Asset trace reports: from mapping to leverage

Broadly, there are two types of asset trace reports. The first version is the bread and butter of the investigations industry and deals with mapping out the subject’s current asset position. Any competent corporate intelligence firm engaged at the pre-litigation stage should be capable of delivering an extensively researched list of both liquid and illiquid assets, supported by credible evidence of ownership and an assessment of the risk of dissipation.

The second version of an asset trace report is a much more strategic document that goes beyond the identification of assets to uncover sources of payment obligations third parties may have towards the subject. In short, it identifies current and future cash flows which can then be used as leverage by a legal team to bring the subject to the negotiating table.

Asset mapping: notes from Spain

Any asset trace investigation should begin by harvesting information on the subject from previous litigation, court proceedings, regulatory reports and any media coverage. Collecting relevant background information should not be confused with ‘soft’ research because data collected at this stage helps to narrow the search and maintain focus.

Spain’s business register will provide some of the most valuable intelligence needed at this stage. However, navigating the register is not without its challenges. Access for users outside of Spain is restricted while each document carries a charge and vital information is often scattered across several types of documents. Nevertheless, in most cases it is possible to identify a company’s ownership and map out its corporate structure from information obtained from the register.

Obtaining a company’s annual financial statement is essential at this stage because the assets listed on its balance sheet provide a roadmap to their real-life identification. Renewable energy companies, for example, report significant tangible assets on their balance sheets under "Property, Plant and Equipment," including solar panels, inverters, and transformers for solar farms. Further research focusing on a company’s capital expenditure announcements may help to match the assets on the balance sheet to a physical location. Firms in this industry may also list substantial intangible assets which could include power purchase agreements, and various concessions, rights, and licenses - all of which can be identified through further research.

If a company or individual in Spain owns property, land, industrial machinery, boats, or aircraft, this information can also be identified using public registers. In the case of intellectual property, relevant details can be obtained from the country’s patent office.

For many clients, a comprehensive mapping exercise of a subject’s assets will help to inform a cost-benefit analysis that will underpin a decision on the commercial viability of continuing litigation. But for legal teams engaged in the recovery of assets it may be the case that the mapping of assets is insufficient to support an effective enforcement strategy.

Turning asset trace reports into leverage

A more comprehensive asset trace report will endeavour to go beyond mapping the subject’s current asset position and will identify pressure points that the legal team can use as leverage to incentivise settlement.

One proven strategy is the targeting of a company’s cash flow and future revenue streams. This requires understanding a company’s cash inflows (sales, loan proceeds, investment income, government grants and subsidiaries) as well as cash outflows (loan repayments, tax payments, interest payments) to build a picture of where a company is particularly vulnerable. This analysis will then help the researcher to identify payment obligations third parties may have towards the subject which the legal team can then target.

Identifying where leverage may be gained from cash flow information varies across industries. If a renewable energy company were in the process of negotiating a Power Purchase Agreement (PPA) for the supply of energy over a period of several years, it has likely already committed significant capital expenditure to the project leaving the company dependent on agreeing a deal to guarantee future cash flow. A well-timed legal challenge delaying the construction of a new on-site photovoltaic plant could affect this cash flow and expedite a settlement. Similarly, in the construction industry where cash flow can be connected to the achievement of construction milestones, a well-timed legal challenge delaying construction works could force a party to the negotiating table.

Ultimately, the legal team executes the enforcement strategy but close collaboration with a researcher may be the best bet to identify potential pressure points that can be leveraged to reach a successful outcome.