New service gateway to support crypto asset recovery

Despite a series of positive steps forward over recent years, victims of crypto fraud have inherently faced challenges when attempting to trace stolen assets and identify the wrongdoer. 

Crypto exchanges are predominantly located outside of England and Wales.  Given the need to respect the autonomy of other jurisdictions, a claimant has to pass through one of the court's "gateways" under CPR Practice Direction 6B ("PD 6B") to serve a claim out of the jurisdiction. However, these gateways have previously been criticised as not being appropriate for modern-day cases, including in respect of victims of crypto fraud.

A change to the court rules as to service on parties to litigation outside of England and Wales significantly improves the prospects of the victim of crypto fraud more cost effectively learning the landscape before embarking on proceedings to recover stolen assets.  With effect from tomorrow (1 October 2022), PD 6B will be amended to introduce a new "Gateway 25" for service of a claim out of jurisdiction for disclosure of documents to (i) identify a defendant or a potential defendant and/or (ii) establish what has become of the property of a claimant or applicant.

Gateway 25 will make it far easier for claimants to serve Norwich Pharmacal Orders ("NPOs") and Bankers Trust Orders ("BTOs") in foreign jurisdictions, and will be seen as a welcome addition for victims of fraud who have found their ability to serve such orders constrained by procedural and jurisdictional barriers.

Disclosure orders against third parties

Due to the anonymous nature of fraud, and especially crypto fraud, there is a need for victims to have the ability to gather information about the perpetrators in order to recover their assets. In particular, NPOs and BTOs have become vital tools.

NPOs, in short, are disclosure orders which allows the applicant to receive information from a third party that has become 'mixed up' in fraud.  They are typically used when the applicant knows there has been wrongdoing against it and requires information from the (often) innocent third party to gather information as to what has happened.  NPOs thus enable victims to investigate and trace the assets.

BTOs are made against banks or other similar financial institutions that are either holding or have held misappropriated funds.  An applicant therefore seeks disclosure from the bank to support a proprietary claim to trace the assets.

These orders are highly useful, giving applicants the power to obtain information from organisations including banks, telephone providers and internet service providers that cannot be provided in the absence of a court compelling disclosure.

Serving out of jurisdiction

There has been an obstacle where the third party holding information is located out of the jurisdiction. CPR 6.36 states that if the defendant is located outside of England and Wales, the claimant cannot serve proceedings out of the jurisdiction without first seeking and obtaining the court's permission under CPR 6.32 or 6.33.

For permission to be granted, there needs to be:

• a good, arguable case that the claim falls within one of the jurisdictional gateways in PD 6B para 3.1;
• a serious issue to be tried on the merits of the case; and
• evidence that England and Wales is the proper place to bring the claim.

In the world of crypto fraud, there are no national barriers and unlawfully obtained crypto assets can be difficult to trace.

Applicants have faced difficulties fulfilling the CPR 6.36 criteria, given the previously limited gateways under PD 6B para 3.1, which has caused significant obstacles to serving NPOs and BTOs outside of the jurisdiction.

In the leading case of AB Bank Ltd v Abu Dhabi Commercial Bank PJSC [2016] EWHC 2082 (Comm), the claimant had applied for an NPO against a foreign bank following the disappearance of his funds. The Commercial Court found that there were no appropriate gateways under PD 6B for the service of NPOs out of jurisdiction.

More recently, the court has allowed service of BTOs out of the jurisdiction (but not NPOs) in Fetch.ai Limited v Persons Unknown [2021] EWHC 2254 (Comm) and Ion Science v Persons Unknown (unreported), 21 December 2020 (Commercial Court).

While the circumstances are difficult to distinguish from the decision in AB, these cases highlighted a willingness by English courts to creatively overcome the jurisdictional limitations, at least in respect of BTOs. Whilst these exceptions have created a route to justice for victims of crypto fraud, they are suitable for a narrow range of cases in which the victim is in hot pursuit of assets. The costs of bringing an ancilliary claim against the unknown fraudster has been a significant barrier to justice from an economic perspective.

Gateway 25 will allow a standalone application for disclosure in order to obtain information:

1. Regarding
   1. the true identity of a defendant or a potential defendant; and/or
   2. what has become of the property of a claimant or applicant;

       and

2. the claim or application is made for the purpose of proceedings already commenced or which, subject to the content of the information received, are intended to be commenced either by service in England and Wales or pursuant to CPR 6.32, CPR 6.33 or CPR 6.36.

Commentary

The new gateway will be seen as a welcome development in civil procedure by a number of interested parties; in particular, victims of crypto fraud.

As noted by HHJ Mark Pelling QC, the overarching difficulty with crypto fraud is that "in most of these cases the principal actors will be located outside England and Wales as will the exchanges that administer the wallets into or through which the victims assets have passed."

Gateway 25 offers victims a straightforward, prompt, and far more cost-effective way of ascertaining what has happened to stolen assets before embarking on court proceedings.  The introduction is a game-changer in terms of the economics of pursuing a claim as it may provide comfort that assets are available against which a judgment may be enforced and can be obtained before commiting to substantive proceedings. 

Gateway 25 additionally provides more certainty for cryptocurrency exchanges and other innocently involved parties who may be willing to help victims but are unsure of their legal position. On the other hand, exchanges may see a sharp increase in the number of orders they receive, and may wish to review and adapt their internal processes for dealing with such situations.