Civil fraud in Ukraine: possible remedies at home and abroad

4 August 2021

The article is published in The Ukrainian Journal of Business Law

Stories of fraudulent schemes can be read in the media almost every day. The recent case of the Just2Trade exchange platform which was working as a classic Ponzi scheme only confirms this trend. Moreover, Ukrainians still remember the infamous case of B2B Jewelry, where 600,000 people were defrauded and lost around USD 250 million.

This short article, the first in a series, explores available remedies under Ukrainian law and English law in situations involving what may be referred to as “fraud”. The focus of this first article is on possible remedies. In addition, the particular procedural dimensions of civil fraud claims in England and Wales through asset freezing orders (including on a worldwide basis), disclosure orders and other remedies require careful attention. They are often integral to successful cross-border asset recovery proceedings with links to Ukraine and England.

A – Ukrainian law perspective

Ukrainian law does not have an institution of civil fraud. However, Ukrainian criminal law recognises the term “fraud”, defined in the Article 190 of the Criminal Code of Ukraine as conversion of another’s property or acquisition of the right to a property by deception (fraudulently) or abuse of confidence.

Article 190 defines two ways of taking possession of another’s property: deception and abuse of confidence. This includes, for instance, wrongfully obtaining deeds. The principal feature of fraud within the meaning of Article 190 is that, at the time of the illegal actions being performed, the victim of the fraud is certain about the lawfulness of the steps being taken and voluntarily gives away their property. However, unknown to the victim, these voluntary steps are a result of deception or abuse of confidence.

Fraud by deception is delivery of deliberately false information or suppression of important facts, with the view to taking possession of the victim’s property. Deception may be exercised in various forms, including orally, in writing or by forging documents. At the same time, abuse of confidence is creation by a perpetrator of friendly or close relations with a victim for the purpose of using such relations to take possession of the victim’s property.

Thus, in Ukraine, fraud is effectively only “criminal fraud” that falls to be investigated by state authorities (in particular, the National Police, the Prosecution Service, the National Anti-Corruption Bureau and other law enforcement bodies). That means that only a court decision in a criminal investigation can remedy the consequences of such fraud. The sanctions are usually a fine and/or imprisonment. These remedies are not usually the main immediate interest of the victims of such fraud, especially in the commercial context.

In any event, there are many obstacles (recently defined by the Prosecutor General’s Office) to efficient and successful criminal investigations in Ukraine. These include:

  1. a large variety of law enforcement bodies that are in permanent jurisdictional conflict with each other;
  2. the lack of definite and speedy timeframes for criminal investigations and criminal court proceedings; and
  3. the general absence of the higher technical or special education required to competently pursue most fraud cases in the ranks of ordinary police detectives in district police departments.

The remedy for an act of criminal fraud will be damages or restitution/vindication in some cases, but a successful criminal investigation and indictment do not guarantee that victims will automatically be awarded with damages. To claim damages a victim of an offence has two options:

  1. to make a civil claim in a criminal proceeding under Article 128 of the Criminal Process Code of Ukraine against a defendant; or
  2. to file a separate civil claim after the indictment (the latter will be strong evidence for the issue to be tried in favour of a claimant who would be able to rely on the criminal findings in civil proceedings).

To sum up, usually a fraud will be tried in criminal proceedings as a first stage and (if there is an indictment) civil proceedings as a possible second stage. Such a litigation process may take a long time. A consequence is that it is common and almost inevitable that this delay provides a window of opportunity for fraudsters to dissipate assets and a consequent inability to enforce successful claims against them. Moreover, Ukrainian criminal law restricts liability for fraud only to individuals. Companies and other legal entities cannot be criminally liable for such fraud. This again narrows down potential remedies, not least when dealing with complex holding structures and shell companies (typically with a prominent offshore element in the case of high value fraud).

B – English law perspective

Overview

English law has both institutions of civil fraud and criminal fraud.

Criminal fraud is a criminal offence which will be prosecuted by the state authorities and the concept resembles the Ukrainian definition of criminal fraud. Relevant offences range from ordinary theft under the Theft Act 1968 to specialist fraud offences under the Fraud Act 2006 to money laundering offences under specialist legislative regimes.

More interesting for present purposes is civil (or commercial) fraud. Such claims are pursued by the victim(s) by way of a private action in the civil courts to seek recovery of the sums or (if a proprietary entitlement can be asserted) assets which are attributable to the relevant legal wrong.

Civil fraud is not a cause of action in itself. Instead, the term describes a range of different activities, in respect of which a victim may have a variety of available causes of action. The exact species of remedy ranges from common law damages (typically for economic torts, deceit or unjust enrichment) to discretionary remedies under specialist statutory regimes (such as under Section 423 of the Insolvency Act 1986 dealing with transactions defrauding creditors). Where equitable causes of action such as breach of fiduciary duty, breach of trust, knowing receipt or dishonest assistance are in play, profit-based remedies (such as disgorgement) are typical.

In essence, the term civil fraud is an umbrella description for causes of action involving deliberate (as opposed to negligent) actions. In contrast, the term “fraud” in some contexts is confined to meaning a fraudulent misrepresentation, or the common law tort of deceit. For instance, section 32(1)(a) of the Limitation Act 1980 allows for the extension of otherwise applicable limitation periods to the date of knowledge where «the action is based upon the fraud of the defendant», and that has been interpreted as being an action based on deceit.

To provide a short list of typical potential causes of actions are:

Deceit or fraudulent misrepresentation (a common law tort);

  1. Unlawful means conspiracy (a common law tort);
  2. Causing loss by unlawful means (a common law tort);
  3. Breach of fiduciary duty (an equitable claim);
  4. Breach of trust (an equitable claim);
  5. Dishonest assistance (an equitable claim);
  6. Restitutionary causes of action (in particular unjust enrichment);
  7. Relief under Section 423 of the Insolvency Act 1986;
  8. Conversion (a common law tort).

Deceit

A civil fraud claim based on deceit can usually be broken down into the following elements:

  1. X makes a statement or representation to Y;
  2. X knows that the statement or representation is false or has no belief in its accuracy or is reckless as to its truth;
  3. X intends for Y to rely on the statement or representation or is of the understanding that Y is likely to place such reliance;
  4. Y has suffered loss or damage.

The main attraction of bringing a claim in the tort of deceit (also known as fraudulent misrepresentation) is that the usual requirements in relation to proof of strict causation of loss and quantification do not apply. The English Court of Appeal has recently considered this in Glossop Cartons and Print Ltd v Contact (Print & Packaging) Ltd [2021] EWCA Civ 639 and confirmed that the default (and conveniently simple) approach is to award the direct loss based on the actual value of the assets bought at the relevant date less the price paid.

Unlawful means conspiracy

The most commonly made civil fraud claim as a result of conspiracy is for conspiracy by unlawful means. This tort is concerned with:

  1. A combination or understanding between two or more people;
  2. An intention to injure another;
  3. Unlawful means at the centre of the action (including civil wrongs and therefore not limited to criminal acts); and
  4. Causation of damage to the injured party.

Strong evidence will be required to claim civil fraud based on this specifies of conspiracy. The most difficult elements to prove are usually that of (1) intention to injure another (it not being sufficient on its own to show injury was reasonably foreseeable absent proof that, in addition, the acts were aimed or directed at the injury party) and (2) commission of unlawful acts.

Insolvency Act claims

Under the Insolvency Act 1986 there are a number of statutory causes of actions dealing with transactions at an undervalue (section 238), fraudulent preferences (section 239) and transactions defrauding creditors (section 423), amongst others. The majority of these deal with situations where an English incorporated company has entered into a relevant insolvency procedure (including administration short of liquidation) and are therefore only available to insolvency office holders. This removes the individual control desirable to victims.

The exception is section 423 which can be directly relied on by individual victims either with the leave of the English court or (if the target English company is not in any insolvency process) without such leave. Section 423 claims are commonly developed in complex cross-jurisdictional civil fraud and asset recovery proceedings alongside conspiracy and other common law or equitable claims.

Standard of proof in fraud claims

More typical claims for breach of contract or, for example, under the Misrepresentation Act 1967 are easier to plead and prove than the civil fraud claims described above. That said, despite the high evidential threshold, the relevant standard of proof remains the usual civil «balance of probabilities». This standard may well be easier to satisfy than the criminal «beyond reasonable doubt» standard (which is the same under English and Ukrainian criminal law).

Concluding remarks

In summary, the English law civil fraud concept provides a wide range of potential causes of action and avenues for asset recovery. It should be noted that claimants in many recent high profile cases that proceeded in England had exhausted domestic remedies and instead pursued civil fraud claims outside their home jurisdiction.

Notable examples are:

  • JSC BTA Bank v Ablyazov – a claim in the Commercial Court by a Kazakh bank for in excess of US$6 billion misappropriated by its former shareholder, involving complex issues as to the scope of worldwide freezing orders and jurisdiction.
  • PJSC Tatneft v Bogolyubov – a recent US$300 million claim in the Commercial Court arising out of the supply crude oil to Ukrtatnafta JSC (dismissed after a 12-week trial);
  • Privatbank v Kolomoisky – a ca. US$2 billion claim in the Commercial Court by a major Ukrainian bank against two Ukrainian “oligarchs” domiciled in Switzerland, leading to an important decision in the Court of Appeal on freezing injunctions and jurisdiction; and
  • AK Investment Limited v Kyrgyz Mobil Tel Limited – landmark litigation arising out of fraudulent actions in Kyrgyzstan, ultimately reaching the Privy Council in London on jurisdictional issues.

Overall, the concept of civil fraud in English law offers a useful alternative to the rigid criminal fraud model in Ukraine. Ukrainian law does not (yet) provide effective and time efficient remedies. By contrast, English law has developed to allow a range of civil proceedings against individuals and corporate entities in this context.

Hillmont Partners’ team together with James Ramsden QC from Astraea Group and Philippe Kuhn from 39 Essex Chambers have considerable experience in this area, with successful examples in handling civil fraud claims of Ukrainian clients in the English courts.

The publication is accessible at the link: http://www.ujbl.info/page.php?id=23