A Hong Kong court has ruled that the long-standing use of “letters of non-consent” to freeze bank accounts suspected of harboring the proceeds of crime is illegal.
The court in Tam Sze Leung vs. Police Commissioner [2021] HKCFI 3118 agreed with the claimants that the public had been under-protected in terms of the “fundamental right to use their own property in the form of funds held in a bank account” by this practice, which had developed as a means of combating money laundering and facilitating the confiscation of the proceeds of crime.
The decision, unless reconsidered on appeal, may result in additional costs and expenses for victims of cyber scams, whose only choice now may be to seek an urgent court injunction to try to prevent dissipation of assets. As for banks, they may find themselves more frequently forced to exercise and rely on their own judgment in pursuing an informal freeze, while having only limited facts on which to base their decision.
Unwelcome discovery
The applicants were permanent residents of Hong Kong and members of the same family. They had between HK $ 30 million and HK 40 million in accounts held at different banks. In December 2020, applicants discovered that the accounts had become disabled and that they were unable to withdraw funds held in the accounts.
The applicants eventually discovered that four “letters of non-consent” (LNC) had been issued by the police in December 2020 in respect of the accounts, following their alleged involvement in suspicion of stock market manipulation through ‘a “ramp and dump” program that was in progress. investigated by the Securities and Futures Commission.
Despite the fact that no charges were ultimately laid against the plaintiffs, CNL was in place for a period of approximately 10 months before police obtained formal restraining orders on the accounts.
The non-consent regime
The current “no consent” regime as applied by the police in accordance with their internal (now public) guidelines (chapters 27-19 of the force procedures manual) (non-consent regime) relates to the Organized and Serious Crimes Ordinance (Cap. 455) (OSCO).
Article 25 of the OSCO provides that it is an offense to deal with property known or reasonably believed to represent the proceeds of crime. Section 25A requires that a person dealing with property make a disclosure to an authorized person if he or she knows or suspects the property is the proceeds of a crime. In addition, section 25A (2) (a) grants legal immunity to the trafficking offense, where the person concerned has made a disclosure but has obtained the consent of an authorized agent to deal with the property in question.
Under the non-consent regime, disclosure under Section 25A of the OSCO is done through Suspicious Transaction Reports (STRs) which, according to a practice that has developed over the years , prompt the police to respond in writing to whether consent is given to negotiate with the property in question. If an LNC is issued, the guidelines state that the police should “do everything possible to obtain a restraint or forfeiture order as soon as possible, or, if the property belongs to one or more victims, advise the victim (s) to seek a civil injunction against the property. CNLs are generally reviewed monthly and should normally not last more than six months from the date of issue, except in exceptional circumstances.
In the present case, it should be noted that prior to being contacted by the police, none of the banks appeared to have had any reason to file an STR regarding the applicants or the accounts. However, “when they were specifically informed by the police that the police suspected illegal activity, and when the police at the same time requested the deposit of STRs, it seems obvious that the banks would all have reacted by depositing STRs.”
Challenge grounds
The applicants raised six grounds for challenge by judicial review:
- Was the CNL issue marred by procedural irregularities and unfairness, in that there was a lack of notice, reasons given or the possibility of a fair hearing?
- CNL were ultra vires OSCO, which does not give the Commissioner the power to apply a de facto asset freeze regime
- The CNL infringed the applicants’ constitutional rights under the Basic Law and the Bill of Rights (BOR), including the right to a fair trial under Article 10 BOR (the question “prescribed by law “)
- CNL violated applicants’ right to a fair trial
- The non-consent regime and the CNL disproportionately hampered applicants’ property rights and their rights to privacy and family
- Decisions to withhold even partial consent to release funds were illegal
The court found grounds 2, 3 and 5 to be established.
Informal set-aside regime?
The tribunal specifically considered the decision of the Court of Appeal in Interush Ltd v Police Commissioner [2019] 1 HKLRD 892 in which the constitutionality of the non-consent regime was upheld. However, the court found that the image has since changed. The tribunal noted that, in his oral submissions, the Commissioner “now asserted that Articles 25 and 25A of the OSCO create an ‘informal freeze regime’ and are used by the Commissioner for this purpose.”
The court said that with constitutional rights at stake, “the means by which the government can restrict those rights must be both clearly prescribed by law and proportionate.” This was a high threshold to be reached before the court found only the legal intention to use the non-consent regime, as had been the practice.
The tribunal recognized that “it was recognized as a practical reality that the issuance of a CNL will itself cause the financial institution not to process the affected funds” and noted that, as was accepted in Interruption, “When consent is denied, the bank invariably errs on the side of caution and refuses to make the payment, so the account is ‘informally frozen’ as long as the bank has the relevant suspicions and the police do not consent .
Therefore, in cases where “no other fact (except the fact of a police investigation) was provided which could have enabled the financial institution to decide for itself whether it had” reasonable grounds to believe ” that the funds were vitiated by article 25 (1), it was the LNC which was at the origin of the assets freeze.
The court ruled that it was unlikely that the legislature could have intended that there be a “power to freeze secret, informal and unregulated assets”, free from judicial review and of indefinite duration. OSCO’s legislative history seemed to indicate that the legislature had been “concerned about limiting executive powers to restrict property without a court order.” The regime as it currently operated lacked “sufficient clarity as to the extent of power and the modalities of its exercise.”
The court concluded that the non-consent regime was ultra vires OSCO (ground 2).
As to ground 3, the “prescribed by law” question, the court noted the “major divergence or development” in the Commission’s own understanding of the true source, nature and extent of police powers. under the regime. The court ruled that judicial review was unlikely to provide an adequate judicial guarantee and found a lack of clarity in police operations manuals as to how the regime should operate. Coleman JA concluded that the non-consent regime as currently applied was not “prescribed by law”.
In considering Ground 5, the “proportionality” claim, the court noted that there was “a myriad of alternatives [to the regime] that the Commissioner take a proactive role in combating money laundering at an early stage of the investigation, albeit with clearly defined powers and guarantees. Justice Coleman concluded that after careful consideration and given the position that the regime in fact allowed for an “informal freeze” of bank accounts, the regime also failed the proportionality test.
Implications
The judgment strongly alludes to the need to reform the non-consent regime as it is currently applied by the police. Specifically, it is possible that in the future, CNLs will be issued for a considerably shorter period (for example, an initial period of seven days and a moratorium period of 31 days, if the UK approach is followed) .
While the judgment may be reviewed on appeal, for now the main implications appear to be for victims of cyber fraud scams, where the early issuance of an LNC often plays a crucial role in providing additional decision support. banks to impose a freeze on bank accounts or by strengthening victim protection if banks decide to change their initial valuation, effectively preserving assets for victims to attempt to recover through legal proceedings. If LNCs are issued for a shorter period of time, victims will have less time to react while being at risk that any traceable asset may be dissipated once an LNC is withdrawn.
Although an LNC is not a prerequisite or necessary for banks to put in place informal freezes on suspicious accounts (banks can refuse instructions from clients and withhold funds on their own initiative in most locations. conditions and / or in accordance with Article 25 of OSCO), the question arises as to whether banks will continue to take informal freezing measures after the withdrawal of an NCL. It depends on the facts of each case and must be weighed against the general obligation of banks to comply with customer instructions.
In order to preserve traceable assets with certainty, victims seem to have no choice but to seek an urgent injunction, a longer and more expensive 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 forced to exercise and rely on their own judgment in pursuing an informal freeze, while having only limited facts on which to base their decision.
