- Victims should act promptly in seeking legal advice to maximize their chances of recovery. Complications are likely to arise as time goes on, e.g. funds may fall into the hands of allegedly “innocent” recipients, or funds may be mixed with those of competing victims.
- In cases where the civil claim is contested, carefully assess the recipient’s explanation as to why and how it received the funds in issue. Test it against the surrounding circumstances and consider whether it makes sense.
- There are different pathways to recovering the funds. In some cases, it may make more sense to settle with the recipient or other victims, rather than engage in a long-drawn court battle.
Litigating against allegedly 'innocent' recipients
Fraudsters typically use a syndicate of shell companies to launder fraudulently received funds. They often use convoluted corporate structures, e.g. by using nominee directors and shareholders, to conceal their identities and to create hurdles for victims and law enforcement authorities. As observed by the Financial Services Development Council in its recent report on cybersecurity strategy earlier this month, cyberattacks have gravitated towards Asia in recent years. Hong Kong is a particular hotspot given the ease of setting up companies and the speed of moving funds electronically here.
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. 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. Victims should lookout for potential red flags which may defeat a bona fide purchaser for value without notice defence. For instance:
Fictitious supply transactions - 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 one presses 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. The Hong Kong Courts are mindful of these issues and have expressed doubts over the legitimacy of some of these alleged supply transactions in recent cases.
Underground remittance agents - 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 in 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 for value defence is precluded if the underlying exchange transaction is illegal.
In some cases, the recipients may have knowingly made use of these underground banking networks. In other cases, these recipients may themselves be the unlicensed remittance service providers. They may also be individuals who act as ‘mules’ in receiving and sending funds on behalf of these underground banking networks.
These red flags, if identified at an early stage, may trigger an early resolution, and recovery, between the victim and the recipient.
It is also common for recipients to have the misconception that it gives them justification to keep the funds by pointing to the fact that they were unaware and were not part of the fraud. This may, at first glance, appear to be a response which has some force. However, as a matter of law, lack of knowledge or involvement in the underlying fraud does not in itself absolve recipients from having to return fraudulently transferred funds that were paid into their accounts, if the transaction which resulted in them receiving the funds was tainted by illegality.
Competing victims - a flock of birds fighting over one worm?
We have handled 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. This inevitably results in victims having to argue amongst each other as to how the funds should be split. This happens all too frequently as money launderers often dissipate the funds promptly in order to frustrate civil recovery and law enforcement action.
The equitable rules of tracing would apply if one were to approach these cases strictly on the basis of law. Victims would have to analyse the sequence of fund movements and assess the relative strengths of their interests, e.g. whether they have a personal or proprietary claim. This may escalate into a long-drawn 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.
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