With more employees working from home amid the coronavirus pandemic, the rise in email and cyber fraud scams has been appalling. Civil court proceedings can often assist victims in tracing and recovering their wrongfully stolen funds. However, these proceedings are highly time-sensitive, and email scam victims should pay close attention to the following legal issues in deciding the appropriate course of action.
The authors have dealt with a significant number of fraud recovery cases in the past few years. Based on their combined experience, this article aims to provide practical tips to the victims on what immediate actions they should take upon discovery of fraud and what further necessary actions they should seek advice on from legal advisers.
Go to the police!
Before resorting to any legal means, anyone who suspects they have been scammed by fraudsters should immediately file a report with the police so that the police can investigate the fraud. Overseas victims can first make e-reports to the local police and then engage a local lawyer to make a formal report to the police. On certain occasions, the police may, if necessary, issue a ‘no-consent’ letter stating that they do not give consent the bank to deal with the bank accounts, thereby ‘temporarily freezing’ the bank accounts. However, it should be made clear that a no-consent letter is not a formal freezing order and an order to freeze the banks account should be obtained from the courts without delay.
Trace and freeze
Norwich Pharmacal Order
More often than not, the identity of and information on fraudsters are untraceable. Even worse, money obtained through email scams is frequently dissipated to various domestic or overseas bank accounts. In situations where the identity of the fraudster is unknown, a Norwich Pharmacal Order (NPO) can be granted by the courts where the victim can point to a third party for such information.
In email fraud cases, NPOs are often sought against banks that have received stolen funds into one of their accounts. Once an order is made, aside from the identity and the personal details of the account of the wrongdoer, victims may also seek disclosure of the statement of accounts, making it easier to investigate the passage of monies in and out of the bank accounts.
However, given that an innocent third party is being intruded on in the process, NPOs are not granted lightly by the courts. In deciding whether to exercise their discretion, the courts will balance the interests of both parties, as well as consider:
- Whether there is cogent and compelling evidence demonstrating that serious tortious or wrongful activities have taken place
- Whether the victim/plaintiff will, or will very likely, reap substantial and worthwhile benefits from the order being made
- That the discovery sought must not be unduly wide
Are disclosure orders accessible and the recoverable costs?
It is the general position that the banks, as the innocent third parties, are entitled to recover their costs on an indemnity basis from victims for complying with the disclosure orders, though the victims can seek recovery of such costs from the fraudsters if liability is established against them.
However, exorbitant bank charges, coupled with legal fees, may result in an overwhelming financial burden for victims who already seeking to find the assets they have lost.
Recently, the Court of First Instance in Hwang Joon Sang & Ors -v- G.E.I & Ors  HKCI 544 openly deliberated on the reasonableness of costs charged by banks in this regard.
In Hwang Joon Sang, the bank sought ‘a handling fee of HK$3,000 per account and an additional fee of HK$200 per page of document to be provided’. The court commented it was unlikely that the bank would seek to profit from charging for compliance with orders for disclosure on a basis greater than the actual reasonable costs of compliance. The whole point of ordering the costs of providing disclosure to be paid on an indemnity basis, against the plaintiff’s undertaking to do so is to ensure full (but no more than full) compensation for the costs of complying with the order.
In response to these charges, the court suggested that banks and financial institutions that are requested to comply with disclosure orders ‘should give careful thought as to the real and reasonable costs of compliance, which would justify the full indemnity extracted from the applicant as part of the consideration in granting or refusing the application’. The court also commented that in future the court may consider identifying the reasonable indemnity costs for compliance with an order in any particular case, through a process of taxation or otherwise.
Once the assets have been identified, victims may wish to apply for an urgent proprietary and/or Mareva injunction to freeze the funds transferred to the fraudster’s bank accounts. Given that proprietary injunctions and Mareva injunctions serve two different functions, victims will need to decide carefully about which option to take depending on their specific situation.
A proprietary injunction serves to preserve assets over which the plaintiff has a proprietary claim. Where the victim was induced to transfer funds by way of fraud, equity holds that these funds are held on constructive trust by fraudsters, or anyone who has knowingly retained or received such property, to the plaintiff. As such, the trust property becomes recoverable and traceable, and must be returned to the plaintiff, subject to the defence of bona fida purchaser for value without notice and/or change of position.
In contrast, Mareva injunctions do not require the victims to prove any proprietary interest over the funds. Its main purpose is to stop and prevent the defendant from dealing with and dissipating victims’ assets away from the relevant bank account(s) so that there will be assets to satisfy the plaintiff’s judgment against them later on. These are often obtained under short notice, and are often made on an ex parte basis (ie without notifying the other party).
Where the traceable funds have yet to be dissipated, proprietary injunctions are often said to be the more suitable relief. However, where there is a real risk that the fraudster has already dissipated their assets, a Mareva injunction should be sought as a ‘top up’ protection.
Recovering your money
Quite often, the defendants to cyber fraud scams can be difficult to locate and do not appear during the proceedings. Under these circumstances, the plaintiff has several options, besides obtaining a default judgment, to secure the return of their funds.
After obtaining a judgment against the fraudster and where the fraudster fails to satisfy the judgment, a victim can apply for a garnishee order against the bank where the fraudster has a bank account, under Order 49 of the Rules of the High Court (Cap. 4A).
Aside from garnishee order, it was the earlier view of practitioners that obtaining a vesting order under section 52 of the Trustee Ordinance (Cap. 29) (TO) was a faster way of ordering the banks to return the stolen funds to the victims instead of a garnishee order. Yet there are conflicting authorities in this regard.
The court considered that section 52 of the TO could not be invoked in email fraud cases. The requirements to grant a vesting order under section 52 of the TO ‘in any such person as the court may appoint’ would mean those who are appointed to be trustees by the court, but not fraudsters or any subsequent recipients of the funds who are constructive trustees of the stolen funds by way of a declaration made by the court: see 800 Columbia Project Company LLC -v- Chengfang Trade Ltd and others  HKCFI 1293 and Tokic DOO -v- Hongkong Shui Fat Trading Ltd  4 HKLRD 189.
However, we note that in recent authorities, the court took a different view. Deputy High Court Judge Paul Lam SC in Wismettac Asian Foods, Inc -v- United Top Properties Limited & Ors  HKCFI 1504 considered that the inclusion of ‘otherwise’ under the condition that ‘a thing in action is vested in a trustee whether by way of mortgage or otherwise’ in section 52(1)(e) of the TO also includes ‘vesting by operation of law’. It is recognised that a constructive trust is not created by a court’s declaration. Rather, it exists at the moment the victim’s funds or its traceable proceeds are transferred to and received by the fraudster or any subsequent recipients. As such, the Hong Kong courts have jurisdiction to grant vesting orders by operation of law.
The above cases were revisited in a recent case of Star Therapeutics, Inc -v- Leabon Technology (HK) Ltd & Another  HKCFI 1715, where a vesting order application was granted by Deputy High Court Judge Le Pichon, as he was of the view that the approach in Wismettac was more appropriate.
This view is similarly seen in cases relating to bitcoin investments. As the popularity of cryptocurrency as a lucrative investment continues to rise, so do the numbers of fraudulent phone calls and emails claiming to sell bitcoin. One such example can be found in the case of Donald Henry Case- v- Profitling International Ltd and Another  HKDC 172. The plaintiff in this case was a victim of a bitcoin investment fraud whereby he was induced to purchase bitcoins worth AU$400,000. The court recognised that constructive trusts came into existence when a victim’s funds or traceable proceeds were received by the fraudster or other recipients and a vesting order for a return of funds was granted.
However, it should be highlighted that since the Court of Appeal has yet to set down a judgment to settle the view on vesting order, a vesting order remains a precarious option for those who wish to seek the expeditious return of their funds and the traditional garnishee order may be a more appropriate relief for recovering the funds from the banks.
Given the highly complex and time-sensitive nature of these proceedings, victims of email fraud must respond immediately. Fraudsters will often transfer the stolen proceeds through various domestic and overseas bank accounts, making it extremely difficult for them to be traced afterwards. As such, victims are advised to contact an experienced lawyer promptly to determine the best course of legal action to secure the safe return of their money.
The authors would like to thank our intern Ms. Carmen Lam for her helpful assistance in the preparation of this article.