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16 May 2023

Hong Kong's old letter of no consent regime to return?

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Following the High Court's decision dated 30 December 2021 in Tam Sze Leung & Ors ("Applicants") v Commissioner of Police ("Commissioner") [2021] HKCFI 3118 we issued a client alert entitled 'Hong Kong's letter of no consent regime declared to be ultra vires the Organised & Serious Crimes Ordinance ("OSCO")' (see here).

The Commissioner appealed this loss to the Court of Appeal ("CA") and on 14 April 2023 it was held that the regime as operated by the Police was lawful after all.

Facts

The Applicants, all family members, were suspected by the Securities and Futures Commission ("SFC") of engaging in pump and dump manipulation of over ten different Hong Kong stocks between 2018 and 2020 reputedly earning over HK$300 million at the expense of innocent investors. Suspecting money laundering, the SFC referred this to the Police for investigation who thereafter emailed three of the Applicants' banks informing them that various accounts were suspected to be involved in their criminality. The banks were told that suspicious transaction reports ("STRs") to the Joint Financial Intelligence Unit ("JFIU")1 were urgently required. Letters of No Consent ("LNCs") were thereafter sent by the JFIU to the banks resulting in the contents of the accounts being frozen.

Deprived of using their accounts, which held a sum of between HK$30 to 40 million, the Applicants challenged the OSCO regime which provided that the offence of money laundering under section 25 OSCO happens when someone knows or has reasonable grounds to believe that property is the proceeds of an indictable offence when they deal with it2.

Section 25A has OSCO's disclosure requirements and those suspecting property constitutes the proceeds of an indictable offence must make a STR to the JFIU. Failing to do so is a criminal offence.

On receipt of an STR, the JFIU can either consent to dealing with the property and thereby give immunity from criminal liability for what would otherwise be money laundering3, or refuse permission to deal with the property by issuing a LNC4.

High Court

When finding for the Applicants, the Honourable Mr Justice Coleman considered it was implausible that the legislature having created a detailed mechanism for restraint and charging orders elsewhere in sections 14 to 16 of OCSO could have also consciously enacted a “secret, informal and unregulated asset freezing power” of the kind exercised by the Police against the Applicants.

CA

The CA disagreed. Analysing the position of banks the CA said they were in an unenviable position because on the one hand they have contractual duties with customers and were required to follow their instructions but on the other faced criminal liability on releasing any such funds with the requisite criminal intent for money laundering.

The CA stated that a bank’s position may be alleviated by an express or implied term in their banking contracts that it can refuse to operate an account when to do so may expose it or staff to criminal liability thereby allowing it to decline a customer’s instructions without incurring civil liability.

Section 25A OSCO provides that a bank is not criminally liable for money laundering if it makes an STR under section 25A(1) OSCO before releasing any funds when it has the consent of the JFIU to do so. The practice of issuing letters of consent and LNCs stems from this. But the power conferred on the Police is not a power to freeze property as asserted by the Applicants, it is just to decide whether or not to give consent to deal with it.

With the above points in mind the CA held an account is “frozen” not because there is any enforceable order made by the Police blocking it, but because the bank has chosen under the banking contract, not to comply with its customer’s instruction because of the bank's concerns about criminal liability.

Emails

The Police's emails to the three banks were sent to alert them of their money laundering investigations. The Police's duties include the prevention and detection of crime5 so sending their emails was consistent with that. A LNC could not become ultra vires OSCO because the Police had proactively reached out and alerted a bank. The CA clarified that the regime in sections 25 and 25A OSCO did not depend on the source of a bank’s suspicion and it did not matter if the Police first contacted the bank or vice versa.

The CA also considered

The LNCs which followed the STRs were also not ultra vires OSCO and this was because the Police had the express power to give consent to deal with suspected property (section 25A(2)(a) OSCO) and therefore the power to also refuse consent necessarily also existed.

The Police's power to give or withhold consent was subject to the Court’s supervisory jurisdiction by way of judicial review so it was not wholly unregulated as the Applicants had asserted.

A purpose of this regime was to deprive wrongdoers of the proceeds of their criminality. In this case the CA stated the Police held a reasonable suspicion about the Applicants' bank accounts when they issued and maintained the LNCs. It was concluded the Police had acted properly in this case.

There could also be no complaint that the bank’s refusal to comply with the Applicants' instructions was not “prescribed by law”. The right to do so would be expressed or implied into the banking contracts and the obligation on the bank to make disclosure under OSCO was clearly defined and dependent on the existence of knowledge or suspicion, whatever the source.

On the basis of various points including the above, the CA thus disagreed with the previous finding that the regime the Police operated was a “secret, informal and unregulated asset freezing power”.

Conclusion

This is a very significant judgment for Hong Kong's banks and financial institutions and the inevitable result of it has to be the return of the old (sections 25 and 25A OSCO) regime. Anyone needing to make STRs must therefore take note of the CA's decision and be aware that from now on the LNC regime no longer depends on the source of a bank’s suspicion.

STR procedures

Paragraph 10 of the CA's judgment describes the procedures followed by the Police and JFIU after receiving STRs and summarizes the contents of the Police's Force Procedure Manual. Any bank, financial institution or other professional gatekeeper making STRs should read this part of the judgment carefully to become aware of the principles and procedures governing the issuance of LNCs, which include:

  1. the underlying principle is that a LNC is only issued when necessary, proportionate and reasonable;
     
  2. once a LNC is issued the investigating unit should use its best endeavours to obtain a restraint or confiscation order as soon as practicable;
     
  3. each LNC is reviewed monthly, initially by the Superintendent commanding the investigating unit and after three months by the Formation Commander; and
     
  4. a LNC should normally only last for six months (without exceptional circumstances) during which time the Police should submit the file to the Department of Justice to examine the prospects of obtaining a restraint order. Without the completion of all steps needed including submitting the file to the Department of Justice, the LNC lapses and the JFIU should then send a consent letter.                                               

This article was written by Ian Childs, head of Stephenson Harwood's Hong Kong litigation department. 

 

1 The JFIU manages the STR reporting regime in Hong Kong. Its role is to receive and analyse STRs and to disseminate them to the appropriate law enforcement agency inside or outside of Hong Kong, or financial intelligence units worldwide.

2 “Dealing” with property is given a wide definition in OSCO as: (i) receiving or acquiring it; (ii) concealing or disguising the nature, source, location, disposition, movement or ownership or any rights with respect to the property; (iii) disposing of or converting it; (iv) bringing it into or removing from Hong Kong; (v) using the property to borrow or as security (i.e. as a charge, mortgage or pledge). Where banks are concerned, dealing is typically remitting funds out of an account.

3 There may be operational reasons for law enforcement to do this such as to avoid the suspected criminal from being aware they are under suspicion or to trace where the property concerned to gather evidence.

4 Between 2018 and May 2021 the JFIU has received 207,146 STRs and less than 2% of which resulted in LNCs.

5 Section 10 of the Police Force Ordinance states what the Police's duties include.

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