Digital asset fraud and the challenges of claims against unidentifiable fraudsters (Tippawan Boonyaem v Persons Unknown)

United Kingdom

Introduction

The High Court’s recent judgment in Tippawan Boonyaem v Persons Unknown [2023] EWHC 3180 (Comm) demonstrates the challenges faced by victims of digital asset fraud, who are typically defrauded by unidentifiable fraudsters operating online.

English and Welsh procedural law allows claims to be brought against anonymous defendants as “persons unknown”, but only if those defendants are identifiable to some degree.  This presents a problem for victims of digital asset fraud who wish to obtain judgments against unidentifiable fraudsters.

The High Court has been prepared to offer some flexibility to help victims of digital asset fraud.  They have allowed victims to bring proceedings against unidentifiable fraudsters as “persons unknown” for the purposes of obtaining interim relief, such as freezing and disclosure orders that may help victims recover their misappropriated assets.  However, Tippawan Boonyaem v Persons Unknown shows that the High Court will not extend this flexibility to grant final judgments against unidentifiable fraudsters.

We examine the judgment in more detail below.

Background

The investment scam

The claimant fell victim to an investment scam perpetrated by an individual calling himself “Suthep Chansudarat” (SC) who contacted her via Facebook.  The scam followed a typical pattern:

  • SC told the claimant he had made good profits from trading cryptocurrency on a supposed “INGFX” platform, that he wanted her to make such profits, and that he had opened an INGFX account for her.
  • SC persuaded the claimant to purchase Tether (USDT) and to send it to various wallet addresses, saying that he and INGFX would invest it on her behalf.
  • When, in due course, the claimant wanted to withdraw her supposed profits from INGFX, SC persuaded her to send more USDT, claiming it was for tax, withdrawal fees and insurance.  He then disappeared and the claimant’s attempts to contact INGFX proved futile.

The claimant instructed solicitors and cybersecurity experts, who linked the supposed INGFX platform to an English company, INGFX Limited.  The cybersecurity experts also tried to locate the proceeds of the USDT 425,836.62 that the claimant had sent, producing a list of the “last hop” wallet addresses that they could trace them to.  Those wallets were hosted on various crypto exchanges.

The proceedings

In 2023, the claimant brought High Court proceedings against INGFX Limited and two categories of “persons unknown”.  The Category A “persons unknown” were, in summary, persons describing themselves as being connected to SC or INGFX.  The Category B “persons unknown” were, in summary, persons operating/owning the “last hop” wallet addresses.

In August 2023, on application by the claimant, the High Court made freezing orders against the defendants to prevent them from dealing further with relevant assets.  It also ordered them to provide certain disclosure.  The defendants neither provided that disclosure nor acknowledged or defended the proceedings.  This is unsurprising, given the allegations against them.

The claimant went on to seek summary judgment in respect of her alleged proprietary claim to the traceable proceeds of her USDT, and her alleged claims for equitable compensation/damages for deceit, fraudulent misrepresentation and/or unlawful means conspiracy.  She also sought continuation of the freezing and disclosure orders.  The defendants did not appear at the hearing.

The judgment

The proprietary claim

The judge (Mr Salter KC) considered the claimant’s alleged proprietary claim to the traceable proceeds of her USDT, referring to the rule in Westdeutsche Bank v Islington LBC [1996] AC 669 that:

… when property is obtained by fraud, equity imposes a constructive trust on the fraudulent recipient: the property is recoverable and traceable in equity…

Has the USDT been obtained by fraud?

The judge was satisfied that the claimant was the victim of a fraudulent scheme to deprive her of her USDT: her evidence was neither obviously incredible nor contradicted by any evidence from the defendants.

Was the USDT “property”?

The judge found that the USDT was “property”.  He acknowledged that there is still some controversy in academic circles about whether digital assets can be regarded as property, despite the conclusion of the UK Jurisdiction Taskforce,[1] the Law Commission,[2] and an unbroken line of judgments that they can be.[3]  However, he did not think it was necessary to concern himself with that debate, given it would be wrong for him to deviate from the line of judgments (unless he considered them obviously wrong, which he did not).

The judge was satisfied that there was the necessary coordination to allow the USDT sent by the claimant to be traced into the “last hop” wallet addresses.[4]  He found that the claimant was entitled, in principle, to a declaration that the USDT at the “last hop” wallet addresses was her property and to an order for delivery up of that USDT to her order.

Against whom should the orders be made?

Next, the judge turned to consider against which of the defendants that order should be made: the Category A “persons unknown”, the Category B “persons unknown” and/or INGFX Limited.

Category A “persons unknown” 

English and Welsh procedural law recognises different categories of “persons unknown”.  One of those categories is “persons unknown” who are anonymous and who cannot be identified (such as most hit-and-run drivers).  It is not possible to bring proceedings against this category of “persons unknown”.  This is because it is not possible to locate them, communicate with them, or know without further enquiry whether they are the same persons described in the claim form.

The judge considered that the Category A “persons unknown” were anonymous and could not be identified.  The claimant did not know who they were, and the fact they had perpetrated the fraud was insufficient to determine them.

The judge acknowledged that, in reality, the courts have taken a pragmatic approach in fraud cases involving digital assets, allowing claimants to bring proceedings against unidentified fraudsters and granting interim relief (e.g. freezing and disclosure orders) to help claimants recover the proceeds of fraud (insofar as possible).  However, the judge drew a distinction between granting interim relief and granting final judgment.  He was not prepared to give final judgment against the Category A “persons unknown”, holding that they “cannot properly be sued to judgment until they can be identified”.  The practical utility of any final judgment against the Category A “persons unknown” is questionable: the claimant would not have been able to enforce it against individuals she could not identify.

Category B “persons unknown”

English procedural law recognises, as a separate category of “persons unknown”, defendants whose names are not known but who can be identified (e.g. squatters in a property).  It is possible to bring proceedings against this category of “persons unknown”, provided the proceedings can be brought effectively to their attention.

The judge considered that whilst the names of the Category B “persons unknown” in this case were unknown, those persons were nevertheless identifiable.  This was because they would have to identify themselves to lay claim to the contents of the “last hop” wallet addresses.  He paused to consider whether the claimant should have obtained disclosure of the names of the Category B “persons unknown” from the crypto exchanges before applying for summary judgment.  The claimant’s counsel persuaded the judge that this would be disproportionate, given it would delay the proceedings and given the proceedings had been brought to the attention of the Category B “persons unknown”.

In order to give summary judgment against the Category B “persons unknown” on the proprietary claim, the judge had to find that those “persons unknown” had no prospect of successfully defending the claim and that there was no other compelling reason why the claim should be disposed of at trial (CPR r 24.3).  The judge acknowledged that if the Category B “persons unknown” were bona fide purchasers for value of the relevant assets, they would be able to defeat the claimant’s claim to trace into the “last hop” wallets.  However, the Category B “persons unknown” had not engaged with the claim and had not raised this defence.  Given this, the judge was prepared to give final judgment against them.

INGFX Limited

The judge also gave summary judgment against INGFX on the proprietary claim, noting that it had also chosen not to defend the claim.

Other claims

The judge adjourned the claimant’s application for summary judgment on her remaining claims (i.e. for equitable compensation and/or damages for deceit and/or fraudulent misrepresentation and/or unlawful means conspiracy).  This was because of issues including that the claimant was unable to identify the Category A “persons unknown” and that the claimant was unable to particularise her losses without first enforcing her proprietary claim. 

Freezing and disclosure orders

The judge continued the freezing and disclosure orders against the Category B “persons unknown” and INGFX Limited, albeit he was sceptical about the usefulness of continuing the disclosure orders given they had previously been ignored.  He was not prepared to continue the freezing and disclosure orders against the Category A “persons unknown”, given they could not be identified with sufficient certainty to make those orders enforceable.

Commentary

It is wholly understandable that victims of digital asset fraud may want to bring proceedings to fix the fraudsters with civil liability and to try to recover their losses.  However, this judgment demonstrates some of the very significant challenges they face in doing so.

Digital asset frauds are typically perpetrated by fraudsters who hide their identities by operating online.  This leaves their victims unable to identify them and, as shown by this judgment, unable to pursue them to final judgment.

Where victims can pursue claims to judgment, the proportionality of the costs of doing so is an important factor to bear in mind.  In this case, the claimant spent at least £70,000 obtaining summary judgment against the Category B “persons unknown” and INGFX Limited on her proprietary claims.  It is not clear from the judgment what recovery this will allow her to make and what future sums she may need to incur in doing so.  In particular, the judgment shows that the claimant has not sought disclosure from the crypto exchanges that host the “last hop” wallet addresses.  It is not clear what comfort she has that the “last hop” wallet addresses still hold the proceeds of her USDT.  Further, the claimant may need to take further steps to ensure that crypto exchanges based outside England and Wales recognise the court’s judgment that proceeds in the “last hop” wallet addresses belong to the claimant, at further cost to her.

Recently, we have seen claimants attempt to pave a different path to recovery by suing crypto exchanges that host “last hop” wallets.  They have sought to establish that those crypto exchanges hold proceeds on constructive trust for the claimants and, to the extent proceeds have been transferred out of the “last hop” wallets, that the crypto exchanges allowed this to happen in breach of trust.  Whilst these arguments continue to be tested, it is notable that in the only case in which a crypto exchange has challenged these types of allegations, the judge doubted the constructive trust claim could succeed.[5]

These difficulties highlight the necessity of remaining vigilant when transacting online.
 

[1] Please see our LawNow on the UK Jurisdiction Taskforce’s Legal Statement on the Status of Cryptoassets and Smart Contracts here.

[2] Please see our LawNows on the Law Commission’s ‘Digital Assets: Consultation Paper’ here and here, and the Law Commission’s final report here.

[3] By way of example, please see our LawNow on AA v Persons Unknown [2019] EWHC 3556 here.

[4] The test of “co-ordination” arises from the Privy Council case of The Federal Republic of Brazil v Durant International Corporation [2015] UKPC 35, [2016] AC 297. Broadly, the case concerns backwards tracing, which is where a claimant seeks to trace into an asset which a fraudster had acquired before the breach of trust. The Privy Council held that a claimant can backwards trace, provided that when looking at the transaction as a whole, there is a “a co-ordination between the depletion of the trust fund and the acquisition of the asset which is the subject of the tracing claim”.

[5] Please see our LawNow on Piroozzadeh v Persons Unknown [2023] EWHC 1024 (Ch) here.