DBS BANK (HONG KONG) LTD v. PAN JING (潘昌)

HCA 3299/2016

[2020] HKCFI 268

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 3299 OF 2016

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JUDGMENT

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1.  This is a summons for summary judgment under RHC Order 14 issued by the plaintiff, DBS Bank (Hong Kong) Ltd (“the bank”), against the defendant, Mr Pan Jing, who is a resident of Hangzhou City. The case arises out of an identity fraud by which an impostor procured the bank to transfer US$12.6m from its customer's account to the account of a Hong Kong company called H2H Trading Co Ltd (“H2H”). H2H then caused tranches to be transferred to various second-level recipients. Some of these were innocent parties, including the defendant, to whom US$150,000 was paid. The bank seeks to recover that sum as being money of which it was defrauded, and seeks summary judgment.

2.  The defendant denies liability, and seeks unconditional leave to defend.  I make it clear at the outset that the defendant is not in any way implicated in the fraud. The question is essentially which of two parties innocent of the fraud is to bear the loss so far as relates to this sum.

3.  The claim is a restitution claim based on unjust enrichment.  The primary issue is whether it is arguable that the defendant can avail himself of defences which might otherwise be available, being bona fide purchaser for value, and/or change of position, the former being pleaded in the original defence, the latter being added by amendment.  The bank’s case is that the transaction entered into by the defendant involved the use of so-called “underground banking”, the consequence being, the bank says, that the defences are barred on account of illegality under PRC law.

4.  A constructive trust claim is pleaded but not pursued by the bank on this application.

The facts

5.  The basic facts are not in dispute on the summary judgment application. The defendant is a Hangzhou businessman involved in the research, development and sales of computer games and apps for mobile devices. He is currently CEO of the business which he established in 2011 in his personal capacity, and sold for a substantial sum in 2016.

6.  In September 2016 as part of his personal business, he entered into a products sale and purchase agreement with a Hong Kong supplier of apps. The price was US$90,000, and he decided to purchase US dollars in the amount of US$150,000, the balance to be retained for future business opportunities.

7.  The defendant says that he asked his friend and colleague, Xu Tao, whom he had known for many years, to facilitate the currency purchase and exchange for him.  On 13 October 2016, he transferred RMB1,025,000 (being the equivalent of US$150,000) to Mr Xu’s account at Zhejiang Tailong Bank.  Mr Xu (as the defendant found out afterwards) then transferred this sum to a Lin Changjin at Ping An Bank in Shenzhen.  Later the same day, his account with HSBC in Hong Kong was credited with US$150,000, the exchange being thereby completed.

8.  It transpired that the money had got into the defendant’s account via a company called H2H Trading Co Ltd (“H2H”), which is a company incorporated in Hong Kong in 2015 with a nominal share capital.  Its account (also with HSBC) was active, the bank’s case being that “H2H was a shell company with no apparent business other than serving as a vehicle for an unlicensed underground money exchange agency”.

9.  The fraud took place as follows. Cai Junfeng is a resident of Guangzhou who opened an account with the bank’s Tuen Mun branch in 2015. On 7 October 2016, a man who fraudulently identified himself as Mr Cai (“the impostor”) visited the bank, and having succeeded in passing the identity checks, got information as to the balance of Mr Cai’s account. On 11 October, the impostor succeeded in changing the phone number on record.

10.  At 09:30am on 13 October 2016 (which was the same day that the defendant exchanged his money), the imposter arrived at the bank and instructed it to break three time deposits held in Mr Cai’s account totaling US$19,665,426, and to remit US$6.3m to the H2H account with HSBC. This was duly done at 13.11pm in the mistaken belief that the instructions had been given by Mr Cai.

11.  It was about two hours later at 15:05pm that US$150,000 was transferred out of H2H’s account to the defendant’s account with HSBC, one of many other transfers made that and the following day.

12.  Later in the afternoon, the impostor signed a further instruction to remit another US$6.3m to the H2H account. Again acting in the mistaken belief that the instruction had been given by Mr Cai, at 11:51am on 14 October 2016, the bank remitted a second tranche of US$6.3m to the H2H account.

13.  The fraud was discovered shortly afterwards when a check was made with the real Mr Cai, but all that the bank recovered from H2H was US$23,035 left in the account.  Presumably most of the US$12.6m went to the fraudsters.

14.  The US$150,000 remains frozen in the defendant’s account with HSBC following the grant of various injunctions.

The plaintiff bank’s case

15.  The Statement of Claim pleads various claims, but the only one which has been pursued is a restitution claim based on unjust enrichment that is, a claim for money had and received (Shanghai Tongji Science & Technology Industrial Co Ltd v Casil Clearing Ltd (2004) 7 HKCFAR 79 at para 66). A proprietary claim is pursued in the alternative, but it was accepted on behalf of the bank that this adds nothing to the unjust enrichment claim, and nothing more need be said about it.

16.  Though the bank makes no allegation of fraud against the defendant, as indicated above its case is that defences of bona fide purchaser for value and/or change of position are not open to the defendant, since the currency exchange involved the use of “underground banking” which is illegal under PRC law.  Hence, the bank contends, there is no defence to the claim, and it is entitled to summary judgment.

The defendant’s case

17.  The defendant’s case is that this is not a proper case for summary judgment. There are serious issues of fact and law including PRC law that arise, and which on the applicable Order 14 principles, should go forward to trial. Further, the court should not grant judgment where the underlying law on illegality in this context is unclear.

18.  The defendant has shown that the disputed sum of RMB1,025,000 or US$150,000 originated from an entirely legitimate source, that is, the amount of RMB40,000,000 that he received in early September 2016 from the sale of his shares in his company.  (I should make it clear that I accept this.)

19.  He entered into a sale and purchase agreement with a Hong Kong supplier of mobile apps but was unfamiliar with foreign currency exchange matters and sought help from his friend Mr Xu who he has known for many years and who was the employee of the company who dealt with foreign trade matters.  The defendant relied on Mr Xu to deal with the transactions properly and legally.

20.  He transferred RMB1,025,000 to Mr Xu’s PRC account (the additional amount over the price being reserved for future business opportunities). Mr Xu transferred it to Lin Changjin (whom the defendant did not know personally) and on the same day, the defendant received US$150,000 in his HSBC account in Hong Kong.

21.  There are at least three grounds which the defendant submits constitute triable issues, namely:

a.  the defence of bona fide purchaser;

b.  the defence of change of position; and

c.  triable issues on PRC Law.

22.  Hence, the defendant submits that he is entitled to unconditional leave to defend.

The correct approach to summary judgment applications

23.  There is no dispute as to the correct approach to summary judgment applications.  In particular, as the defendant points out, Order 14 is for clear cases, that is, cases in which there are no serious material factual or legal disputes. The defence need only show that there is a triable issue or question of law or fact, or some other reason for there to be a trial (Hong Kong Civil Procedure 2020 at §14/4/9).  I have approached the case with these principles in mind.

Tracing

24.  Questions of tracing do not arise in this case, because it is accepted on behalf of the defendant that the US$150,000 received by the defendant came from the first tranche of US$6.3m of funds stolen from the bank.  I simply record therefore that the bank’s undisputed case in that regard is based on the state of the account when US$150,000 was debited and transferred to the defendant.  On an examination of the entries, it is evident that the debit came from the first tranche of US$6.3m.

The illegality issue

25.  Both parties have put in expert evidence as to the applicable PRC law dealing with exchange transactions so far as relevant to this case.  The bank’s evidence is given by Ma Chen, who is a partner of Han Kun Law Offices, Beijing.  The defendant’s evidence is given by Yang Xueyu, who is a partner in Yun Zheng Law Firm in Shanghai.

26.  It was submitted on behalf of the defendant that various areas of PRC law are potentially relevant, being the criminal law, the Decision of the Standing Committee of the National People's Congress on Punishing Crimes of Fraudulent purchase of Foreign Exchange, Foreign Exchange Evasion and Illegal Foreign Exchange Trading, Administrative Regulations on Foreign Exchange, Foreign Exchange Measures for Individuals, Interpretation on Applicable Laws to the Trial of Criminal Cases of Arbitrage and Racketing of Foreign Exchange by Supreme People’s Court (1998), Interpretation of the Supreme People’s Court and Supreme People's Procuratorate on Several Issues concerning the Application of Law in the Handling of Criminal Cases regarding Illegal Fund Payment and Settlement Business and Illegal Trading in Foreign Exchange (2019), contract law, and property law.

27.  It is submitted that disputes arising from these areas of law are unsuitable for disposition at the summary judgment stage, and that the differences of opinion between the lawyers must go forward to trial.

28.  In assessing this submission, it is necessary to identify the ambit of any relevant dispute between the respective lawyers, from the parties’ pleaded cases, and from the evidence which followed the pleadings.

29.  As to pleadings, the defendant’s case is set out in its Amended Defence, and the bank’s case is set out in its Amended Reply. As to evidence, the affirmations of both lawyers (Ma Chen for the bank has made two) are helpful and relatively short.

30.  The Amended Defence which comes first in time for these purposes pleads in paragraph 12 that the transfer in the present case would not be considered unlawful under the law of the People’s Republic of China.  Various legal provisions are cited, and the pleaded reasoning is that the transfer “would not be considered as criminal offence unless the act is ‘serious’ or ‘particularly serious’… From Article 3 of the Judicial Interpretation in 1998, it clearly explains that only the act of exchanging the amount of US$200,000 or over will be considered as criminal offence …”.

31.  In fact, this is not in dispute. It is no part of the bank’s case that any criminal offence has been committed by the defendant.

32.  In his evidence (which came next in time), Ma Chen distinguishes between criminal violations and administrative violations. The bank puts its case exclusively on the latter. According to Mr Ma, “… the Defendant, an individual, is subject to an administrative penalty… because his… foreign exchange trading with Mr Xu Tao contravened Articles 30 and 39 of the PRC Foreign Exchange Measures for Individuals and Article 45 of PRC Administrative Regulations on Foreign Exchange”.

33.  Each of these provisions (among others) is pleaded in the Amended Defence, and they are the only provisions pleaded in the Amended Reply.  They are as follows.

“Article 30

Domestic individuals that engage in foreign exchange trading or other transactions related to foreign exchange, shall conduct such business at a domestic financial institution qualified therefor.

Article 39

Where there is any violation of the provisions of these Measures, the foreign exchange authorities shall impose punishment upon the parties involved according to the Regulations of the People’s Republic of China on Foreign Exchange Management or other relevant provisions; Where said actions constitute a crime, such parties shall be investigated by judicial authorities for criminal liability.

Article 45

If any one trades foreign exchange in private or in a disguised way, or profiteering purpose or illegally recommends the purchase and sale of foreign exchange of which the amount is relatively large, the relevant foreign control organ shall issue a warning thereto, confiscate its illegal gains, and shall impose a fine of not more than 30% of the amount of foreign exchange involved in the illegal activities; in serious case, the relevant foreign exchange control organ shall impose a fine of more than 30% and not more than the equivalent of the amount of foreign exchange involved in the illegal activities; or it shall be subject to criminal liability if the act constitutes a criminal offence.”

34.  In her affirmation on behalf of the defendant, Ms Yang Xueyu says in this regard:

“I note that while Mr Ma discussed in great details that there are two types of violations under Article 45 of the PRC Administrative Regulations on Foreign Exchange and Articles 30 and 39 of the PRC Foreign Exchange Measures for Individuals (i.e. administrative violations and criminal violations), it is not his view that the Defendant’s conduct in the present case constitutes a criminal violation. I agree and further believe that all analysis of the criminal violations is irrelevant in the present case.

With respect to administrative violations, it is pertinent to note that foreign exchange control is a governmental policy adopted by the central government in the PRC, after taking China’s special national conditions into consideration.  Article 45 of the PRC Administrative Regulations on Foreign Exchange and Articles 30 and 39 of the PRC Foreign Exchange Measures for Individuals are administrative regulations particularly applicable in the PRC on the activities involving foreign exchange. As such, the governmental authorities in the PRC shall have the jurisdiction to decide on the administrative consequences of the foreign exchange activity conducted between the Defendant and Mr Xu Tao.  As of today, I am not aware that any administrative penalties (i.e. a warning and/or a fine up to 30% amount) have been imposed on the Defendant by any governmental authorities in the PRC.”

35.  The rest of her affirmation goes on to deal with other matters.

36.  On the face of the pleadings and the evidence, the bank submits that it is effectively common ground that the defendant has contravened Articles 30 and 45 and is liable to pay an administrative fine because he has purchased foreign currency from an unlicensed exchange agent. The defendant does not seriously dispute that he acted in breach of these provisions. Though there is no criminal liability, his breaches still amount to “administrative violations” which would potentially attract fines.  The fact that there have been no fines in this case is irrelevant.

37.  It was submitted on behalf of the defendant that is unclear whether the currency transaction would attract fines as administrative violations.  This is because it is not clear what amount would be considered as “relatively large” within the meaning of Article 45.  It is clear, it is submitted, that the PRC authorities would only take action in the event of foreign exchange involving a “relatively large” amount.  No action has in fact been taken in this case.

38.  It is to be noted, however, that the affirmation of Ms Yang Xueyu does not appear to provide support for these submissions on behalf of the defendant (except that no action has been taken which is factually correct), the totality of her evidence on this point being set out above. 

39.  It is correct that it is not permissible on a summary judgment application to seek to resolve factual disputes. Equally, however, if there is no serious dispute as to an issue no purpose is served in directing it to trial. This applies also to those issues of law which (as here) are the subject of expert evidence. The underlying law may be highly complex, but that should not be allowed to dictate a trial if the relevant issue is one which can be resolved without a mini-trial on the material before the court.

40.  In my view, the bank’s submissions accurately reflect the state of the evidence and pleadings.  It is clearly established that the defendant’s exchange transaction breached PRC law, and rendered him liable to an administrative penalty, albeit none has been imposed.

41.  The question is as to the effect of this illegality on the defence to the claim.  The bank submits that illegality when raised as a defence to a claim for unjust enrichment is concerned with acts which are contrary to public law and engage the public interest, and may extend to the infringement of rules attracting civil sanctions of a penal character (see eg in a different context Les Laboratoires Servier v Apotex Inc [2014] 3 WLR 1257 at para 25, Lord Sumption).  I accept this submission.  It is not unusual for breaches of financial regulations to attract civil rather than, or as well as, criminal penalties.  I agree that the PRC law provisions relating to exchange transactions applicable in the present case may fall within this category.  The defendant’s response is that no such administrative sanctions have actually been imposed, but this is irrelevant, because a determination or sanction by the relevant authorities cannot be a prerequisite for the doctrine of illegality to bar a claim or defence if otherwise available.

42.  The particular position of “underground banking” as a form of illegality has been considered in a number of the authorities that were cited to me, and it is necessary to examine these with some care to ascertain where the law presently stands. 

43.  The case of HKSAR v Yan Suiling (2012) 15 HKCFAR 146 concerned a charge of money laundering contrary to s 25 Organized and Serious Crimes Ordinance (Cap 455) (“OSCO”).  In her defence, the defendant claimed that she received the money pursuant to an underground currency exchange arrangement which she used to exchange sums of RMB for Hong Kong dollars in connection with her share investments in Hong Kong, and she did not know, and had no reasonable grounds to believe, that the money represented the proceeds of crime. The Court of Final Appeal held that if the defendant’s version was true, this would support her defence (para 24).

44.  However, the issue in that case is different from the issue arising in the present case.  Yan Suiling did not concern the legality of underground banking exchange transactions under PRC law.  If anything, such transactions were assumed to be unlawful (eg para 28). The transfers through underground banking arrangements were relevant so far as they may have provided support for the defendant’s case that she had no reason to believe that the money was the proceeds of crime (eg para 48). That question does not arise in the present case.  The issue is specifically whether the illegality of the exchange transaction precludes a defence to an unjust enrichment claim by a claimant to recover stolen money.

The defence of bona fide purchaser for value

45.  The bona fide purchaser principle is widely recognised in the law, and it is clear that it can operate as a defence to personal claims in unjust enrichment Goff & Jones, The Law of Unjust Enrichment, 9^th ed (para 29-12), and this is not in dispute.  As to the defence generally, see Lewin on Trusts (19^th ed) at para 41-117.  In principle, there is no reason why the defence should not be available to a claim in unjust enrichment against a party such as the defendant who purchases currency, even if the currency comes (as here) from stolen funds, provided, of course, that the party gave value for the purchase and acted in good faith and without notice of the fraud.  This is the defendant’s case.

46.  There is no suggestion that the defendant was on notice of the fraud. But based on Lipkin Gorman (A Firm) v Karpnale Ltd [1991] 2 AC 548, 575, the bank sought to argue that the bona fide purchaser principle cannot apply here because the defendant did not give value, since even if the currency exchange between the defendant and Mr Xu was a contract, it would have been void pursuant to Article 52 of PRC Contract Law, which provides that, “A contract is invalid under any of the following circumstances: … (5) mandatory provisions of laws and administrative regulations are violated”.

47.  The bank may well be correct as to this submission, but whereas the illegality of the exchange transaction is not really open to doubt, the precise effect under PRC law of the illegality on the arrangements (contractual or otherwise) between the defendant and Mr Xu, for example whether the money would be recoverable, is in dispute.  This is not a dispute which can be resolved on a summary judgment application.

48.  However, the bank maintains its alternative position which is that the defendant cannot be considered to have provided value for the currency because the exchange transaction was illegal, alternatively that the illegality of the exchange transaction itself goes to negative good faith on the defendant’s part.

49.  As regards the effect of such illegality, there are cases in point in which the underground banking system was considered.

50.  In Arrow ECS Norway AS v Xin ChengHoldings (International) Company Limited, HCA 239/2016, 12 May 2016, the plaintiff was the victim of a major fraud, and the issue was as to the continuance of an injunction against a defendant who had received part of the traceable proceeds of the fraud as a result of his use of the underground foreign exchange system.  Au-Yeung J ordered discharge of the injunction on the basis that there was a good arguable defence based on bona fide purchaser for value without notice or change of position without notice of the fraud.  Her Ladyship cited the HKSAR v Yan Suiling case to the effect that being a mere recipient of funds remitted through an underground banking system is not sufficient in itself find guilt (para 30).

51.  However, as was pointed out by DHCJ Keith Yeung SC (as he then was) in Grupo Arbulu s.l. v City Apex Holdings Ltd [2018] HKCFI 1351 (where the issue again was as to continuation of an injunction), “ … in Arrow ECS Norway, when counsel was making submissions on, and when Her Ladyship was considering the issues of “good faith” and “illegality”, their emphasis was not on any illegality that the underground foreign exchange system gave rise to, but on the illegality in connection with the offence commonly known as money laundering …” (para 42).  He further pointed out at para 41 that there was no evidence in that case (unlike present case) as to what PRC law had been breached (see para 33 of Arrow v Xin ChengHoldings).

52.  In BR CAT International Co Ltd v Hong Kong Proof Import and Export Trading Co Ltd, HCA 1023/2014, 22 September 2017, B Chu J applied these passages from Arrow ECS Norway. There is no reference to any evidence on the illegal nature of the underground foreign exchange system, but at para 92 Her Ladyship recorded her understanding that transactions under that system would be illegal under the law of Mainland China.  It seems however again that the effect of such illegality as raised in the present case was not before the court (Grupo Arbulu s.l. v City Apex Holdings, supra, at para 43).

53.  DBS Bank (Hong Kong) Ltd v Tian Wen Quan concerned another claim brought by the plaintiff bank in the present case against another second-level recipient in respect of the same fraud as in this case, in the context of an application to discharge an injunction. Among other defences, the defendant raised the bona fide purchaser defence on the basis that the funds were received pursuant to underground banking.  In rejecting this defence, Anthony Chan J saw “no answer to the illegality point, which would defeat Tian’s Bona Fide Purchaser claim” (see paras 34-37).

54.  The injunction was discharged on other grounds, a decision from which the bank appealed.  I was told that the case settled before the appeal came on.  Prior to then, the Court of Appeal refused leave to appeal on the judge’s rejection of the bank’s case as to the requisite knowledge for a knowing receipt constructive trust case.  The Court said that the judge was correct in holding that the mere use of underground money exchange is not sufficient to establish requisite knowledge ([2018] HKCA 65 at para 7). 

55.  This issue does not strictly arise in the present hearing, because the bank has not advanced a case in knowing receipt constructive trust on the summary judgment application.  However, there is in my view no inconsistency in holding that use of underground money exchange may defeat a defence of bona fide purchase to a claim in restitution to recover stolen money.  The necessary ingredients of the claims are different.  To succeed on a knowing receipt constructive trust claim, the plaintiff must show knowledge on the part of the defendant that the assets received are traceable to the fraud.  This is in substance very similar to the issue that arose in Yan Suiling where the prosecution had to prove that the defendant dealt with property which she knew or had reasonable grounds to believe represented the proceeds of crime.  In either case, it is established that the mere use of illegal underground banking is not enough to establish knowledge or belief as to ill-gotten gains.  However, in the present case, the question arises as to the effect of the illegality itself.  The question is not what the defendant believed about the origin of the US dollar funds that he received.

56.  Breach of exchange control is a form of illegality that has come before the courts relatively frequently: see Goode on Payment Obligations in Commercial and Financial Transactions, 3^rd ed, 2016, pp87-90.  In principle, the courts will not enforce an exchange contract which is contrary to exchange controls under the governing law.  Although the effect of illegality in restitution has been the subject of discussion and controversy, so far as the present issue is concerned, I consider the law to be correctly stated in Virgo, The Principles of the Law of Restitution, 3^rd ed, 2015, at p 659, where the author is dealing with the defence of bona fide purchaser: “The defendant cannot be considered to have provided value for the property if it was transferred pursuant to an illegal transaction.”  This in my view applies to the funds transferred to the defendant.  Nothing in the above authorities contradicts this conclusion.   

57.  In his careful submissions, Mr Colin Leung, counsel for the defendant, emphasised the defendant’s evidence that he relied on Mr Xu, who he said had experience of these matters, to deal with matters properly and legally.  It was up to Mr Xu, counsel submitted, how the exchange was to be executed, and the defendant had no reason to believe that it would not be executed lawfully.  That being so, the defendant acted in good faith whether or not the exchange transaction was illegal.

58.  Mr Charles Hollander QC on behalf of the bank responded that to make out such a case, the defendant’s evidence would have to lay a proper foundation, and there is nothing to show that the defendant believed that the exchange would be effected otherwise than by an underground currency exchange arrangement.  A bare assertion that he relied on his friend is not enough to rebut the conclusion that the defendant was well aware how it would be effected.

59.  In considering whether this raises a triable issue, the defendant pointed out that leave to defend should be given where the defendant raises any substantial question of fact or law which ought to go to trial or if the court has doubts or suspicion as to the plaintiff’s case: see Billion Silver Development Ltd v All Wide Investments Ltd [2000] 2 HKC 262 at 268C-D.  I also keep in mind what whilst avoiding a mini‑trial, the court will not take the defence at its face value, but will also consider the inherent probability of the defence (Time Rich 08 Ltd v DBE (HK) Ltd and others [2018] HKCA 404 at para 5.2, Cheung JA, citing Paul Y Management Ltd v Eternal Unity Development (CAVC 16/2008)).

60.  Though the defendant says that he was primarily a technical person unfamiliar with exchange transactions, he was also an experienced businessman, who had built up and sold a successful business.  It is not credible to suppose that he did not know how the exchange would be effected, and I do not accept that a triable issue is raised in this respect.

The defence of change of position

61.  That change of position is available as a defence to a restitutionary claim is not in dispute.  The defendant’s case is that he changed his position by transferring RMB1,025,000 from his Zhejiang Tailong Bank account to the bank account of Mr Xu and later the same amount was transferred to the account of Lin Changjin at Ping An Bank in Shenzhen.  The only aspect to be taken into account in this context, it is submitted, is good faith (Dextra Bank & Trust Co Ltd v Bank of Jamaica [2002] 1 All ER 818 at para 45).

62.  The bank relies on Lipkin Gorman (see above) at p 580C where it is said that “… it is commonly accepted that the [change of position] defence should not be open to a wrongdoer”.  It contends that the issue is settled by Arrow ECS Norway AS v M Yang Trading Ltd [2018] 5 HKC 317 in which the court gave summary judgment on the basis of illegality in a very similar context.

63.  The logical starting point for considering these submissions is Barros Mattos Junior v General Securities & Finance Ltd [2005] 1 WLR 247, where a bank fraud in Brazil resulted in the transfer of US dollars to the defendants in Nigeria who exchanged it into Naira and transferred it on.  Proceedings were brought in England to recover the funds. The defendants relied on a change of position defence on the basis that they had exchanged the money into Naira in good faith.  Though innocent of the fraud, it was held that the defendants could not rely on change of position where they had converted the money into local currency before paying it away to third parties, contrary to Nigerian legislation that required foreign exchange dealings to be conducted through authorised intermediaries. The fact that the illegality happened under what for the English court was foreign law, i.e. Nigerian exchange controls, made no difference.

64.  In Arrow ECS Norway AS v M Yang Trading Ltd [2018] 5 HKC 317, the plaintiff, a Norwegian company, was fraudulently induced to transfer US dollars to an account in Shanghai, from which part was transferred on to the defendants (second level recipients in Hong Kong), who transferred the money onwards to accounts in the Mainland.  The defendants relied on the change of position defence on the basis that they had paid out the relevant funds in good faith and in the usual course of their money changing business.

65.  In that case, Chow J found that in the case of some of the defendants, who were unlicensed, the receipts and payments out of their accounts occurred in the course of an illegal money service business carried on contrary to the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance, Cap 615. The defendant which was licensed had failed to comply with a raft of customer due diligence requirements so was carrying on the business in an illegal manner.

66.  In giving summary judgment, Chow J applied Barros Mattos, noting that the effect of the illegality in that case was based on the majority view in Tinsley v Milligan [1994] 1 AC 340 (c.f. Patel v Mirza [2017] AC 467), which has been adopted in Hong Kong – see Kan Wai Chung v Hau Wun Fai [2016] 5 HKC 585 at paragraph 8.7 (Cheung JA, with whom Yeung VP and Kwan JA agreed).  On that basis, if the recipients’ actions of changing position were treated as illegal, which they had been, the court could not take them into account, unless the illegality was so minor as to be ignored on the de minimis principle.

67.  The defendant seeks to distinguish Barros Mattos and Arrow ECS Norway v Yang Trading on various grounds.  It is said that unlike the defendants in Barros Mattoswho were directlyinvolved in changing the currency into Nigerian currency which rendered their actions illegal, the defendant himself did not commit any offence but relied on Mr Xu.  He was not involved in any way in the fraud.  Knowledge of the illegal conduct must be required to bar the defence, otherwise, the bank would also be debarred from making its restitution claim as it assisted in the fraudulent act by transferring the money.

68.  It is correct that the facts are different, in that the defendants in those cases were the parties that received and distributed the stolen funds in the course of a business, whereas the defendant in this case received the funds as the final leg of the exchange transaction.  But otherwise, the cases are indistinguishable, because the courts refused to allow a change of position defence where the relevant acts were illegal, as they are in this case.  The defendant’s submissions fail for the same reasons that ruled out the bona fide purchaser defence, namely that it is not necessary for the bank to show that the defendant knew of the fraud because the money was transferred pursuant to a transaction that was itself illegal, and the evidence does not support the proposition that the defendant did not know how the exchange would be effected. I conclude that the court should follow the decisions in Barros Mattos and Arrow ECS Norway v Yang Trading.

69.  I would have followed the result of these decisions even if (as some commentators consider) the judge in Barros Mattos put the test too high in suggesting that if the recipient’s actions in changing position are treated as illegal, the court will more or less automatically refuse to contemplate a change position defence.  Whether or not this is correct, in my view, the result is justified on the basis of public policy considerations regarding breach of exchange control regulations (see Virgo, cited above, at p 693), which apply equally, if not more so, in the present case.

Conclusion

70.  It follows that the bank is entitled to judgment for the sum of US$150,000 (or its HKD equivalent), together with pre-judgment interest.  On a nisi basis, the defendants should pay the costs of the action. The plaintiff bank has submitted a statement of costs for summary assessment

dated 3 January 2020. The defendant should submit any objections within seven days, and the matter will be dealt with on the papers.