Asset recovery in email fraud: the position of the second layer recipient
Introduction
In the case of UPS Parcel
Delivery Service Limited v Huaqi Import & Export Co., Limited and Others [2022] HKCU 4663, the Court of First Instance (the “Court”) considered the liability of
more “remote” layers recipients of fraud proceeds
arising from an email fraud. The Court recognized that there are situations where although the parties have not dealt
directly with one another, the defendant has nevertheless received a benefit
from the claimant, and the claimant has incurred a loss through the provision
of that benefit.
Background
This case concerns an email fraud whereby the
Plaintiff alleges that the first Defendant (“D1”) was the first layer recipient of a sum of US$1,575,000 whereas the
second, third and fourth Defendants (“D2”,
“D3” and “D4” respectively) were the second layer recipients of the sums of
US$500,000, US$750,000 and US$250,000 respectively. Final Judgment was granted
by the Court against D1. D2 and D3 never appeared in the proceedings.
The Plaintiff’s
case
Pursuant to an Aircraft Charter Agreement
entered into between UPS Worldwide Forwarding, Inc. (“UPS Worldwide”)
and Western Global
Airlines (“WGA”) dated 18 March 2020, UPS Worldwide was obliged to pay
WGA the sum of US$1,575,000 (the “Sum”).
Per the request made in a number of fraudulent
emails, the Plaintiff transferred the Sum to D1 on 25 March 2020 believing that the payment
request was issued for and on behalf of WGA.
Over 26 March 2020 to 2 April 2020, D1 transferred US$1.5
million out of the Sum to D2, D3 and D4 as the “second layer” recipients of the
Sum.
Unjust
enrichment of D2 and D3
Citing Investment
Trust Companies v Revenue & Customs Commissioners [2018]
AC 275, the Court recognized that there may be situations where, while the
parties have not dealt directly with one another, or with one another’s
property, the defendant has nevertheless received a benefit from the claimant,
and the claimant has incurred a loss through the provision of that benefit. One such situation is where an intervening transaction is found to be a sham. Since the
sham is created precisely in order to conceal the connection between the
claimant and the defendant, it is disregarded when deciding whether the latter
was enriched at the former’s expense.
There Court also
recognized that there were cases in which a set of co-ordinated transactions
has been treated as forming a single scheme or transaction for the purpose of the
‘at the expense of’ inquiry, on the basis that to consider each individual
transaction separately would be unrealistic.
In this case, given that the transfer
between the Plaintiff and D1 on one hand and the transfers between D1 and D2 /
D3 are closely related in time and that the pattern and coordination in the
subsequent transfers clearly demonstrate that there was a systematic and
orchestrated attempt to dissipate the money received by D1, the Court held that
the situation is equivalent to a direct payment to D2 and D3, who had therefore
been unjustly enriched.
D4’s Defence
D4 allegedly engages in the business of
sourcing and selling frozen meat and seafood throughout South East Asia. It
admitted that it had received two sums of US$125,000 each on around 31 March
2020 and 1 April 2020 respectively (in the total sum of US$250,000) (the “D4 Sum”). D4 however argued that the D4
Sum was sale proceeds received from a client Polenectar (“Polenectar”) for sale of frozen pork. D4 and Polenectar did enter
into a sale and purchase agreement (the “Polenectar
SPA”), and D4 did deliver some frozen pork to Polenectar accordingly.
D4’s sole
shareholder and director Mr. Zheng Min (“Zheng”)
claimed that he did not have any knowledge or means to know about the alleged fraud nor
did they had any previous dealings/business relationship with the Plaintiff or
any of the other defendants.
The main factual issue for the Court to rule
on D4’s defence is whether the two payments of USD125,000 were related to the
alleged transaction with Polenectar.
D4’s Evidence
For the purpose of proving its defence, D4 only called a manager Mr. Cheung Kim Hung (“Cheung”) as its witness. Cheung assists Zheng to oversee D4’s operation. Cheung
gave, among others, the following evidence:
1.
Zheng assigned Cheung to give evidence because (i) Cheung is stationed
in Hong Kong and (ii) Cheung had a good understanding of D4’s business by way
of reading the company’s WeChat group messages;
2.
All sale and purchase contracts were signed by Zheng on behalf of D4;
3.
Zheng had never shown Cheung any record of communication between Zheng
and Polenectar;
4.
After receiving the two payments totaling the D4 Sum, D4 did not receive
any further payment from Polenectar even though approximately 40% of the total
quantity of frozen pork ordered under the Polenectar SPA had been delivered. Zheng
told Cheung that he did follow up the matter but Polenectar did not give any
constructive reply; and
5.
Zheng told Cheung that D4 did not have any business relationship with D1,
D2 and D3.
The Court considered
that a lot of crucial evidence of Cheung were hearsay evidence. While hearsay evidence is admissible
pursuant to section 47(1)(a) and (b) of the Evidence Ordinance, the Court went
on to consider the weight to be attached to hearsay evidence in this case:
1.
It would have been reasonable and practicable for D4 to call Zheng as a
witness;
2.
The only reasons which Cheung gave as to why Zheng did not come forward
to give evidence (as mentioned above) were not good reasons at all;
3.
Since Zheng was the person responsible for the alleged transaction with
Polenectar and he was allegedly the one who confirmed with Polenectar about the
payments of the D4 Sum, it was reasonable to expect that he would explain these
matters in Court.
In the light of the
above circumstances, the Court in citing Tullett & Tokyo
International Securities Ltd v APC Securities Co. Ltd. [2001] 2
HKLRD 356, decided that no weight should be attached to
Cheung’s evidence. The Court also ruled that D4’s failure to produce
Zheng as a witness and to disclose any internal WeChat group chat communication
records to show what its staff had discussed about the follow-up work in
relation to the Polenectar SPA after the alleged payments made by Polenectar or
about any other discussion in relation to the Polenectar SPA was “extremely
suspicious”.
Takeaway
Once a fraud victim
has successfully established that some funds have been paid to a recipient, the
burden of proof will then shift to the recipient to show that he has good reasons
to receive such funds. Should D4 have called Zheng as a witness and
successfully convinced the Court that the D4 Sum represented genuine proceeds
of sale of frozen pork (and hence there was no “unjust enrichment”), D4 might
be able to retain the D4 Sum.
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Important: The law and procedure on
this subject are very specialised and
complicated. This article is just a very general outline for reference and
cannot be relied upon as legal advice in any individual case. If any advice
or assistance is needed, please contact our solicitors. |
Published by ONC Lawyers © 2022 |