Cyber Fraud: An alternative approach to recover defrauded monies

23 March 2017

Richard Keady, Rebecca Sargent, Connie Wong

Cyber fraud is a serious problem for businesses, as opportunistic fraudsters continue to find new ways to deceive companies into transferring money to unauthorised accounts. One of the most common scams we come across is where a member of staff receives an email from a purported supplier or business partner, and follows the instructions to make payment to an unauthorised account.

Two recent cases in the Hong Kong court have adopted an alternative approach against such fraudsters in efforts to reclaim the monies transferred.  The plaintiffs in these cases applied simultaneously for default judgement and a vesting order in respect of trust property under the Trustee Ordinance (Cap 29), using equitable principles to establish a trust scenario where the fraudsters are deemed to hold the money on trust in their bank account, and the court orders the banks to return the trust property to the rightful owner.  

Alternative approach to recover defrauded monies

In the most recent case Halliburton BV Merkezi Hollanda Ankara Merkez Turkiye Subesi v Sheng Yi (HK) Trade Co Ltd and Ors (HCA 1627/2016), the plaintiff fell victim to a fraud where imposters procured the plaintiff to transfer nearly US$5 million to a Hong Kong bank account.  The sum was then transferred in tranches to a number of recipients. As an alternative to the usual approach of firstly obtaining default judgment and then applying separately for a garnishee order, the plaintiff applied simultaneously for

(i) default judgment;
(ii) a vesting order for payment of the monies defrauded; and 
(iii) a continuation of a Mareva injunction obtained previously in aid of execution. 

Deputy Judge Cooney, SC considered the proposition that, when property is obtained by fraud, equity imposes a constructive trust on the fraudulent recipient, so that the money is recoverable and traceable in equity. He determined that the facts pleaded in the Statement of Claim enabled the plaintiff to assert a proprietary interest in the traceable proceeds of the funds, and to claim for their return on the basis that the funds were obtained by fraud or fraudulent misrepresentation. 

Regarding the vesting order, the relevant provisions of the Trustee Ordinance were section 52(1)(e), which enables an order to vest the right to sue for and recover funds, as a thing in action, in the plaintiffs, and section 52(5), whereby the court can make declarations and give directions concerning the manner in which the right to transfer the thing in action is to be exercised. The Judge considered there was no real prospect that any of the defendants would voluntarily comply with any direction to transfer the portion of the funds held on trust to the plaintiff and thus, without a vesting order, it would have been difficult, if not impossible, to deal with the funds. 

This approach has been used in another case, Guaranty Bank and Trust Co v ZZZIK Inc Ltd (HCA 1139/2016). It provides a cost efficient way to claw back money transferred pursuant to scams by dealing with everything within one hearing. 

Practical tips 

It is important to remain ever vigilant against email scams and cyber fraud. For email scams in particular, always verify the sender's identity when being asked to transfer large sums of money, especially when emails come at odd times or seem out of place from the normal process. Key giveaways include:

  • spelling mistakes, including random capital letters, numbers or abbreviations;
  • generic salutation (e.g. Dear Sirs, when you would normally correspond by name);
  • changes to bank account details;
  • emails marked urgent and/or using capital letters or bold fonts.

These are just some of the examples we have come across, although they are becoming harder to spot as fraudsters become increasingly more sophisticated. The safest approach, if in any doubt, is to contact the sender to verify the contents, using contact details (ideally a telephone number) that you know to be genuine and used regularly.

If you suspect something after a transaction has been completed, it is not too late.  Many employees may be concerned about repercussions when escalating incidents involving large sums of money, but, if action is taken swiftly, money can be successfully traced and returned. If a fraudulent transaction is discovered, the first thing to do is to notify both your bank and the receiving bank that they may be dealing with the proceeds of crime, and contact the police.

Authors

Keady-Richard

Richard Keady

Partner
China and Hong Kong

Call me on: +852 2248 6000

Rebecca Sargent

Registered Foreign Lawyer
China and Hong Kong

Call me on: +852 2248 6000

Connie Wong

Associate
China and Hong Kong

Call me on: +852 2248 6000