New Tools for Fraud and Asset Tracing between Hong Kong and China?

Introduction

Many experienced fraud and asset tracing practitioners have come to realize over the years that when defrauded monies are dissipated into Mainland China, asset tracing becomes extremely difficult and more often than not, victims of fraud are advised to focus their efforts for recovery in other jurisdictions.

With the new reciprocal of enforcement of judgment regime between Hong Kong and Mainland China coming into effect on 29 January 2024, it may be time to revisit what tools may potentially be available from a Hong Kong perspective.

What’s New in Hong Kong?

The new regime in Hong Kong covered by the Mainland Judgments in Civil and Commercial Matters (Reciprocal Enforcement) Ordinance (Cap. 645) (“REJ”) will supersede previous arrangements under the Mainland Judgments (Reciprocal Enforcement) Ordinance Cap 597 (“MJREO”). 

Two key features of the new regime:

Non-Monetary Judgments: The availability of reciprocal enforcement for non-monetary judgments is game-changing. Previously, only monetary judgments could be the subject of reciprocal enforcement between Hong Kong and Mainland China.

Removal of Exclusive Jurisdiction Requirement:  Previously, only contractual disputes containing an exclusive jurisdiction clause for either Hong Kong or Mainland China could be the subject of reciprocal enforcement. This is no longer the case and arguably removes the single most significant barrier for reciprocal enforcement.

While there are a number of exclusions under the new regime, it is important to bear in mind that interim measures such as injunctions and freezing orders cannot be the subject of reciprocal enforcement under the new regime.  

Disclosure Orders against Mainland Chinese Banks?

One of the primary barriers for asset tracing in China is the very difficult task of obtaining information from Mainland Chinese banks.  

In Hong Kong, the Courts regularly grant disclosure orders (“Bankers Trust Orders”) against banks alongside freezing orders. However, these orders are arguably interim in nature as they do not form a standalone proceeding and would not therefore meet the requirements for reciprocal enforcement pursuant to the REJ.

On the other hand, a Norwich Pharmacal application is arguably a standalone proceeding in Hong Kong capable of being a full and final judgment. There is some support for this view in the UK case of AB Bank Limited v Abu Dhabi Commercial Bank [2016] EWHC 2082 (Comm) where it was held that for the purposes of service out of the jurisdiction, a Norwich Pharmacal order constitutes full and final relief rather than interim in nature. 

If the usual requirements for a Norwich Pharmacal order can be satisfied and there is a sufficient factual connection to Hong Kong (e.g. monies passing through Hong Kong bank accounts to Mainland China), the resulting disclosure order can potentially be enforced in Mainland China giving valuable intelligence to an otherwise hopeless recovery.

This intelligence can then be used to establish a proprietary interest in assets. Even if such assets are based in China, a Hong Kong court declaration may be effective for enforcement against those Chinese assets. 

Public Policy Considerations

It is important to note that once a judgment is registered for enforcement pursuant to the new regime, there is still discretion to set that registration aside.

For the Hong Kong side, the REJ provides that the Hong Kong courts may set aside registration of a Mainland Chinese judgment if enforcement of that judgment would be contrary to public policy.

The comprehensive data privacy laws of Mainland China passed in 2021 must be critically borne in mind when seeking any disclosure of information from Mainland China. Practitioners will need to work closely alongside their Mainland Chinese counterparts to obtain relevant exemptions and waivers to give practical effect to any information obtained.

Final Remarks

Some degree of asymmetry is to be expected given prior experience of reciprocal arrangements between China and Hong Kong.  

On one hand, insolvency practitioners will be aware that since 2021, mutual recognition and assistance to insolvency proceedings between Mainland China and Hong Kong has resulted in only a few Hong Kong liquidators being recognised in China despite many more requests for assistance being made.

On the other hand, for international arbitration practitioners, the Mainland China and Hong Kong interim measures in aid of arbitral proceedings arrangement has been in force since 2019 and has produced remarkable results with more than US$2.3 billion in assets being the subject of freezing orders as at October 2023.

Overall, the ability to enforce Hong Kong common law remedies in China more readily is truly ground-breaking and has potentially wide-ranging implications. Time will tell whether such remedies will be of practical use in asset recovery across Mainland China and Hong Kong.  

This article was originally published in thoughtleaders4.