In Tam Sze Leung & Ors (“Applicants”) v Commissioner of Police (“Commissioner”) [2021] HKCFI 3118, Hong Kong’s High Court was recently asked to consider the legality and constitutionality of the letter of no consent (“LNC”) regime and in particular whether as currently operated by the Commissioner its protection of the community from money laundering had left them under-protected in terms of their fundamental rights to use their own property, which in this case was the funds held in a number of bank accounts.
In summary of the below and in a very significant judgment for Hong Kong’s banks and financial institutions, the Court found that the way in which the Commissioner has been triggering extensive use of the LNC process under OSCO is unlawful.
Facts
The Applicants were Hong Kong residents from the same family holding 12 accounts with various banks.
In December 2020 all those accounts had LNCs issued against them, resulting in the continuation of the banks’ freezing of such accounts. The Applicants were suspected of being involved in pump and dump stock market manipulation between 2018 and 2020 and were under investigation by the Securities and Futures Commission (“SFC”).
The SFC had also referred the case to the Police for investigation of suspected money laundering and this led to the Applicants’ banks each being alerted to the fact that such investigations were on-going. The banks were urged to file a suspicious transaction report (“STR”) to the authorities and in one such message from the Police it was stated:
‘…In order to facilitate the SFC’s investigation, please suspend the operation of the account held by the above Subject … as they are suspected to be involved with money laundering; … According to the law (Cap 455 OSCO), Suspicious Transaction Report (STR) to JFIU [Joint Financial Intelligence Unit1] is urgently requested.’
STRs were filed and LNCs then issued. In March 2021 criminal proceedings were commenced when the Applicants were charged with money laundering2.
In early October, shortly before the hearing in this case, the contents of the accounts were formally restrained pursuant to section 15 OSCO. Following the grant of these orders the LNCs against the Applicants were withdrawn and the Commissioner asked for the case to be dismissed but this was refused by Coleman J. who at paragraph 37 of his judgment stated the:
‘… present challenge seems to me to raise issues of real public importance … .’
Sections 25 and 25A OSCO
Money-laundering and the offence of dealing with the proceeds of an indictable offence under section 25 happens when someone knows or has reasonable grounds to believe that property is the proceeds of crime when they deal with it. In the case of a bank or financial institution this would include remitting illicit funds out of an account.
Section 25A deals with OSCO’s disclosure requirements. Those suspecting monies constitute the proceeds of crime must make a STR to the JFIU. Failing to do so is a criminal offence.
Section 25A(2)(a) provides for statutory immunity to money laundering where the person concerned has reported a suspicious transaction and has obtained the consent of an authorized officer to deal with the property in question. The Police can grant relief from criminal liability in circumstances where it is considered to be in their interests, for example to avoid a suspected criminal becoming aware they are under investigation or permitting a transfer to take place so that the funds can be followed.
“Informal freezing regime3”
The Applicants asserted that the Police had unlawfully engineered the filing of the STRs by their banks. The Court was told while the Police would typically communicate with banks and financial institutions about on-going investigations, the decision to submit an STR remained with the institution, but the Court held that here:
- before they were contacted by the Police none of the banks had any reason to file an STR;
- contact from the Police provided the only reason to consider the possibility of suspicious activities;
- for the banks then not to have filed any STR would have been reckless;
- the idea that the banks would have made their own further investigations so as to decide whether or not to submit an STR was unlikely; and
- the STRs were specifically requested by the Police, so they could issue LNCs giving the banks no option other than to continue the freezing of the accounts.
The Commissioner’s evidence to the Court was that the freezing of assets was the deliberate objective of his operation of the no consent regime.
When compared with the restraint regime under section 15 OSCO which derives from a careful and detailed statutory regime with the relevant powers being exercised by the High Court, the no consent regime as operated allowed the Commissioner to force the banks to continue to freeze the property indefinitely, without having to satisfy a Court it was appropriate or meeting any expressly stated procedural safeguards.
The Applicants argued OSCO’s intent was that powers to restrain a person’s property should be subject to specific protections so it was implausible the law also intended to give unregulated and informal freezing powers to the Police to be exercised before the Courts were involved.
The Court agreed and held that there was no basis for the no consent regime that the Commissioner had operated and that it was ultra vires OSCO.
Not prescribed by law
For the following reasons, the Court also held that the no consent regime was not prescribed by the law because there was insufficient clarity as to the scope of the powers and the manner of their exercise had inadequate safeguards.
Not proportional
The no consent regime was also found not to operate proportionally. The Court found it was without limit and with only intermittent internal Police review.
Here, the Applicants’ bank accounts were the subject of LNCs for 10 months, which exceeded the Police’s internal guidelines that a LNC should last no more than 6 months and accordingly no reasonable balance was struck between the benefits of preventing money laundering and the encroachment of an individual’s constitutionally protected property rights4.
Conclusion
The Commissioner is likely to appeal this decision.
With the current uncertainty, anyone (whether a bank, financial institution or other professional gatekeeper) needing to make an STR should take expert legal advice on what it should now do in relation to already frozen accounts on which there is a LNC and what it should do in future when faced with:
- a notification from the Police that an account or account holder is under anti-money laundering, counter-terrorist financing or national security law investigation;
- a request from the Police to make an STR with respect to an account or account holder;
- a letter of consent from the JFIU; or
- a LNC from the JFIU.
This article was written by Ian Childs a partner in Stephenson Harwood’s litigation department.
For further information, please contact:
Katherine Liu, Partner, Stephenson Harwood
katherine.liu@shlegal.com
1 The JFIU manages the suspicious transaction reporting regime for Hong Kong and its role is to receive, analyse STRs and to disseminate them to the appropriate law enforcement agencies in or outside Hong Kong, or financial intelligence units worldwide.
2 Contrary to section 25 OSCO.
3 How the Commissioner described OSCO’s no consent regime nowadays: see paragraph 62 of the judgment.
4 See Articles 6 and 105 of the Basic Law.
