International Fraud & Asset Tracing 2021

Last Updated April 30, 2021

Cyprus

Law and Practice

Authors



Georgiades & Pelides LLC is a leading Cypriot law firm with a broad corporate, banking, commercial and litigation practice and a distinct international focus. The firm was formed in 1998 by the merger of Georgiades & Georgiades, one of the most successful and dynamic younger firms in Cyprus, with Nicos Pelides & Co, one of the longest established. The firm offers a unique blend of dynamism and experience. The firm’s skills are particularly suited to the needs of international clients who not only demand a fast, specialised and professional service, but also practical and commercial advice. The firm is client-focused and offers its clients a positive and constructive approach to fulfilling their targets and strategic objectives.

Fraud under Cap 148

Under Section 36 of the Civil Wrongs Law (Cap 148), the tort of fraud is proved when a false representation of fact has been made with the intention that it will be acted upon by the person to whom it is addressed, either with knowledge of its falsity, or with non-belief in its truth, or recklessly whether it is true or false.

It is necessary that the representor has an intention to deceive the representee and that the representee has been deceived and has acted upon the misrepresentation and has suffered damage as a result.

One distinguishing factor between a claim for fraud and other claims is the recoverability of damages. In fraud, the damages are not limited to what could have been reasonably foreseeable by the parties. The defendant is bound to make reparation for all the actual damages directly flowing from the fraudulent misrepresentation.

Related Causes of Action

The Cypriot Supreme Court has emphasised that fraud under Section 36 of Cap 148 (which has been termed the “actual fraud”) is only one type of fraud and that the term "fraud" also embraces certain other conduct which falls below the standards demanded by equity. It has also been said that “fraud is infinite and cannot be strictly defined”. 

Accordingly, fraud may take several forms and there are various causes of action which a victim of civil fraud may pursue either separately or in parallel with actual fraud, depending on the specific circumstances of each case, for instance: breach of fiduciary duty, breach of trust, knowing receipt, conspiracy by unlawful or lawful means, dishonest assistance, misappropriation, undue influence, conversion and economic duress.

Criminal Liability

According to Section 3(a) of the Prevention of Corruption Law (Cap 161) it is a criminal offence for an agent to obtain a gift or consideration as an inducement or reward for doing or for failing to do an act concerning the affairs or the business of the agent’s principal. The term principal includes an employer, the bribe may be given either directly or indirectly, and it is irrelevant whether it is given for the agent’s or for someone else’s benefit.

An offence is also committed by the person giving the bribe. It is also an offence to present false evidence to the principal with an intent to deceive.

The maximum punishment for the above offences is imprisonment for up to seven years or a fine up to EUR100,000 or both.

Cyprus is also signatory to several international conventions against corruption, such as the United Nations Convention Against Corruption (ratified by Law 25(III)/2008), the Criminal Law Convention on Corruption (ratified by Law 23(III)/2000) and the Civil Law Convention on Corruption of the Council of Europe (ratified by Law 7(III)/2004).

Civil Liability

While the legislative provisions mentioned above govern criminal sanctions for bribery, they do not provide a civil law regime to deal with bribery. In the absence of such framework and any relevant case law, it is anticipated that where an agent has been bribed by a third person to the principal’s detriment, the principal may either repudiate the contract and recover the bribe as money had and received or claim damages for loss, or the principal may affirm the contract and sue for damages. As there is no case law on this point, it is likely that the Cypriot courts would follow and apply English case law. 

Accessory Liability in Tort

According to the Civil Wrongs Law (Cap 148), any person who collaborates, assists, authorises, counsels, orders, directs or approves an act which has been committed or which is to be committed by another person, is liable for the commission of that act. 

Accordingly, a party who assists or facilitates a fraudulent act may incur joint liability with the principal tortfeasor. It is however also necessary to show that the party had done so in pursuance of a common design to do or secure the doing of the acts which constituted the tort. In other words, there must be concerted action towards a common end. While it is not necessary for the party to have joined in the very act constituting the tort, the assistance provided must be substantial.

Related Claims

Conspiracy

The tort of conspiracy may be established where two or more persons act together with the purpose to cause loss to another either by lawful or by unlawful means. In the former case, causing harm to the claimant must be the predominant purpose of the action. If the conspiracy is to do acts that are in themselves wrongful, such as to deceive or defraud, the injury need not be the predominant purpose. It is also important to note that it is not necessary for the unlawful conduct to be actionable by the injured party. Accordingly, liability may arise for an agreement to commit a fraudulent act that is intended to and does in fact cause loss to another, even if the offence would not be actionable in the absence of the conspiracy.

Knowing receipt

Liability for knowing receipt may arise when a person knowingly receives trust property or its proceeds in breach of trust and fails to return it to the rightful owner. It is immaterial whether the breach of trust is fraudulent or not. Both a proprietary and a personal claim will be available against the knowing recipient.

Dishonest assistance

Where a breach of trust or fiduciary duty causes loss, a third party assisting in the breach may be found liable for dishonest assistance if this party has acted dishonestly. The relevant question is whether the party who assisted did not act as an honest person would in the circumstances, taking into account what this party actually knew at the time.

Τhe general limitation period for tort claims is six years from the date that the cause of action was completed. However, where the claim concerns fraud on the part of the defendant or where the defendant has concealed facts which are relevant to the cause of action, the limitation period does not begin to run until the time that the claimant could have reasonably discovered the fraud or the concealment.

A claimant who seeks the recovery of property misappropriated in breach of trust or fraudulently, may have a proprietary claim against a third party who has received that property and retains it or its proceeds, unless the third party is a bona fide purchaser for value without notice.

Trust property or other property into which it has been converted may, as long as it can be identified, be followed or traced and recovered. 

"Following" is the process of following the same asset as it moves from hand to hand. "Tracing" is the process of identifying a new asset as a substitute for the old. 

The claimant will have a continuing beneficial interest in the trust property as well as in its traceable proceeds and this interest binds all recipients, except for a bona fide purchaser for value without notice.

The matter becomes much more complicated when there has been a mixture of trust property with the defendant’s own property. For instance, where the defendant/trustee mixes trust money with their own money in an active banking account, it is presumed that they draw out their own money first. Also, where the defendant/trustee acquires an asset using both trust money and their own money, the beneficiary may either claim a proportionate share of the asset or enforce a lien upon it to secure their personal claim against the defendant/trustee. 

No particular rules of pre-action conduct apply in relation to fraud claims. A victim of fraud may bring an action directly, without taking any other steps.

Power to Grant Interim Relief

Section 32 of the Courts of Justice Law confers wide powers on the Cypriot courts to grant interim relief against a defendant who is properly a party to proceedings in Cyprus. 

The interim relief may range from mandatory, prohibitory and freezing orders and injunctions, to worldwide freezing and anti-suit injunctions, to disclosure, tracing, search and seizure, gagging and Chabra orders, and to the appointment of an interim receiver.

It is thus possible for a court to issue a freezing order against a defendant, preventing them from disposing of their assets. This provides an important practical tool for claimants who seek to ensure potential enforcement of a judgment, or to safeguard their interests by restraining wrongful acts which are threatened, or who seek an early out-of-court settlement of a dispute.

Requirements

The claimant will need to satisfy the court that:

  • a serious question arises to be tried at the hearing; 
  • there appears to be "a probability" that the claimant is entitled to relief; and
  • it will be difficult or impossible to do complete justice at a later stage without granting the injunction.

The first two requirements involve an assessment of the claimant’s underlying cause of action against the defendant. The standard required for the claimant to overcome the evidential hurdle is not very high. As regards the third requirement, it is usually satisfied where there is a real risk that the defendant may dissipate the assets, or where damages would not be an adequate remedy in the light of the facts of the case. The court will take into account several factors, including for example, any indication that the defendant plans to dispose of assets or move them out of the jurisdiction; the nature, value and location of the defendant’s assets; the defendant’s financial standing, credit history and length of time in business; and any evidence of dishonesty by the defendant or misuse of their assets.

When all the above requirements are satisfied, the court must ultimately decide whether it is just or convenient to grant the order. In this context, the court will examine all the circumstances of the case, including the claimant’s own conduct and the interests of justice. It is therefore important for the claimant to act in an honest and reasonable manner, without undue delay.

In Personam Remedy with Worldwide Effect

A freezing order is a remedy of an equitable nature and therefore acts in personam. Its purpose is to restrain a party from removing their assets from the jurisdiction or from dealing with any assets whether located within the jurisdiction or not. Accordingly, in appropriate circumstances, a freezing order can have worldwide effect.

Without Notice and Cross-Undertaking in Damages

Freezing orders are usually granted without notice so as to avoid the risk of dissipation before the order is granted. The claimant would need, however, to convince the court that there is an urgency for granting the order without hearing the other side. It is thus vital for a claimant who seeks an order without notice to apply to the court as swiftly as possible, without undue delay. The claimant will also need to provide full and frank disclosure of all the relevant facts and circumstances of the case and, for the order to be granted, they will be required by the court to give a cross-undertaking in damages, usually in the form of a bank guarantee.

The defendant will have an opportunity to seek to vary or discharge the order later.

Sanctions for Non-compliance and Effect on Third Parties

Any violation of an order might constitute contempt of court, which is punishable by imprisonment or a fine or a sequestration of assets. 

All persons who have been served with an order, including third parties such as banks, must not assist in a breach of the order and must not frustrate its purpose, or otherwise they will be in contempt of court.

The freezing order will usually include an order requiring the defendant to give disclosure of their assets (including their value, location and details) in the form of an affidavit. This would assist in ensuring compliance with the order and in preserving assets pending a judgment. 

The order will usually be drafted in wide terms so as to include an asset that the defendant has the power, directly or indirectly, to dispose of or deal with as if it were their own. Accordingly, the disclosure will need to include both assets held in the name of the defendant and assets held by nominees on the defendant’s behalf.

A violation of an order might constitute contempt of court, which is punishable by imprisonment or a fine or a sequestration of assets. 

As mentioned above, Section 32 of the Courts of Justice Law confers wide powers on the Cypriot courts to grant a variety of interim remedies, as long as they are deemed to be just or convenient under the circumstances. 

It would therefore be possible for a court to make an order requiring a party to preserve evidence in circumstances where it is feared that important evidence might be destroyed or suppressed.

It is also possible for an Anton Piller order to be issued, requiring a respondent to admit another party to premises for the purpose of securing or preserving relevant evidence. Such an order will only be issued if the court is satisfied that there is a very strong prima facie case on the merits and that there is a very real possibility that relevant documents or evidence might be destroyed.

Such orders will naturally be sought without notice. Accordingly, the claimant will need to convince the court that there is an urgency for granting the order. For the order to be granted, a cross-undertaking in damages will need to be given by the claimant, usually in the form of a bank guarantee.

Norwich Pharmacal Orders

It is also possible for the court to make disclosure orders against third parties, so that the claimant obtains the necessary information and documents relating to the commission of any fraudulent acts, the identity of the wrongdoers or of the persons into whose hands property has passed, and the availability and whereabouts of misappropriated assets. 

The leading case on this subject is the decision of the House of Lords in Norwich Pharmacal Co v Commissioners of Customs & Excise [1974] AC 133 HL which has been followed by the Supreme Court of Cyprus. A Norwich Pharmacal order is a flexible remedy which compels a party who is involved or mixed up in a wrongdoing, whether innocently or not, to provide information to the claimant to assist them in litigation.

Requirements

While the Norwich Pharmacal order is a strong and flexible remedy and the circumstances in which it may be used are not fixed, it will not be made just to satisfy one’s curiosity. 

The court has discretion to grant an order provided that all requirements of Section 32 are satisfied, ie, that there must be a serious question to be tried at the hearing, there must appear to be "a probability" that the claimant is entitled to relief, and it must be difficult or impossible to do complete justice at a later stage without ordering disclosure. 

Moreover, the court will need to be satisfied that a wrong has arguably been carried out by an ultimate wrongdoer, that there is a need for disclosure to enable action to be brought against the wrongdoer and that the person against whom the order is sought, participated or was involved in the wrongdoing and is likely able to provide the requested information.

Ultimately, the court will engage in a balancing exercise and decide whether making an order would be in the interests of justice.

Procedure, costs and use of the material

The disclosure is usually sought before the commencement of the substantive proceedings against the wrongdoer. It can also be sought in the course of an existing action or post-judgment, usually to disclose the whereabouts of the judgment debtor’s assets. 

Also, the Norwich Pharmacal order may be the sole relief sought, or it may be ancillary to other relief. It is usually obtained with notice but in exceptional circumstances can be sought without notice.

As regards costs, usually an innocent third party will be entitled to their costs, including any administrative cost for complying with the disclosure order.

Moreover, the applicant will be expected to identify the purpose for which the disclosure will be used when it is made and the court will restrict disclosure accordingly. It has also been accepted that there is an implied undertaking by the successful claimant to use the information obtained for the purposes disclosed. 

The court has the power to make any order without notice as long as it is convinced that there is an urgency for granting the order without hearing the other side.

It is thus vital for a claimant who seeks an order without notice to apply to the court as swiftly as possible, without undue delay. 

The claimant will also have a very strict duty of full and frank disclosure, meaning that they will need to disclose all relevant facts and circumstances of the case, including anything which could be adverse for their case.

The court will require an applicant to give a cross-undertaking in damages before making an order without notice, usually in the form of a bank guarantee.

The affected parties will have an opportunity to seek to vary or discharge the order later.

To the extent that a wrongful or fraudulent act constitutes a criminal offence as well, the victim would also be entitled to seek redress against the perpetrator via the criminal process, by filing a complaint with the police.

It is possible for the civil and criminal procedures to run in parallel. Usually a criminal case will be completed sooner, and the criminal court’s findings could be used for the purposes of the civil case.

While it may be argued that running two parallel proceedings is abusive and oppressive, the Cypriot courts have held that the purpose of each process is different and that they can therefore run in parallel, as long as the criminal prosecution is not diverted from its true cause so as to serve extortion or oppression, or to exert pressure so as to achieve an improper end.

It is possible for a judgment to be obtained without the need for a full trial in two instances. First, where the defendant is not participating even though they have been properly served. Second, where the claimant applies for summary judgment and the defendant does not satisfy the court that they have a good defence to the action on the merits or that they can disclose such facts as may be deemed sufficient to entitle them to defend. 

As regards the second instance, however, a summary judgment cannot be issued for actions for libel, slander, malicious prosecution, false imprisonment, seduction or breach of promise of marriage, and actions in which fraud is alleged by the claimant.

Actions in which fraud is alleged are commenced by a writ of summons not specially indorsed with a statement of claim. The statement of claim will need to be filed ten days after the defendant’s appearance. Full particulars of any misrepresentation, fraud, breach of trust, wilful default or undue influence must be stated in the pleadings. In the case of fraud, the alleged fraudulent acts must be specially set out and it must be averred that such acts were done fraudulently. If it is material to allege malice, fraudulent intent, knowledge, or other condition of the mind of any person, it is sufficient to allege the same as a fact without setting out the circumstances from which the same is to be inferred.

Claims against "persons unknown" have not been tested in Cyprus yet.

Nevertheless, having in mind that UK case law is highly persuasive in Cyprus and that it is frequently followed and applied, it is likely that the Cypriot courts would follow the UK authorities on this point and it might therefore be helpful to refer to the analysis of the law in the England & Wales chapter of this book in this regard.

Any person is a competent witness and is capable of giving evidence, except if the court considers that they are not capable due to their age, mental illness or for any other reason.

All competent witnesses may be compelled by the court to testify, except for the defendant’s wife or husband and the defendant’s co-accused.

The plaintiff may apply for a witness summons requiring a person to give evidence or produce documents. A person who has been summonsed and fails to attend court may be guilty of contempt of court.

A corporate entity can be found liable for the fraudulent acts of a person who may properly be classified as the “directing mind of the company”. Accordingly, liability for fraud may be imposed on to a limited liability company if the offence is committed by a person in control of its affairs to such a degree that the company may be said to think and act through them so that their actions and knowledge are the actions and knowledge of the company. Different persons may for different purposes satisfy the requirements of being the company's directing mind and will.

A very careful and detailed analysis of all circumstances of the case will need to take place before attributing an individual’s knowledge and actions to the company they represent.

Where a corporation has been used as the vehicle for fraud, a natural person involved, such as an ultimate beneficial owner or a director may also be found liable both in a civil action (eg, as a joint tortfeasor due to their collaboration, direction, counselling or assistance and/or for the torts of conspiracy or dishonest assistance) and in a criminal prosecution (eg, as a joint principal if they are the person who physically committed the offence or as an accomplice, if they aided abetted, counselled or procured its commission).

In general, it is the company that brings a claim for a wrong done to the company, including against directors who acted fraudulently or in breach of their duties. The proper organ of the company that can initiate the proceedings is the board of directors. However, it has been recognised that the shareholders may have a residual power to do so flowing from their ultimate control over the affairs of the company, where the directors are unwilling to exercise their powers, eg, where fraudulent directors exercise control over the company and consequently prevent the company from bringing a claim against them. 

Most importantly, the Supreme Court of Cyprus has repeatedly recognised and applied the rule in Foss v Harbottle and the “fraud on the minority” exception thereto. Accordingly, where a wrong has been done to a company and the wrongdoer is in control of the company, the shareholder may bring a derivative action (their rights being derived from the company) on behalf of the company.

The Cypriot courts may exercise extraterritorial jurisdiction against foreign defendants in various instances (subject to any bilateral or multilateral agreement providing otherwise).

Fraud Committed in Cyprus

In a fraud claim, jurisdiction can be established against a foreign defendant provided that the civil wrong was committed in Cyprus.

Fraud Committed Out of Cyprus, Where Foreign Defendants Are Necessary or Proper Parties to the Claim against a Cypriot Defendant

Where a fraud claim has been properly brought in Cyprus against a wrongdoer (the anchor defendant) because, for instance, the wrongdoer resides in Cyprus, it is possible to join foreign defendant(s) to the claim, if they are deemed to be necessary or proper parties to the action.

A connection between the anchor defendant and the foreign defendant(s) will need to be established to make the latter a proper party. The question is answered by asking “supposing both parties had been within the jurisdiction would they both have been proper parties to the action?” This question will usually be answered in the affirmative if the claims against the anchor and the foreign defendants involve one investigation or if they are closely bound up with one another. 

Where the foreign defendant is domiciled in an EU member state, similar but different rules would apply, pursuant to Article 8(1) of the Regulation (EU) No 1215/2012. In particular:

“A person domiciled in a Member State may also be sued:

(1) where he is one of a number of defendants, in the courts for the place where any one of them is domiciled, provided the claims are so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings.”

It has been held that the interpretation of the “risk of irreconcilable judgments” criterion must be broad and should cover all cases where there is a risk of conflicting decisions, even if the judgments would not be mutually exclusive. Accordingly, in a case where the court finds that the claims against the anchor and the foreign defendants are closely connected and that the claimants will in any event continue against the anchor defendant in Cyprus, the test will likely succeed.

Good Cause of Action and Forum Conveniens

In any of the above instances, the court will also need to be satisfied that:

  • the claimant has prima facie a good cause of action against the defendants; and
  • the case is a proper one for service out of Cyprus.

As regards the first requirement, it has been held that it is the same as the test for summary judgment and it will be satisfied where, on the affidavit evidence before the court, there is a serious question to be tried. As regards the second requirement, the task of the court will be to identify the forum in which the case can be suitably tried for the interests of all the parties and for the interests of justice.

In view of the above, claimants in fraud claims normally find it helpful to include conspiracy as an additional cause of action.

Every court judgment can be enforced through any of the following methods:

  • by seizure and sale of movable property;
  • by sale of immovable property and/or by registering a charge over immovable property;
  • by a garnishee order (ie, a third-party debt order, which allows the judgment creditor to take the money they are owed directly from a third party who either holds it for the benefit of the judgment debtor or owes it to the judgment debtor);
  • by monthly instalments determined by the court following an examination of the judgment debtor;
  • by issuing a writ of possession of immovable property (where the court judgment orders the recovery or delivery of possession of any immovable property);
  • by issuing a writ of delivery of movable property (where the court judgment orders the recovery or delivery of any movable property); and/or 
  • by encumbering and selling any shares of the judgment debtor.

It has been held that any of the above methods of execution can be taken in parallel.

Moreover, bankruptcy or liquidation proceedings can be initiated against a judgment debtor. 

The right against self-incrimination is a fundamental right in Cypriot law and it has been deemed to be entrenched in Article 12.4 of the constitution which establishes the presumption of innocence.

Accordingly, a party that is called to testify at court or to disclose documents, may invoke the privilege against self-incrimination and refuse to answer questions or produce documents which might expose them to proceedings for an offence.

The privilege may not be invoked if there is no possibility of such proceedings being taken against the witness or merely because an answer would degrade the witness or subject them to a civil action.

Nevertheless, inferences may in certain circumstances be drawn from a person’s failure to answer questions. As this matter has not been examined by the Cypriot courts in the context of fraud claims, it might be helpful to refer to the analysis of the law in the England & Wales chapter of this book, which would probably be highly relevant should this issue be raised in Cyprus.

Generally, a party can avoid disclosing documents subject to legal professional privilege. 

There are two kinds of legal professional privilege: legal advice privilege and litigation privilege. The former protects communications between lawyer and client for the purpose of giving or receiving legal advice, both in a litigation and in a non-litigation context. The latter protects communications between a client or their lawyer and third parties for the purposes of litigation.

Nevertheless, communications which would otherwise appear to satisfy the relevant requirements of legal professional privilege, would not attract privilege if they are themselves part of a crime or a fraud or if they seek or give legal advice about how to facilitate the commission of a crime or a fraud. 

The principle also extends to civil fraud and applies to both legal advice and litigation privilege. It would not however apply where a defendant requires advice for defending civil or criminal proceedings.

The predominant purpose of damages in the context of civil proceedings is the compensation of the victim and not the punishment of the wrongdoer. It is however possible for punitive or exemplary damages to be awarded, in exceptional circumstances, “where the defendant’s conduct is so intrinsically blameworthy as to deserve punishment from a civil court” (Papakokkinou v Princess Zena De Tyra Kanther (1982) 1 CLR 65).

All credit institutions in Cyprus are subject to a statutory duty of confidentiality and banking secrecy, prescribed by Section 29 of the Business of Credit Institutions Law 66(I)/1997.

According to Section 29(1), no member of the management body of a credit institution and no chief executive, manager, officer, employee or agent of a credit institution and no person who has by any means access to the records of a credit institution, shall provide, divulge, communicate, reveal or for their own benefit use any information whatsoever regarding the account of any individual customer of the credit institution, either while being under the employment or in a professional relationship with the credit institution, as the case may be, or after the termination of such employment or professional relationship.

Section 29(2) provides a number of exceptions to the above duty, such as where the disclosure of confidential information would be necessary for reasons of public interest or for the protection of the interests of the credit institution.

In view of the above, a bank would not be able to disclose documents or information subject to banking secrecy in the absence of a court order (such as a Norwich Pharmacal order – see 2.3 Obtaining Disclosure of Documents and Evidence from Third Parties). Before making such an order, the court will need to engage in a balancing exercise to ensure that this would serve the public interest. 

Georgiades & Pelides LLC

16 Kyriakos Matsis Avenue
Eagle House 1st Floor
Agioi Omoloyites
1082 Nicosia
Cyprus

+357 22889000

+357 22889002

info@cypruslaw.com.cy www.cypruslaw.com.cy
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Law and Practice

Authors



Georgiades & Pelides LLC is a leading Cypriot law firm with a broad corporate, banking, commercial and litigation practice and a distinct international focus. The firm was formed in 1998 by the merger of Georgiades & Georgiades, one of the most successful and dynamic younger firms in Cyprus, with Nicos Pelides & Co, one of the longest established. The firm offers a unique blend of dynamism and experience. The firm’s skills are particularly suited to the needs of international clients who not only demand a fast, specialised and professional service, but also practical and commercial advice. The firm is client-focused and offers its clients a positive and constructive approach to fulfilling their targets and strategic objectives.

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