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BRIBES HELD ON CONSTRUCTIVE TRUST IN JERSEY

bribes held

Our portal editor, Jonathan Fisher QC, explores a recent decision by the Royal Court in Jersey addressing the thorny issue of whether bribes are held on constructive trust for the payer. English law has not been followed on this occasion.

SPEED READ

In Lloyds Trust Co v. Fragoso the Royal Court in Jersey held that where trust funds are found to be the proceeds of bribery they will be deemed to be held by the trustee on constructive trust for the payee. The decision places added pressure on the English courts to reverse its reliance on Lister v Stubbs and follow the lead given by the Privy Council in Reid v Attorney General some years ago.

COMMENTARY

Lloyds Trust Co (CI) Ltd v. Fragoso, Hoy, Government of Mozambique and HM Attorney General [2013] JCR 211 concerned a trust established by Mr Fragoso in Jersey in 1999, where Lloyds were acting as trustee.  When setting up the trust, Mr Fragoso told Lloyds that the trust funds were proceeds of twenty years of civil consultancy contracts. However, it was later discovered, following the conviction of Mabey & Johnson for bribery offences in England, that this was not the case. It came to light that Mr Fragoso was the National Director of the National Directorate of Roads and Bridges in Mozambique, that Mabey & Johnson had met with Mr Fragoso, and that a total of £286,978.54 was paid into a Swiss bank account belonging to Mr Fragoso. When Mr Fragoso failed upon request to provide evidence as to the source of the funds, Lloyds and the Government of Mozambique sought an order that the trust funds be paid to the Mozambique Government.

The Royal Court of Jersey found that, on the balance of probabilities, the trust funds represented bribes received by Mr Fragoso in his role as public officer for Mozambique.

In deciding whether Lloyds held the funds on constructive trust for the benefit of the Government of Mozambique, the Royal Court was faced with two conflicting precedents in this regard. The decision of the Privy Council in Attorney General for Hong Kong v. Reid [1993] UKPC 2 suggested that the funds were to be regarded as held on constructive trust, but there was the more recent decision of the Court of Appeal in England in Sinclair Investments (UK) Ltd v Versailles Trade Finance Ltd & Ors [2011] EWCA Civ 347 which came to the opposite conclusion.

In Reid v Attorney General, the Privy Council considered the case of Lister & Co. v Stubbs [1890] 45 Ch. D. 1, which had always been assumed to have definitively settled the common law on this subject. In Lister v Stubbs the Court held that where a servant is found to have accepted bribes, the relationship between him and his master does not become one of trustee and beneficiary but rather a relationship between debtor and creditor. However, the Privy Council determined that this conclusion was inconsistent with the principle that a fiduciary must not be allowed to benefit from his own breach of duty. Therefore, in refusing to follow the decision in Lister v Stubbs, the Privy Council held that where a bribe (or property representing the bribe) is received, it is deemed to be held on constructive trust for the payee.

In Lloyds Trust v Fragoso, the Royal Court in Jersey decided to follow the Privy Council’s decision in Reid v Attorney General, finding the decision to be of the “highest degree of persuasiveness.” It was held that Reid v Attorney General should be accorded greater weight than the decision in Sinclair Investments v Versailles, since this decision had “made the law more complex and uncertain and dependent upon very fine factual distinctions.” The Royal Court also identified some strong policy reasons for its decision to follow Reid v Attorney General instead of Sinclair Investments v Versailles, citing the need to deter fraud and corruption and to have the ability to strip fiduciaries who have channelled their illicit funds through Jersey jurisdiction of all benefits. In addition, the Royal Court referred to the fact that many other common law jurisdictions now take a different approach to that of the Court of Appeal in Sinclair Investments v Versailles.

Unquestionably, Lloyds Trust Co v. Fragoso was correctly decided and it will almost certainly have a significant impact on the future development of English law. As a result of the decision in Sinclair Investments v Versailles, unjust enrichment claims from the recipients of bribes have become more difficult to pursue. This cannot be right, and it is surely only a matter of time before the Supreme Court is asked to intervene and approve the Privy Council’s approach in Reid v Attorney General. It is also worth pointing out that as a result of the introduction of the Bribery Act 2010, the number of potential transactions that are to be regarded as tainted by bribery has significantly increased. When dealing with a bribery case, finding that the funds are held on constructive trust is the most effective way of recovering the proceeds of crime.

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The views expressed in this article represent those of the author and not Bright Line Law.

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