Michael S. Kim, Randall Arthur and Kelly J. Spatola, Kobre & Kim,
Legaltech News
This step-by-step guide can help a
victim of email fraud maximize the chances of recovering stolen funds
According to the FBI, since January 2015, there has been a 270 percent increase in the number of victims of email fraud and exposed loss, with nearly 8,000 complaints filed and over U.S. $268 million lost in 2015 alone. Email fraud—which typically involves hacking into a company’s IT systems and using spoof communications to induce an employee of the company to initiate unauthorized international wire transfers—has affected individuals in all 50 states across the U.S. and in 79 countries globally. And although funds have been fraudulently transferred to at least 72 different countries, the majority of transfers are to banks in Asia, predominantly Hong Kong and China, as well as certain Eastern European and African countries, according to the FBI and U.S. Department of Justice (DOJ).
But while the U.S. Department of Justice has published “best practices” on how to respond to a cyber-attack, the U.S. government has offered little guidance on what steps a victim should take to recover stolen funds. The following is a step-by-step guide of what a victim of email fraud should do to maximize the chances of recovering stolen funds. Ideally, each of these steps should be undertaken simultaneously:
Step 1: Contact the bank from which the funds were fraudulently transferred.
Upon discovering an email fraud, a victim must immediately report the fraud to the bank from which funds were fraudulently transferred. Wire transfers are not always instantaneous. Rather, many banks, in an effort to combat email fraud, are delaying processing requests for international wire transfers in order to verify their legitimacy. Such delays may give both the victim and the victim’s bank the opportunity to cancel or recall a fraudulent transfer, if they act quickly enough.
Because it is not uncommon for fraudsters to quickly and repeatedly transfer stolen funds to different banks in an attempt to evade detection, it is imperative that victims act quickly. Fast detection and reporting of fraud may prevent subsequent transfers to different banks, which are increasingly more difficult to trace. Thus, the faster a victim discovers and reports the fraudulent activity to its bank, the more likely the company is to recover its assets.
Step 2: Report the fraudulent conduct to local law enforcement.
Local law enforcement can be useful in helping to freeze funds that have been fraudulently transferred. For example, in Hong Kong, if there are sufficient funds in the fraudster’s account, the police can issue a “letter of no consent” to the bank, which has the effect of freezing the account immediately, thereby stopping the funds from being withdrawn or further transferred.
Contacting and communicating with local law enforcement in different time zones and in different languages, however, can be challenging and often inefficient. To maximize the chances of early and effective police intervention, a victim should contact the police through an agent that is based in the jurisdiction and speaks the native language—preferably a local lawyer who is accustomed to dealing with the police and who can quickly take steps to recover the stolen funds should they be successfully frozen. The agent should communicate with law enforcement face-to-face, if possible, and be prepared to provide detailed information about the fraud and related wire transfer, including any email correspondence with the fraudster and wire confirmations showing the name and bank account of the recipient.
Step 3: Notify counsel.
Inform both the company’s in-house counsel and local counsel in the jurisdiction to which the funds were transferred of the loss. In-house counsel will, among other things, liaise with local counsel, assist in gathering evidence for any police investigation or legal proceedings that need to be commenced, ensure that there have been no additional data breaches, and determine whether the loss is covered by the company’s insurance policies.
If the company does not have an in-house counsel, then a member of senior management should be appointed to liaise with local counsel and assist in undertaking these tasks. Local counsel can facilitate communications with local law enforcement agencies, take other steps to freeze the assets (see step four) and advise on the best legal strategy to recover the stolen funds.
Step 4: Obtain freezing orders.
In the event that local law enforcement is unsuccessful or unwilling to freeze the fraudster’s bank account, or the victim wishes to further ensure preservation of the misappropriated funds, courts in many jurisdictions, including Hong Kong and China, have the ability to make orders to freeze a fraudster’s assets on an urgent and ex parte basis—i.e., the victim is not required to notify the account holder about the application unless and until a freezing order is issued by the court. Such orders—known as Mareva injunctions in Hong Kong and property preservation orders in China— prohibit the recipient of stolen funds from disposing of the assets, making it impossible for the fraudster to withdraw or further transfer the stolen funds from the frozen account. Victims of email fraud should discuss with local counsel whether and under what circumstances a freezing order would be obtainable.
Step 5: Secure discovery orders.
In the event that the fraudster transfers the stolen funds before the victim can obtain a freezing order, the victim should consider an application to the local court for a “disclosure order,” which is an order requiring the bank to provide information about the account holder and whether and where the funds were subsequently transferred. Such information is vital if the victim needs to undertake an asset tracing exercise.
With incidents of cybercrime on the rise, companies face an ever-growing threat of being defrauded. In the unfortunate event that a company falls victim to such a fraud, following the above steps can help identify the fraudsters and locate the stolen funds. Once the stolen funds are located and secured, the victim should quickly commence legal proceedings against the fraudster for the loss suffered as a result of the fraud. Once a judgment is obtained, the victim can then apply to enforce the judgment against the fraudster’s assets by, among other things, garnishing the bank accounts into which the stolen funds were transferred.
So long as victims of email fraud act quickly and seek early intervention by local counsel and law enforcement, they maximize their chances of recovering stolen assets.
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