In Chile there is no comprehensive legislation dealing specifically with asset recovery. However, victims of fraud may use the general tools that are available according to Chilean law for victims of crime that seek restoration. As in the majority of countries around the world, Chilean legislation allow both civil and criminal remedies in order to achieve the recovery of assets. Moreover, it is common to file both criminal and civil actions, with the possibility to file civil actions within a criminal proceeding or after a criminal conviction has been obtained. Insolvency proceedings, particularly after the revamping of its regulatory framework in 2014, play also an important role, especially in cases with multiplicity of victims and with cross-border components.
The possibility to initiate precautionary measures are available in criminal and civil proceedings, although criminal courts tend to focus on the determination of criminal liability rather than the economic restoration of the victim or a third party. The burden of proof relies on the party that states the occurrence of the act that caused him or her harm.
Over the last few years, asset tracing and recovery have acquired a new dimension in the Chilean judicial and political agenda. Major financial scandals, particularly a series of Ponzi schemes that were unveiled in 2016, have put legislation and the action of the Public Prosecutor's Office under the spotlight, as the compensation of a multiplicity of victims and the recovery of assets that where hidden abroad required putting all available tools to the test, including cooperation in cases of cross-border insolvency.
The current development of affairs in the financial system – especially those related to fintech companies – will most likely force a much needed institutional modernisation in order to effectively investigate and prosecute a thriving range of crimes that are most often executed from one jurisdiction, but have effects on another, and where assets have to be recovered in a multiplicity of jurisdictions.
II LEGAL RIGHTS AND REMEDIES
i Civil and criminal remedies
As already mentioned, under Chilean law victims of fraud may use civil or criminal proceedings, or both, to seek recovery of the defrauded assets.
As it is the case of victims of crimes in general, persons who have been offended by fraud may initiate a criminal proceeding, by filing a criminal action. In Chile, the prosecution of crimes is dealt by the Public Prosecutor's Office, an autonomous entity that handles investigation and prosecution before criminal courts. As claimant, the victim has the right to act as an active party in the criminal proceeding, being able to propose investigative measures to the Public Prosecutor's Office, make some type of petitions during the proceedings and to attend all hearings that are held before courts. As public prosecutors are more focused in pursuing the criminal liability of the fraudster rather than the economic restoration of the victim, in practice it is important to be very active as a claimant in order to suggest measures to effectively lead to the recovery of assets within a criminal proceeding.
There are different ways to recover assets through this type of proceeding. In connection with objects that were taken from the victim through fraud and were seized during the criminal investigation, it is possible to request the restoration of these assets through a simple application to the court. Objects are immediately restored, once their value and ownership has been established. When the victim solely seeks the restoration of the object, and does not jointly interpose a civil liability action, it can be exclusively filed during the investigation phase of the criminal procedure. However, this simple restoration action can be problematic in cases where it is not possible to establish that the asset clearly belongs to the victim or where the asset has been transformed by the fraudster into another asset. Also in cases of multiplicity of victims this may be problematic, as there are no rules for criminal courts as to the order and proportion in which victims should be compensated.
The other possibility to obtain restoration within a criminal proceeding is by filing a civil action against the defendant for damages (tort liability). Civil action seeking compensation for the civil damages of criminal conduct can be filed in the same criminal proceeding or before the competent civil court. Nevertheless, once the action has been exercised before the criminal court, this precludes the right to do so in a civil court. On the other hand, if the action is brought by a third party, or directed against a person other than the accused, it must be brought before the competent civil court.
During the course of the criminal proceeding, it is possible that civil compensation is obtained through a settlement with the defendant. The public prosecutor cannot oppose this agreement, except in certain cases where there is a public interest involved in the criminal prosecution of the case. The defendant may also reach a deferred prosecution agreement (DPA) with the public prosecutor, to which the victim has no veto right. However, public prosecutors tend to only agree to these DPAs if a complete, or at least reasonable, compensation to the victim is offered by the defendant.
Chilean law states that victims of acts of dishonesty have to be restored to the state prior to the commission of the act or to obtain the corresponding compensation. As stated above, if a criminal proceeding exists, the action to solely seek the recovery of the object lost by fraud can only by filed within the criminal proceeding. Other civil liability, particularly a civil action asking for full compensation of damage, can be filed in the criminal proceeding or directly before a civil court. Thus, it is possible to have parallel criminal and civil proceedings.
It is necessary to point out that civil liability is independent of the criminal liability. Therefore, once the right to bring a civil action is extinguished, the right to file criminal action persists. In the same sense, the circumstance of issuing an acquittal in a criminal matter does not automatically prevent the civil action from arising, if legally appropriate. On the other hand, criminal convictions produce res judicata in civil courts, and the plaintiff cannot adduce evidence or allegations that are incompatible with the decision in a criminal sentence or with the decisive considerations of that judgment.
The Chilean Civil Code expressly states that if the offence is committed by two or more persons, each of them will be jointly liable for any damages arising from that conduct. Chilean law states that victims of acts of dishonesty have to be restored to the state prior to the commission of the act or to obtain the corresponding compensation.
Moreover, the Civil Code contemplates an action that allows an innocent third party to be sued for profits made as a result of a fraudulent act committed by another person. Third parties, who benefit from someone else's misconduct, respond only up to the amount with which they were benefited.
Complex civil trials can easily last more than five years. Criminal procedures, as well as arbitration, are, in general, more agile, due to laws that prevent excessive appeals.
ii Defences to fraud claims
Faced with this type of actions, defences will normally question the necessary elements for the configuration of the crime in question. It is common that they contest the existence of a scam and argue that damage caused to the victims obeys to bad commercial decisions or the risks of every business rather than to a fraud. Defendants also use to challenge damage, arguing that there are enough assets to cover all debts, which usually responds only to a dilatory tactic.
Additionally, the statute of limitations may be a defence against criminal or civil actions mentioned above. Criminal liability in common fraud cases has a statute of limitation of five years, which can go up to 10 years in some cases. According to the Civil Code, civil liability for a crime is statute-barred for four years counted from the commission of the act.
III SEIZURE AND EVIDENCE
i Securing assets and proceeds
Chilean law considers precautionary measures to seize the assets of the accused.
Despite being regulated in the Chilean Code of Civil Procedure, precautionary measures may be requested both in civil and criminal proceedings in order to protect the economic interests of the victim.
Precautionary measures extend to any act that ensures or protects the claim deduced or the favourable sentence that could be pronounced. The code regulates four measures in particular:
- the sequestration of the good that is the subject of the lawsuit. This measure consists in the deposit of the property in the hands of a third party, which is obliged to keep it to prevent its loss or deterioration and to return it at the termination of the trial to the person determined by the judge;
- the appointment of one or more auditors. This is the appointment of a person by the court who will ensure the legality of the administration of the assets that are the subject of the lawsuit, keeping track of the entries and expenditures of the objects intervened and giving notice of any embezzlement or abuse noted in the acts of the accused;
- the retention of certain goods. This measure seeks to ensure effective enforcement of the judgment by seizing property and preventing its sale. The seizure can be of a legal or material nature (in this case the goods pass to the claimant or a third party); and
- freezing of assets: The prohibition on carrying out actions or contracts over certain assets. This is court-ordered in order to prevent the defendant from validly doing any legal act in relation to movable or immovable property owned by him.
Broadly speaking, petitioners must fulfil two requirements for a judge to enact these measures. First, the plaintiff must present proof that constitutes at least a serious presumption of the claimed right. Additionally, he or she must provide the evidence of the existence of a danger in delay, which could result in the impossibility of enforcing the judgment. Courts are very strict in the appreciation of these requirements.
All of these measures may be requested to a judge at any stage of the trial even before the plaint is filed.
In criminal proceedings, it is possible to request these measures, but only once the prosecutor has pressed formal charges against the defendant, which can be too late. This is why in cases where there is no expectation that the public prosecutor will present formal charges in a short period, it may be advisable to request the pertinent precautionary preliminary measure in a civil court in the first place.
In criminal proceedings it is also possible that the pubic prosecutor seizes assets with a judge's order. These objects may be subject to the penalty of confiscation in the final ruling. As mentioned above, the interveners or third parties may file claims to obtain the restitution of objects collected or seized. As a general rule, they will not be returned until the procedure has been finalised. The exception to this rule is the seized goods that come from fraud, which will be delivered to the owner at any stage of the procedure, once the ownership of the good has been proven by any means.
ii Obtaining evidence
Chilean law does not contemplate a general discovery system as known in common law systems. In connection with civil actions, the facts of the claim must be introduced and proved by the party that alleges them. The burden of proof is generally in charge of the person who claims the positive act, as the judge in this system is limited to issuing orders to proceed.
However, the Civil Procedure Code establishes certain limited measures that can be ordered by the court upon request, by means of which certain evidence can be obtained from another party, in some cases even prior to filing a civil action and as a way to be able to prepare the action. In this context, a court can order the exhibition of accountancy books of the defendant or any specific document that might be of interest in the matter. The exhibition of documents that are held by the counterpart or by third parties can be also be ordered during the trial, to the extent they have a direct relationship with the matter under discussion and that they are not confidential.
In criminal proceedings, the public prosecutor has more tools at his or her disposal to gather evidence, which is another good reason to file in cases of fraud not only a civil action, but also a criminal action in order to have access to evidence to proof the fraud.
IV FRAUD IN SPECIFIC CONTEXTS
i Banking and money laundering
Regarding fraud in the banking field, the General Law of Banks establishes a specific fraud with respect to those who obtain loans from credit institutions, providing false or incomplete data regarding their identity, activities or patrimonial situation, causing damage to the financial institution. But nowadays the most relevant fraud cases in the banking system are those related to cybercriminality. Over the last year, there have been many cases that have shown the weakness of banks in Chile to protect the client's sensible credit card and bank accounts information, which has lead to fraud cases against clients. There is a trend in court precedents, which in such cases have made the banks liable for the damage causes by frauds suffered by their clients.
On the other hand, Law No. 19,913, in force since 2003, contains the main anti-money laundering regulations in Chile. This Law regulates the Chilean anti-money laundering prevention system. The purpose of these regulations is to prevent the laundering of assets derived from unlawful acts, avoiding the use of the financial system and other actors of the financial system for money laundering. For this purpose, Law No. 19,913 created the Financial Analysis Unit (UAF).
To this end, the UAF has the power to request, verify, examine and record information on suspicious activities and request all the files that appear relevant in the context of the report of a suspicious transaction. In addition, it can exchange information with similar agencies abroad, and access the databases of public agencies if more information is required to complete the analysis of the suspicious transaction. In cases where the information is covered by secrecy duties or is in the hands of a person that is not among the entities that have a reporting duty according to the Law, this request of information has to be approved by a judge of the Court of Appeals of Santiago.
Moreover, if the UAF considers that from the gathered information, there are indications of a crime, it has the obligation to inform the Prosecutor's Office immediately. The Prosecutor's Office, which is the entity in charge of investigating and prosecuting money laundry offences, has, on its turn, additional powers to investigate such illegal conduct, including the possibility of requesting the lifting of bank secrecy, wiretapping of communications and seizure of documents, among others.
According to Chilean law, money laundering is committed by anyone who in any way hides or conceals the illicit source of certain assets, knowing that they proceed, directly or indirectly, from the perpetration of conduct that constitutes any of the predicate crimes listed by the law, or who knowing the origin of these assets, hide or disguise them.
Law No. 19,913 also punishes whoever acquires, possesses, has or uses the aforementioned goods for profit, when at the time of receiving them he or she knew of their illegal origin.
Before the enactment of Law No. 19,913 back in 2003, the only predicate offence that served as basis for money laundering was drug trafficking. Law No. 19,913 included a broader scope of offences, which may give rise to money laundering as a criminal offence. This list has experienced an ongoing expansion over the last years. Even though fraud in some specific contexts was considered a predicate offence since 2003, such as banking fraud and certain securities fraud offences, it was only in 2015 when common fraud was included as predicate offence of money laundering. This is why many fraud investigations also include the prosecution of money laundering. This has been an important improvement for the chances of success of victims of fraud to find assets, as anti money laundering provisions provide public prosecutors with additional and enhanced investigation powers.
Criminal infringements of laws committed in other jurisdictions may also serve as predicate offences of money laundering activities carried out in Chile, to the extent that those acts would also constitute one of the predicate offences according to Chilean law.
Both natural and legal entities can be prosecuted and sanctioned for committing money laundering. In the case of individuals, penalties include imprisonment of up to 15 years, fines of up to approximately US$80,000 and the confiscation of the laundered assets. Even though the law expressly permits the separate imposition of a penalty for the predicate crime and the associated money laundering, the imprisonment penalty imposed for the latter can in no case exceed the highest penalty that is established by law for the predicate offence.
In those cases in which, as a result of criminal acts or omissions of the indicted person, the seizure or some other precautionary measure could not be imposed on the goods that are the object or product of the criminal activities, the court will be able to impose, at the request of the prosecutor, the seizure or some precautionary measure on other assets that are owned by the person for a value equivalent to that related to the crimes. these assets may also be subject to forfeiture in the event of a conviction.
All assets subject to forfeiture in these cases are for the benefit of the state, which may constitute a conflict between the interests of the state and the victims, as there are no special provisions dealing with indemnities or compensation to potential victims in connection with money laundering.
Chilean insolvency law was subject to a profound amendment in 2014. On that occasion, the statute applicable to insolvency offences was also improved. Currently anyone who, within the two years prior to the date on which the court declares the liquidation, executes acts or contracts that diminish their assets or increase their liabilities without any other economic or legal justification than harming their creditors, is punishable under law.
Under this law, debtors are criminally responsible if they partially or totally hide their assets; receive or use assets that must be subject to a liquidation process; perform real or simulated acts of disposition of assets or to constitute a lien on the assets once the settlement resolution has been issued; provide false or incomplete information during the liquidation or reorganisation process; and provide undue advantages to a creditor, the debtor or a third party, among others.
This law at the same time regulates the issue of cross-border insolvency, based on the UNCITRAL model law established by the United Nations Commission on International Trade Law. It determines cooperation between Chilean courts and other agencies involved and the foreign States that intervene in cases of insolvency, in order to give greater protection to national or foreign creditors and the assets of the debtor.
In that sense, it established important proceedings in order to regulate the cross-border effects of insolvency. For instance, it states the way to request that a foreign proceeding be recognised in Chile, the way assets of the debtor located in Chile may be protected and the manner in which a creditor or other person abroad that is interested in requesting the procedure or participating in one may do it, among others.
It has become common that in criminal fraud investigations with a large number of victims (particularly on Ponzi scheme cases), a parallel insolvency proceeding is carried out. Even though insolvency law establishes certain provisions in order to avoid conflicts between liquidators and public prosecutors, particularly in connection with seizure of assets and distribution of proceeds among victims, there are still some grey areas, which lead to uncertainties in this field.
Criminal cases cannot be subject to arbitration, although the civil liability derived from the crime may be submitted to the competence of arbitration tribunals. Naturally, arbitration means faster proceedings than in ordinary courts, but at a higher cost. In any case, it is not uncommon that parties in arbitration argue that breaches of the other parties are due to fraud and also start parallel criminal proceedings.
In Chile's legal system, the arbitral tribunals lack the power to execute resolutions. In cases where force is required to comply with the judgment of an arbitral tribunal, the arbitrator must issue an order to the ordinary courts to execute the ruling. Ordinary courts will not be able to review the merit or the opportunity of the resolution, thus being exclusively responsible for supervising the compulsory compliance of the sentence.
Finally, the Law on International Commercial Arbitration, in force in Chile since 2004, authorises the arbitral tribunal to order provisional precautionary measures at the request of one of the parties if they deem it necessary, unless the parties agreed otherwise beforehand. In this way, a foreign arbitral tribunal could decree precautionary measures on assets located in Chile. This provision, however, has not been applied by the Chilean courts, and the Supreme Court has ruled that such a request must be filed directly before Chilean ordinary courts.
iv Fraud's effect on evidentiary rules and legal privilege
There are no special rules on the matter. Evidentiary rules and privilege fully apply in fraud cases.
V INTERNATIONAL ASPECTS
i Conflict of law and choice of law in fraud claims
The principle of territoriality applies in Chile, under which a sovereign state can prosecute criminal offences that are committed within its borders. In the event that the crime is committed in more than one country, the general opinion is that both countries are competent to prosecute the felony.
Exceptionally, Chilean criminal law seeks to receive extraterritorial application, based on other principles, in some cases. For example, Chilean law claims jurisdiction to prosecute and judge crimes committed by Chileans against Chileans if the guilty party returns to Chile without having been tried by the authority of the country where he or she committed the crime. Also, the crimes perpetrated outside the territory by a diplomatic or consular agent who is in exercise of his or her functions are subject to national jurisdiction.
ii Collection of evidence in support of proceedings abroad
The Chilean Criminal Procedure Code establishes that requests to execute measures in Chile ordered by competent authorities of a foreign country will be sent directly to the Prosecutor's Office, which will request the intervention of the competent judge when the nature of the measure makes it necessary.
The requests to carry out proceedings in Chile are centralised by the UCIEX,2 which is a specialist unit that is part of the Prosecutor's Office. This unit analyses the requirements and forwards the requests and its background to the competent regional prosecutor.
Chile is a member of a series of international treaties, both bilateral and multilateral, in order to facilitate and expedite the process with the members of these treaties. Among others, Chile is part of the following treaties: the Code of Private International Law; the Inter-American Convention on Mutual Assistance in Criminal Matters; the Agreement of Mutual Legal Assistance in Criminal Matters between the States Parties of MERCOSUR and the Republic of Bolivia and the Republic of Chile; the United Nations Convention against Transnational Organized Crime and its two Additional Protocols; and the European Convention on Mutual Assistance in Criminal Matters.
iii Seizure of assets or proceeds of fraud in support of the victim of fraud
In order to be able to execute a precautionary measure on assets located in Chile of a person who committed a crime abroad, either the foreign judgment must be enforceable or the Chilean court must have jurisdiction over the matter.
Therefore, in most cases it is not possible to establish precautionary measures in assets that are located in Chile to ensure the outcome of a trial abroad.
iv Enforcement of judgments granted abroad in relation to fraud claims
The Chilean Code of Civil Procedure has established a system to allow the recognition of foreign judgments (exequátur) comprising three alternative criteria, applicable in the order established by law. First, if an international treaty regarding recognition of foreign judgments exists with the country of origin of the foreign judgment, the analysis of recognition will be done according to that treaty. Second, in the absence of any treaty, it is necessary to establish whether the country of origin of the judgment whose recognition is sought recognises Chilean rulings. Third, when that criteria cannot be applied, the Code of Civil Procedure lists four minimum requirements that a foreign judgment must meet to be recognised and ultimately enforced in Chile. These requirements are that:
- the judgment contains nothing contrary to Chilean laws (with the exception of the procedural laws under which the judgment would have been issued in Chile);
- the judgment does not oppose Chilean national jurisdiction;
- the party against whom the judgment is invoked has been duly served with the action. However, this party could prove that, for other reasons, it was prevented from presenting a defence; and
- it is final and irrevocable in accordance with the laws of the country in which it was rendered.
The first and second requirements are aimed directly at the protection of Chilean public policy and the rule of law. The first requires that the foreign judgment is issued pursuant to the procedural laws of the foreign country (following the principle of lex locus regit actum) and, at the same time, that it does not violate Chilean substantive laws. The second means that the foreign judgment cannot decide on matters over which, according to Chilean law, Chilean courts have exclusive jurisdiction. The third criterion intends to ensure that the underlying judicial proceeding respects the principle of due process of law, especially the right to a defence. This requisite goes beyond the formality of having served the defendant; it allows the party against whom the foreign judgment is invoked to demonstrate that, despite being served, it was unable to exercise a meaningful defence. The fourth requisite, that the foreign judgment has to be final and irrevocable in the country of origin, responds to the need for legal certainty. This requisite is met when the foreign judgment is not subject to any additional appeal or recourse in the country of origin.
In practice, even if there is a treaty or reciprocity with the country of origin, the Chilean Supreme Court might not recognise the foreign judgment if the sentence, or the proceeding from which it resulted, goes against Chilean public policy or the rule of law according to the next criteria.
v Fraud as a defence to enforcement of judgments granted abroad
In the exequatur process, once the application is submitted, the Supreme Court will give the affected a term to present arguments for the rejection of the request. If the court deems it necessary, it may open an evidentiary term before deciding. Therefore, in the event that an attempt is made to execute a judgment that was obtained through fraud, there is an opportunity to oppose.
Regarding foreign criminal sentences, the Chilean Criminal Procedure Code recognises their value in Chile. However, the accused may oppose if the respective process has not been implemented in accordance with the guarantees of due process, or if it revealed a lack of intention to judge the accused seriously.
VI CURRENT DEVELOPMENTS
In 2016 a series of Ponzi scheme cases came into light and gave rise to several criminal fraud investigations involving thousands of victims and the concealing of assets in different jurisdictions. These cases put asset recovery tools available to public prosecutors in the spotlight. After three years, most of the proceedings have come to an end or are reaching final stages. From a criminal liability perspective, cases ended in different manners: some of them with plea convictions that allow the accused not to effectively serve time in jail or with DPAs, and only one of them with a conviction after a trial. But in all these cases, only a fraction of the assets could be recovered.
But of all these cases, at least from a asset recovery perspective, the most interesting one was the one concerning a pyramid scheme of a company that amounted to around US$100 million. The company offered high annual returns, ranging from 10 per cent to 19 per cent. The scam used false information regarding investment and profits. Hundreds of persons invested money and received, in exchange, monthly deposits from the company, which were funded by the successive contributions of third parties, and not by the returns on the supposed investments. The principal accused was prosecuted for money laundering, fraud and offences against the Chilean Securities Law.
The case generated interest of foreign agencies, such as the US Securities and Exchange Commission (SEC), which filed for fraud and proceeded to freeze the defendants assets in the US.
The criminal case as well as the insolvency procedure started in 2016. The forced liquidation of assets requires tracing them in several jurisdictions around the world. The Chilean liquidator in charge of the case has been recognised internationally and allowed to request information from banking institutions and to summon witnesses to testify in order to collect relevant information. This has permitted the recovery of assets in the US, Australia, England and other jurisdictions to a value of more than US$10 million. The extradition of the defendant from Malta, where he fled in 2016, was denied by the Maltese Court of Appeals in 2018.