Fraud fundamentals: what 'tools' are available to assist in civil fraud?

You may know or suspect that you have been defrauded, but don't know the identity of the fraudster, or what has happened to misappropriated assets. There are various orders that can be sought from the English court to assist with legal proceedings, particularly with tracing and preserving assets and in this instalment of our 'Fraud fundamentals' series, we touch on some of the 'tools' that might be able to help.

Fraudsters act quickly and you should seek urgent legal advice if you have or suspect you have been defrauded. Considering who might hold relevant information and documents evidencing the fraud and identifying the location of misappropriated assets early on is important and could make all the difference to any recovery. Any delay may also hinder the prospects of obtaining orders to assist you.

Third party disclosure orders

While the alleged fraudster is an obvious source and it might be possible to obtain an order for 'pre-action' disclosure against them (if known), it is often difficult to obtain and you will usually not want to tip the fraudster off that you are on to them. The focus will typically be on third parties who are bound up in the fraud, innocently or otherwise. Depending on the nature of the fraud, this could include banks and typically a number of them in different jurisdictions where money has been moved into numerous accounts, quite often in quick succession.

The circumstances and parties involved will guide the different disclosure options to consider, with two main third party disclosure options in England being:

• A Norwich Pharmacal order (derived from Norwich Pharmacal Co v Commissioners of Customs & Excise [1973]) - an order against a third party who is bound up in the wrongdoing (innocently or otherwise and who is unlikely to be a party to any subsequent claim), requiring it to disclose certain information and/or documents to the applicant. It could be used to identify the wrongdoer, set out the facts required to bring a claim or to trace assets.
• A Bankers Trust order (derived from Bankers Trust Co v Shapira [1980]) - an order requiring a bank or other financial organisation such as a cryptocurrency exchange believed to be holding misappropriated funds to disclose information and/or documents. Its purpose is to seek disclosure of confidential documents to support a propriety claim to trace assets. An example would be use in a cheque fraud where the applicant is looking to trace their money and discover what has happened to it. To obtain an order there needs to be a clear case that the victim's funds have been misappropriated, are held by (or have passed through) the relevant account(s) and there is a real prospect that the information might lead to the location or preservation of the funds.

See our note regarding the amendment to the Civil Procedure Rules effective from 1 October 2022 that removes the previous uncertainty around service of these orders out of the English jurisdiction.

Search orders and freezing injunctions

It may also be appropriate to apply for a search and seizure order to recover and preserve evidence and/or apply for a freezing injunction to freeze assets, such as money in bank accounts, to stop any further dissipation and increase recovery prospects. Particularly in large complex frauds, a co-ordinated approach in a number of jurisdictions will often be required which may involve applying for one or more of these orders (or others), as well as seeking judicial assistance from a foreign court such as via letters rogatory or applying to foreign courts for relief available in the relevant jurisdiction(s).

• A search order requires a respondent to permit an applicant's representative (usually their solicitor) to enter the respondent's premises to search for, copy and remove documents or material. The purpose is to preserve evidence or property which is or may be the subject of legal proceedings, and may be obtained where a less intrusive remedy (such as an order for delivery up or preservation of documents) may not be sufficient as there is a real possibility of the destruction or disposal of them if prior notice is given. Given its draconian nature, one of the safeguards in place is the requirement for an independent 'supervising solicitor' to be appointed by the applicant to supervise and report (to the court) on the search and to hold the seized evidence until the court gives permission for it to be reviewed.

• An asset freezing injunction restrains a party from disposing of or dealing with assets pending judgment or enforcement, and can be applied for in support of English or foreign court or arbitration proceedings. It may freeze assets in England and Wales (domestic) and/or in other jurisdictions (worldwide) and can in principle freeze any asset including bank accounts, vehicles, land, cryptocurrency and shares and assets held jointly or by a third party on behalf of a respondent. Ancillary orders may also be applied for to support the injunction, including for the respondent's cross examination, delivery up of assets and the appointment of a receiver.
• It is possible to obtain a freezing injunction against persons unknown (but must be described). A freezing injunction can often be a springboard for other forms of relief against third parties, and freezing bank accounts for example will not only be important to preserve misappropriated funds but can be used to obtain information to assist in identifying defendants. If applying for a worldwide freezing order, consideration should be given whether to seek permission at the same time to enforce the order out of the jurisdiction, or whether relief in the local foreign court(s) would be more appropriate.
• A freezing injunction does not provide security over the fraudster's assets and the victim will rank as an unsecured creditor in the event of the fraudster's insolvency. The interplay between fraud and insolvency will be covered later in this article series.

Points to note when applying for one of these orders

When applying to the English court for any of the above orders it will be necessary to satisfy the conditions applicable to them and it is usual for an application for these orders to be issued 'without notice' to the respondent, so as to avoid tipping off the suspected fraudster thereby giving them an opportunity to dissipate assets or destroy evidence. The applicant therefore has a duty to give full and frank disclosure to the court, requiring them to disclose all matters that are material to the court in deciding whether to grant the order, including disclosing any defence to the underlying claim that the respondent may raise. These orders typically also come with a gagging order preventing third parties (such as banks) from notifying anyone of the order (including their customer), and penal notices giving notice that failure to comply with the order may result in committal for contempt of court which includes third parties served with the injunction or non-parties knowingly aiding and abetting a breach of the injunction by the respondent.

The applicant will be required to provide a cross undertaking in damages to compensate the respondent should they suffer damage as a result of the order and it transpires that the order should never have been made.

If an order is granted, it will be served on the respondent as well as third parties so that steps may be taken to comply with it (such as banks freezing accounts) and there will be a later return court hearing at which the respondent will have an opportunity to apply to vary or set aside the order.

Key takeaways

A key takeaway is that if you have been the subject of a fraud, it is important to take urgent action to increase the prospect of tracking down and preserving assets. Similarly, if you are the recipient of one of these orders it is important not to ignore it - prompt action should be taken, particularly in relation to a freezing injunction or search and seizure order as these can cause difficulties for your business and failure to comply may result in contempt proceedings.

To discuss the issues raised in this article in more detail, please contact a member of our team.