Unfrozen – Hong Kong Court Rules “Informal Freezing” Of Bank Accounts Unlawful.

A Hong Kong court has ruled that the longstanding use of “letters of no consent” to freeze bank accounts suspected of harbouring the proceeds of crime, is unlawful.

The court in Tam Sze Leung v Commissioner of Police [2021] HKCFI 3118 agreed with the applicants that the public had been left under-protected in terms of their “fundamental right to use their own property in the form of funds held in a bank account” through the practice, which had grown up as a means to combat money laundering and facilitate the confiscation of the proceeds of crime.

The decision, unless reviewed upon appeal, may mean extra costs and expense for victims of cyber fraud scams, whose only choice now may be to seek urgent injunctive relief through the courts to try to prevent the dissipation of assets.  As for banks, they may find themselves more frequently having to exercise and rely on their own judgment as to whether to continue an informal freeze, yet having only limited facts on which to base their decision.

Unwelcome discovery

The applicants were Hong Kong permanent residents and members of the same family. They held between HK$30 to HK$40 million in accounts held at different banks. In December 2020, the applicants discovered that the accounts had become disabled and they were unable to withdraw funds held in the accounts.

The applicants eventually discovered that four “letters of no consent” (LNCs) had been issued by the police in December 2020 in respect of the accounts, following their suspected involvement for suspected stock market manipulation through a “ramp and dump” scheme that was being investigated by the Securities and Futures Commission.

Notwithstanding that ultimately no charges were laid against the applicants, the LNCs were in place for a period of roughly 10 months before the police obtained formal Restraint Orders over the accounts.

The No Consent Regime

The current “no consent” regime as operated by the police pursuant to their internal guidelines (now public) (Chapter 27-19 of the Force Procedures Manual) (No Consent Regime) relates to the Organized and Serious Crimes Ordinance (Cap. 455) (OSCO).

Section 25 of OSCO provides that it is an offence to deal with property known or is reasonably believed to represent the proceeds of crime. Section 25A requires a person dealing with property to make disclosure to an authorized person if they know or suspect the property to be the proceeds of crime. In addition, section 25A(2)(a) provides a statutory immunity to the dealing offense, where the person concerned has made a disclosure but obtained consent of an authorized officer to deal with the property in question.

Under the No Consent Regime, disclosure under section 25A of OSCO is made by way of Suspicious Transaction Reports (STRs) which, under a practice which has developed over the years, prompts a written response from the police as to whether consent is given to deal with the property in question.  If a LNC is issued, the guidelines provide that the police should make “the best endeavour to obtain a restraint or confiscation order as soon as practicable, or, if the property belongs to a victim(s), advise the victim(s) to apply for a civil injunction in respect of the property.” LNCs are usually reviewed monthly and should normally last no more than six months from the date of issue unless there are exceptional circumstances.

In the present case, it is noteworthy that prior to being contacted by the police, none of the banks appeared to have had any reason to file an STR in relation to the applicants or the accounts. However “when specifically informed by the Police that the Police suspected unlawful activity, and when the Police at the same time requested the filing of STRs, it seems obvious that the Banks would all have reacted by filing STRs.”

Grounds for challenge

The applicants raised six grounds for challenge by way of judicial review:

1. Was the issue of the LNCs tainted by procedural impropriety and unfairness, in that there was a lack of notice, reasons given or opportunity for a fair hearing?
2. The LNCs were ultra vires OSCO, which does not confer power on the Commissioner to operate a de facto property freezing regime
3. The LNCs interfered with the applicants’ constitutional rights under the Basic Law and Bill of Rights (BOR), including the right to a fair hearing under Article 10 BOR (the “prescribed by law” issue)
4. The LNCs breached the applicants’ right to a fair hearing
5. The No Consent Regime and the LNCs disproportionately interfered with the applicants’ property rights and rights to privacy and family
6. The decisions to refuse even partial consent to release of funds were unlawful

The court held that grounds 2, 3 and 5 were made out.

Informal freezing regime?

The court specifically considered the Court of Appeal decision in Interush Ltd v Commissioner of Police [2019] 1 HKLRD 892 in which the constitutionality of the No Consent Regime was upheld. However, the court found that the picture had since changed. The court noted that, in oral submissions, the Commissioner was “now saying that sections 25 and 25A of OSCO do create an ‘informal freezing regime’, and are used by the Commissioner for that purpose.”

The court said that as constitutional rights were at stake, “the means by which the government may restrict those rights must be both clearly prescribed by law and proportionate.” This was a high threshold to be met before the court would find it was the statutory intention for the No Consent Regime to be used as had been the practice.

The court acknowledged that “it has been recognized as a practical reality that the issue of a LNC will itself cause the financial institution not to deal with the relevant funds” and noted that as was accepted in Interush, “where consent is withheld, the bank invariably errs on the side of caution and refuses to make the payment, so that the result is that the account is ‘informally frozen’ for as long as the bank has the relevant suspicion and the police do not consent.”

Therefore, in cases where “no other fact (except the fact of police investigation) was provided as might have permitted the financial institution to decide for itself whether it had “knowledge or reasonable grounds to believe” that the funds were tainted within the meaning of section 25(1), it is the LNC which is what causes the freeze of assets.”

The court found it unlikely that the legislature could have intended a “secret, informal and unregulated asset freezing power” to exist, free from judicial oversight and of indefinite duration. The legislative history of OSCO appeared to indicate that the legislature had been “concerned with limiting executive powers to restrain property without court orders.” The regime as presently operated lacked “sufficient clarity as to the scope of the power and the manner of its exercise.”

The court found the No Consent Regime was ultra vires OSCO (ground 2).

As for ground 3, the “prescribed by law” issue, the court noted the “divergence or major development” in the Commission’s own understanding of the true source, nature and extent of police powers under the regime. The court thought it unlikely that judicial review would provide an appropriate judicial safeguard and found a lack of clarity in the police operations manuals as to how the regime should operate. Coleman J concluded that the No Consent Regime as operated presently was not “prescribed by law.”

In considering ground 5,  the “proportionality” claim, the court noted there were “myriad alternatives [to the regime] for the Commissioner to take on a proactive role in tackling money laundering at an early stage of investigation, albeit with clearly defined powers and safeguards.” Coleman J concluded that, after careful reflection, and in view of the stance that the regime in effect permitted an “informal freezing” of bank accounts, the regime also failed the proportionality assessment.

Implications

The judgment strongly hints at the need for reform of the No Consent Regime as currently operated by the police. Specifically, it is possible that going forward, LNCs may be issued for a significantly shorter period (for example, a seven day initial period and 31-day moratorium period, if the UK approach is followed).

Whilst the judgment may be reviewed upon appeal, for now, the chief implications would appear to be for victims of cyber fraud scams, where the early issue of a LNC often plays a crucial role in giving further support to banks’ decisions to impose an informal freeze of bank accounts or in enhancing protection to victims should banks decide to alter their initial assessment, effectively preserving assets for victims to try to recover through legal proceedings. If LNCs are issued for a shorter period, victims will have less time to react while running the risk that any traceable asset may be dissipated once a LNC is withdrawn.

While a LNC is not a prerequisite or necessary condition to banks putting in place informal freezing measures in relation to suspicious accounts (banks may refuse customer instructions and withhold funds on their own initiative under most terms and conditions and/or in compliance with section 25 of OSCO), there is a question as to whether banks will continue any informal freezing measures after a LNC is withdrawn. This depends on the facts of each case and must be weighed against banks’ general duty to comply with customers’ instructions.

In order to preserve traceable assets with certainty, victims would seem to have no other option than to seek urgent injunctive relief, a more time consuming and costly method which may not be cost effective given the modest sums sometimes seen in such cases. As for banks, they may find themselves more frequently having to exercise and rely on their own judgment as to whether to continue an informal freeze, yet having only limited facts on which to base their decision.