{"id":25251,"date":"2024-04-08T15:31:23","date_gmt":"2024-04-08T15:31:23","guid":{"rendered":"https:\/\/oln-law.com\/?p=25251"},"modified":"2024-05-29T10:13:26","modified_gmt":"2024-05-29T10:13:26","slug":"handling-second-layer-recipients-in-fraud-cases-defence-concerning-underground-banking","status":"publish","type":"post","link":"https:\/\/oln-law.com\/fr\/handling-second-layer-recipients-in-fraud-cases-defence-concerning-underground-banking\/","title":{"rendered":"Handling Second-layer Recipients in Fraud Cases \u2013 Defence Concerning Underground Banking (\u5730\u4e0b\u9322\u838a\/\u5730\u4e0b\u94b1\u5e84)"},"content":{"rendered":"\n

Introduction<\/h4>\n\n\n\n

In typical fraud cases, victims would find it difficult to trace the defrauded money because often case, the first-layer fraudsters would have dissipated fund elsewhere in a nano second, leaving their own bank balance with close to nothing. Victims therefore have to also sue the second-layer recipients to recover the lost fund. The fund transfers from the victims to the second-layer recipients, however, are not a direct one. Problem arises if the second-lawyer recipients come forth and defend the claim by arguing that they are equally innocent and their receipt of money was deriving from legitimate underlying transactions with the first-layer fraudsters.  <\/p>\n\n\n\n

One of the most often cited defence by PRC second-layer recipients is that they engage service of Underground Banking (\u5730\u4e0b\u9322\u838a\/\u5730\u4e0b\u94b1\u5e84) whereby they send money to a stranger in the PRC and in return obtain money from another stranger in Hong Kong. This explains why they would receive money from certain person not even their acquaintance as this is essentially the modus operandi of Underground Banking. It could be entirely credible that these second-layer recipients do not know the first-layer fraudsters personally (notwithstanding that they do transact with them) and that these second-layer recipients are truly irrelevant to the fraud scheme. In light of the prevalence of email and identity scam these years, such fact pattern and defence has become a common occurrence. Does that then mean that the victims\u2019 claims against these second-layer recipients would be defeated?<\/p>\n\n\n\n

As the Mainland practices foreign currency control, it is not uncommon for individuals in the Mainland to use underground banking for their outward remittance needs. While commonly used, such practice is inherently illegal under the relevant PRC administrative regulations and administrative measures on foreign exchange. Victims facing such defence raised by the second-layer recipients may therefore counter-argue in response that the use of underground banking itself constitutes an \u201cillegality\u201d and thus should not be given effect.<\/p>\n\n\n\n

The Case Laws<\/h4>\n\n\n\n

OLN acted for the victim in the fraud claim Taihei Dengyo Kaisha Ltd v. Zhao Yizhe and another <\/em>[2024] HKDC 222. The Plaintiff was a victim of an elaborate email scam, whereby after its funds were induced to be deposited into a fraudster\u2019s account (first layer bank account), part of the funds were then dissipated from the first layer bank account to the second-layer recipient (i.e. 1st<\/sup> Defendant in the present case)). To recover the funds, the Plaintiff started a civil claim against the 1st<\/sup> Defendant based on the different causes of action including unjust enrichment and tracing.<\/p>\n\n\n\n

In response to the Plaintiff\u2019s unjust enrichment claim and tracing claim, the 1st<\/sup> Defendant raised the aforesaid defence concerning the use of Underground Banking, arguing that she received the funds due to her purchase of HKD with RMB through an exchange agent in the Mainland, and such constituted (1) defence of bona fide purchaser and (2) defence of change of position.<\/p>\n\n\n\n

In the Plaintiff\u2019s application for summary judgment against the 1st<\/sup> Defendant, the District Court has confirmed that in analyzing the issue of illegality, a distinction has to be made between domestic illegality and foreign illegality, and that the Court has different approach in handling the two types of illegality.<\/p>\n\n\n\n

In view of the frequency of litigation in Hong Kong involving cross-border elements, especially regarding PRC law, this is a much welcome decision in confirming the Court\u2019s readiness to grant judgment at summary stage where the defence concerns a transaction illegal under PRC law, and should discourage unmeritorious defences going to trial.<\/p>\n\n\n\n

Summary Judgment<\/h4>\n\n\n\n

The District Court confirms that in respect of foreign illegality, the Court of Final Appeal decision in Ryder Industries Ltd v Chan Shui Woo<\/em> [2015] 18 HKCFAR 544 (\u201cRyder<\/strong>\u201d) is the highest authority in Hong Kong on how it affects the enforceability of contracts.<\/p>\n\n\n\n

In respect of foreign illegality, the Court\u2019s task is to identify which type of illegality the case falls within as follows:<\/p>\n\n\n\n