There has been a noticeable increase in the prevalence and sophistication of cyber fraud incidents in recent years, which has led to a substantial rise in civil recovery actions.
Fraudsters typically use a syndicate of shell companies to launder funds they receive fraudulently. They often use convoluted corporate structures, for example by using nominee directors and shareholders, to conceal their identities and to create hurdles for victims and law enforcement authorities.
Hong Kong is a particular hotspot given the ease of setting up companies and speed of moving funds electronically here. Given the rise in number of cases, we now have the benefit of key learnings from recent court decisions in Hong Kong and other jurisdictions.
Litigating against allegedly 'innocent' recipients
Laundered funds often trickle through multiple bank accounts, and may eventually fall into the hands of recipients who claim to be innocent and allege that they had provided good consideration and were lawfully entitled to receive those funds. Put simply, these are recipients who claim to be a bona fide purchaser for value without notice of the fraud (bona fide purchaser). If proven, this would defeat the victim's proprietary interest and prevent the recovery of those funds.
When faced with these situations, victims should carefully assess the recipient's version of events and test whether the defence is sustainable both factually and legally. For instance, some recipients may allege that the funds in issue were paid to them as payment for goods or services which they had supplied to their client.
However, when pressed for more details, these recipients often react defensively or give responses that are riddled with logical gaps and inconsistencies. These may be signs of impropriety in the underlying transaction, which may defeat a bona fide purchaser defence. The Hong Kong Courts are mindful of these issues and have expressed concern in recent cases.
In addition, we often encounter entities and individuals who receive tainted funds allegedly as part of certain cross-border remittance transaction(s). Victims should pay particular attention to such cases. These recipients may attempt to deflect or obfuscate the issue by portraying it as a legitimate remittance transaction.
In reality, many of these transactions are conducted through underground banking networks with the aim of circumventing foreign exchange control restrictions that exist in certain jurisdictions. They do so by utilizing bank accounts owned by individuals who allow these networks to use their bank accounts as a conduit for these illegal remittances. In this regard, courts have emphatically stated that a bona fide purchaser defence is precluded if the underlying exchange transaction is illegal.
Competing victims: a flock of birds fighting over one worm?
There have been cases where there are multiple competing victims seeking recovery from the same recipient. The funds available for judgment enforcement in these situations are usually insufficient to satisfy all of the judgment creditors' claims, as money launderers often dissipate the funds promptly to frustrate civil recovery and law enforcement action.
If this occurs, victims would have to analyse the sequence of fund movements and assess the relative strengths of their interests, for example, whether they have a personal or proprietary claim. This may escalate into a long-drawn-out court battle if the victims are unable to reach agreement. However, it may be commercially unwise to do so, as the costs and time involved may outweigh what they ultimately recoup (in monetary terms). It may end up being a case of "throwing good money after bad".
The approach and strategy would naturally depend on the facts of each case. With that said, it is generally advisable for victims to take court action as quickly as possible, and to make a reasonable effort in attempting to strike a settlement deal on how the funds are split. This reduces costs and allows for greater certainty for each of the victims involved. More importantly, it minimizes the risk of more victims joining the battle as time goes on.
Gary Seib, Partner; Gillian Lam, Senior Associate; and Victor Yip, Associate, Baker McKenzie