Navigating the money laundering minefield – the Court of Appeal dismissed the constitutional challenge against the “no consent” regime

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Introduction

In Interush Ltd v Commissioner of Police [2019] HKCA 70, the Court of Appeal (“CA”) has rejected an argument that two money laundering offences, namely sections 25 and 25A of the Organized and Serious Crimes Ordinance (Cap. 455) (“OSCO”) under the so called “no consent regime” or “informal freezing” of assets, infringe the property rights and access to Court rights under the Basic Law and the Hong Kong Bill of Rights.

Facts

On 1 November 2013, the Commercial Crime Bureau of the Police (“CCB”), Hang Seng Bank (“HSB”), and the Bank of East Asia (“BEA”) were alerted by the newspaper coverage in relation to an alleged pyramid scheme promoted by a company. As such, BEA suspended the account of that company (“Interush”) on 1 November 2013 whereas HSB filed a “Suspicious Transaction Report” to the Joint Financial Intelligence Unit (“JFIU”) on 4 November 2013. Whilst CCB was investigating into the alleged pyramid scheme, JFIU issued a letter of “no consent” to HSB covering the accounts of Interush Limited and Interush (Singapore) Pte Limited (collectively “Interush”) on 6 November 2013. Shortly after receiving the “no consent” letter, HSB suspended the accounts of Interush Limited until 9 April 2015 when a restraint order against Interush’s accounts in HSB and the Bank of America was granted.

Interush, therefore, challenged the constitutionality of sections 25 and 25A of OSCO by way of judicial review on the ground that Interush’s property right under Articles 6 and/or 105 of the Basic Law, and its right to access to Court under Article 35 of the Basic Law and Article 10 of the Hong Kong Bill of Rights has been infringed due to an absence of

  1. any time limit within which the authorised officer should decide whether or not to give consent under section 25A(2)(a) of OSCO;
  2. any time limit for the expiry of a “no consent” decision; and/or
  3. any compensation by the Government for the loss of an applicant whose property was withheld under a letter of “no consent”.

Interush also argued that, even if sections 25 and 25A of OSCO are held to be constitutional, the decision of the Police to refuse to give consent is unlawful.

The relevant laws

Section 25(1) of OSCO creates an offence commonly known as “money laundering offence” and provides that, “subject to section 25A (of OSCO), a person commits an offence, if knowing or having reasonable grounds to believe that any property in whole or in part directly or indirectly represents any person’s proceeds of an indictable offence, he deals with that property.

Section 25A(2)(a) of OSCO contains the “no consent regime” and creates an offence commonly known as “failing to disclose offence” and provides that person who fails to disclose suspicious transactions relating to property known or believed to represent proceeds of crime will commit an offence unless an authorized officer has given his consent to allow that person to continue dealing with those proceeds.

The CFI’s decision

In gist, the Court of First Instance (“CFI”) held that the “no consent regime” under section 25A(2)(a) of OSCO did not infringe the property rights and did not deny Interush’s access to Court due to the following reasons:-

Property rights

  1. Section 25A(2)(a) of OSCO does not operate to withhold the bank accounts or freeze suspicious properties. It merely creates a defence for those who further deals with the property after disclosure and is not used to bypass the procedures for a restraint order. Therefore, the property rights under Articles 6 and 105 of the Basic Law are not engaged.

Time limit in the “no consent regime”

  1. Notwithstanding the absence of a time limit in section 25A(2) of OSCO and the theoretical possibility that the Police can extend the “no consent” letter for an indefinite period, there were sufficient safeguards to ensure a reasonable time limit in the “no consent regime” in the Police Internal Guideline.
  2. Financial institutions, such as banks, could withhold the suspicious bank accounts on their own initiative. The “no consent” letter, which is often issued after the bank’s disclosure of the suspicious activities, is not a prerequisite for the banks’ decision to freeze the bank accounts. Ultimately, it is for the financial institutions to decide whether to follow their customers’ instruction despite their suspicion and the disclosure.

Access to Court rights

  1. The “no consent regime” is amenable to judicial review since OSCO or other laws did not exclude judicial supervision in this regime. Moreover, section 26(2)(b) of OSCO empowers the Court to allow a witness to reveal the disclosure and the identity of the person making the disclosure, which will therefore enables the aggrieved party to cross-examine that person. As such, there is no denial of the access to Court rights.

 

  1. Further or alternatively, the owners of the property can also resort to suing the financial institution holding the suspicious property for not allowing the owners to use that property

Compensation

  1. A person holding property may also apply for compensation to be paid by the Government under section 29 of OSCO provided that:-
    1. a disclosure in relation to that property has been made;
    2. an act is done in relation to that property in consequence of the disclosure and for the purpose of an investigation;
    3. no proceeding is instituted against the person holding the property;
    4. there has been some serious default on the part of any person concerned in the investigation or prosecution; and
    5. the person holding the property has suffered loss resulting from anything done in pursuance of a restraint order.

Police’s refusal to give consent

  1. The “no consent” letter and the Police’s subsequent extension of the “no consent” decision are not Wednesbury unreasonable and are justified since first, the Police has reasonable suspicion that the funds in Interush’s accounts represent proceeds of crime and there is a pyramid scheme; and secondly this is a complex case given the scale of the alleged scheme and the lack of cooperation by Interush.

The CFI also held that section 25A(2) of OSCO was not unconstitutional since section 25(1) of OSCO did not empower a person to intervene, confiscate or deprive any property of the others. As such, Articles 6 and 105 of the Basic law are not engaged insofar as section 25(1) of OSCO is concerned. In view of the failed attempt to challenge section 25A(2) and 25A of OSCO before the CFI, Interush appealed to the Court of Appeal (“CA”).

Issues before the CA

The issues before the CA are:-

  1. Whether the constitutional right to property under Articles 6 and 105 of the Basic Law is engaged;
  2. Whether the “no consent regime” is prescribed by law;
  3. Whether the infringement of property rights is justified under the proportionality test; and
  4. Whether the Police and the Customs & Excise (“C&E”) acted unconstitutionally or otherwise unfairly and unreasonably against Interush by using the “no consent regime” to bypass the procedural safeguards for restraint order applications under section 15 of OSCO (“fact-specific challenge”); and
  5. Whether the access to Court rights under Article 35 of the Basic Law is engaged.

The CA’s ruling

      1. Are the constitutional property rights engaged

The CA held that section 25 of OSCO and/or in conjunction with section 25A of OSCO did not engage the constitutional property rights. The CA concurred with the CFI that section 25 of OSCO only creates an offence of dealing with the property known or believed to represent criminal proceeds.

In relation to section 25A of OSCO, the CA held that property rights are engaged. The Court referred to a case in Guernsey and held that the power to freeze the bank account is granted by, for instance, a restraint order rather than by the “no consent regime” or “letter of No consent”. Nevertheless, this letter of no consent has affected the use of the Interush’s money in the bank accounts, thereby affecting the economic value of Interush’s property.

      1. Whether the regime is prescribed by law

Interush submitted that, prior to examining whether the intrusion of the property rights can be justified, the Court should first consider the issue of whether the “no consent regime” was “prescribed by law” which are accessible and precisely defined. The CA rejected such argument on the basis that this was not raised in the CFI. If such argument had been raised, the Police and the C&E, who bear the burden to justify the incursion of the protected rights, shall be entitled to adduce further evidence to rebut such argument.

Nevertheless, the CA does opine that, sections 25 and 25A of OSCO fall foul with the requirements of adequately accessible and sufficiently precise to enable individuals to regulate and foresee the consequences of their conduct since, first, it provides no guidance as to when the consent may be refused and if so for how long and by what criteria; and secondly, the Police’s internal manual Force Procedures Manual (the “Manual”) are vague and not accessible to public.

      1. Justification: Proportionality

The CA followed and applied the 4-stage proportionality test and the two standards in Hysan Development Co Ltd v Town Planning Board (2016) 19 HKCFAR 372:-

  1. Whether the intrusive measure pursues a legitimate aim;
  2. If so, whether it is rationally connected with advancing that aim;
  3. Whether the measure is ‘no more than necessary’ for that purpose (if the decision-maker is better placed to decide the legitimacy of the societal aims of the challenged measures, the standard to apply is ‘manifestly without reasonable foundation’); and
  4. If so, whether a reasonable balance had been struck between the social benefits of the encroachment and the inroads made into the constitutionally protected rights of the individual, asking in particular whether pursuit of the societal interest resulted in an unacceptably harsh burden on the individual.

In the present case, the CA held that, first, sections 25 and 25A of OSCO are rationally connected to the legitimate aim of deterring criminal activity through limiting access to the crime proceeds.

Secondly, the Manual is not so uncertain that it falls foul of the proportionality test. Whilst Interush argued that there was a lack of temporal limit and guidelines, the CA rejected such argument and concurred with the Police and C&E on the ground that:-

  1. All persons exercising public power bear the implied duty to act reasonably;
  2. The decision-making process under the Manual must be subject to section 70 of the Interpretation and General Clauses Ordinance, which provides that “any thing shall be done, such thing shall be done without unreasonable delay, and as often as due occasion arises”;
  3. The time and method taken by the Police to investigate shall necessarily hinge on the complexity of the case and how the person subject to investigation responds to the Police’s enquiries;
  4. The level of precision required of a law conferring discretionary power on public officials, which shall be balanced with the desirability of avoiding excessive rigidity in the law, must depend on the subject matter of the law in question;
  5. It is well-established that when a statute imposes an obligation on a public authority to take a particular step, that does not normally import any time frame. The general rule is that the delay is controlled by the application of established common law principles, including but not limited to Wednesbury test but not reading in time limits.

Thirdly, whilst Interush submitted that the “no consent regime” adversely affects fundamental rights and is disproportionate since the indefinite freezing of accounts can critically damage individuals and businesses and there are less intrusive alternatives available, the CA held against Interush that:-

    1. The availability of the restraint order regime under sections 14 and 15 of OSCO at a later stage does not support the argument that the “no consent regime” at an earlier stage is disproportionate since the two regimes are not comparable based on the differences set out herein below:-
Restraint Order Regime No Consent Regime
Contains numerous procedural safeguards (e.g. it is time-limited, the persons aggrieved have the right to be heard, the Court can impose measures to preserve the frozen property) Does not contain the safeguard imposed in the Restraint Order Regime
Freeze the bank account Does not freeze the bank account (The freezing was done by the financial institution itself)
Operates at the prosecution stage Operates at the investigation stage
The standard of granting restraint order is based on “reasonable cause to believe” The standard of granting a “letter of no consent” is based on “reasonable suspicion”

 

    1. The Interush’s arguments that, first, the consent regime affects the financial resources of a party; secondly, one is unlikely to obtain sufficient information about the Police’s suspicion in order to successfully initiate a judicial review; thirdly, the persons aggrieved are unlikely to successfully pursue a civil claim against a bank since the bank is impliedly entitled to refuse to process payment instructions if there is suspicion; and fourthly, the compensation provision under section 29 of OSCO only arises when there is a restraint order and there is no right to compensation for the informal freezing of the property, do not pass the threshold of “manifestly without reasonable foundation” in the present constitutional challenge.
    2. Interush’s argument that there are multiple significantly less intrusive alternatives which will not compromise the legitimate aims pursued in Canada, Australia and New Zealand is rejected since it is not helpful to refer to these alternatives without understanding the vast legal landscape in these jurisdictions.

 

      1. Fact-specific challenge

The CA referred to Engineers’ and Managers’ Association v Advisory Conciliation and Arbitration Service [1980] 1 WLR 302 and ruled that the crucial question is whether the decision-maker has by the deferment abdicated its statutory function to proceed with the “No Consent Decision”. In this regard, the CA held that, since no bad faith is alleged and cross-border elements are involved in the present case which will further complicate the investigation, Police and C&E did not act unconstitutionally or otherwise unfairly and unreasonably against Interush.

      1. Access to Court rights

Whilst Interush argued that any exercise of judicial power other than by the Court, namely the Police and C&E in the present case, will curtail the access to Court right and the person aggrieved by the exercise of the judicial power shall have a right to a fear hearing, the CA held against Interush that the access to Court right has not been engaged since judicial review and civil actions against the banks are available to Interush and the persons affected.

Takeaways

The decision upholds the constitutionality of the no consent regime and highlights the Court’s reluctance to interfere with the no consent decision by the Police. As the decision shows, the Court approves the Police to spend as much time as is required to investigate if the case is complex. It also reinforces the high threshold to be met when one seeks to challenge the “no consent regime” on the basis that it is not proportional and there are less intrusive measures available. Once a company or a person’s assets got entangled in the “no consent” regime and “frozen” in bank accounts, it is very difficult and may take a long time and much legal costs to “unfreeze” the accounts. There is also a high risk that after such incidents, the bank might choose to end the relationship with the company or individual and close the account. The better way for a company is to review and enhance its anti-money laundering systems to conduct proper client due diligence and transaction monitoring.

 

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.
Published by ONC Lawyers © 2019