The enigma network in cyber fraud recovery actions – Battling against allegedly ‘innocent’ recipients and competing victims

In brief

We have seen a noticeable increase in the prevalence and sophistication of cyber fraud incidents in recent years. This has led to a substantial rise in civil recovery actions, and as a result, we now have the benefit of key learnings from recent decisions by the Hong Kong Courts and other jurisdictions.

This alert discusses some of the common themes and challenges victims of fraud may face in civil recovery actions, particularly in cases involving allegedly “innocent” recipients of tainted funds and competing victims pursuing recovery from the same finite pool of funds.


Key takeaways

  • 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.

Source:  Global Litigation news