- scammers mimicking the email account of a senior official (often the CEO) of a company and sending fictitious emails to victims asking them to transfer funds to designated account(s) in the fraudsters’ control; and
- fraudsters pretending to be government officers, calling victims and then alleging the victims have been involved in some sort of crime and demanding they disclose their bank account details.
In most cases by the time the victims discover the fraud and report it to the police and their banks, the accounts have already been emptied. In a few cases, the police are able to trace at least part of the misappropriated funds and attempt to freeze them by way of a “no-consent” letter to the relevant bank (discussed further below). It’s then up to the victim to try to recover the frozen funds by taking civil action.
This article will examine the different stages needed to recover fraudulently-obtained funds and provide an update on recent judicial developments in relation to the impact of the usage of the underground banking system, where money is transferred through informal rather than formal mechanisms, in these kinds of cases.
Reporting to the Police
As soon as a person becomes aware they have been the victim of a scam, the first step is to make a report to the police, either in person at a police station or online through an
e-Report Centre. Time is of the essence as scammers are capable of cleaning out a bank account and then laundering the money through different accounts, sometimes in just minutes, or at the most, a few hours. The more time that passes before a report is made, the harder it becomes to trace the stolen funds.
To help the police investigation, a victim should collate all the documentary evidence in support of the fraud, like messages between the victim and the fraudster and bank transaction records.
The first step in the police investigation will be to try and trace the funds. Often the money will have been transferred by what is known as a first-layer recipient(s), usually the person(s) perpetrating the fraud, to a second-layer and third-layer recipient(s) and so on. Where appropriate, the police will issue a “no consent” letter to the bank(s) whose clients have received part or all of the victim’s funds, stating that the police will not consent to the bank(s) dealing with their clients’ accounts. Effectively those bank account(s) will be “frozen” and no one will be allowed to transfer money out of them.
The no-consent regime has been held by the Hong Kong Court of First Instance as unconstitutional in
Tam Sze Leung v. Commissioner of Police [2021] HKCFI 3118. It is currently unknown whether new legislation will be introduced to replace the no-consent regime. If a substantial amount of funds are involved, the victim is advised to apply for an injunction order to formally freeze the funds in the recipient(s)’ accounts.
As the police are not in a position to return the fraudulently-obtained funds to the victim, what the victim should do next is to commence a civil action against the recipient(s).
In practice, the police may not disclose or share the results of their investigation with the victim, which means it is possible they may refuse to disclose the last known addresses of the recipients or the transaction details of the accounts. In that case, the victim may have to apply for a
Norwich Pharmacal order, an order for discovery against a third party, from the Court against the banks to obtain those details before commencing legal action. In most cases, it is likely the bank will adopt a neutral stance and inform the Court it will abide by any court order.
Commencement of Civil Action
On receipt of the necessary information from the bank, the victim can then issue a Writ of Summons against the recipients for recovery of funds. For action(s) against first-layer recipients, it is often not difficult to establish the claim since they are implicated in the fraud itself. However, taking action against second-layer recipients and beyond, may be more difficult, as the victim may not necessarily have the evidence they need to prove the recipient(s) knew about the fraud. In general, the victim will have a
prima facie claim to the money and can assert a proprietary claim against a recipient for any fraudulently-obtained funds traceable to them, subject, of course, to any defence the recipient may put forward.
Available Defences
If the defendant doesn’t contest the claim, then the victim can proceed to obtain a default judgment against them, but in some cases, the defendant, particularly second-layer recipients or beyond, may contest the claim. There are two typical defences put forward in these cases (a)
bona fide purchaser defence and (b)
change of position defence.
(a) Bona fide purchaser defence
One common defence a recipient may try to establish is that they were a
bona fide purchaser for value without notice, in other words, they received the money in consideration of goods or services provided by them.
The burden is on the defendant to prove they are a
bona fide purchaser and did not have actual or constructive notice of the existence of a proprietary right in the funds. Generally speaking, such a defence can be defeated if it can be shown that a reasonable person with the attributes of the defendant should either (a) have appreciated based on the facts available to them that a proprietary right probably existed; or (b) should have made inquiries or sought advice that would have revealed the probable existence of such a right.
(b) Change of position defence
This defence is available to an innocent recipient of the funds where they have changed their position as a result of receiving those funds in good faith.
For this defence to succeed, the recipient of the funds will need to prove two elements:-
- There is a causative link between their receipt of the funds and their change of position so that if it were not for the receipt of the funds their position would not have changed; and
- The change in the defendant’s position makes it inequitable in all circumstances to require them to make restitution to the plaintiff.
The impact of usage of underground banking system
A typical pattern in email fraud cases is for the recipients, usually, the second-level recipients and beyond, to claim they are parties to genuine commercial transactions and they have no knowledge of the fraud itself, and that they received the tainted money because they made use of the “underground banking system,” described as any informal banking arrangements that run parallel to, but are generally independent of, the formal banking system. Underground banking systems are also referred to as alternative remittance systems.
As an example, due to stringent currency control in Mainland China, it is difficult for someone in the Mainland to pay a person in Hong Kong. Although it is unlawful, what they will do is work with a currency broker, paying a sum in RMB to an account in the Mainland designated by the broker, who in turn will pay into the receiving party’s Hong Kong account. Nominee accounts are often used by the broker throughout the process and it is not uncommon that tainted money is involved.
Often, recipients who receive tainted money through the underground banking system will raise both defences of
bona fide purchaser and change of position. However, this kind of underground banking system has been held by Hong Kong courts to be a violation of Mainland foreign exchange laws, which has raised the issue of how this illegality will impact the two defences.
Currently, the Hong Kong courts at the first instance level have adopted conflicting views. In
DBS Bank (Hong Kong) Ltd v Pan Jing [2020] HKCFI 268, in a hearing for an application for a summary judgment against a defendant who was a second-layer recipient of tainted money, Deputy High Court Judge (DHCJ) Blair held that the illegality of the currency exchange itself rendered the defendant unable to rely on both the
bona fide purchaser and change of position defences. The judge granted summary judgment in favour of the Plaintiff, adding the decision was justified on the basis of public policy considerations regarding breach of exchange control regulations.
In
Idemitsu Chemicals (HK) Co Ltd v Brilliant One Shipping Company Ltd [2021] HKCFI 1175, concerning the defendant’s application to discharge an injunction order, DHCJ Liu cited
DBS Bank v Pan Jing in his decision to dismiss the application, taking the view that both defences of
bona fide purchaser and change of position would not be open when the defendant was aware the funds had come through the underground banking system.
However, in
Lesnina H DOO v Wave Shipping Trade Co Ltd [2022] 2 HKLRD 727, where DHCJ Dawes SC came to an opposite view and held the “absolute” approach adopted in
DBS Bank v Pan Jing was problematic, saying the Court should take a more proportionate approach on the question of illegality, by measuring the gravity of the defendant’s criminal conduct against the impact of allowing the defence of change of position, an approach taken from the UK Supreme Court case
Patel v Mirza [2016] UKSC 42. DHCJ Dawes SC held the case should go to trial for more detailed consideration, and refused to grant summary judgment for the Plaintiff and granted the Defendant unconditional leave to mount a defence.
However, the ruling in
Lesnina H DOO was not followed in a recent District Court case
Ling Weixian v Tsoi Ai Tong [2022] HKDC 967, where the Deputy Judge instead followed the line taken in
DBS Bank v Pan Jing and granted summary judgment in favour of the Plaintiff.
As the matter now stands (September 2022), these conflicting decisions have yet to be resolved and it appears clarification from a higher court is urgently needed in relation to the principle of illegality in general. The current state of the law would certainly add uncertainty to Plaintiff’s strategy in an email fraud case, especially if they intend to make an application for summary judgment.
Haldanes is an independent Hong Kong-based law firm which provides service on all aspects of litigation and arbitration. We have extensive experience in representing victims of email fraud cases. For more details, please go to our online profile at [https://www.haldanes.com].
Disclaimer: This article is provided for information purposes only and does not constitute legal advice.