How fraud victims can recover their funds

Someone who has been duped in a scam can commence a civil action to get their money back. In the second of their two-part series examining cyber fraud, Boase Cohen & Collins Associate Arthur Chan and Trainee Vivian Yu outline the steps to be taken.

Hong Kong, 18 August 2020: In our previous blog we looked at different types of cyber fraud and discussed the legal means by which victims can identify the recipients of their lost funds and prevent the monies being dissipated from bank accounts held by those persons. This time, we examine the civil procedures for recovery of those funds.

While we may typically describe someone who has received monies from a scam as a “fraudster”, it is unwise to sue them for the actual offence of fraud, for two reasons. First, if they contest the claim, the hearing must proceed to full trial, no matter how frivolous their defence might be. This is the so-called “fraud exception” that prevents the victim seeking a summary judgment.

Second, in dealing with alleged fraud, the courts apply a higher threshold than the usual civil standard of proof. This means it is harder to prove that someone who received money from a scam actively participated in the fraudulent scheme. For example, they may have let someone simply use their bank account to receive the funds.

Therefore, the most practical way to chase lost funds is to make a claim for constructive trust and/or unjust enrichment. In other words, the victim sues the recipient for wrongfully receiving the funds without consideration.

Once a judgment is obtained, the victim needs to enforce it. Generally speaking, the courts are willing to assist a plaintiff who has been defrauded to recover the funds, but they do not enforce a judgment for the winning party on their own initiative, this is up to the successful litigant.

First, the winning party needs to know if the debtor has the finances to pay. Under the Rules of the High Court and the Rules of the District Court, the debtor can be called to the court to answer questions about their assets. Failure to attend can lead to arrest and the winning party can also apply to the court for a prohibition order to prevent the debtor leaving Hong Kong.

The winning party can also turn to the Bailiffs Office for assistance if the debtor refuses to pay. Bailiffs are authorised to seize goods and possessions at a value equivalent to the judgment. However, it should be noted there are costs involved and the judgment cannot always be enforced, for example the debtor may have no money or assets or cannot be located. There are also limits to the bailiff’s obligations, it is not their job to trace the location of the debtor or to ensure the sum owed is recovered.

If the debtor cannot be located, a fraud victim can seek a garnishee order from the court. Simply put, this allows him or her to take enforcement action against any third party, including a bank, who might be holding funds belonging to the debtor. In this instance, the order must be at least HK$1,000 in value and it must be made ex parte (without notifying the debtor) and supported by an affidavit or affirmation. When it is served on the garnishee, he or she is required to show cause, that is, to give any reasons to object the application.

It was previously suggested that a fraud victim could seek a vesting order under section 52 of the Trustee Ordinance (Cap. 29) to compel the defendant’s bank to pay the money back to the victim. However, a recent High Court decision in Tokic, D.O.O. v Hongkong Shui Fat Trading Ltd & Anor [2020] HKCFI 1822 has suggested otherwise, taking the view that “the trustee” referred to in section 52 should be confined to “true trustees” and not “recipients of proceeds of fraud”. There may be further rulings on this issue.

Apart from civil liability, there could be criminal consequences for someone who has allowed their bank account to be used by a fraudster. According to section 25 of the Organized and Serious Crimes Ordinance (Cap. 455), they may be liable for dealing with property known or believed to represent the proceeds of an indictable offence. In other words, money laundering.

On this issue, the law is clear, it is not acceptable for an account holder to simply turn a blind eye and claim they were not aware of the source of the money going in and out of his or her own bank account. The maximum penalty for money laundering is 14 years’ imprisonment and a HK$5 million fine.

In summarising the issues discussed in these two blogs, the watch words for the public are caution and vigilance. Fraudsters who operate via email and telephone are becoming increasingly resourceful and the scams they operate are often highly sophisticated. Anyone who suspects they have been defrauded, or that they may have been used as an unwitting accomplice in a fraud, is strongly advised to report the matter to the police.

A fraud victim can pursue a civil action against whoever holds their lost funds.