A Practical Guide for Cybercrime Victims in Hong Kong - Obtain Police Freeze - Collect Evidence - Secure Court’s Judgment

It used to be the wealthier you were, the more immune you were to crime. Cybercrime has topped it the other way.
- Neal O’Farrell

INTRODUCTION

Many cyber fraud cases involve the victim being inducing to transfer funds whereby the recipient holds the respective funds on a constructive trust. Whilst many legal recourse may arise, the first practical step to take is, in fact, to report such crime to the police with a request for an immediate police freeze against the accounts employed by cybercriminal. Legal recourse is, after all, useless in the absence of secured assets for Court’s judgment to enforce against.

Where plaintiffs have a proprietary claim to preserve their assets, they seek a proprietary injunction. The threshold to seek a proprietary injunction is fairly lower than that of a Mareva injunction. Unlike in a Mareva injunction where the plaintiff is required to prove a real risk of dissipation of assets by the defendant (Pacific Rainbow International Inc v Shenzhen Wolverine Tech Ltd [2017] HKEC 869), the plaintiff is only required to demonstrate that there is a serious issue to be tried on the merits to obtain a proprietary injunction.

PROCESS TO SEEK A PROPRIETARY INJUNCTION

After a claim has been made by the plaintiff with no acknowledgement of service or defence filed by the defendant within the set time period, the plaintiff can then apply and obtain a default judgment. In addition to that, they can also seek for declaratory relief to their claim to the misappropriate funds proving they are held on trust for the plaintiff and to keep the defendant’s other creditors from having any access to the stolen funds.

A lot of cases have been granted declaratory relief despite it being an uncommon practice because the court in Skandinaviska Enskilda Banken SA v Hongkong Liling Trading Ltd stated where there is a genuine need for declaratory relief the practice will give way to the requirements of justice.

As a result of this, action taken in cyber fraud cases has been simplified by providing the victims with proprietary rights to their stolen funds if they declare that the defendant holds the funds on trust, which sequentially also provides them with a better mechanism to recover them.

MILESTONE ELECTRIC V. MEIHOUKANG TRADING CO LIMITED

The decision of Milestone Electric Inc v. Meihoukang Trading Co Limited [2020] HKCFI 2542 has restated the tracing principles in order to obtain proprietary relief and how proprietary claims in cyber fraud cases should now come about.

Unlike the significant number of cases where the court moved away from making a declaration without a trial for justice to be done to the victim, Recorder Eugene Fung SC in Milestone relied on Federal Republic of Brazil v Durant International Corpn [2016] AC 297 and restated that the plaintiff must establish that the assets claimed can be identified by the tracing process as representing the original trust property.

COURT DECISION

The court was not satisfied that the plaintiff could seek proprietary relief in regard to the US$850,000. The court relied on Boscawen v Bajwa [1996] 1 WLR 328 and stated the plaintiff must prove that the property was still owned by the defendant. Given that over US$600,000 of the US$850,000 had been withdrawn already, the plaintiff could not claim its proprietary rights for the sum of US$850,000.

Additionally, the court considered the plaintiff would not be able to claim the remaining credit balance in the defendant’s account, as the evidence provided was not sufficient assuming that the plaintiff had not applied for a disclosure order for provision of the defendant’s bank statements.

CHANGE IN LEGAL POSITION

The judgment in this case established how proprietary claims concerning email fraud cases should now be developed. It would be better for victims to claim their proprietary interest regarding the amount of each separate transfer or any remaining traceable part of it, instead of the entire sum by putting together different payments.

Also, victims should be able to provide documentary evidence that the remaining balance in the defendant’s account is traceable from the original sum transferred by the victim. Mr Recorder Eugene Fung SC has explicitly stated that where declaratory relief is sought for the defendant merely holding the funds on constructive trust, the court will scrutinise the application for default carefully, and will not hastily grant the relief sought.

It will be upon the practitioners representing the victims to take the additional step of applying to banks for the records of the defendant in order to provide documentary evidence to the court proving that the misappropriated funds are traceable and thus, be granted declaratory relief.

OPTION PLANS (CIVIL LITIGATION)

With the aforesaid in mind, victims should bear in mind of the advantages and/or disadvantage in deciding whether to secure a proprietary declaration when pursuing remedies from the Court, the same of which has been summarized hereinbelow:

 

Pros

Cons

Monetary Judgment

  • Save time (around 4-5 months if the fraudsters do not raise a defense);
  • Lower fee

The victim may not be able to get back all the money in the bank account

  • If the fraudster also defrauded other victims, and the fraudster does not have adequate money to pay back each of the victim, then all the defrauded money may be paid back on a first-come-first-serve basis.

Proprietary Judgment

Declaring the amount of money is always owned by the victim

 

  • Even if there are other victims, the victim will have the priority to make a claim for the amount of money.
  • Time-consuming (around 7-8 months if the fraudsters do not raise a defense);
  • Higher fee (owing to more work involved);

Court may not grant declaratory relief

  • If not able to establish that the assets claimed can be identified by the tracing process as representing the original trust property, or in other words, if there has been any mixing of money in the bank account (e.g. other victims also remitted money to this account) and some part of money has been withdrawn), it will be hard to convince the court to grant declaratory relief

CONCLUDING REMARKS

Therefore, if you find yourself in the unfortunate situation of being a victim of cybercrime:

  1. Step 1 Call the Police: Report the matter to the Police in order to obtain a police freeze on the stolen asset. Cybercriminals rarely sits on stolen assets for long. The more time they have to dissipate the stolen funds to other layers of recipients, the more perilous asset recovery it will be;
  2. Step 2 Collect all relevant evidence: It pays to secure evidence through asset tracing exercise at an early stage. Not only will you have an easier time to prove that the money frozen in a particular account is yours (and not that of another victim), you can also freeze money in second-tier recipient; and
  3. Step 3 Secure Judgment from the Courts: There is no free lunch in this world. The same applies towards asset recovery. Victims must as expediently as possible recovery their assets via Judgment from the Court (as it will not simply return to them). Specifically, the pros and cons of obtaining Monetary Judgment and Proprietary Judgment are outlined in the following table:

Solicitor, ONC Lawyers

Joshua Chu is a Litigation Solicitor qualified to practice in Hong Kong. Before becoming a lawyer, Joshua worked in the healthcare industry serving as the IT department head at a private hospital as well as overseeing their procurement operations.

Since embarking upon his legal career, his past legal experience includes representing the successful party in one of Hong Kong’s first cryptocurrency litigation cases as well as appearing before the Review Body on Bid Challenges under the World Trade Organization Government Procurement Agreement concerning a health care industry related tender.

Today, Joshua’s practice is mainly focused in the field of dispute resolution and technology law.

Aside from his legal practice, Joshua is currently also a Senior Consultant with a regulatory consulting firm which had been founded by ex-SFC Regulators as well as being a management consultant for the Korean Blockchain Centre.

Partner, Ravenscroft & Schmierer, Hong Kong

Anna is a Hong Kong qualified lawyer and is responsible as a partner at Ravenscroft & Schmierer for the commercial litigation department. Aside from her legal background, Anna is also an advisor to the Ohkims Blockchain Centre in South Korea and Hong Kong qualified lawyer and a regulatory consultant specialized in IT control and compliance.  

Before starting her practice as a lawyer, Anna worked closely with the United States Patent and Trademark Office (USPTO) and US Food and Drug Administration (FDA) on intellectual property and FDA regulatory matters. 

​Since embarking on her legal career, Anna was part of the team that defended a party in Hong Kong High Court proceedings involving the jurisdiction’s first cryptocurrency cases where she leveraged her science and engineering skills extensively to help improve her client’s case’s position. This feat was repeated again shortly after when Anna again leveraged her science background in a healthcare-related tender dispute. 

​Today, Anna is proactively working on various Distributed Ledger Technology related projects where she combines her love for science and technology together with the logic behind regulatory framework.