“If banks were to engage in a practice of levying extravagant photocopying or administrative charges, rather than seeking genuinely to provide for full (but no more than full) compensation for the costs of complying with the order, victims of fraud may face a significant dilemma…”
“Either they are stuck with a “take it or leave it” situation and have no choice but to accede to the bank’s demanded charges, or they may have to chance the costs of an argument at a contested hearing, where the only contest is as to the proper or reasonable charge for compliance with the order for disclosure. And even worse alternative would be for the victim not to pursue the disclosure at all, as in some cases it may appear commercially not worthwhile to do so.”
– The Honourable Mr Justice Coleman
Over the past few years, the world have seen an explosion in the number of complex cybercrime with many cybercriminals using increasingly high tech schemes to obtain property by cyber-deception. 2020 saw the industrialization of such crime with the number of victims in Hong Kong having increased exponentially. It is a well-established fact that many victims of these fraud cases includes the elderly and vulnerable segment of our population with many swindled out of their savings. These victims will, naturally, not have an abundance of financial resources at their disposal for the purpose of asset recovery.
Whilst our law enforcement agencies have since been hard at work to orchestrate police freeze on accounts used by criminal where possible (many times successful), the long road for the victims to recover said asset, is another story entirely.
New Tracing Requirement
In the past, victims have a rather easy road to asset recovery. Victims would often claim for proprietary relief and seek for the Court’s declaration for the return of such assets via default judgment applications. This changed with the handing down of Milestone Electric Inc v. Meihoukang Trading Co Limited  HKCFI 2542 when the Court sets out the applicable tracing principles for obtaining proprietary relief.
The Plaintiffs in Milestone was a victim of an email fraud whom had been deceived into transferring a sum of US$850,000 to a fraudster’s account. Like many victims, upon detecting the fraud, the Plaintiffs reported the matter to the police and a police freeze was successfully put in place, albeit that not the full amount was frozen (e.g. only around US$244,000 was left). Once the police was involved, the fraudsters never showed up and as a result, the Plaintiffs applied for default judgment for the recovery of what money was left in the account.
Whilst the Plaintiff was successful in obtaining a default judgment for monetary relief with interest, the Court in this instance declined to grant a declaratory judgment in the Plaintiff’s favour on the spot reasoning that in order for the Plaintiff to obtain the proprietary relief in relation to the assets transferred to the Defendant, the Plaintiff must establish that the assets claimed can be identified by the tracing process as representing the original trust property. As the amount frozen was less than the defrauded amount, the Court was concerned with potential mixing of funds.
The Milestone case incidentally highlighted another critical factor - the bank accounts of cybercriminals which have successfully been frozen by the police will most likely not have sufficient funds to cover the entire claim of a victim. In such instances, victims increasingly face the realities of diminishing returns
Victims will often times have to be prepared to pocket out the legal costs and costs of tracing (which can be substantial as demonstrated below). As such, it may no longer be economically viable/sensible to pursue the claim). The end result is that perpetrators may very well make away with the monies as the police freeze (in the absence of prosecution due to the inability to locate the defendant) eventually expires.
But is Tracing Affordable/Commercially Sensible?
One of the little touched upon factor in asset recovery cases is the costs of the tracing exercise itself (since made into a requirement). In the absence of proper guidelines as to what will constitute as ‘reasonable costs’ however, scenarios such as the one now observed in Hwang Joon Sang & Ors v G.E.I & Ors  HKCFI 544 will persist where costs levied by the banks can vary substantially and seem arbitrary:
“In this case, the Bank is seeking a handling fee of HK$3,000 per account and an additional fee of HK$200 per page of document to be provided. The plaintiffs’ solicitors’ suggestion in correspondence that HK$200 per page is wholly excessive, not least when the previous agreed charge was HK$25 per page in April 2020 for another disclosure application involving the same Bank in this Action…”
Where costs is arbitrary and high, only the wealthiest of victims may be in a position to recover assets.
“And even worse alternative would be for the victim not to pursue the disclosure at all, as in some cases it may appear commercially not worthwhile to do so.”
Such status quo will of course be contrary to the Underlying Objectives of the Court. And whilst the Court noted that:
“I do not think it is part of the profit making of a bank to charge for compliance with orders for disclosure on a basis greater than the actual reasonable costs of compliance. Indeed, the whole point of ordering the costs of providing disclosure to be paid on an indemnity basis, against the applicant’s undertaking to do so, is to ensure full (but no more than full) compensation for the costs of complying with the order.”
The Court nevertheless is persuaded to make the following findings:
“it seems to me that failing a justified approach in future, it may be that the court will on some occasion be forced to consider identifying the reasonable indemnity costs for compliance with an order in any particular case, through a process of taxation or otherwise. Perhaps the time has come for a suitable association of banks to consider in broad terms what would be fair and reasonable charges for complying with disclosure orders, as might justify the undertaking to meet those costs of compliance on an indemnity basis.”
It is crucial for stakeholders in our community to remember that these Plaintiffs are victims at the end of the day. Without procedural economy, grave injustice will prevail. Further, parties to bankers trust application should remember that costs is for full (but no more than full) compensation for the costs of complying with the order.