assume that the agent acted in accordance with his duty, so that the benefit must belong to the principal. The Supreme Court decided that where an agent takes a secret commission or bribe, a proprietary remedy was available (in addition to a personal one) on the basis of legal principle, decided cases, policy considerations and practicality. PRACTICALITY, POLICY AND PRINCIPLE

A considerable part of the Supreme Court judgment reviews the law as pronounced in previous cases. The court overturned the basis upon which the Court of Appeal in Sinclair Invs Ltd v Versailles Trade Fin Ltd7held that a proprietary remedy was not available. The court also departed from 19th century House of Lords authority to the same effect. The court decided FHR's arguments had the benefit of first being wholly consistent with the principles of the law of agency, and secondly having the benefit of simplicity: any benefit acquired by an agent as a result of his agency and in breach of fiduciary duty is held on trust for the principal. The decision also neatly aligns the rules of equitable accounting, which can encompass both personal and proprietary claims. The court considered that any other result would have left the relevant concepts somewhat incongruous. The same test (whether the benefit was acquired by an agent as a result of his agency and not disclosed) will therefore now apply to whether an agent has to account personally and to whether the principal has a proprietary interest in the proceeds of a bribe or secret commission.8 This decision in FHR covers both bribes and secret commissions. A secret commission is conceptually distinct from a bribe in that it does not have to be established that the person paying the commission was inducing the recipient to breach his duty. In other words, when seeking a proprietary remedy, it is not necessary to establish the purpose for which the money was paid in order to be able to seek a proprietary remedy. Nor is it necessary for a plaintiff to prove that the payment actually resulted in the agent doing something he would not otherwise have done. At para 42 of the judgment, the court said— "Wider policy considerations also support [FHR's] case that bribes and secret commissions received by an agent should be treated as the property of his principal, rather than merely giving rise to a claim for equitable compensation. As Lord Templeman said giving the decision of the Privy Council in Attorney General for Hong Kong v Reid [1994] 1 AC 324, 330H...