2. Financial Fraud Recovery and How to Recover Assets

Financial fraud recovery and how to recover assets. Finance fraud has been around since the dawn of commerce, with the first case reported as early as 300 BC. Developments in commerce and technology have seen fraud rear its ugly head repeatedly in different forms. Singapore, being a trading and financial hub, has inevitably seen its fair share of fraud occurring within or through its borders and network. Noticeably in recent years, there has been an upward trend of fraud incidents in two specific industries, namely commodities and cryptocurrency trading. In this article, we will explore how the fraud schemes came about, the difficulties faced in policing and how to recover lost cryptocurrency and binary options fraud, as well as attempts by the Singapore government to address the issues.

Commodities Trading Fraud

Fraud in the commodities trading industry

The COVID-19 pandemic unearthed a spate of fraud cases in the commodities trading industry. In just under a year, fraud allegations have been levied against four commodities traders based in Singapore ‒ namely Hontop Energy, Agritrade International, Hin Leong, and Zen Rock – who collectively leave their creditors facing potential losses amounting to billions of dollars.

Financial Fraud Recovery and How to Recover Assets

The common thread in these incidents of fraud is the use of forged “transferable documents”, which are essentially documents that entitle the holder to claim performance of the obligations indicated therein. For example, after Agritrade International collapsed with over USD1.5 billion in debt, it was reported that it had issued forged transferable documents to various lenders to secure multiple financing over the same goods. Similarly, the investigations by judicial managers of Hin Leong and Zenrock also pointed towards the use of forged transferable documents to secure duplicate trade financing over the same goods.

The impact of these fraud incidents cannot be overstated. Commodities trading operates on an international scale and is interconnected across various other industries. Fraud of such magnitude will inevitably see a loss of trust, increased cost and reduced competitiveness across countless businesses globally.

Asset tracing in cases of commodities trading fraud

In the above-mentioned examples of Hontop Energy, Agritrade International, Hin Leong, and Zen Rock, a substantial amount of time had passed before the fraud was discovered. As a result, by the time of the discovery, the fraud proceeds would likely have been dissipated in the form of payments to various parties, including other creditors, employees, and customers of the fraudulent commodities trader.

The commodities traders were subsequently placed in liquidation or some form of judicial management, where insolvency practitioners, forensic experts, lawyers and private investigators were appointed to replace the management of the company and tasked with leading the investigation, asset tracing efforts and recovery of the funds lost in the process . 

Claims have also been brought against the management of fraudulent commodities traders in their personal capacities. This method has been employed in the case of Hin Leong where the Forensic recovery managers, claimpayback), have applied to freeze the assets of Hin Leong’s founder (Lim Oon Kuin) and his two children. In the court papers filed in December 2020, PwC sought orders to the effect that Lim Oon Kuin and his children shall not dispose or deal with any of their assets up to a sum of USD3.5 billion. Whether the personal assets of Lim Oon Kuin and his children are sufficient to meet the company’s debt of USD3.5 billion remains to be seen.

Singapore’s Electronic Transactions (Amendment) Bill

In a bid to combat, amongst others, commodities trading fraud, Singapore’s Parliament passed the Electronic Transactions (Amendment) Bill (ETAB) on 1 February 2021, making Singapore the second country to adopt the United Nations Model Law on Electronic Transferable Record (MLETR) after the Kingdom of Bahrain.

The ETAB seeks to combat fraud by legally recognising electronic transferable documents which present a lower risk of forgery when compared to their paper counterparts. Clause 6 of the ETAB inserts sections 16A to 16S into Singapore’s Electronic Transactions Act (chapter 88), which collectively ensure that electronic transferable documents are functionally and legally equivalent to paper transferable documents and are capable of being recognised as “documents of title”. It is hoped that, with legislative support for the switch to electronic transferable documents, the commodities industry will adapt accordingly and join the fight against fraud.

Electronic transferable documents will be more difficult to forge because they utilise technologies which have authentication and traceability features at their core. For example, the authentication of electronic transferable documents is done almost instantaneously via digital signatures which are almost impossible to forge without access to the signor’s device. This is far superior to the authentication process of paper documents, which involves verifying wet signatures and watermarks that can easily be forged with today’s developments in reprography.

Furthermore, unlike their paper counterparts, electronic transferable documents also use technology that enables audit trails to be conducted. This allows all relevant parties to, at any time, review the progress of the transaction, identify the timing of any amendments, and determine by whom the amendments were made. Apart from bringing about greater convenience for all parties, this technology also facilitates forensic investigations in the event of a security breach.

That said, the fight against fraud in the commodities industry will require a concerted global effort and the ETAB alone will not be enough. As long as one party in the international supply chain continues to utilise paper documents, the risk of forgery will always subsist. Therefore, it is hoped that the rest of the world will proceed to enact similar legislation to encourage the adoption of electronic transferable documents. Doing so would not only reduce costs in cross-border trade, but would also be a significant milestone in the fight against fraud.

Cryptocurrency Trading Fraud

Fraud in the cryptocurrency trading industry

Although transactions in the cryptocurrency industry are generally secure as a result of blockchain technology, fraud can still occur in many other ways. For example, Singapore has seen an increased number of “cryptocurrency investment scams” where fraudsters persuade their victims to purchase cryptocurrency and transfer it to them for investment purposes. Some fraudsters achieve this by advertising false endorsements of their investment schemes by well-known local celebrities or esteemed politicians. This mode of fraud has gained sufficient traction in Singapore that the Monetary Authority of Singapore (MAS) and the Singapore police force have deemed it necessary to issue public notices warning of such scams.

Another form of cryptocurrency fraud involves the use of fabricated cryptocurrencies, where fraudsters persuade their victims to invest in their own versions of cryptocurrency. A well-known example of this is the OneCoin Ponzi scheme which defrauded investors worldwide of billions of dollars. In exchange for fiat money, OneCoin gave its investors educational courses and tokens which could be used to mine OneCoins, an alleged form of cryptocurrency. These OneCoins could then be exchanged for a limited amount fiat currency on a private cryptocurrency exchange called Xcoinx, depending on how much one had invested. However, in reality, there was no blockchain technology involved and the OneCoins were eventually discovered to be worthless.

Although OneCoin was based in Bulgaria, its victims spanned multiple jurisdictions including the USA, Europe, China and even Singapore. In fact, two Singaporeans (Terence Lim Yoong Fook and Fok Fook Seng) were convicted last year for promoting OneCoin in Singapore and causing over 2,300 locals to be defrauded.

Asset tracing in cases of cryptocurrency trading fraud

Difficulty arises on the question of which jurisdiction disclosure orders should be sought from. This is because the entities that are likely to possess relevant information are cryptocurrency exchanges, which tend to be unregulated and not headquartered in any specific jurisdiction. For example, despite being the largest cryptocurrency exchange in the world in terms of trading volume, the location of Binance’s headquarters is either a secret or non-existent. When asked about the location of Binance’s headquarters at ConsenSys’ Ethereal Summit in 2020, Binance’s CEO (Zhao Changpeng) did not provide a definite location, and instead focused on Binance being a new type of organisation that did not need registered bank accounts or postal addresses. This issue will be particularly troublesome in cases involving large cryptocurrency exchanges with offices all over the world and in cases where the cryptocurrency exchange cannot be physically located.

Another practical problem that could arise is with regard to the identification of the stolen assets. As cryptocurrency fraudsters know that their transfers will be traced, they often arrange to conceal their ill-gotten gains by passing them through what is known as a “coin mixer”. This software essentially breaks up the cryptocurrency into smaller amounts, sends them to be mixed with cryptocurrencies in thousands of other crypto-wallets, before finally depositing them in an account of the fraudster’s choice. As one can imagine, tracing and identifying the stolen cryptocurrency would be extremely difficult after a coin mixer has been used due to the extensive mixing of the assets with other sources of cryptocurrency.

This is precisely why it is imperative to act with utmost urgency in cases of cryptocurrency fraud to report and initiate a recovery. Failing to do so only enables the fraudsters to further conceal the stolen assets. As such, the expeditious appointment of competent legal counsel and forensic teams to trace and recover these assets could mean the difference between a successful and an unsuccessful recovery.

Singapore’s Payment Services Act

Singapore’s Payment Services Act 2019 (No 2 of 2019) (“PS Act”) came into force on 28 January 2020. One of its aims is to provide better protection of the public in the payment services sector, which includes the trading of cryptocurrencies.

In relation to the cryptocurrency industry, Section 6 of PS Act requires cryptocurrency exchanges to apply for a licence before they are allowed to operate in Singapore, as they generally fall under the categories of an “e-money issuance service” and a “digital payment token service”.

This licensing regime aims to reduce the incidents of cryptocurrency fraud in Singapore by imposing fraud-prevention obligations on licensed cryptocurrency exchanges. For example, the MAS has issued “Notice PSN03” pursuant to its powers under Section 102 of the PS Act, which imposes on cryptocurrency exchanges an obligation to report “any suspicious activities and incidents of fraud”. Technology risk management obligations have also been imposed on licensed cryptocurrency exchanges in Singapore via “Notice PSN05”, which include the requirement to implement safeguards to protect their customer’s information from unauthorized access or disclosure, and to take steps to prevent and detect any cyber-attacks.

Many welcome the PS Act as a step towards regulating the opaque and high-risk cryptocurrency industry which has caused many to fall victim to fraud. While it remains to be seen whether the PS Act is effective in preventing cryptocurrency fraud, it is undoubtedly a first step in the right direction.

Conclusion

It is undeniable that fraud will continue to exist in our world and take on many forms as commerce and technology continue to develop. While fraud is certainly impossible to eradicate, measures can be taken to reduce its occurrence and mitigate its consequences. As much as governments have a duty to enact legislation and promote technology to combat fraud, Recovery specialists and legal practitioners should also be aware of the evolving nature of fraud and how best to recover the stolen proceeds for their clients. It is hoped that this article has provided information that will enable legal practitioners and their clients to better understand the trends and developments of fraud and asset tracing in Singapore today.