COVID-19 and PPE fraud – a Hong Kong perspective
Unscrupulous COVID-19 scammers
It will come as little surprise that since the start of 2020 there has been unprecedented demand across the globe for Personal Protective Equipment (PPE) – in particular for disposable face masks, gloves and surgical gowns. At the outset of the pandemic, these items were needed to supply and protect front-line health workers. Of late there has been wider demand from the public at large as the pandemic spreads. Unfortunately, opportunists see these events as a chance to cash in and profit from people’s anxieties.
In the APAC region, and being a global manufacturing hub, China has become a provider of much of this PPE. Many contracts for the supply of Chinese products are arranged through Hong Kong sales entities and middlemen – the supply of PPE is no exception to this rule. With this we have witnessed a sharp increase in fraud schemes associated with PPE transactions all around the globe. There have been thousands of online PPE scams reported to the Hong Kong authorities since the start of this year.
In our experience there have been 2 main types of PPE fraud:
- Low quality or defective PPE: fraudsters assert that they will provide PPE which meets a defined standard (Chinese standard - KN95, US standard - N95, or European standard - FFP2, etc.). The PPE is delivered but is of such low quality that does not meet the required standard. There have reports in the media of such items arriving with falsified paperwork and/or kite-marking.
- Non-existent PPE: fraudsters offering to sell non-existent PPE. After the customer wires payment to the fraudsters’ bank account the fraudster vanishes and no PPE is delivered. The victim then seeks recovery of the money paid.
While due diligence may not have been performed to the highest level (owing to time pressure or difficulty in sourcing PPE) it is regrettable that those in need have fallen victim to sophisticated fraudsters. At FitzGerald Lawyers we are happy to engage with, and where possible assist, those who are affected. What follows is a heads-up on what to look for in any recovery action.
Where did my money go? What can be done?
- Consider taking prompt action to preserve whatever is left in the fraudster's Hong Kong bank account to avoid being left with a worthless paper judgement.
- In the event of a non-existent PPE fraud, report the scam to Hong Kong police as soon as possible. Hong Kong police may issue a “no consent” letter over the fraudsters bank account, which in some respects has the effect of freezing the funds in that account without the need for an injunction. Note though, that such a letter will only remain in place for a limited period of time.
- Consider applying for a regular civil freezing order (also known as a 'Mareva injunction') in the Hong Kong High Court.
- Consider a worldwide Mareva injunction to freeze the fraudster's assets located both in Hong Kong and abroad.
- Factor in the likely cost of obtaining a Mareva injunction and remember there is no guarantee that funds will remain in the fraudster's bank account once you obtain the court order.
Follow up civil action – non-existent PPE
Injunctive relief in Hong Kong will only preserve the funds in the fraudster's bank account along with any other assets. Entitlement to the funds and assets must be established by way of a civil action against the holder of the relevant bank account and/or the fraudsters (if they are different).
A victim purchasing non-existent PPE may be able to set out a case for unjust enrichment, constructive trust, knowing receipt and dishonest assistance. If the defendant stays silent following the commencement of Hong Kong proceedings, the victim should apply for default judgment, with garnishee proceedings to follow against the bank compelling them to transfer the ill-gotten funds to the victim directly.
Follow up civil action – defective PPE
The approach here is less clear-cut, as the victim has received PPE, albeit not of the required or agreed standard. Consider the following in the context of the contract with the supplier:
- Misrepresentation: the victim may have relied on misstatements made by the fraudsters (fraudulent and/or negligent). The victim may choose to retain the products delivered items but sue for damages instead, or try to rescind the contract and secure a refund.
- Express terms: the contract may specify the particulars of the PPE to be supplied and reference the requisite standard. Failure to supply PPE commensurate with contract terms constitutes a breach.
- Implied terms: under Hong Kong law, terms going to merchantable quality, fitness for purpose and conformity with description may be implied into the contract under the Sale of Goods Ordinance.
- Other factors: also consider governing law, dispute resolution clause, exemption clauses etc.
It is important for victims of PPE fraud to be aware of the pros and cons of the various legal options so that an informed decision can be made. Importantly, victims must act swiftly and take steps to recover the lost funds before they are dissipated by the fraudsters.
If you have been the victim of unscrupulous PPE fraudsters, and there is a Hong Kong element to your claim please contact Peter McCullough of FitzGerald Lawyers.
See also our article on Are you a victim of CEO fraud?
This alert is for information only and is not legal advice.