Cyber fraud
recovering money
and recent developments on remedies

Hong Kong has unfortunately seen a significant rise in cyber fraud, including business email compromise. Not only are Hong Kong companies the victims of such fraud, but Hong Kong is also a popular destination for fraudsters to send the proceeds of their crimes after defrauding foreign companies.

Typically, a fraudster may impersonate a CEO and send an email to someone in the company authorized to make payments, instructing them to make a wire transfer to a Hong Kong company bank account in respect of a fake transaction. Or, by email manipulation, a fraudster interposes himself between a company and one of its suppliers, and pretending to be the supplier, directs the company to make payments to the bank account of a different company.

If a company is the victim to such a fraud, swift action needs to be taken to try to recover money:

  • Report the fraud to the Hong Kong Police. A company can do this by using the Police’s e-Report form, including details of the bank account to which the funds were wired.

    The police, through the Joint Financial Intelligence Unit, may issue a ‘letter of no consent’, which has the effect of freezing, at least temporarily, any money which remains in the bank account.

  • Notify the recipient bank that fraudulently obtained funds have been transferred to an account held with it. Although the bank will not freeze the account unless it receives a letter of no consent or is served with an injunction order, it would be put on notice of the fraud.

  • Commence civil court proceedings, including seeking injunctive relief and banker’s disclosure orders. In order to recover any money which has been defrauded from a company, the victim company should commence legal proceedings against the fraudster and/or holder of the bank account to which the money was transferred.

    If the fraud is discovered quickly, so there may still be money in the bank account to which it was wired, the victim company should also apply for a proprietary injunction and/or a Mareva (freezing) injunction. A proprietary injunction restrains the disposal of property over which the plaintiff has a proprietary claim (e.g. the money which it transferred to a bank account as a result of the fraud). A Mareva injunction is wider than this, restraining the defendant from disposing of, or dealing with, its assets over which the plaintiff asserts no proprietary claim, but which after judgment may be attached to satisfy a money judgment.

    In order to trace and preserve the defrauded money, the victim company can also seek a banker’s records disclosure order, requiring the bank to disclose its records of the transactions in the account to which the defrauded funds were wired.

The relief sought by a victim company will usually include a declaration that the fraudster, or the recipient of the defrauded funds, holds the defrauded funds on constructive trust in favour of the victim company. As the fraudster/holder of the bank account generally does not defend the claim, the Court can then make a vesting order under section 52 of the Trustee Ordinance that the bank transfers the relevant funds directly to the victim company. This is a quicker option than the procedure to garnishee (attach) the funds in the bank account.

However, there has been a spate of cases this year in which judges have differed as to whether section 52 of the Trustee Ordinance can be used to grant a vesting order upon the making of a declaration that that defendant holds certain sums of money in a bank account on a constructive trust for a plaintiff.

In one of these cases, Wismettac Asian Foods, Inc. v United Top Properties Ltd and others [2020] HKCFI 1504 (10 July 2020), in which we represented the plaintiff and obtained proprietary and Mareva injunctions against two Hong Kong companies which were recipients of defrauded funds, Deputy High Court Judge Paul Lam SC concluded that section 52(1)(e) could be used to make a vesting order in these circumstances.

Section 52(1)(e) permits a vesting order to be made “where stock or a thing in action is vested in a trustee whether by way of mortgage or otherwise and it appears to the court to be expedient”. Deputy High Court Judge Lam held that s.52(1)(e) does not exclude a constructive trustee.

In two subsequent cases in July, the judges also concluded that vesting orders should be made. However, in two other cases, one in January 2020, and more recently TOKIC, D.O.O. v Hongkong Shui Fat Trading Limited [2020] HKCFI 1822 (4 August 2020), the judges took a different view regarding section 52(1)(e) and did not make vesting orders.

If a victim company is denied a vesting order, it can still apply for a garnishee order over the funds in the bank account. In addition, in the TOKIC case, the judge identified an alternative remedy in s.25A(1) of the High Court Ordinance. He ordered the relevant defendants to execute such documents as may reasonably be required to instruct the banks in which the relevant bank accounts were held to transfer to the plaintiff the sums which he had declared to be held on a constructive trust for the plaintiff, failing which the plaintiff could apply for an order under s.25A(1) that the documents be executed by such other person as the Court may nominate for that purpose.

There will likely continue to be different views and decisions concerning remedies in cyber fraud cases until there is an appellate decision on this issue. However, for a victim of cyber fraud, the key to recovering money is to act quickly and seek legal advice as soon as the fraud is discovered.

The contents of this newsletter are for reference only and do not constitute legal advice. If you would like advice on any of the issues raised, please speak to one of our contacts below.

Dorothy SironMark Bedford
Partner (Hong Kong)Partner (Hong Kong)
+852 2298 7620+852 2298 7617