Proof in tracing claims – build a compelling narrative

A recent judgment of the New South Wales Court of Appeal is a useful reminder of the evidentiary principles involved in proving a tracing claim.  If a plaintiff raises a clear prima facie case and the recipient of funds fails to offer a reasonable explanation for receiving them, Courts will readily use ‘commonsense and reasonable inference’ to find that the unexplained assets are the proceeds of misappropriation.

In Toksoz v Westpac Banking Corporation (2012) 289 ALR 577, Allsop ACJ described the process of inferential reasoning that can be used to trace into the hands of a recipient of fraudulently misappropriated funds.

At trial the Bank proved that Mr Toksoz’s husband had been involved in frauds on Westpac Bank customers, through which he had obtained over $1 million.  In the same period Mrs Toksoz had received over $600,000 into accounts controlled by her, while her only disclosed source of income was a pension of $1,300 per fortnight.

The Bank claimed that she had received the misappropriated funds as a volunteer and was obliged to disgorge them, or alternatively that she had received the funds with sufficient knowledge of the fraud to be liable under the first limb of Barnes v Addy (1874) LR 9 Ch App 244.

There was little direct evidence linking the frauds with the deposits into Mrs Toksoz’s accounts.  The Bank relied on the unexplained deposits and the absence of any evidence of a legitimate source of funds. The Bank obtained its evidence from the financial disclosure Mrs Toksoz had been required to make in response to an application for a Mareva order, together with tax returns and answers to interrogatories.

The Court of Appeal was satisfied that there was a clear prima facie case against Mrs Toksoz that she had received the stolen money and that she had knowledge of it.  That was all that was required.  As Allsop ACJ went on to ask rhetorically:

What other possible explanation was there? Only the appellant could supply the answer to that question. That is not to reverse the onus of proof. There was a clear basis to infer that the appellant received the stolen funds in the amounts claimed.

Mrs Toksoz’s appeal was dismissed.

So, plaintiffs in tracing claims – build a compelling narrative.  Gather as much financial information as possible so that reasonable explanations for the funds can be excluded.

If the picture can be sketched out as well as it was in this case, courts will be willing to assist by drawing reasonable inferences.  A complete paper trail of the money flow might be a perfect proof, but unless a defendant is prepared to risk giving evidence, a prima facie case that excludes reasonable alternatives should be enough.

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