This article is on how to recover money from cryptocurrency scams from Hongkong if you have been scammed into a cryptocurrency fraud. Cryptocurrency has become the new tool of choice for fraudsters given the decentralised nature and easy access of the cryptocurrency market. Similar to investment fraud scams, fraudsters generally carry out cryptocurrency scams by setting up fake websites which look remarkably similar to legitimate cryptocurrency exchange websites guaranteeing high returns and inducing victims into investing in digital currencies or transferring their cryptocurrencies into the digital wallet of the fraudsters. Once a fraudster is able to divert the cryptocurrency to a wallet they control, the victim is left with little information about the identity of the wallet holder, location of the wallet, making it very difficult to recover the funds. And many of such frauds are originating from Hongkong.
There are 3 important steps the victims must take immediately upon discovering the fraud when the funds have been diverted to Hong Kong:
- Contact the bank to cancel or revert the wire transfer and request them to notify the recipient bank immediately to recall the remittance.
- Report the wire fraud to the local police and to the Hong Kong police. The Hong Kong police have a discretion to issue a “Letter of No Consent” (“LNC”) over the concerned bank account which serves as a temporary freeze (normally for no more than 6 months). The LNC is a very efficient and costs saving tool for the victims, but it is worth bearing in mind that the police retain the discretion to unfreeze the account anytime. The High Court of Hong Kong has recently expressed concerns over the LNC regime and held that the manner in which the police administered and maintained the LNC in that particular case disproportionately interfered with the right to the use of one’s own property. In our experience, in light of the judgement, the police are now more cautious and are issuing warnings that they would lift the freeze on the accounts without further notice. This means that the victims may be forced to apply for an injunction through the Courts to prohibit the account holder from dealing with the funds which can be an expensive process.
- Engage a fraud and asset tracing lawyer to assist with the process of recovery. Reporting the wire fraud to the police is not enough. It is also necessary to simultaneously commence civil proceedings to recover the lost funds provided the funds still remain in the concerned bank account. While the process may appear quite straightforward and something the victims can handle by themselves quite conveniently, it is not always the case. Law firms with the know-how to handle these types of claims can help prepare all the necessary Court documents, communicate with the Court and the police, and guide the victims through the process in a timely manner. If the victims are overseas, solicitors can also be the local contact so that they do not have to travel to Hong Kong. One thing to keep in mind is that in Hong Kong, companies must engage a lawyer to act on their behalf in court proceedings unless they obtain special permission from the Court.
Recovery of Funds
Civil Proceedings in Hong Kong
The proceedings for recovery are commenced by issuing a Writ of Summons setting out the basis of the relief sought and serving it on the defendant, i.e., the holder of the Hong Kong bank account into which the funds have been transferred.
The defendant has a short period of time to indicate whether it intends to contest the proceedings. Fraudsters often remain silent, which enables the victim of the wire fraud to apply for a default judgment.
Upon obtaining default judgment, garnishee proceedings can be commenced to enforce the judgment against the funds remaining in the bank account.
A garnishee order is obtained in 2 parts – a garnishee order nisi, which is a temporary order obtained ex parte (i.e. without notice to the bank or the defendant) on papers. Once the garnishee order nisi is obtained, the matter is set down for a short hearing at which the defendant and the bank are given an opportunity to make submissions. Unless there is a good reason why the funds in the defendant’s bank account should not be attached, the Court makes the garnishee order absolute. Fraudsters often remain silent, and the bank normally does not contest the proceedings. Once the order is obtained, the bank is able to release the funds to the victim’s designated bank account.
If the proceedings are uncontested, the recovery process takes approximately 6 to 8 months in straightforward cases subject to the Court’s capacity.
Pursuing the individuals behind a corporate account holder is challenging as it is difficult to establish personal liability and they are likely to be in foreign jurisdictions with no identifiable assets, making both service of documents and enforcement difficult. Likewise, suing the recipient bank is not recommended as it does not owe the victim of the wire fraud any duty of care.
Injunctions in Cryptocurrency Funds
Victims of cryptocurrency fraud can also seek to apply for injunctive relief in Hong Kong, particularly if they are able to trace the transaction to a cryptocurrency exchange in Hong Kong. For example, in Nico Constantijn Antonius Samara v Stive Jean Paul Dan  HKCFI 2718 and  HKCU 1899, the Hong Kong court granted a Mareva injunction and a proprietary injunction over the assets of a cryptocurrency trader, and also granted discovery orders against the defendant to assist the plaintiff. In Yan Yu Ying v. Leung Wing Hei  HKCFI 3160, the Hong Kong court granted an interim proprietary injunction over 999.9900261 bitcoins to preserve the subject matter of the dispute, pending substantive determination. It is worth noting that, in both cases, the Court granted the injunctions without discussing any specific issue or technical difficulties arising from the nature of cryptocurrencies.
The standard form of the injunction order includes a term ordering the defendant to disclose its assets, including their value and location.
Ancillary disclosure orders can also be sought against the bank as part of the injunction application.
A Norwich Pharmacal application can be made against a bank if the victim of the wire fraud does not know the identity and address of the wrongdoer but knows the relevant account number, or if the victim wants to obtain details of the status of the funds before deciding the steps for recovery. The application can be made without commencing any proceedings against the account holder. Pursuant to this application, banks can be directed to disclose bank records, such as bank account opening forms, which can help identify and locate the wrongdoer, bank statements, remittance advices. If it transpires that the funds have been transferred out, the victim may need to apply for separate disclosure orders against the next layer of recipient(s) in order to ascertain the status of those funds. The whole process can be quite expensive. Generally, a gagging order is sought against the relevant bank at the outset so that the bank is prohibited from notifying the account holder (i.e., its client) about the intended proceedings.
In ongoing civil proceedings in Hong Kong, an application under Section 21 of the Evidence Ordinance can be made against a bank to obtain bankers’ records.
The Singaporean equivalent to Section 21 of Hong Kong’s Evidence Ordinance is Section 175 of the Evidence Act 1893. The High Court in La Dolce Vita Fine Dining Company Ltd v Zhang Lan and others  SGHC 89 has recently affirmed that bankers’ books are limited to transactional records concerning a customer. Anything beyond that is protected by banking secrecy and not subject to disclosure.
Practical Tips to Prevent Wire Fraud
Prevention is always better than cure when it comes to wire fraud, and we set out some practical tips to prevent wire fraud:
- Regular training sessions on wire fraud and best practices.
- Never rely on a single source of instructions for payment requests or changes to payment methods.
- Double check email address, spelling mistakes, and verify payment instructions by phone.
- Research before investing. Verify licenses and beware of promises of high rates of return. If the offer seems too good to be true, it probably is too good to be true.
To conclude, upon discovery of the fraud, victims must act immediately. They must (1) inform the banks; (2) file a police report; and (3) promptly instruct solicitors to take care of the court process. If the victims act fast and if they are fortunate, there will still be some funds left to recover. In most cases, the civil proceedings would go uncontested, and the process of recovery can be quite straightforward.
Of course, each case turns on its specific facts. But the slightest of delays on the victim’s part can risk dissipation of the funds, which would mean additional time and costs to trace the funds, rendering the recovery process difficult and costly.