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Asset recovery in the era of “all things digital” – steps to be taken when fallen victim to a scam

2021-03-31

Introduction

In the past year, with the outbreak of COVID-19, there has been an escalation in the usage of and the reliance on information technology given the transition to remote working arrangements and the growing trend of “contactless” online shopping. However, this has also unfortunately brought about a drastic surge in fraud cases including email, telephone and investment scams. According to a recent news report based on police sources, over HK$8.33 billion was stolen from the victims of online, phone and investment scams in the year of 2020 in Hong Kong, with nearly HK$3.07 billion intercepted by the Anti-Deception Coordination Centre of the Hong Kong Police both locally and globally. More than 10,000 bank accounts were set up for the purpose of collecting and laundering fraudulent proceeds before such were onward paid to other accounts and eventually channelled out of Hong Kong in an attempt to make tracing and recovery implausible.

Where victims are able to react in a prompt manner upon the discovery of fraud cases, they may be able to recoup most if not all of the scammed funds. This article provides a brief outline as to how one may maximize his/her prospect of recovery in the unfortunate event of a fraud incident.


Common types of scams

With the wide adoption of technological advancement, a multitude of different types of scams have emerged over the years with increased sophistication. Below are some of the typically seen types of frauds one may encounter:

1.        Business email scam: fraudsters may impersonate the opposite party to a contract by using the same or a highly similar email or domain account. For instance, where a sale of goods agreement is drawn up, fraudsters may then send fictitious yet phishing emails to victim buyers and claim that the seller’s payment receiving bank account number has changed, and to request for the transferal of monies to the bank account operated by the fraudsters instead.

2.        “Ramp and dump” scams: they are a form of stock market manipulation where the fraudsters "ramp" up the stock price and use social media to lure investors into buying at an artificially high price. The fraudsters then sell or "dump" the stock. The Securities and Futures Commission announced that it is their top priority this year to crack down this scam in joining force with the Hong Kong Police.

3.        Virtual currency investment scams: fraudsters may impersonate agents of overseas investment firms and induce victims to sign up for factitious virtual currency investment schemes. Victims may be asked to visit a scam website or to download a fake mobile investment app which requires the provision of their bank accounts and credit cards details. Such information is then used by fraudsters to steal money from such accounts. In other cases, the fraudsters may pose as cryptocurrency investors and ask victims to transfer cryptocurrencies to them.


Steps to be taken

A fraud incident should generally be reported to the financial institutions and/or the Hong Kong Police at the earliest opportunity as an initial step. In the unfortunate event that you have fallen victim to a fraud, you may inform your bank and instruct for a reversal of the payment by notifying the recipient bank to return or freeze the funds if the transfer is still being processed and has not been credited into the target’s account.

Further, pursuant to section 25A of the Organized and Serious Crimes Ordinance (Cap 455) (“OSCO”), reporting obligations are imposed on everyone including financial institutions that, where a transaction is found to be suspicious, a suspicious transaction report (STR) should be with filed with the Joint Financial Intelligence Unit (the “JFIU”), a governmental organization jointly run by officers from the Hong Kong Police Force and the Hong Kong Customs and Excise Department. Victims of fraud should also, on their own initiative, file a report with the Hong Kong Police.

Upon reviewing the application and assessing the evidence, the JFIU may issue a “no consent” letter to the relevant banks by informing them that the JFIU does not give consent to any dealings in relation to the accounts. Although a “no consent” letter is not per se an injunctive court order and that it is ultimately for the banks to decide whether or not to withhold the suspected accounts and to refrain from honouring the instructions of their clients, banks generally err on the side of caution and adhere to such instructions as it is an offence to deal with crime proceeds under section 25 of OSCO if a person knows or has reasonable grounds to believe that he is dealing with proceeds of crime. Effectively, a “no-consent” letter operates as a de facto informal freeze against the target accounts so long as the letter remains valid.

In the case of Interush Limited v The Commissioner of Police HCAL167/2014, the Court of First Instance highlighted that the relevant factors when considerations are made to issue a “no-consent” letter include the nature of the offence, the prospect of a conviction, the value of proceeds and realizable property, the reasonable likelihood of obtaining a restraint order and/or an injunction and the preservation of proceeds of crime for confiscation. It was also indicated that once a ‘no consent’ letter is issued through the JFIU, its validity does not normally exceed over 6 months and that its extension is to be reviewed on a monthly basis.

With the passage of time, there may be an increasing risk of dissipation of funds as they are more often than not swiftly onward transferred from one account to another. This results in a heightened difficulty in tracking and locating the whereabouts of the funds as they may have reached the second or third layer recipients. As such, in the absence or at the expiry of the JFIU’s “no-consent” letter, considerations should be given to apply to the Hong Kong Courts for a freezing order and/or a disclosure order.


Mareva (asset freezing) injunction

To prevent and restrain the dissipation of funds, victims could make an urgent application to the Hong Kong Courts to freeze the relevant bank account. A hearing for this interim relief can be obtained in short notice and is usually heard ex parte. A freezing injunction (i.e. a Mareva Injunction) will be issued upon the Court’s satisfaction that the following required conditions are met:

1.        there is a good arguable case on a substantive claim against the defendant;

2.        the defendant has assets within Hong Kong;

3.        the balance of convenience is in favour of granting this injunction order; and

4.        there is a real risk of dissipation or secretion of assets by the defendant before the court can make the final judgment at the coming trial.


Norwich Pharmacal (disclosure) order

Where the whereabouts of the scammed funds are unknown and/or have been onward transferred to the second or even the third level recipients in whole or in part, applying for a disclosure order (i.e. a Norwich Pharmacal order) grants victims the right to trace the passage of information and assets, and to identify the proper defendant for commencing civil proceedings. A disclosure order can be made against banks for inspecting the information and documents in relation to the suspicious accounts, including the identities and addresses of the fraudsters, the bank statements, and their instructions to the banks.

Similarly, an application for a Norwich Pharmacal order is usually made ex parte. Courts will only exercise its discretion to grant an order where it is “necessary” in the interests of justice and where:

1.        there are cogent and compelling evidence to demonstrate serious wrongful activities have taken place;

2.        the order will or will very likely reap substantial and worthwhile benefits for the plaintiff; and

3.        the discovery sought must not be unduly wide.


Commencement of civil proceedings

As the Hong Kong Police will not help to recover the defrauded funds, once the defrauded funds are secured in the bank accounts, victims should then act promptly and instruct lawyers to assist in lodging civil proceedings against the defendant to recover the funds via obtaining a Court order. 

In a typical civil action for recovering assets, the defendant(s) (i.e. the fraudster and/or the subsequent recipient of the funds) would not normally appear to contest the claim and to participate in the legal proceedings. Given the high threshold for a plaintiff (i.e. the defrauded victim) to bring forth claims on the grounds of fraud, instead of pleading fraud against the defendant, the plaintiff can sue on other grounds such as unjust enrichment (or money had and received) and knowing receipt and/or dishonest assistance.

In the event that the defendant fails to file a notice of intention to defend, the plaintiff could then apply to the Court for a final judgment without a trial. Upon obtaining the final judgment, an application for a garnishee order may be made against the bank which holds the proceeds of the fraud to enforce the judgment. This garnishee order compels the recipient bank to transfer the fraudulent funds from the fraudster’s bank account back to the victim.

Hong Kong Courts have also routinely granted vesting orders to victims of fraud cases pursuant to section 52 of the Trustee Ordinance (Cap 29) in the past. A vesting order is essentially a procedural shortcut for recovering scammed funds by obtaining the right to call upon the recipient bank to directly transfer the fraudulent proceeds back to the victim.

However, the applicability of vesting orders has been reassessed, with conflicting first-instance judgments handed down since 2020. Debates as to whether the Courts have the jurisdiction to make a vesting order in a cyber-fraud context remains dynamic. For a more in-depth review of the recent judgments on the applicability of vesting orders in email scam cases, please read our previous article, “Email fraud cases: How best to recover the scammed funds”.


Conclusion

In some cases, upon the freezing of the relevant bank accounts, be it via an informal JFIU freeze or an injunctive Court-ordered freeze, there would still be some credit balance remaining in such accounts yet to be transferred onward, meaning that defrauded victims are still able to recoup some of the scammed proceeds. Hence why, time is always of the essence in the recovery process when it comes to fraud cases. Upon the discovery of fraud, victims should forthwith notify the banks and file reports to the Hong Kong Police. Legal advice should also be obtained in a timely manner such that the necessary injunctions and civil claims could be applied for and put forth before the Hong Kong Courts straight away without further delays.




For enquiries, please feel free to contact us at:

E: criminal@onc.hk                                                             T: (852) 2810 1212
W:
www.onc.hk                                                                    F: (852) 2804 6311

19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

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 © 2021


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