Is it rule Britannia for crypto fraud and banking disputes?

Insight

09.05.2023

How far should the English Courts go to help the victims of cryptocurrency frauds? As far as possible, one might say. But what about when that assistance comes at a cost to third parties? Where should the Court draw the line then? That was the question answered by the Court in the recent case of Scenna v Persons Unknown [2023], in which Jolyon Connell and Charles Fursdon acted for one of the two successful banks. In this briefing, Jolyon and Charles explain the key lessons from the case, for both victims and third parties alike.

Most fraud claims start with the victim, upon discovering the fraud, suffering not only from an obvious sense of urgency but also a critical information disadvantage. Even more so with cryptocurrency frauds, in which digital assets can be defrauded at the click of a button by persons unknown lurking who knows where. Quite rightly, victims try to take steps to uncover the fraudsters’ identity and locations, so as to recover the stolen assets. As well as targeting the fraudsters themselves, those steps can also be aimed at third parties such as banks, who might hold information which will help to uncover the fraudsters.

The English Courts have emerged as a leading jurisdiction for victims of cryptocurrency frauds seeking to trace ill-gotten assets: laudably, the English Courts have been willing to apply the law (and to amend its procedural rules) in such a way as to resolve thorny legal issues and assist the victims in their pursuit. For example, the recent case of LMN v Bitflyer involved wide ranging disclosure orders (including of confidential personal or customer data) against third parties where the identity of alleged fraudsters, and the location of stolen crypto assets, are unknown to the claimant / victim but held by the third parties. These such cases have increased the perception that the English Courts are a “friendly” jurisdiction for victims of cryptocurrency fraud, but have also raised the question about how far such orders should go against third parties who are not themselves accused of any wrongdoing.

It was against this backdrop that two Canadian claimants in Scenna v Persons Unknown sought English disclosure orders against two Australian banks (and a Hong Kong bank which did not participate in the proceedings) who inadvertently held the bank accounts, into which the unknown alleged fraudsters were said to have transferred the US$2.9m alleged to be (unbeknownst to the banks) the proceeds of the crypto fraud. The disclosure orders sought would have obliged the banks to provide confidential customer information to the claimants. The claimants also advanced substantive claims against the banks for breach of constructive trust, unjust enrichment and knowing receipt.

Judgment

The Court overturned the disclosure order, which had originally been granted at an urgent hearing without notice to the Australian banks. In doing so, the Court made it clear that:

the key issue, as per the test set out in the earlier case of Kyriakou v Christie & others [2017], is for the Court to balance the interests of the applicant in obtaining the disclosure against the detriment to the respondent in providing it. In undertaking this exercise, the Judge applied the principles set out in another key case (Mackinnon v Donaldson & others [1986]) in which it was held that only in exceptional circumstances should an English court impose a disclosure requirement on a foreign person, and in particular a foreign bank. In the Scenna case, the Judge found that there were no exceptional circumstances justifying a departure from the general rule. On the contrary: complying with the putative English disclosure order would have required the Australian banks to act in breach of Australian banking and privacy laws which prohibited the disclosure of confidential customer information in the absence of an Australian court order. The English Court therefore refused to order disclosure by the foreign banks,
the most typical exceptional circumstance (justifying the imposition of a disclosure obligation on a foreign third party) might be extreme urgency. In cases of “hot pursuit”, the Court might be more likely to consider that the balance of interests lay in favour of the victim who was taking urgent and immediate action to pursue the fraudster. However, in the Scenna case, the victims had been aware of the fraud (which took place in March 2022) since at least June 2022 but had waited until October 2022 to commence the English Court proceedings. Rather than being a case of “hot pursuit”, the Judge considered the pursuit in Scenna to be “lukewarm”, and
the English Courts will not accept jurisdiction where England is not the appropriate forum. In this case, England was not clearly or distinctly the appropriate forum given the claim by two Canadians concerned the disclosure by an Australian bank of information located in Australia, where a key issue was the application of Australian law. The Court accepted the submission of the banks that there was nothing to stop the claimants from applying to the Australian courts for the equivalent disclosure orders. The decision in LMN v Bitflyer could be distinguished because that was a case where the location of the relevant assets / information was unknown and indeed there was a real possibility that they were within the jurisdiction. By contrast, in the Scenna case, the claimants had a clear alternative remedy (of applying in Australia where the relevant information was located) and there was no risk of the claimant having to make the “speculative applications” in multiple jurisdictions of the type considered by the Court in Bitflyer.

The Court also dismissed entirely the substantive claims against the banks for breach of constructive trust, unjust enrichment and knowing receipt because: (i) there was no serious issue to be tried against the banks, and (ii) in any event, England was not clearly or distinctly the appropriate jurisdiction. As to the latter, the claimants were in Canada and the only active defendants were in Australia. It was therefore likely that witnesses would come from those countries. Neither was it clear which law would apply. The only nexus to England was that the principal fraudsters had held themselves out as being employed by a company which was registered in the UK, but in reality there was no evidence that the company was actually operating here.

What this means for fraud victims and third parties (such as banks)

While England remains a strong jurisdiction in which victims of fraud, especially cryptocurrency fraud, can pursue justice and the recovery of assets, the following lessons arise from the Scenna case:

victims need to think carefully before issuing proceedings in England where the nexus to England is weak. Misjudged claims can result in wasted time and, as in the Scenna case, significant costs (including the respondents’ costs) being incurred without any real benefit,
while banks occupy a unique position under English law in terms of customer privacy and disclosure obligations, some of the principles underlying the Scenna judgment ought to apply more widely than just to banks and may provide a basis on which other (non-bank) third parties, particularly those based overseas, can attempt to resist disclosure orders. It will be interesting to see how the case law develops in this area,
consideration should always be given to foreign law. In particular, whether compliance with an English order might put the respondent to a disclosure order in the invidious position of having to breach foreign law to comply with the English order, as well as whether equivalent orders might be obtained in the foreign jurisdiction, and
that said, due to its willingness to grapple with the difficulties of tracing digital assets, in the right circumstances the English courts will rightly remain an attractive forum for obtaining freezing injunctions, disclosure orders and other forms of relief, particularly in “hot pursuit” cases. Victims should therefore act quickly and seek legal advice as soon as they become aware of the fraud.

Jolyon Connell and Charles Fursdon acted for Australia and New Zealand Banking Group in this case and instructed Edward Harrison of Brick Court Chambers.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.