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15 January 2019
In a series of recent judgments, the first-instance courts in Hong Kong have demonstrated an increasing flexibility in assisting victims of internet and email fraud, including granting declaratory relief without trial. This development is welcome given the scale of the problem. It is a recognition that existing court procedures and rules need to adapt to new challenges.
The Anti-Deception Coordination Centre reported that a colossal HK$6 billion in payments misappropriated from scam victims was transferred through bank accounts in Hong Kong in the 15 months leading up to December 2018.(1) Despite the law enforcement authorities' efforts, only about 20% of these payments have been recovered from the scammers. To make matters worse, recent scams have exhibited greater levels of sophistication and ambition, often applying advanced social media engineering techniques to mislead people (sometimes acting on their own account, sometimes as a company employee) into transferring funds to a bank account controlled by the fraudster.
Full recovery of the money misappropriated in such circumstances is challenging, particularly as the majority of scammers are located outside Hong Kong and those affected need all of the help that they can get from the legal system. Unfortunately, the litigation process can be complex and confusing.
A scam will generally be reported to the Hong Kong Police, who will begin a criminal investigation. If it is not too late, the police may require the recipient bank to temporarily block any attempted withdrawal or transfer of the funds. In parallel, civil court proceedings can generally be brought against the holder of the recipient account. These civil proceedings generally involve seeking default judgment (without trial) against the perpetrators of the fraud (or the corporate vehicle used thereby), which rarely defend claims made against them.
After this, the typical route taken is to pursue (for example) garnishee enforcement proceedings against the recipient account holder's local bank. Once a final garnishee order is served on the relevant local bank, the victim/claimant can theoretically safely recover their misappropriated funds. However, this process takes time. If the order is not obtained quickly enough, unless the relevant bank account is frozen, the fraudster will likely have already transferred the misappropriated funds elsewhere – generally, out of the jurisdiction.
Therefore, where a large amount of money has been stolen, victims should consider instructing local lawyers to make an urgent ex parte (ie, without notice) application for a Mareva (ie, freezing) injunction against the account holder so that the recipient account can be frozen – thereby preventing dissipation of the misappropriated funds. Such an injunction can also be supplemented with a disclosure order, which can help to identify those behind the scam. However, affected parties must balance the sums that they have lost to the fraud with the legal costs that they will incur if they choose to apply for an injunction.
The legal processes described above can sometimes be unwieldy and require fraud victims to quickly make difficult decisions on how and whether to proceed, weighing up the need to spend money on lawyers with the prospect of recovering some or all of the money – usually on the basis of limited information.
One of the more interesting developments concerning the courts' recent approach to email fraud cases involves declaratory relief.
Although it is a well-established principle that when property is obtained by fraud, equity imposes a constructive trust on the fraudulent recipient and the property is recoverable and traceable, in practice it is has traditionally been rare for declaratory relief to be granted before trial. Civil claims pursued in relation to email fraud tended not to include a claim for declaratory relief as a matter of course.
However, there have been a significant number of recent cases in the High Court and District Court where declaratory relief has been granted alongside default judgment without a full trial. For example, in the recent High Court case of Skandinaviska Enskilda Banken SA v Hongkong Liling Trading Ltd,(2) an email fraud victim brought a claim based on proprietary constructive trust. Granting default judgment along with a declaration that the defendants held the funds on trust for the plaintiff, the court commented that:
There is a rule of practice, which is not a rule of law, that a court will not normally make a declaration without a trial. However, where there is a genuine need for declaratory relief the practice will give way to the requirements of justice.(3)
The same reasoning has been followed in several other recent first-instance judgments, both in the High Court and the District Court.(4)
The Hong Kong courts' increasing willingness to grant declaratory relief without trial in these circumstances is a significant step in the right direction, as it has simplified the civil action to be taken by those affected by email fraud and similar scams. This development enhances a victim's proprietary rights to their misappropriated funds by establishing that the recipient is merely holding the funds on trust for the victim and expanding the tools in the victim's arsenal for recovery.
Legal advisers who take advantage of this development should be able to reduce the legal costs involved and may achieve better results for their clients.
Although a streamlined legal process is welcome, it should be borne in mind that the need to act quickly remains of paramount importance. Further, the fact remains that there is no guarantee of successful recovery. As such, every business should prioritise the adoption of preventative measures, including training staff and implementing a multi-step authorisation procedure for any significant transactions or payments. An old saying equally applies to modern day scams: "prevention is better than cure".
For further information on this topic please contact Ben Yates or Rico Chan at RPC by telephone (+852 2216 7000) or email (firstname.lastname@example.org or email@example.com). The RPC website can be accessed at www.rpc.co.uk.
(1) "HK$6 billion in scammed funds transferred through Hong Kong bank accounts in past 15 months", South China Morning Post, 13 December 2018.
(4) See, for example, Guaranty Bank and Trust Co v ZZZIK Inc Ltd, HCA 1139/2016; Christ Reaching Asia Mission Worldwide, Inc v Hanzhongsi Trade Ltd  HKDC 1340, 2 November 2018; Rolling Hills Trading, Inc v Premier Trading Develop Ltd  HKDC 1614, 31 December 2018; and 巨展皮具香港有限公司 v 上海兄弟海運有限公司  HKCFI 53, 17 January 2018.
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