Fraud and asset recovery: “Catch me if you can”

Our panel event was an instant sell out and a huge success. Here are some of the highlights in case you missed it and also some other recent developments in this ever-fast-moving area of the law.

Seizing jurisdiction

The introduction of the new common law gateway 25 (information orders against non-parties) has proved most useful in fraud cases, enabling victims in cross-border cases to establish the identity of potential fraudsters, understand how a fraud has been perpetrated and the location of assets. This new gateway was introduced specifically for facilitating the service of Norwich Pharmacal and Bankers Trust disclosure orders for information from third parties. Note however that consideration should be given to the extent to which such orders may conflict with laws in local jurisdictions and whether third parties could be put into difficulty when seeking to comply with confidentiality provisions.

Watch this space in terms of the recent consultation on the gateway in the context of claims relating to digital assets. The Law Commission of England and Wales is considering whether to expand the remit of the English courts’ jurisdiction in order to aid crypto fraud victims.

Digital fraud

With the advancements in technology and the digital world, the different types of fraud are also developing, and the digital fraud masterminds are setting quite a pace. The use of artificial intelligence (AI) means there are fewer inconsistencies and errors that were previously made by humans. This is of course relevant to both sides of the fence.

In the cybersecurity sector, both attackers and defenders are now using free AI tools like ChatGPT and Google’s Bard, as well as whatever else might be available on the dark web. AI tools can be used to quickly build malicious code with a view to unleashing a virus on the web. AI can be used to manipulate media and create deepfakes and shallowfakes, namely fake video, audio footage and fake photographs. These advanced techniques create realistic content, which can be used to fabricate evidence in fraudulent claims.

Solutions are being developed and AI can quickly analyse this footage or photographs for inconsistencies in digital fingerprints, patterns and other anomalies that would not necessarily have been picked up by a human. In addition, AI’s ability to quickly scan and analyse social media for details of those associated with fraudsters, their assets and their location, etc, is assisting victims to build their claim. This is speeding up (and thereby reducing the cost of) the investigation process and broadening the scope of searches.

When facing digital fraud, it is essential to act quickly, so as to secure sufficient information is gathered to bring a claim before the assets are further dissipated.

The technological nuances of digital assets often means that victims are seeking to make recoveries against anonymous fraudsters. The English courts have the power (and CYK was the first law firm to bring such a claim) to grant freezing injunctions against ‘persons unknown’. They have also shown a willingness (albeit more hesitant than their willingness to grant injunctions) to entertain applications for summary and default judgments against ‘persons unknown’ and in the recent decision of Mooij v Persons Unknown[2024] EWHC 814 (Comm) the court granted summary judgment against all of the defendants, including the ‘persons unknown’.

The English courts have also been willing to offer solutions when it comes to the service used and have allowed alternative service methods including by email, WhatsApp, text message, Facebook messenger and by non-fungible tokens (NFTs). English courts have not only permitted service by these methods, but in some cases, have also validated that service by granting summary judgment or default judgment on the basis of it.

Chasing and locking down the assets

Proprietary claims and constructive trusts

We often find that once fraudsters realise the game is almost up, they start to look at means by which they can dissipate their ill-gotten gains. In order to increase leverage in the event of a target becoming insolvent and to enable victims to trace funds into substitute assets, it will be sensible to assert all available proprietary claims so that victims can reach the assets ahead of the many other victims who have also been defrauded. For example, under English law, a party can set aside an ‘investment’ contract on the grounds of fraudulent misrepresentation, leading to a plea that the proceeds are held on constructive trust. Victims may then assert a proprietary interest in the traceable product of monies advanced pursuant to the contract. A proprietary injunction claim prevents use of those assets for the fraudster’s legal and ordinary living expenses.

When tracing assets into the hands of third parties, it may be possible to bring claims in knowing receipt and/or unjust enrichment if you can demonstrate that the funds paid to the fraudsters were impressed with a trust and then the funds are able to be traced into the hands of third parties.

Trusts are widely recognised in many jurisdictions around the world. The English courts are ever ready to impose a trust in commercial transactions as a way of preventing one party unjustly enriching itself at the other’s expense. Such trusts are known as constructive trusts. Constructive trusts arise through the operation of law, regardless of the parties’ intentions. For example, where a bank wrongly makes a payment twice to another bank: the second bank is held to be a constructive trustee.

Constructive trusts have arisen in some situations where you wouldn’t expect. It has been argued that a constructive trust arose in relation to platforms on which cryptocurrency and NFTs are held and traded. In Osbourne v Persons Unknown [2023] EWHC 39 (KB), the High Court granted permission to amend the claim to add, as constructive trustees, the hackers who had removed the NFTs from the wallet. The judge granted permission to make the amendments and to serve out of the jurisdiction. There was a good arguable case that the new claims fell within gateway 15(c) (a claim against the defendant as constructive trustee where the claim is governed by English law), because it was strongly arguable that the constructive trust, created when A transferred the NFTs from the wallet, was governed by English law and, therefore, so was the question of whether B and T became constructive trustees when they received the NFTs.

Liability depends on knowing that the trust exists, and either dealing with (knowing receipt) or helping the trustee to deal with (dishonest assistance) trust property in a way that is inconsistent with it being trust property. Receiving trust property without knowledge does not give rise to liability for knowing receipt; liability arises only when the recipient continues to deal with it improperly, after discovering that it is trust property. However, knowledge can be imputed to someone who does not make enquiries, or wilfully ignores the obvious.

Byers v Saudi National Bank [2023] UKSC 51: The Supreme Court had to decide whether a claimant pursing a claim in knowing receipt against a defendant who has received trust property in breach of trust must demonstrate that they, the claimant, have a continuing equitable interest in the property. The UK Supreme Court was unanimous in its conclusion that a claim in knowing receipt cannot succeed if the claimant no longer has an equitable interest in the misappropriated property.

The UK Supreme Court did point out that the solution in this instance might have been a claim in dishonest assistance given that such claims do not require the defendant to ever have received the trust property. They also helpfully hinted that a claim in unjust enrichment might also have stood better chances of success. That claim of itself has its advantages: no limitation period and it imposes strict liability.

Insolvency Act claims

Section 423 of the Insolvency Act 1986 provides that a transaction can be set aside if the transaction is entered into at an undervalue and the purpose of the transaction was to put assets beyond the reach of a person who is making or may make a claim against the person who entered into the transaction, or to otherwise prejudice a person’s interests in relation to such a claim.

Invest Bank PSC v El Husseini [2023] EWCA Civ 555 concerned the use by a fraudulent director of his company. The Court of Appeal found that a transfer of assets by a company controlled and owned by a fraudster could constitute a transaction at an undervalue by that fraudster for the purposes of Section 423. The transaction in this instance was the diminution in value of the shares in the company.

The English courts are incredibly astute to the progress being made in the digital world and to the fact that new tools are necessary in order to enable victims to seek to recover assets.

Freezing injunctions

In British Overseas Territories and in other jurisdictions that follow the common law, it is recognised that there are now opportunities to obtain freezing injunctions in support of only foreign proceedings. This may also have an impact on the ability to obtain such injunctions in England and Wales, on the basis that the statutory limitations in Section 25 of the Civil Jurisdiction and Judgments Act 1982 could be circumvented by seeking freezing injunctions at common law.

Illegally obtained evidence

English courts will have regard to whether documents have been obtained in circumstances giving rise to a duty of confidentiality. In general, where documents have been obtained illegally (eg, through hacking), they must be returned to the other side, but the court may require the other side’s solicitors to give an undertaking to retain a copy so that relevant and non-privileged documents will be disclosed in due course (see Imerman v Tchenguiz [2011] Fam 116). If the documents obtained evidence fraud, then different considerations apply, and the court is more likely to exercise its discretion to permit the documents to be retained and used notwithstanding that they have been obtained illegally.

As to a party’s disclosure obligations, any relevant documents obtained through unlawful means will need to be disclosed to the other side, whether they are helpful or not. Even if the documents in question (or related documents) are prima facie privileged (eg, because they were obtained for the dominant purpose of conducting litigation or getting legal advice), they will be caught by the iniquity exception to privilege.

Generally speaking, the other side cannot stop a party relying on an illegally obtained document and the documents are admissible, but the court has a discretion to exclude them. In exercising this discretion, relevant questions will include how serious the illegality is and how important the evidence is; and if the documents evidence fraud they are highly likely to be admitted. The court can express its disapproval of the illegality in other ways (including through cost sanctions).

Debarring orders

These are orders resulting in a party not being permitted to take further steps in the proceedings. Note that a debarring order won’t result in a default judgment and will still enable a party to obtain a judgment on the merits. These orders are often coupled with strike out applications.

The test is whether there is a ‘substantial risk to justice or fair trial’. These orders are very useful where, for example, the other side is refusing to give disclosure in a civil fraud claim and can be used to stop them making submissions or cross-examining the other sides’ witnesses at trial. Much will depend on the judge and whether he or she considers such an order too drastic, but recent authorities suggest that these orders should now stick.

Iniquity (crime/fraud) exception to legal professional privilege

This is the rule that privilege will not cover a client seeking advice on how to commit a crime.

In the recent decision in Al Sadeq v Dechert [2024] EWCA Civ 28, the court confirmed that the evidential threshold necessary to show that the exception applied on an interlocutory application is whether there is a prima facie case that the alleged iniquity took place, which means that the court must be satisfied on the balance of probabilities that it did based on the material before it. The court also confirmed that the document had to be either in furtherance or part of the iniquity for the exception to apply, subject to the overriding condition that they must have been created in circumstances amounting to an abuse of the solicitor–client relationship. A document was a ‘part of’ an iniquity so long as it reported on or revealed it.

In summary, the English courts have embraced a great deal of measures to assist parties to fight fraud and recover assets. In this ever-advancing digital world, we as lawyers need to be creative and forward thinking.