Jersey: The Judicial Committee Of The Privy Council Confirms The Existence Of "Backwards Tracing"

Last Updated: 4 August 2015
Article by Paul Nicholls and James Turnbull

Most Popular Article in Jersey, August 2015

The Judicial Committee of the Privy Council (the Privy Council) has today handed down its landmark judgment, in The Federal Republic of Brazil and another (Respondents) –v- Durant International Corporation and another (Appellants) (Jersey) [2015] UKPC35, in which Advocate Paul Nicholls of Walkers appeared for the Appellants. The Privy Council confirmed that it is possible for a claimant to rely on the principle of "backwards tracing" in order to recover an asset, provided that a coordination between the depletion of the trust fund and the acquisition of the asset which is the subject of the tracing claim, looking at the whole transaction, can be established. The question of whether or not "backwards tracing" should be recognised was previously unsettled. Both the Royal Court and the Court of Appeal took the view that the outcome of a case ought properly to depend on its facts as opposed to whether or not the concept of "backwards tracing" is accepted in the abstract, a view endorsed by the Privy Council.

Preamble - Tracing

The doctrine of tracing involves rules by which to determine whether one form of property interest is properly to be regarded as substituted for another. It is therefore necessary to begin with the original property interest and study what has become of it. As Lord Toulson stated in his judgment in the present case, "if it has ceased to exist, it cannot metamorphose into a later property interest. If the money in a bank account has dwindled from £1,000 to £1, only the remaining £1 is capable of being substituted by something else; the £999 has ceased to exist. This explains "the lowest intermediate balance" principle". Similarly, a property interest cannot turn into (or provide a substitute for) something which the holder already has; the later acquisition cannot be the source of the earlier. This explains the "no backward tracing" principle.

The Appeal - facts

The Appellants (Durant and Kildare) were companies registered in the BVI. Kildare was a wholly owned subsidiary of Durant and both companies were, at the relevant time, under the practical control of Mr Paulo Maluf (Mr Maluf) and/or his son Mr Flavio Maluf. From 1993 to 1996 Mr Maluf was mayor of the Municipality of Sao Paulo (the Municipality).

The Appellants appealed to the Privy Council against a decision of the Court of Appeal of Jersey (upholding a decision of the Royal Court) that the companies were liable to the Municipality as constructive trustees of US$10,500,055.35 representing bribes paid to Mr Maluf in connection with a major public road building contract.

The facts giving rise to the appeal to the Privy Council were undisputed: in early 1998 Mr Maluf, or others on his behalf, received 15 secret payments, and that funds equivalent to 13 of those payments were converted to US dollars and paid into an account under the control of Mr Maluf junior in New York in the name of Chanani (the Chanani Account). The 13 payments spanned a period from 9 January to 6 February 1998 and amounted in all to US$10,500,55.35. Over the period of ten days from 14 to 23 January 1998 there were six payments from the Chanani Account to an account held by Durant in Jersey (the Durant Account). These payments totalled US$13,120,000.00. Over the period from 22 January to 23 February 1998 there were four payments from the Durant Account to an account held by Kildare in Jersey (the Kildare Account). These payments totalled US$13,500,000.00.

The Appeal - arguments

The Appellants' case was that their liability as constructive trustees was in the region of US$7.7m, and not for US$10.5m. They argued that:

(a) The last three payments into the Chanani Account identified as proceeds of bribery were made after the final payment from the Chanani Account to the Durant account and that those three payments could not therefore be traced to the Appellants because there could be no "backwards tracing"; and

(b) The Chanani Account was a mixed account; where a claimant's money is mixed with other money, and drawings are made on the account which reduce the balance at any time to less than the amount which can be said to represent the claimant's money, the amount which the claimant can thereafter recover is limited to the maximum that can be regarded as representing his money (the "lowest intermediate balance rule"). In this case, on two occasions, payments were made from the Chanani Account to the Durant Account of sums which exceeded the maximum that could be said to have come from the earlier bribes and must therefore have come from other sources.

The Respondents looked to trace the amount of US$10,500,055.35 to the Durant Account and thence to the Kildare Account. It was asserted that the full amount of those bribes was paid from the Chanani Account to the Durant Account. In the Respondents' submission, it was inaccurate to speak of tracing one asset into another; rather, the Court's should look at the substance of the transaction, not the form, and establish whether or not a sufficient transactional link exists. However, the Privy Council rejected the Respondents' submission that money used to pay a debt can, in principle, be traced into whatever was acquired in return for the debt, considering that argument to be too broad a proposition which would take the doctrine of tracing far beyond its established limits. Indeed, the Privy Council said that courts should exercise caution when expanding equitable property remedies in such a manner as to have an adverse effect on innocent parties. However, the Privy Council did acknowledge that there may be instances in which a close causal and transactional link exists between a debt incurring and the use of trust funds to discharge such a debt.

Appeal – decision

Whilst the Privy Council acknowledged that the Appellants' arguments were conceptually coherent and supported by a great deal of authority and academic writings, it agreed, in general terms, with the Respondents' submission that the substance (as opposed to the form) of the transactions should be examined.

Lord Toulson, delivering the judgment, stated:

"The development of increasingly sophisticated and elaborate methods of money laundering, often involving a web of credits and debits between intermediaries, makes it particularly important that a court should not allow a camouflage of interconnected transactions to obscure its vision of their true overall purpose and effect. If the court is satisfied that the various steps are part of a coordinated scheme, it should not matter that, either as a deliberate part of the choreography or possibly because of the incidents of the banking system, a debit appears in the bank account of an intermediary before a reciprocal credit entry. The Board agrees with Sir Richard Scott V-C's observation in Foskett v McKeown that the availability of equitable remedies ought to depend on the substance of the transaction in question and not upon the strict order in which associated events occur".

The Privy Council rejected the argument that there can never be backward tracing, or that the court can never trace the value of an asset whose proceeds are paid into an overdrawn account. However, it is for the claimant to establish a coordination between the depletion of the trust fund and the acquisition of the asset which is the subject of the tracing claim, looking at the whole transaction, such as to warrant the court attributing the value of the interest acquired to the misuse of the trust fund.

The Privy Council found that that the Royal Court and the Court of Appeal were justified in concluding that the necessary connection between the bribes and the receipts was proved and it therefore dismissed the appeal.


The Privy Council has made clear that much will turn on the substance of the transactions and the evidence submitted. Courts will therefore scrutinise all facts when considering tracing claims and it is therefore important that all those who hold monies on behalf of third parties are certain of the source of funds. Failure to do so may result in criticism from the Court and possible sanctions from the regulator.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Mondaq Advice Centre (MACs)
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.