In typical email fraud cases, victims can rarely trace their funds to ‘first layer’ bank account(s) where they were initially persuaded by fraudsters to transfer their money. Usually, by the time fraud is discovered, the funds are long gone; or transferred onwards to second, third or even fourth-layer recipients, who may well be innocent third parties with no involvement or even knowledge of the underlying illicit act.
Additional complexity arises when "underground banking" is involved in asset tracing and fraud recovery.
"Underground banking" in this context is commonly known as a method of transferring funds out of a place to circumvent its foreign exchange control regulations – by transferring a foreign currency to a third party in that country, and in return receiving an equivalent sum at an agreed exchange rate in other currencies.
The approach of Hong Kong courts to this aspect has changed in recent years.
Since late 20171 the fact that a third party recipient who engaged in underground banking and received proceeds of fraud in the course of transactions has become a consideration in determining whether the recipient is a bona fide purchaser for value without notice.
The recent judgment in TTI Global Resources v Hongkong Myphone Technology Co Ltd  HKCFI 306 handed down on 10 February 2021 serves as a timely reminder of the risk of using “underground banking” to transfer funds in the context of recovery by fraud victims.
Overview of the TTI Global Resources Case
In the TTI Global Resources case, the Plaintiff, a victim of email fraud, is a Hong Kong company sourcing from a Mainland China supplier. The Plaintiff was tricked by an imposter purporting to be the owner of the supplier to transfer various sums to the respective accounts of 1st Defendant (D1) and 2nd Defendant (D2). Tranches of these funds were then transferred to various second-layer recipients, including the 3rd Defendant and 4th Defendant (D4).
Upon discovery of the fraud, the Plaintiff commenced action against D1 to D4 and obtained an ex parte injunction order against them. The Plaintiff first obtained summary judgment against D1, who did not file evidence opposing the application.
After the Plaintiff's application for summary judgment against D2 and D4 was dismissed by a Master, the Plaintiff filed an appeal (Appeal) which was allowed by Deputy High Court Judge (DHCJ) To with summary judgment entered against D2 and D4.
At the Appeal, the Plaintiff successfully established a claim of restitution based on ‘unjust enrichment’, with the burden shifted to D2 and D4 to show that their receipt of benefit was not unjust.
Their main defense was as bona fide purchasers for value without notice. D2 and D4 claimed their very substantial seafood business required significant US dollars to pay their Vietnamese importer. To meet this US dollar requirement, they claimed they bought US dollars through underground banking, arranged by a third party by paying RMB to different entities in Mainland China, and receiving equivalent US dollars in Hong Kong.
In this instance, D2 and D4 claimed they paid D1's suppliers in RMB and received US dollars from the Plaintiff and D1 – and in doing so checked with the third party, and were satisfied that D1 was a supplier of the Plaintiff and had received US dollars from the plaintiff at that time. On this argument, DHCJ To held that, firstly, such defense was not credible due to lack of evidence.
Secondly, since underground banking is illegal under PRC law, D2 and D4 could not in law be considered to have provided value for the property if it was transferred through an illegal transaction. In reaching the latter conclusion, DHCJ To accepted PRC expert evidence cited by the Plaintiff and rejected that adduced by D2 and D4. Therefore, DHCJ To allowed the Appeal and entered summary judgment against D2 and D4.
The TTI Global Resources case continues to support the Hong Kong court's updated approach taking into consideration the use of "underground banking" to circumvent foreign exchange controls in deciding a bona fide purchaser for value without notice defense. Since this ruling was fact based – and partly due to lack of credible evidence provided by the third party defendants – it is unclear whether all transactions involving illegal "underground banking" will be held unenforceable. That said, this case demonstrates how a fraud victim was able to recover funds transferred to a recipient not directly implicated in the fraud.
Mayer Brown advised and represented the fraud victim in the TTI Global Resources case.
1 See, for instance, Grupo Arbulu S.L. v City Apex Holdings Ltd  HKCFI 1351 and DBS Bank (Hong Kong) Limited v Pan Jing  4 HKC 395.