ZEUS AIRCRAFT OWNER 2 LTD AND ANOTHER v. POLAR PAY LTD

DCCJ 6509/2020

[2023] HKDC 1674

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO. 6509 OF 2020

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BETWEEN

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JUDGMENT

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1.  The plaintiffs are claiming against the defendant for the sum of USD 272,135 which the defendant has allegedly received as a third-tier recipient of funds originated from the plaintiffs as victims in an email fraud scheme.

Background

2.  The plaintiffs are special purpose companies incorporated under the laws of the Cayman Islands under the Mirae Asset Financial Group for executing funding arrangements in respect of purchase of two aircrafts.

3.  The defendant is a Money Service Operator (“MSO”) licensed to operate and regulated by the Hong Kong Customs & Excise Department (“C&ED”).

The parties’ cases

4.  Essentially, the parties’ factual cases do not intersect: the plaintiffs’ factual evidence is confined to the circumstances of the email fraud which is not challenged by the defendant, and the defendant’s involvement in its capacity as a MSO in handling part of the defrauded funds as a third-tier recipient is also not disputed by the plaintiffs.

5.  Between 26 February 2020 and 5 March 2020, the plaintiffs fell victim to an email fraud (“the Fraud”) and have transferred a total sum of USD 5,330,886.82 to the Standard Chartered Bank account of the 1^st tier recipient, Hong Kong JunYa Limited (“Junya”).

6.  Junya then transferred the money into the bank accounts of 3 different companies, including the Bank of China account of Hong Kong Tianxiao International Co. Ltd (“Tianxiao”) which, as the 2^nd tier recipient, received approximately USD 1M over two such transfers from Junya on 9 March 2020.

7.  From 9 to 10 March 2020, Tianxiao made 8 transfers to pay out approximately USD 1M and the last of which amounting to USD 272,135 (“the Sum”) was made to the DBS Bank account of the defendant (“the Defendant’s Account”) as a 3^rd tier recipient.

8.  The Sum was received by the defendant on instruction from its client, Oriental Remittance Exchange Limited (“Oriental”, which is another MSO licensed in Hong Kong which has been operating without its own bank account) and on 10 March 2020, the defendant carried out a currency exchange of the Sum and paid out according to the instruction of Oriental (“the Transaction”).

9.  The profit earned by the defendant in the Transaction was HKD 3,156.41. The plaintiffs do not raise any allegation that the defendant has been in any way connected with or involved in the Fraud.

10.  Although the defendants raise 5 causes of action (namely, constructive trust, unjust enrichment, inconsistent dealing, knowing receipt and dishonest assistance), I agree with the observation of Mr. Christopher Chain, counsel for the defendant (“Mr. Chain”), that the crux of the case is whether the defendant is able to establish that it has acted in good faith without notice at the time it was handling the Transaction.

11.  In short, the plaintiffs allege that the defendant has carried out an exercise whereby money from different origins (including the Sum) were pooled together, combined and mixed, and subsequently remitted to different destinations (including various companies and individuals) in amounts different and / or not corresponding to the original source of funds so that the Sum could not be further traced.

12.  As such, the plaintiffs claim that the defendant ought to have investigated into the relationships between Tianxiao, Oriental and the purported recipients, as well as the nature of the Transaction, which the defendant has failed to do.

13.  In support, the plaintiffs refer to a flow chart (enclosed as Annex 1 in the plaintiffs’ Opening Submission, “the Flow Chart”) which shows the funds flowing in and out of the Defendant’s Bank Account at the relevant time.

14.  The left side of the Flow Chart shows incoming transactions on or before 10 March 2020 of 25 deposits from 22 depositors (including the Sum from Tianxiao shown in the centre of the Flow Chart) amounting to HK$11,512,718.80.

15.  The right side of the Flow Chart shows outgoing transactions on or about 10 March 2020 of 13 transfers for 12 recipients amounting to HK$11,466,689.

16.  Besides a couple of typos (which have been corrected), there is no dispute between the parties of such transactions.

17.  The plaintiffs’ case is that these transactions should raise suspicion: for example, if the defendant was engaged in money exchange business, there seems to be no one-to-one correspondence of each incoming deposit in USD to an outgoing payment in HKD. Further, of the 25 deposits, 19 were deposits in USD but 6 were in HKD, thus raising the suspicion that there have been HKD to HKD transactions which would not be for currency exchange.

18.  The defendant case is that the defendant and Oriental operate under what it calls the “Settlement Approach”.

19.  The “Settlement Approach” provides a system whereby, as the defendant alleged, licensed MSOs without bank accounts (like Oriental) conduct money exchange business with licensed MSO with bank accounts (like the defendant).

20.  The defendant’s witnesses, Wong Kai Hang (“Wong”, General Manager of the defendant) and Lee Nam Ying (“Lee”, Director of the defendant and, at the relevant time, Deputy Head of defendant’s Compliance Team) have both gave evidence on this.

21.  Mr. Chain summarised this system under paragraph 11 of his Opening Submission:

“Say A, B and C are licensed MSOs. A does not have a bank account. B has a bank account offering a favourable RMB exchange rate. C has a bank account and offers a favourable USD exchange rate.

Transaction 1: A’s customer wishes to convert USD 150,000 into RMB 1,000,000. To process this request, A would arrange for the following steps to be taken:

(i) Direct its customer to deposit USD 150,000 with C: C would then record +USD 150,000 in A’s client account with C; and

(ii) Direct B to send RMB 1,000,000 to A’s customer: B would then record –RMB1,000,000 in A’s client account with B.

Transaction 2: Another customer of A wishes to convert RMB 850,000 to HKD 1,000,000. To process this request, A would arrange the following steps to be taken:

(i) Direct the customer to deposit RMB 850,000 into B: B would then record +RMB 850,000 in A’s client account with B; and

(ii) Direct C to convert the USD balance (from transaction 1) into HKD (e.g. at a rate if USD 1 = HKD 8), and then have C send A’s customer HKD 1,000,000: C would then record – HKD 1,000,000 in A’s client account with C.”

22.  Thus, if one takes the example transactions above and look at looks at A’s account with one MSO alone (say, B): B will record an incoming deposit of RMB 850,000 but an outgoing of RMB 1,000,000, so the account would show –RMB 150,000 on this day.

23.  As such, if one only looks at the bank account held by Oriental with the defendant alone, there will unlikely to be any one-to-one direct corresponding money exchange transactions, and only Oriental is in the position to explain how it utilises its various bank accounts opened in various other MSOs (which have bank accounts) to perform such transactions.

24.  The defendant claims that a typical licensed MSO without a bank account like Oriental carries out numerous such transactions every day for numerous customers requesting money exchange, taking advantage of the most competitive offers from different accounts it holds with different licensed MSOs with bank accounts (like the defendant).

25.  The defendant’s case is that it has complied with the relevant anti-money laundering guideline etc. and has performed all due diligence required. Thus it has acted in good faith without notice at the time it was handling the Transaction.

The legal principles

26.  The legal principles in assessing the defendant’s state of knowledge and “bona fides” are well-established.

27.  In Armstrong DLW GmbH v Winnington Networks Ltd [2013] Ch 156, Deputy High Court Judge Stephen Morris QC stated (at 191C-F):

“(a) Whilst “bona fides” and “without notice” are in principle distinct elements of the bona fides purchaser defence, it would be most artificial to consider them separately as “it is difficult to envisage a situation in practice where a defendant is found not to have notice and yet still to have acted in bad faith.”

(b) The unifying test is whether, taking into account all the facts know to the defendant, the defendant has acted in a “commercially unacceptable way.”

28.  As for what is meant by “commercially unacceptable way”, Snell’s Equity (34^th ed.) at paragraph 4-035 stated that the court must take into account:

i) The past experience of the defendant;

ii) Any expert evidence available to the defendant;

iii) Any routine procedures followed in transactions of the kind in question; and

iv) Whether on the facts known to the defendant, a reasonable professional in his position would have serious cause to question the propriety of the transaction.

29.  It is also well-established that the defendant be judged against the standard of the relevant industry (Philipp v Barclays Bank UK plc [2021] Bus LR 451 at paragraph 82; [2022] QB 578 (CA) paragraph 28) and that if a defendant has acted in accordance with industrial regulations and standards, he will not be considered a wrongdoer which acted in bad faith or with knowledge (Jeremy D Stone Consultants v National Westminster Bank plc [2013] EWHC 208 (Ch) (11^th February 2013) paragraphs 250, 253 – 254).

30.  Further, in Macmillan Inc. v Bishopsgate Investment Trust plc (No. 3) [1995] 1 WLR 978 at 1014, Millert J stated:

“Worse still, Macmillan attempted to establish constructive notice on the part of each of the defendants by a meticulous and detailed examination of every document, letter, record or minute to see whether it threw any light on the true ownership…which a careful reader…ought to have detected. That is not the proper approach. Account officers are not detectives. Unless and until they are alerted to the possibility of wrongdoing, they proceed, and are entitled to proceed, on the assumption that they are dealing with honest men. In order to establish constructive notice, it is necessary to prove that the facts known to the defendant made it imperative for him to seek an explanation, because in the absence of an explanation, it was obvious that the transaction was probably improper.”

31.  In case where the defendant has performed a due diligence procedure, Bird J stated in Tecnimont Arabia Ltd v National Westminister Bank plc [2023] 1 All ER 57 under paragraph 190:

“…A bank is entitled, having gone through a due diligence procedure before opening an account in the form of KYC (at the end of the hearing the Bank’s KYC procedure here was not criticised), to proceed on the basis that its customers operate legitimately…”

Analysis of the evidence

The Settlement Approach

32.  As illustrated above in paragraphs 21-23 above, if Oriental was using the “Settlement Approach” when dealing with its money exchange business, then I cannot see why there should be any suspicion raised when there was no “one to one” corresponding transaction from USD to HKD or when there was HKD deposits in Oriental’s account held at the defendant.

33.  As explained by Wong during cross-examination, there was a range of currencies that Oriental might arrange to be deposited at the defendant, and Oriental might then instruct the other MSOs to remit the corresponding funds in the requested currencies to the recipients. Only Oriental would know how it was utilising the services of different MSOs to conduct its business.

34.  Of course, the “Settlement Approach” also makes perfect commercial sense for the money exchange business in the circumstances where MSOs without bank accounts could utilised favourable exchange rates offered by different MSOs with bank accounts. The evidence given by the defendants’ witnesses on this was all along consistent and logical, and stood up well against cross-examination.

35.  The plaintiffs alleged that “other licensed money service operators” ought to have been able to provide services directly to their client(s) without going through the defendant” (paragraph 5(2) (c) in the Re-Amended Reply, Trial Bundle A, page 110) but failed to put up any alternative case (with supporting evidence) as to how the money exchange business ought to operate by licenced MSOs without bank accounts if they were not using the “Settlement Approach”.

36.  In other words, as Mr. Chain observed, Mr. Victor T.S. Lui, the plaintiff’s counsel (“Mr. Lui”) has attempted to raise criticisms in a vacuum.

37.  On balance, I would accept the evidence from Wong and Lee and that the “Settlement Approach” was a common practice, at the very least, between the defendant and its clients including Oriental.

Oriental as a licensed MSO without bank account

38.  There was no dispute that Oriental was a MSO licensed by the C&ED to operate without a bank account.

39.  Section V of the Money Service Operators Licensing Guide by C&ED concerns with the application for a MSO licence, and paragraph 5.2 (Trial Bundle C4, page 737) clearly catered for such operation:

“What are Business Plan and AML Policy…Business Plan should be a comprehensive overview of the business, which includes but not limited to…detailed operation mode…payment system…For example, if an applicant intends to operate a money service without using a bank account, the applicant is required to provide relevant details as to how its money service business is operated in this circumstances.” (my underlining)

40.  Thus, it is clear that Oriental, in order to obtain its licence from C&ED (since 2012 until now, according to Lee’s unchallenged evidence), must have produced its Business Plan which provided “relevant details as to how its money service business is operated” in the circumstances of “operating a money service without using a bank account”.

41.  There is no evidence before the court that Oriental has in any way been misleading or fraudulent in its licence application so one must assume, on balance of probably, that such relevant details in the Business Plan would have contained some form of explanation of the “Settlement Approach” in utilising the defendant and other MSOs with bank accounts. It must follow, self-evidently, that the “Settlement Approach” was approved by the C&ED.

42.  Further, the defendant has produced its own Business Plan submitted to C&ED for the year 2020 (Trial Bundle C4 page 698-724) and it has named Oriental as one of the “major MSOs which may transact remittance with us” (Trial Bundle C4, page 724). The application must have been approved so one must assume that the name “Oriental” did not raise any concern with the C&ED.

43.  As Lee explained in court, she was aware of around 3,000 licensed MSOs at the relevant time but only a small portion (around 100) have their own bank accounts. Further, at that time, the defendant had around 30 licensed MSOs without bank accounts as clients. Both Wong and Lee also gave evidence that the “Settlement Approach” was commonly used amongst the defendant’s clients and, as far as they knew, a common practice within the industry, and that C&ED was clearly aware of such a system as this has been discussed in various seminars held by C&ED.

44.  Mr. Lui has no real challenge to such evidence besides questioning how MSOs without bank accounts could operate e.g. how can they pay their staff and company expenses?

45.  Lee explained that the MSO bank accounts registered with C&ED must be used for money exchange business and not to be mixed with paying overhead expenses of the company.

46.  This is clearly logical: I cannot see how any anti-money laundering tracing is helped if an MSO is allowed to hold bank accounts where funds used for money exchange business are mixed up with funds for day to day profits and expenses of running the business.

47.  In any case, I cannot see how the court should be concerned with the minute details of how Oriental might be managed: suffice to say that I accept that Oriental must have submitted its own Business Plan to C&ED explaining “how its money service business is operated” and has obtained a license to operate without a bank account since 2012.

48.  Therefore, utilising the “Settlement Approach” with an MSO operating without a bank account is clearly very far from any operation that “defies commercial sense and is suspicious in nature” (paragraph 5(2) (c) in the Re-Amended Reply, Trial Bundle A p. 110) and making “it imperative for the defendant to seek an explanation”.

Due Diligence measures

49.  More importantly, Lee, who has over 20 years of experience working in money laundering prevention, third party assessment, including “Know Your Customers” (“KYC”) and Customers’ Due Diligence (“CDD”), and being a certified anti-money laundering specialist since 17 June 2021 (paragraphs 5 of Lee’s witness statement, Trial Bundle B, page 70) gave detailed evidence as to the defendant’s standard client due diligence procedures and practices.

50.  She has also produced a copy of the Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (For Money Service Operators) November 2018 (“AMLO Guideline”, Trial Bundle C4, p. 830-898) and gave evidence that the defendant’s policy is “in full compliance with AMLO Guideline, published under section 7 of the AMLO from time to time.”  (paragraphs 12 – 17 of Lee’s witness statement, Trial Bundle B, page 72-74)

51.  It cannot be disputed that under AMOL Guideline, only Oriental was considered to be the defendant’s customer or client, and Tianxiao (as a depositor) as well as all the recipients (except of course the defendant) on the right hand side of the Flow Chart were merely “third parties” which the defendant has no business relationship with:

“The meaning of “customer” and “client” should be inferred from its everyday meaning and context of the industry practice.” (paragraph 4.1.4 of the AMOL Guideline, Trial Bundle C4, page 844)

“In general, the term “customer” refers to the party, or parties with who a business relationship is established, or for whom a transaction is carried out by an MSO. This generally excludes the third parties of a transaction. For example, an ordering MSO in an outward wire transfer transaction does not regard the beneficiary (who has no other relationship with the MSO) as its customer.” (paragraph 4.1.5 of the AMOL Guideline, Trial Bundle C4, page 844-845)

“Business relationship” is a business, professional or commercial relationship with an element of duration, or an expectation of an element of duration in the case of potential customer.” (paragraph 4.2.2 of the AMOL Guideline, Trial Bundle C4, p. 844-845)

52.  I need not repeat here the details of the CDD procedures actually conducted by the defendant on Oriental (paragraphs 19-21 of Lee’s witness statement, Trial Bundle B, page 77-79): the plaintiffs did not raise any dispute nor supportive evidence that the defendant’s CDD process concerning Oriental have failed to comply with AMLO Guideline.

53.  Indeed, I accept the evidence from Wong and Lee that some procedures conducted by the defendant were above and beyond the requirements under AMLO Guideline e.g. conducting face-to-face meeting with Oriental’s officers, inspecting the MSO licence and BR certificate of Oriental, identifying the ongoing source of funds of Oriental etc.

54.  Lee also made the (rather obvious) point that Oriental itself was also subject to AMLO and AMLO Guideline in order to obtain a MSO license, so Oriental was required to do CDD on its own clients (e.g. Tianxiao) and to report any suspicious circumstances etc. This evidence was also unchallenged.

55.  As such, I accept the evidence from Lee and Wong that when processing transactions requested by another licensed MSO such as Oriental, the defendant was entitled to expect that proper CDD has been conducted and relied on the information and documents obtained from that licensed MSO.

56.  The AMLO Guideline clearly enshrines such operation between licensed MSOs: a licensed MSO is a financial institution defined under the AMLO which constitute a low customer risk factor (paragraph 4.8.7 of AMLO Guidelines, Trial Bundle C4, p. 855) and the defendant is only required to carry out limited due diligence on Depositors and / or Recipients who are clients of Oriental.

57.  The defendant’s witness, Tong Siu Him Jackel, the Sales Representative of the defendant (“Tong”), gave detailed evidence for such “limited” due diligence conducted on Oriental’s clients.

58.  Tong gave evidence as to what happened on 10 March 2020 regarding the receipt of instructions from Oriental concerning the Transaction including the Depositor Due Diligence performed on Tianxiao (identified as “an unknown deposit”) including obtaining the deposit proof, the BR certificate of Tianxiao and the identification document of Tianxiao’s sole director and passing such to the defendant’s Compliance Team for due diligence check, calling Oriental and making enquiries as to Tianxiao’s nature of business and source of funding etc. (paragraphs 24-36 of Tong’s witness statement, Trial Bundle B, page 55-57).

59.  Tong also confirmed that during the transaction regarding Tianxiao’s deposit, he observed no abnormality or irregularity and that the due diligence assessments were also satisfied (paragraph 37 of Tong’s witness statement, Trial Bundle B, page 57).

60.  In addition, Lee also gave detailed evidence of the Transaction from the Compliance Team’s point of view. In particular, the factors considered were (paragraph 34 of Lee’s witness statement, Trial Bundle B, page 82 and documented in the defendant’s Payer / Originator Record, Trial Bundle C5, page 1098):

a. Tianxiao was a company incorporated on 20 January 2017 (i.e. for more than 3 years as opposed to being incorporated only immediately before the transaction) in Hong Kong;

b. Being able to obtained various KYC documents on Tianxiao from searching on the Hong Kong Company Registry (including the Certificate of Incorporation, Annual Return up to 20 January 2020, the Articles of Association) as well as the documents obtained from Oriental (as stated in the paragraph above); and

c. No negative news or adverse findings revealed on Tianxiao or its director from both Dow Jones Risk Centre and Google search.

61.  Lee also stated how the defendant, in accordance with AMLO Guideline, carried out Recipient Due Diligence assessment on the 11 recipients on instruction by Oriental at the relevant period of time, all of which showed no negative results. (paragraph 39 of Lee’s witness statement, Trial Bundle B, page 83)

62.  I will not need to go into all the details of such Depositor and Recipient Due Diligence processes or any of the corresponding AMLO Guideline but suffice to say, I am satisfied that these measures were above and beyond what was required by the ALMO Guideline.

63.  There have been extensive cross-examinations of the defendant’s witnesses by Mr. Lui but more often than not, he was asking essentially the same question: “Why did you not ask for such and such information on such and such a transaction as instructed by Oriental?”

64.  The answers were essentially the same: “Under the AMLO Guideline, there was no need to investigate further into any of the transactions instructed by Oriental, which was also a licensed MSO and which would have performed its own KYC and CDD etc..”

65.  At one point, Mr. Lui questioned an apparent misspelling on Tianxiao’s address on the BR Certificate (“Hatcourt” Road instead of “Harcourt” Road) and suggested that somehow this should raise suspicion.

66.  Firstly, I cannot see why this cannot be a simple typo.

67.  Secondly, in this and other similar lines of cross-examination, Mr. Lui was essentially conducting a Macmillan-type inquiry (see the Macmillan case above) performing minute examinations of all documents and expecting the defendant’s officers to act like detectives. This is not the proper approach.

68.  In his Closing Submission, Mr. Liu also argued that the defendant did not plead that the “Settlement Approach” was “common and industry wide” and that independent expert report should be adduced to illustrate an industrial standard.

69.  I do not think that the defendant need to plea an industrial standard, adduce evidence in support of such and then show that it has not fallen below such standard: this is not a negligence claim. Both Lee and Wong are clearly experienced and qualified professionals and I cannot see why they cannot give factual evidence on the MSO industry practice based on their own personal knowledge and experience, as well as making reference to various documents including the AMLO Guideline.

70.  In any case, it is already enough for the defendant to adduce evidence that the “Settlement Approach” was adopted between it and Oriental (amongst other clients of the defendant) and such an approach was approved by the relevant authority, i.e. C&ED. It was for the plaintiffs to adduce expert evidence or refer to any relevant legislations or guidelines to challenge such. The plaintiffs have not done so.

Conclusion

71.  I find no evidence that the defendant has acted in a “commercially unacceptable way” so it must follow that, on balance of probability, the defendant has acted bona fides and without notice in handling the Transaction. As such, all 5 of the plaintiffs’ (somewhat overlapping) causes of action must fail.

72.  Accordingly, I would dismiss the plaintiffs’ claim.

Costs

73.  Mr. Chain in his closing submission argued that there should be an award of indemnity costs. However, I do not think that this case falls into those exceptional circumstances when the claim was so unmeritorious and hopeless that the plaintiffs knew, or ought to know that it was doomed to fail so it should never have been brought in the first place, or that the plaintiffs’ conduct was abusive or otherwise culpable. (Wates Construction Limited v HGP Greentree Allchurch Evans Limited [2005] EWHC 2174 (TCC), Huge Dragon Corp Ltd v Lung Mun Oasis (IO) [2014] 3 HKLRD 286).

74.  I would therefore award the costs of the action to the defendant to be taxed on a party and party basis if not agreed with certificate for one counsel.