Recovery Of Funds Lost To Fraudulent Scams: Legal Principles & Practical Challenges

RDS Project
Jun 16
8 min read

Fraudulent scams have become increasingly prevalent where victims voluntarily transfer funds to scammers whom they genuinely believe to be legitimate at the time of payment. This reality renders the recovery of funds from banks to be extremely challenging, if not impossible. Consequently, the primary recourse for victims often lies in pursuing recovery directly from the fraudsters themselves.

Fraudulent scams invariably involve elements of fraud and illegality. In such circumstances, the principle that the ‘loss lies where it falls’ may apply. Difficulties tend to arise because a party cannot avail itself of the remedy of restitution where it is equally at fault or where it has voluntarily participated in a fraudulent or illegal transaction. As a result, victims often face significant hurdles when seeking to recover their losses.

The Phang Yeong Hau Case

In Phang Yeong Hau v Click Internet Traffic Sdn Bhd & Ors [2025] 7 MLJ 890, the High Court, after a full trial, allowed the Plaintiff to recover part of the investment monies he had paid to the Defendants. The Plaintiff had invested a total of RM 2.2 million into a so-called ‘click subscription plan’ (Plan). The High Court awarded recovery of RM 1.9 million, after deducting RM 229,000, which represented the purported ‘returns’ previously received. Exemplary damages of RM 1 million were also awarded against the 1st and 2nd Defendants.

The parties were as follows:

Plaintiff – the victim
1st Defendant – the company promoting the Plan
2nd Defendant – the founder and CEO of the 1st Defendant
3rd Defendant – an individual who promoted the Plan to the Plaintiff
4th Defendant – the nephew and former employee of 3rd Defendant
5th Defendant – the wife of the 3rd Defendant

The incident began when the 3rd Defendant invited the Plaintiff to attend meetings and seminars promoting the Plan operated by the 1st Defendant. It was represented to the Plaintiff that:

(a) upon payment for a subscription, customers would access a webpage;

(b) customers would browse the page for 12 seconds to generate internet traffic;

(d) the maximum daily return was RM40, depending on the subscribed package; and

(e) the 1st Defendant would provide a ‘data unit’ worth USD10,000, potentially yielding a further 10% return.

At trial, however, the 1st and 2nd Defendants were unable to demonstrate how the Plan operated, claiming instead that their webpage had been hacked – a contention that the court rejected for lack of evidence.

Following a full evaluation of the evidence adduced in trial, the High Court found that the Plan was a fraudulent enterprise designed to induce the public into investing in the 1st Defendant company. The High Court made the following key findings:

The Plan operated as a classic multi-level marketing scheme, promising returns tied to the recruitment of new members who paid subscription fees into the Plan;
There was no credible evidence that any internet traffic was generated or that any genuine income was produced through the webpage;
There was no credible evidence to show that a functioning system existed to deliver the purported business model;
The Defendants failed to explain how subscription payments were proportional to any legitimate generation of income for investors;
The contention that the webpage had been hacked was unsupported by evidence;
The scheme was structured such that so long as new subscribers continued to join, the flow of fresh subscription monies would sustain payouts. Once recruitment slowed, the scheme would inevitably collapse. This was a classic example of a Ponzi scheme; and
There was no legitimate business activity carried out by the 1st Defendant. Rather, it was an investment scam where earlier investors were paid returns from funds collected from later investors, creating the illusion of profitability.

The Defendants attempted to rely on tax payments and filing of audited financial statements to substantiate their operations. However, the court held that the mere payment of taxes did not validate the legality of the business, as the tax authority does not distinguish between income derived legally and income from fraudulent activities. Similarly, audited accounts indicating a "true and fair view" of financial statements did not absolve the Defendants of fraudulent conduct.

Ultimately, the High Court concluded that the Plan promoted by the Defendants contravened, amongst others, the provisions under the Financial Services Act 2013, Capital Markets and Services Act 2007 and Direct Sales and Anti-Pyramid Scheme Act 1993, rendering the Plan illegal.

The High Court permitted the Plaintiff to recover the sums he had invested from the 1st and 2nd Defendants because to deny the claim and to allow the 1st and 2nd Defendants to retain the sums paid by the Plaintiff would not achieve the purpose of the law. Further, the court held that this was a suitable case for exemplary damages to be imposed against the 1st and 2nd Defendants, considering their fraudulent conduct in the scheme.

The Tan Sai Cheng Case

In Tan Sai Cheng & Ors v Mohamed Azuan bin Mohamed Noor (Berniaga di atas nama dan gaya sebagai Blackbull Markets Academy) [2024] MLJU 1734, the High Court similarly permitted recovery by Plaintiffs who have been induced into investing with the Defendant. The Plaintiffs have invested a total of RM 2.1 million and recovery was allowed for RM 1.3 million, taking into account ‘returns’ previously received.

The Plaintiffs were introduced to the alleged investment opportunity by 2 persons by the name of Ong and Kenneth, who operated a partnership called North Western Services. Representations made included:

(a) the Defendant was partnered with Blackbull Markets New Zealand, a licensed entity under the New Zealand Financial Services Providers Register and supported by ANZ Banking Group;

(b) Blackbull Markets Academy (operated by the Defendant) was authorised to offer an investment scheme guaranteeing a 40% annual return; and

However, it was later discovered that the scheme was fraudulent and the Plaintiffs filed the present suit. In his defence, the Defendant contended that he was merely an agent for Blackbull Markets New Zealand. He further asserted that the Plaintiffs' dealings were with Ong, Kenneth or North Western Services, and not with him personally. The Defendant maintained that at most, he merely acted as a middleman for the trading activities.

However, the High Court rejected the Defendant’s contentions after full trial. The court made the following key findings:

Ong and Kenneth acted as the Defendant’s agents in recruiting customers and investors for the Defendant’s investment scheme. Funds collected from investors were pooled by the Defendant for use in purported trading activities, with profits to be shared according to the promised rate;
The Defendant failed to produce any documentary evidence demonstrating a legitimate relationship with Blackbull Markets New Zealand, and he was merely being a backroom operator;
WhatsApp correspondences showed that the Defendant had direct control over the trading account;
The Defendant prepared announcements to reassure investors who had deposited monies either directly with him or via Ong and Kenneth;

Analysis of fund transfers showed discrepancies that contradicted the Defendant’s version of events;
The Defendant made direct payments to the Plaintiffs. He also paid commissions to North Western Services, consistent with the operation of a recruitment-based investment scheme; and
The Defendant personally received and utilised the investment monies, with RM 1,222,924.70 credited directly into his account and RM 739,738.80 paid into his agents’ accounts.

The High Court concluded that the Defendant’s activities amounted to accepting deposits for investment purposes without the requisite licenses under the Financial Services Act 2013 and Capital Markets and Services Act 2007. The Defendant effectively operated as an unlicensed fund manager, collecting monies from investors and engaging in trading activities without authorisation from the relevant regulatory authorities.

Given that the monies were paid in contravention with the laws, the Defendant contended that the parties were in pari delicto (which means the parties were equally at fault for engaging in an illegal transaction), and the loss should lie where they fall. In principle, this doctrine prevents a party from recovering monies arising from an illegal transaction in which they knowingly participated.

The High Court, however, rejected this defence. While acknowledging the general applicability of the in pari delicto principle, the court emphasised that the said legislations were enacted to protect members of the investing public from unscrupulous individuals operating unlicensed investment schemes. The court reasoned that to apply in pari delicto in these circumstances would frustrate the very protective purpose of the legislation. The court held that ‘having breached these legislations, it would be wrong for this Court to not allow for the return of the said sums that were paid by the Plaintiffs’. Accordingly, the Plaintiffs were entitled to recover the investment monies from the Defendant.

Other Practical Considerations

While the legal principles provide a foundation for recovery, there are further practical considerations that victims must carefully weigh before commencing a claim for recovery of monies lost to fraudulent schemes:

· Identifying The Defendant

A fundamental challenge in scam-related cases is identifying the true perpetrator. Often, the scammers operate under false identities, making it difficult to ascertain who the real defendant should be. Even where funds are traced to a particular bank account, the true owner of that account may not be known at the outset.

In Phang Yeong Hau, despite the Plaintiff tracing payments to the 4th and 5th Defendants, the court held that they were merely acting at the behest of the 3rd Defendant and they had subsequently transferred the funds to the 1st and 2nd Defendants. Thus, no liability was imposed on them. This case illustrates a critical difficulty: if subsequent transferees cannot be identified or traced, victims face significant obstacles in recovery actions.

When the true perpetrator who has finally received the funds are not identifiable, victims may consider naming "persons unknown" as defendants. The High Court in Zschimmer & Schwarz GmbH & Co KG Chemische Fabriken v Persons Unknown & Anor [2021] 7 MLJ 178 endorsed the practice of initiating actions against unnamed individuals where the exact identity of the wrongdoer is unknown but their wrongful acts can be described with sufficient certainty. Related procedural considerations, such as mode of service and applying for disclosure orders (including pre-action discovery), will also be critical at an early stage.

It is worth noting that such discovery applications, investigations, and interlocutory proceedings can be both costly and time-consuming. In Zschimmer, for instance, the plaintiff had to navigate through multiple procedural hurdles before the matter could properly proceed against the relevant parties.

· Risk Of Defendant’s Insolvency Or Bankruptcy

Even if a claim is successful, enforcement is a separate issue. Victims must consider the risk that defendants may become insolvent or bankrupt before or during the litigation. In Phang Yeong Hau, for example, the 3rd Defendant was adjudicated bankrupt during the proceedings, resulting in the Plaintiff discontinuing the action against him. Enforcement strategies and pre-emptive measures (such as seeking Mareva injunction) may therefore be essential. However, procedures as such would increase the cost of litigation.

· Evidential Burden

Victims must also be mindful of the evidential burden they carry. In Azizul Eamy bin Arsad & Ors v Mohd Azman bin Zakarya & Ors [2018] MLJU 1932, the court underscored that plaintiffs alleging fraud bear a heavy burden to establish their case to the requisite standard of proof. In scam-related claims, it may be particularly challenging to gather the necessary evidence, especially where transactions were conducted online, communications were limited to untraceable messaging platforms or where records are scant or deliberately destroyed.

Conclusion

Recovering funds lost to fraudulent scams is legally and practically challenging. While victims may have avenues to seek restitution, a successful recovery often depends on careful navigation of complex legal principles, such as the in pari delicto principle, and overcoming practical obstacles such as identifying perpetrators, securing evidence, and ensuring enforcement. The cases discussed above demonstrate that courts are prepared to assist victims where fraud is proven but effective recovery requires strategic planning and prompt legal action.

16 June 2025