Hong Kong: Email Fraud and the Con Game in Business


In summary

A year has passed since our article on email fraud in last year’s edition of this Review and, unfortunately, fraud cases still remain at a high. Companies should therefore remain vigilant and alert, and revisit our previous article, which explores the typical scenarios of email fraud in a business context and how to mitigate the financial losses. In this article, we will carry on from where we left off and further explore how companies can recoup these financial losses, even where there are competing claims. We will also explore recent developments in this area in order to provide the reader with a more holistic picture.


Discussion points

  • Recent update on email fraud cases
  • Options available to victims to recoup financial losses, including in a situation where there are competing claims
  • Recent developments in investigations, asset tracing and recovery

Referenced in this article

  • Rules of the High Court (Chapter 4A of the Laws of Hong Kong)
  • Companies (Winding Up and Miscellaneous Provisions) Ordinance (Chapter 32 of the Laws of Hong Kong)
  • Companies (Winding-up) Rules (Chapter 32H of the Laws of Hong Kong)
  • Trustee Ordinance (Chapter 29 of the Laws of Hong Kong)
  • Milestone Electric Inc v Meihoukang Trading Co Ltd [2020] HKCFI 2542
  • 800 Columbia Project Co LLC v Chengfang Trade Ltd [2020] HKCFI 1293
  • Wismettac Asian Foods Inc v United Top Properties Ltd [2020] 3 HKLRD 732

Introduction

In our article in last year’s edition of this Review,1 we noted that, in the context of the worsening covid-19 situation last year, there was a rise in email fraud cases in Hong Kong, and that fraudsters had increased the intensity of their con game and adopted various techniques to conduct email fraud. Unfortunately, the situation has not improved, and fraud cases still remain at a high in 2021.

In the first quarter of 2021, 4,183 fraud cases were reported to the Hong Kong police. Compared with the same quarter in 2020, which saw 4,200 cases reported,3 the number of cases remained largely similar. Both figures, however, when compared against the number of fraud cases reported in the same quarter in pre-covid 2019 (1,954 cases),4 represent an increase of around 115 per cent. Based on that, it is clear that the number of fraud cases remained consistently high in both 2020 and 2021.

In terms of annual figures, 15,553 fraud cases were reported to the Hong Kong police in 2020.5 Compared with 2019, which saw 8,216 cases reported for the whole year,6 the increase in 2020 attributes to an increase of approximately 90 per cent year-on-year. In relation to business email fraud, 639 cases were reported to the police in 2020, the relevant losses of which amounted to HK$2.2 billion, which averages out to a loss of HK$3.5 million in each case.7

Considering the large number of reported fraud cases in both 2021 and 2020 and the amount of loss that may potentially arise from each case, directors and senior management of public companies should remain vigilant and alert.

This article builds on and further supplements last year’s article. In particular, we examine how victims of email fraud can obtain and enforce judgments to recoup the defrauded sums. We will also explore the options available to a victim in the face of a competing claim.

Obtaining judgment and enforcement – a closer look

In last year’s article we explored the various techniques fraudsters commonly adopt in email fraud. We also mentioned that the longer the period between when the fraudulent transfers occurred and when they are detected and acted upon, the more difficult and less likely it is that the money will be recovered. Hence, it is important to act within the first 72 hours – the window of ‘golden opportunity’. As there are various options available to directors and management of a public company (the victim), it is important for the victim to prioritise these work streams to increase the chances of recovery. The most immediate work stream is to contact the victim’s bank as well as the police.

In terms of court proceedings, we mentioned that the victim can take out applications for injunctions and disclosure orders to freeze funds in the fraudster’s Hong Kong bank account and begin the tracing process should the funds be dissipated from the first-level bank account and into second- (or further) level accounts. If it is discovered that there are funds still in Hong Kong at the end of the tracing exercise, it is possible for the victim to obtain a court judgment against the subsequent level accountholder (the subsequent accountholder) (ie, a recipient of the defrauded funds) to recover the funds.

While there is a chance that the subsequent accountholder may appear in civil proceedings to defend its case on the basis that it is a bona fide recipient for value without notice, in practice, it is unlikely that the subsequent accountholder will contest the court proceedings. This may be because the subsequent accountholder also belongs to the same criminal enterprise as the fraudsters and does not wish to appear in court.

In such a case, the victim may apply for default judgment (ie, final judgment without trial) against the subsequent accountholder pursuant to Order 13 of the Rules of the High Court (Cap 4A).8 However, this is not a straightforward process. In order to enter judgment under Order 13, the court needs to be satisfied that the writ has been served on the subsequent accountholder and that it has failed to file an acknowledgement of service of the writ giving notice of intention to defend.9 Accordingly, the victim is required to file an affidavit or affirmation proving due service of writ.10 The victim may also have to answer any queries the court may have, including queries on the attempts made to serve the writ on the subsequent accountholder or queries concerning the subsequent accountholder’s registered address or last known address. Hence, it may be best to leave the default judgment application to legal experts who are knowledgeable of the relevant legal thresholds and are experienced in obtaining default judgments.

After judgment is obtained, the victim may apply to the court for a garnishee order11 against the fraudster’s bank that holds the proceeds of the fraud, in order to attach the judgment debt to this sum, which is due to the fraudster from the bank. Once obtained, the garnishee order compels the fraudster’s bank to pay the attached sum in the fraudster’s bank account back to the victim.

Competing claims against the balance in the same account

The above situation envisages that there is only one victim and one claim to the sums in the subsequent accountholder’s bank account (the relevant account). However, this is often not the case, as proceeds from numerous fraud schemes may be funnelled into the same account, and thus multiple victims may make claims against the sums in the relevant account.

It is only upon the commencement of enforcement proceedings and service of the garnishee order nisi against the fraudster’s bank that the fraudster’s bank may inform the victim whether the remaining balance in the relevant account is subject to any other claims, and if so, the relevant case numbers. More importantly, the fraudster’s bank will also inform the victim whether the same is also subject to any injunction or further order by the court. This situation is not as problematic if the balance is sufficient to satisfy every victim’s claim. However, this is unlikely as funds may have been further dissipated before an injunction is put in place, thereby resulting in competing claims over a smaller pot.

Once the victim is aware of a competing claim, they should commence negotiations with other victims to reach an agreement on the distribution of the funds in the relevant account as soon as possible. If all victims agree on the distribution and vary their own respective injunctions permitting payment out of the relevant account to all of the victims, the fraudster’s bank would release the funds to be divided among the victims as agreed and that would be the end of the matter.

Winding-up proceedings to ensure fair distribution

If, however, the rival victims are unable to reach an agreement, the victim may wish to consider commencing winding-up proceedings against the subsequent accountholder (if a company) to ensure a fair distribution of the subsequent accountholder’s assets. Upon the grant of a winding-up order, the distribution of the subsequent accountholder’s assets will be determined by law; it is likely that all victims’ claims as unsecured creditor claims will rank pari passu and the victim will (subject to the discussions below) be paid in proportion to its claim.

However, the victim should bear in mind that there are likely to be liquidation costs that rank higher than the victims’ claims and must be paid out of the pot first. Furthermore, the commencement and subsequent advertisement of the winding-up proceedings (see below) may invite competing claims from other non-victim creditors (eg, creditors from the ordinary course of business) that may rank higher than the victims’ unsecured claims and will be paid before the victims’ claims. The overall effect is that after paying out the liquidation costs and the non-victim claims, there may not be much left of the subsequent accountholder’s assets to satisfy the victims’ unsecured judgment debt. Hence, whether it is beneficial for the victim to pursue this option will depend on the circumstances of the case, primarily the amount of assets the subsequent accountholder has and the potential claims against the subsequent accountholder.

Legal considerations for winding-up proceedings

At the same time, the victim should also consider whether there are sufficient grounds for the winding-up application. The typical circumstance in which the court may wind-up a company is if the company is unable to pay its debts pursuant to section 177(1)(d) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (CWUMPO). In this regard, the subsequent accountholder shall be deemed to be unable to pay its debts if:

  • it fails to pay the judgment debt three weeks after being served with the victim’s statutory demand;12
  • execution or other process issued on a judgment, decree or order of any court in favour of the victim is returned unsatisfied in whole or in part;13 or
  • it is proved to the satisfaction of the court that the subsequent accountholder is unable to pay its debts upon consideration of the contingent and prospective liabilities of the subsequent accountholder.14

Unless the victim has already obtained an execution order, the most straightforward method of establishing a prima facie case of inability to pay debts would be serving the subsequent accountholder with the statutory demand and then waiting for three weeks before filing a winding-up petition. This approach requires the victim to prove that the subsequent accountholder had been served with the statutory demand and failed to pay the judgment debt within three weeks without the need to actually prove that the subsequent accountholder is insolvent. The potential issue, however, is that the victim’s action will have to be prolonged by a further three weeks, during which more victims may join the scene with further competing claims, thereby further reducing the sum that the victim may ultimately recover. Hence, depending on the situation, the victim could consider filing a petition immediately and directly prove to the satisfaction of the court that the subsequent accountholder is unable to pay its debts pursuant to section 178(1)(c) CWUMPO rather than to rely on the statutory demand.

Alternatively, another circumstance in which the court may wind-up a company is if the court is of the opinion that it is just and equitable that the company should be wound up pursuant to section 177(1)(f) CWUMPO. Similar to section 178(1)(C) CWUMPO, this would require the victim to make a positive case that it is indeed just and equitable for the subsequent accountholder to be wound up, and thus is a more complicated approach than relying on the statutory demand.

Steps in a winding-up proceedings

As can be seen from the above, the practical considerations and legal issues involved in commencing a winding-up application are numerous and complex. It is therefore suggested that the victim should consult its legal experts to assess this option first before committing to the application. If, after consideration, it is decided that winding-up proceedings against a subsequent accountholder in Hong Kong should be commenced, the victim should also engage legal representatives with the relevant experience to assist with the application process, which, as shown in the brief summary below, can be rather complicated:

  1. Prepare the relevant papers: This includes the winding-up petition, which would, among other things, state the grounds for the winding-up application.
  2. Payment of deposit: Before presenting a winding-up petition, the victim must deposit with the Official Receiver a sum15 for the purposes of covering the fees and expenses to be incurred by the Official Receiver.16
  3. Presentation of the petition: The petition must then be presented at the office of the Registrar, who shall appoint the time and place at which the petition is to be heard (the hearing).17
  4. Service of the petition: The petition must be served upon the subsequent accountholder at its registered office, and if there is no registered office, then at the principal or last known principal place of business of the subsequent accountholder, by leaving a copy with any of the subsequent accountholder’s member, officer or servant. If no such personnel can be found there, then a copy should be left at the registered office or principal place of business.18 Service should ordinarily be effected on business days and during normal working hours.19
  5. Affidavit of service: After effecting service of the petition, an affidavit of service should be prepared and filed. The affidavit of service should, as far as possible, identify the person with whom a copy of the petition has been left.20
  6. Verification of the petition: Every petition for the winding up of the company by the court must be verified by an affidavit made by the petitioner or, if the petition is presented by a corporation, by its director, company secretary or other principal officer. Such affidavit shall be sworn after and filed within four days after the petition is presented and shall be sufficient prima facie evidence of the statements within the petition.21
  7. Service of documents on the Official Receiver and Chief Bailiff: If any document was presented or filed by the victim, a copy of the document must be served on the Official Receiver and Chief Bailiff within 24 hours of the presentation or filing.22 This includes documents such as the petition, the affidavit of service and the verification affidavit.
  8. Advertising the petition: The petition should be advertised before the hearing in the prescribed form and in a manner as prescribed by section 24 of the Companies (Winding-up) Rules (Cap 32H) (the Rules).
  9. Certificate of compliance: After a petition has been presented, the victim or its legal representatives, shall attend before the Registrar on a day to be appointed by the Registrar before the hearing and satisfy that (1) the petition has been duly advertised; (2) the verification affidavit and affidavit of service have been duly filed; and (3) the provisions of the Rules as to winding-up petition have been duly complied with by the victim. Upon being satisfied that all the requirements have been fulfiled, the Registrar will endorse on the court file a ‘certificate of compliance’. This is an important step as no winding-up order will be made unless this procedure is complied with.23
  10. Up until the hearing: Persons who intend to appear on the hearing of the petition (eg, other creditors) may serve a notice of their intention to the victim.
  11. Hearing: The first hearing of a winding-up petition is before a Master. If the winding-up petition is not opposed, the Master has jurisdiction to make a winding-up order.24 If the petition is opposed, the Master will adjourn it to be heard before the Companies Judge who, if he or she thinks it fit, will make a winding-up order.25

Ultimately, the intention is for the subsequent accountholder to be wound up with its assets distributed among its creditors and contributories, allowing the victim to recoup the defrauded sums.

Recent developments in investigations, asset tracing and recovery

There are reported cases of victims attempting to recover defrauded funds by way of seeking declaratory relief and vesting orders,26 which effectively compel the fraudster’s bank to directly return the defrauded sums back to the victim from the fraudster’s account. This is because obtaining declaratory relief and a vesting order is, in theory, a shortcut – since the victim can apply for both declaratory relief and a vesting order during the default judgment hearing27 and achieve the same outcome without the need to further apply for a garnishee order at a later date to enforce the default judgment, thereby saving precious time and costs. However, such an approach has been re-examined by the court in recent cases, and the current legal position is not entirely clear.

Declaratory relief

Before the victim can obtain a vesting order, it will seek a declaration from the court that the subsequent accountholder holds the funds in the relevant account on constructive trust for the victim. Such a declaration is usually a form of proprietary relief that ranks ahead of any monetary relief against the subsequent accountholder. To obtain such a declaration, the victim must successfully establish that the funds held in the relevant account ‘can be identified by the tracing process as representing the original trust property’.28 If the victim is unable to meet the legal threshold through investigative and tracing efforts, the court is unlikely to grant declaratory relief.

In the case of Milestone Electric Inc v Meihoukang Trading Co Ltd [2020] HKCFI 2542 (decided in September 2020), the court was not prepared to grant the victim proprietary relief because, inter alia, the victim failed to plead certain information, including but not limited to, whether or not there had been any mixing of money in the defendant’s account, and whether the intermediate balance had fallen to or below zero. While these considerations were highlighted by the court, it remains to be seen whether these specific considerations will have to be addressed in every case in order to obtain declaratory relief.

Vesting orders

In relation to vesting orders, recent case law has led to questions concerning the current legal position. To provide context, the court’s jurisdiction to grant these vesting orders originates from section 52(1)(e) of the Trustee Ordinance (Cap 29) (TO), which states that where ‘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, the court may make an order vesting the right to . . . recover the thing in action’ in a person appointed by the court.

In 800 Columbia Project Co LLC v Chengfang Trade Ltd [2020] HKCFI 1293 (decided in June 2020),29 Recorder Eugene Fung SC held that section 52(1)(e) TO was not applicable to email fraud cases, despite being prepared to grant declaratory relief that the defendants (ie, recipients of the defrauded sums) held certain sums in constructive trust for the victim. This was because the court held that the language of section 52(1) TO itself contemplated the appointment of a trustee by the court. However, a person was not ‘appointed’ by the court to be a trustee for the purposes of section 52 TO when he or she became a constructive trustee pursuant to a declaration made by the court. While the defendants might be required by equity to account as if they were trustees or fiduciaries, they were not true trustees as they never assumed and never intended to assume the status of a trustee and thus fell out of the scope of the section. Further, while section 52(1)(e) TO might be satisfied when a ‘thing in action is vested in a trustee’, Recorder Eugene Fung SC found that legal title in the right to call for repayment would continue to be held by the defendants even after default judgment, therefore it was not apt to say that the right was vested in the defendants by virtue of the court’s giving of the default judgment.

However, in Wismettac Asian Foods Inc v United Top Properties Ltd [2020] 3 HKLRD 732 (decided in July 2020), Deputy Judge Paul Lam SC held that section 52(1)(e) TO was applicable to email fraud cases, as the meaning of the word ‘trustee’ in section 2 and section 52(1)(e) TO extends to a constructive trustee unless the context requires otherwise. In considering whether the context in section 52(1)(e) required the exclusion of a constructive trustee, the court noted that the phrase ‘or otherwise’ was extremely broad and was capable of including vesting by way of operation of law. The court made a distinction and noted that the ‘[t]he constructive trust comes into existence the moment the fraudster or the subsequent recipient receives the victim’s money or its traceable proceeds in their bank accounts by operation of law. When the court grants a declaration in this respect upon the victim’s application for default judgment, it is merely affirming the legal position but is not creating any trust by such order.’30 As such, Deputy Judge Paul Lam SC was satisfied that, looking at the matter in this way, it fell within the case of ‘a thing in action is vested in a trustee by way of mortgage or otherwise’.

In light of the conflicting authorities mentioned above, it may be unlikely that the court will easily grant vesting orders in the future absent any clear appellate decision on the relevant issues. Hence, as suggested by Deputy Judge Paul Lam SC in Wismettac, in order to play safe, it may be sensible to achieve the same objective by a means which is clearly uncontroversial, such as applying for a garnishee order under Order 49 of the Rules of the High Court (Cap 4A).31 Nevertheless, developments in this area would be of interest to and closely monitored by legal experts, as vesting orders may lead to time and cost savings if they are indeed found to be applicable to email fraud cases.

Conclusion

As fraud cases remain at a high in 2021, it cannot be further stressed how important it is for the company, including its directors, senior management and employees, to remain vigilant and cautious when handling or approving large transactions over email. In order to minimise the chances of the company falling victim to email fraud, the company should conduct regular employee training, adopt double-authentication processes, conduct frequent IT security checks and even set up controls with banks, if appropriate. This is not an exhaustive list and other controls can be implemented, depending on the company’s structure and unique circumstances.

In the unfortunate event that one does fall victim to email fraud, there are numerous legal options and remedies available to recover defrauded funds, even when faced with competing claims from other rival victims. However, choosing which option to take requires careful consideration, though legal advisers should have the necessary expertise and experience to advise accordingly, and are best placed to assist the victim.


Notes

[1] See GIR Insight: Asia-Pacific Investigations Review 2021 ‘Hong Kong: Email Fraud and the Con Game in Business’ by Maria Sit, Hadrian Ho, Fei Kwok and Natasha Shum with contributions from Amanda Liu.

[2] Hong Kong Police Force, ‘Crime Statistics Comparison’, retrieved on 29 June 2021 from https://www.police.gov.hk/ppp_en/09_statistics/csc.html.

[3] ibid.

[4] See our previous article (footnote 1).

[5] Hong Kong Police Force, ‘Crime Statistics Comparison’, retrieved on 29 June 2021 from https://www.police.gov.hk/ppp_en/09_statistics/csc_ 2019_2020.html.

[6] ibid.

[7] Cyber Security and Technology Crime Bureau, Hong Kong Police Force, ‘Business Email Scam’, retrieved on 17 June 2021 from https://cybersecuritycampaign.com.hk/fraud/email-scam_eng.html.

[8] See also Båsløkka Invest AS v Lambert and Sons Incorporated [2016] HKEC 1199, where Deputy Judge Saunders quotes Robert Goff J in Stewart Chartering Limited v C & O Managements SA [1980] 1 WLR 460 stating that the court has power under its inherent jurisdiction to give the plaintiff leave to enter judgment for a debt or liquidated demand, notwithstanding that the writ is indorsed with a claim for an injunction and the plaintiff has in fact obtained a Mareva injunction against the defendant. Deputy Judge Saunders’s comment was given in the context of Order 13 Rule 6 of the Rules of the High Court (Cap 4A), which appears to suggest that the plaintiff needs to abandon its claim for injunctive relief before a default judgment can be entered against the defendant.

[9] Order 13 Rule 1 and Rule 7 of the Rules of the High Court (Cap 4A).

[10] Order 13 Rule 7 of the Rules of the High Court (Cap 4A).

[11] Order 49 of the Rules of the High Court (Cap 4A).

[12] Section 178(1)(a) CWUMPO.

[13] Section 178(1)(b) CWUMPO.

[14] Section 178(1)(c) CWUMPO.

[15] As at the date of writing, the relevant sum is HK$11,250. See Section 22A of the Companies (Winding-up) Rules (Cap 32H) (the Rules).

[16] Section 22A of the Rules.

[17] Section 23 of the Rules.

[18] Section 25 of the Rules.

[19] Paragraph 4.1 of Part II of Practice Direction 3.1.

[20] Paragraph 4.2 of Part II of Practice Direction 3.1.

[21] Section 26 of the Rules.

[22] Section 23A of the Rules.

[23] Section 29 of the Rules.

[24] Section 180A CWUMPO.

[25] Section 180(1) CWUMPO.

[26] Section 52 Trustee Ordinance (Cap 29) (TO).

[27] Though this has recently been questioned by the court in Wismettac Asian Foods Inc v United Top Properties Ltd [2020] 3 HKLRD 732.

[28] Milestone Electric Inc v Meihoukang Trading Co Limited [2020] HKCFI 2542.

[29] See also Tokić DOO v Hongkong Shui Fat Trading Ltd [2020] 4 HKLRD 189 (decided 4 August 2020), which equally held that Section 52(1)(e) TO had no application to email fraud situations and the court had no jurisdiction to make the vesting orders sought. This was because defendants in such a situation were not ‘true’ trustees and the TO was never intended to apply to such persons. Furthermore, ‘the fact that the court had declared that a wrongdoer was to account for certain stocks or choses in action as if he were a trustee did not vest legal title in the same in that wrongdoer as trustee, or recast what was a remedy into an institutional trust’ to which the TO could apply.

[30] Wismettac Asian Foods Inc v United Top Properties Ltd [2020] 3 HKLRD 732 at p. 770.

[31] ibid at p. 775.

Get unlimited access to all Global Investigations Review content