Financial Crime World

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Money Exchange: Maelstrom Principle Strengthens Plaintiff’s Ability to Trace Misappropriated Funds

In a landmark decision, the Cayman Islands Court of Appeal (CICA) has clarified the “maelstrom” or “cross-firing” principle, making it easier for plaintiffs to trace their misappropriated funds.

Background: The Maelstrom Principle

The principle was first considered in the English case of Sinclair Investments (UK) Limited v Versailles Trade Finance Limited (in administrative receivership). This decision established that when a defaulting fiduciary mixes trust funds with his own funds, creating a “maelstrom” or “cross-firing” situation, the burden of proof shifts to the fiduciary to establish what part of the mixed fund is their property.

Recent Clarification by the CICA

In the case of AHAB v SAAD, the CICA further clarified that this principle is not limited to cases where the defaulting trustee mixes trust funds with his own money. Instead, it also applies when the mixing takes place in a company owned or controlled by the defaulting fiduciary, even if the company’s funds are borrowed from third-party banks.

Purpose of Tracing Misappropriated Funds

The CICA emphasized that the purpose of tracing misappropriated funds is to combat modern methods of fraud and money laundering. In cases where a fraudster creates a complex web of transactions to conceal their wrongdoing, the burden should rest on them to prove that particular payments were not traceable proceeds of fraud.

Impact of the Decision

This decision is likely to strengthen the ability of plaintiffs to trace their property in the Cayman Islands when it has been misappropriated by a wrongdoer. The recognition of the “maelstrom” principle as part of Cayman Islands law will provide greater clarity and certainty for parties involved in disputes over tracing and recovering misappropriated funds.

  • Borden (UK) Limited v Scottish Timber Products Limited [1981] Ch. 46
  • El Ajou v Dollar Holdings plc [1993] 3 All ER 717
  • Relfo Limited (in liquidation) v Varsani [2015] 1 BCLC 14; [2014] EWHC Civ 360
  • Foskett v McKeown [2001] 1 AC 102
  • Federal Republic of Brazil v Durant International Corporation 2012 (2) JLR 356