Asset Tracing

Asset tracing is the process of following money or property from its source through each account, company and transaction it passed through, in order to establish where it is now and who controls it. It is used by law enforcement agencies, insolvency practitioners, litigators and victims of fraud to identify assets that can be frozen, seized or claimed.

Tracing is the first stage of asset recovery. It provides the evidence needed for a court to grant a freezing order, a confiscation order after conviction or a civil recovery order without one. It draws on forensic accounting, open-source research and legal powers to compel disclosure, and it is made harder by the same techniques that define money laundering: movement through many hands and places to break the link between funds and their origin.

Tracing takes place in several settings. Police and prosecutors trace the proceeds of crime in order to deprive offenders of their benefit. Liquidators and trustees trace assets moved out of a company or estate before insolvency. Claimants in commercial fraud cases trace their own money so that they can assert ownership of whatever it was turned into. Governments trace state funds taken by corrupt officials, often with help from international bodies such as the Stolen Asset Recovery Initiative run by the World Bank and the United Nations. Creditors holding an unpaid judgment trace a debtor's assets in order to enforce it.

An investigation usually begins with the point at which the money left its rightful owner and works forward, one transfer at a time. Typical sources include:

• Bank and payment records. Account statements, transfer messages and account opening files show where money went and who gave the instructions.
• Corporate and property registries. Company filings, land registers and registers of ships and aircraft reveal ownership, directors and charges, though a shell company or nominee owner often stands in front of the real party.
• Financial intelligence. A financial intelligence unit (FIU) holds reports filed by banks, including the suspicious activity report (SAR), and can exchange information with counterparts abroad.
• Open sources. Court files, leaked data sets, social media, sanctions lists and news archives help map relationships and lifestyle.
• Ledger analysis. Where funds were converted into crypto-assets, blockchain analytics tools follow them between addresses and identify the exchanges where they were cashed out; see digital asset recovery.

The findings are assembled into a flow-of-funds analysis that links each asset to the original loss. Establishing beneficial ownership, meaning the person who really benefits from an asset whatever name is on the title, is usually the hardest step.

Private parties cannot simply demand bank records, so tracing depends on court orders. In England and other common law jurisdictions, a disclosure order can require an innocent third party such as a bank to reveal information about a wrongdoer, and a bankers trust order does the same for a victim tracing its own funds. A freezing injunction prevents a defendant from disposing of assets while the claim is heard and normally requires the defendant to list them. In the United States, a federal statute allows parties to foreign proceedings to obtain evidence from persons located there.

Public authorities have stronger powers: production orders, account monitoring orders, search warrants and, between states, mutual legal assistance requests. Informal networks of asset recovery practitioners help agencies locate assets abroad before a formal request is made.

In the law of property, "tracing" also has a narrower technical meaning: the rules that decide when a claimant can treat a new asset as representing the original one, for example when stolen money is mixed with other funds in one account and then spent on a house. These rules determine what can be claimed once the factual trail has been found.

Several features of the financial system slow tracing down. Layering through multiple accounts and jurisdictions means each step may need a separate legal request, and some states respond slowly or not at all. Corporate structures in an offshore financial centre can hide ownership behind trusts and nominee directors. Cash, informal value transfer and high-value goods leave few records. Crypto-asset mixers and cross-chain transfers break the visible trail. Time also matters: banks keep records for a limited period, and assets can be moved faster than courts can act.

The recommendations of the Financial Action Task Force require countries to be able to identify, trace, freeze and confiscate criminal property, to respond to foreign requests and to keep accurate beneficial ownership information. The United Nations Convention against Corruption makes the return of stolen assets a fundamental principle. Registers of company ownership, central bank account registers in the European Union and wider access to tax and financial data have improved the starting point for investigators. Some countries also allow civil asset forfeiture, which lets the state claim property on proof that it derives from crime without convicting an individual. Even so, the share of criminal proceeds that is ultimately recovered worldwide remains small.

• Financial Action Task Force
• Stolen Asset Recovery Initiative (StAR)