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COVID-19 Scams – What To Do If You Are Defrauded – Coronavirus (COVID-19) | #coronavirus | #scams | #covid19



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The Surge of COVID-19 Scams

Since the outbreak of COVID-19, we have seen an overwhelming
demand worldwide for Personal Protective Equipment (PPE), which
includes respirators, surgical masks, gloves and face shields.
Regrettably, unscrupulous traders never miss an opportunity to
capitalise on public fears and concerns. Amid these difficult
times, there has been a surge of fraud schemes associated with PPE
transactions all around the globe. In Hong Kong, over 1,600 reports
of online mask scams were received by the Hong Kong Police between
January and March this year, consisting of more than 3,000
individual victims and local companies involving a total of HK$48.2
million1. It has also been reported that fraudulent mask
schemes totalling US$799 million were uncovered in United States in
the last few months2, and similar patterns have been
observed across the Europe.

PPE frauds typically fit the following two scenarios:-

  • Fictional PPE:
    Fraudsters offer to sell PPE which does not exist. After the victim
    makes payment into the fraudsters’ bank account, the fraudsters
    disappear and no PPE will ever be delivered. The victim would wish
    to at least recover the money paid.

  • Quality of PPE falling below
    established standards
    : Fraudsters offer to sell PPE which
    meets a certain established standard (g. the Chinese standard
    of KN95, US standard of N95, European standard of FFP2, etc.
    ).
    The PPE is delivered, but of outrageously poor quality which does
    not meet the standard promised. In this scenario, the victim may
    wish to (i) return the PPE, get a refund and possibly compensation
    for the loss incurred or (ii) keep the PPE with a view to reselling
    them with proper labelling and description, and sue for the
    loss.

While due diligence must be exercised with great caution before
an order is placed and money is paid, it is not surprising to see
that one may still fall prey to an elaborate fraud scheme, often
orchestrated by groups of sophisticated scammers. This article aims
to provide practical tips for businesses and individuals when they
are unfortunately defrauded in so-called “COVID-19
Scams”.

Stop the clock, trace the funds

As the first step, the victim should consider taking prompt
action to preserve whatever is left in the relevant bank account,
so that he would not be left with nothing more than a moral victory
by the time a judgment is finally obtained.

If involved in a PPE scam where no PPE is ever delivered, the
victim should report the scam to the Hong Kong Police as soon as
possible. The Hong Kong Police may issue a “no consent”
letter to the relevant bank, directing the bank that it does not
have consent to deal with the account. Out of caution, the bank
would often proceed to stop the dealings in the bank account. In
such circumstances, the victim will be able to achieve the goal of
freezing the bank account at virtually no cost. It should however
be noted that such measures are not complete substitutes of a
“freezing order” made by the Court, given that the
“no consent” letter would be reviewed by the authority
from time to time not subject to the victim’s control and such
measures would only reach the funds in the identified bank account
but not the other assets of the fraudsters.

In appropriate circumstances, the victim should also consider
applying for either or both of a proprietary injunction and
Mareva injunction (also known as the “freezing
order”), which the Hong Kong High Court has jurisdiction to
grant in aid of court and arbitral proceedings, commenced or to be
commenced in Hong Kong and foreign jurisdictions. Generally
speaking, a proprietary injunction aims at preserving the
particular assets which a plaintiff has a proprietary claimso that
they can be turned over to him if he is successful in the action,
while a Mareva injunction is designed to protect the
plaintiff against the dissipation of assets of the defendant in
general against which the plaintiff may otherwise execute judgment.
Where there are insufficient assets in Hong Kong but there exist
assets elsewhere to satisfy a claim, the victim may consider
applying for a worldwide Mareva injunction to freeze
assets located both locally and abroad, especially where the
fraudsters have certain Hong Kong nexus or assets so that such
weapon would have teeth. While a Mareva injunction is
recognised as the law’s “nuclear weapon”, such
applications, usually made on an urgent basis, are inevitably
costly and there is no guarantee that there is still money left in
the relevant bank account when international fund transfers can now
be made in a split second.

In order to trace the whereabouts of the funds so that further
action may be taken against the second-level recipients and others
along the chain of transfers, the victim may wish to apply for
ancillary disclosure orders in the same application for the
injunctive relief. In the standard form of a Mareva
injunction, the Court will order the defendant to disclose, by way
of affidavit evidence, his assets with their value, location and
details. The Court also has jurisdiction to order third parties,
such as the bank with which the relevant bank account is held, to
disclose details of the transactions in the account within a
certain period of time, if the relevant legal requirements are met.
The practical difficulty in a lot of cases is that the tracing
exercise is time-consuming and expensive, and even when the
subsequent recipients are identified, the victim has to overcome
various legal hurdles in order to establish a claim against
them.

Civil action to recover the money

An injunctive relief only serves the purpose of preserving the
funds in the relevant bank account and other assets of the
fraudsters, against which a judgment may be executed. In order to
establish an entitlement to the funds and assets, a civil action
against the holder of the relevant bank account and fraudsters (if
they could be identified) is required.

A victim purchasing fictional PPE may rely on causes of action
including deceit, unjust enrichment, constructive trust, knowing
receipt and dishonest assistance. If the defendant does not come
forward, the victim can obtain a default judgment, which may be
enforced by way of garnishee proceedings so that the funds in the
bank account would be transferred to the victim directly.

The situation is likely to be more complicated if a victim
purchases PPE falling short of the required standard, given that
the victim indeed receives something in return. The victim may take
note of the following where there exists a formal sale and purchase
contract:-

  • Express terms of the
    contract
    : The contract may specify the details of the
    products to be supplied, including the requisite standard. Failure
    to supply PPE accordingly constitutes a breach of contract.

  • Implied terms
    of the contract: Under Hong Kong law, terms as to
    merchantable quality, fitness for purpose and conformity with
    description and samples may be implied into a contract pursuant to
    the Sale of Goods Ordinance (Cap. 26).

  • Misrepresentation:
    The victim may be induced to enter into the contract by
    misstatements made by the counterparties, which may be fraudulent
    or negligent. The victim may choose to keep the products delivered
    and only sue for damages, or to rescind the contract so that the
    products would be returned for a refund.

  • Other issues:
    governing law, dispute resolution clause, exemption clause.

Conclusion

It is unfortunate that COVID-19 provides a breeding ground for a
new pandemic of related scams and frauds. Each case has its own
facts and there is no one-size-fits-all solution. It is important
for defrauded businesses and individuals to understand the benefits
and costs of available options so that they can make an informed
decision as to the most cost-effective approach for their
particular circumstances. Above all, time is of the essence if one
is to successfully recover the money before it has been disposed of
by the fraudsters.

Footnotes

1 Clifford Lo (2020) ‘Coronavirus: con artists
swindle thousands of Hongkongers in face mask scams totalling HK$48
million’, South China Morning Post, 11 April 2020,
accessed at
https://www.scmp.com/news/hong-kong/health-environment/article/3079388/coronavirus-con-artists-swindle-thousands

2 Alexandra Sternlicht (2020) ‘Almost $800
Million In Mask Scams Alleged In The U.S. Alone’,
Forbes, 27 May 2020, accessed at
https://www.forbes.com/sites/alexandrasternlicht/2020/05/27/almost-800-million-in-mask-scams-alleged-in-the-us-alone/#2c016cff712b

Originally published 11 August, 2020

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.



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