Tracing the Money from Kinshasa to Maryland: A New Frontier for Sovereign Enforcement?
How do several million dollars of funds allegedly embezzled from Democratic Republic of the Congo (DRC) state coffers apparently end up on quiet suburban streets in Montgomery County, Maryland? And how does demonstrating this stand to benefit holders of sovereign debts? Wallbrook sets out how below.
Sovereign Enforcement: Difficult in Practice
Enforcing a judgment or award against a sovereign state can be challenging (see our previous commentary here). While the state in question may have valuable assets in enforcement friendly jurisdictions (for example, an ambassador’s residence), the sovereign immunity doctrine would prevent a debtor from seizing them. Although it should be possible to enforce against a state’s commercial assets, the burden falls on the claimant to adequately demonstrate that an asset is both of a commercial nature and, if not held directly in the state’s name, owned by an alter ego of the state itself. This in turn can present its own difficulties. For example, a state may have implemented a complicated ownership structure in order to frustrate enforcement efforts; or a state-owned entity might credibly argue that its activities are sufficiently detached from the state so as to void any alter ego arguments. Moreover, recalcitrant states seem to be ever more relaxed about the consequences of not satisfying an award or judgment debt.
Creditors may therefore need to turn to more creative methods to collect a sovereign debt. An ongoing US case concerning the enforcement of two judgments against the DRC shows that new ground may have opened up to holders of sovereign debt – and to the investigators advising them on its recovery.
FG Hemisphere Associates, LLC v. Democratic Republic of Congo et al
The US-registered investment company FG Hemisphere Associates LLC filed suit against the DRC in Maryland in 2021, seeking to enforce judgments of over USD 30 million. The judgments stem from arbitral awards against the DRC which it had purchased from another party in 2004.
FG Hemisphere spent years investigating allegations of corruption in the DRC and has used its findings to help enforce its judgments. It alleges that Francis Selemani, the brother of the country’s former president Joseph Kabila, used misappropriated government funds to purchase real estate – three luxury townhouses and a terraced house – in Bethesda and Rockville in Maryland’s Montgomery County. After speaking with witnesses and seeking discovery from financial institutions, FG Hemisphere reviewed financial records and details of bank wires. This information, it claims, traces the flow of funds from seemingly unjustified transfers from DRC state institutions all the way to the US-registered Balanne Family Living Trust, which Selemani and his spouse purportedly used to acquire the properties for a total of USD 4.2 million.
On 5 September 2023, before reaching a judgement, a US federal judge allowed FG Hemisphere to attach the four Maryland properties after it had “reasonably demonstrated” that they “may very well be subject to the judgments it holds against the DRC”.
While FG Hemisphere is yet to assume ownership of the disputed assets, the fact it has convinced a US court to attach them shows that debtors may have a new route to enforcing against stubborn sovereign states – arguing that assets purchased with allegedly embezzled state funds are in fact the property of the state in question.
A New Path Forward?
A debtor may wish to pursue an avenue similar to FG Hemisphere’s for two reasons. First, if there are allegations of corruption or embezzlement made against former and serving figures in a state’s government, then studying the footprint of an alleged kleptocrat (or their family) in debtor friendly jurisdictions such as the USA, the UK and France might identify valuable assets such as real estate (even when it is held via entities registered in secrecy jurisdictions – see our previous article here). These findings can then, potentially, be exploited with creative investigative methods, such as those employed by FG Hemisphere, to trace the funds used to acquire the asset back to the debtor state and demonstrate that the transfers were illicit.
Second, the exposure of seemingly misappropriated funds being used to benefit a government official may be sufficiently embarrassing to encourage the debtor state to settle. For example, Kensington International Ltd, an affiliate of the hedge fund Elliott Management, investigated the allegedly corrupt practices of the family of Congo-Brazzaville’s former president in its efforts to enforce against the country. It disseminated its findings via NGOs and mainstream media outlets, which pushed Congo-Brazzaville into settling with Kensington International in 2008.
The extent to which creditors may be able to exploit such avenues in future remains to be seen. But given that enforcing against a sovereign debtor is already a lengthy and costly process, there may be value in thinking creatively and exploiting allegations of corruption, following the money and – with a combination of skill and luck – reaping the rewards.