Introduction

The Court of First Instance (“Court”) handed down an important judgment in the recent judicial review case of Tam Sze Leung & Ors v Commissioner of Police [2021] HKCFI 3118, which concerns the scope of Hong Kong Police powers under the Organized and Serious Crimes Ordinance (Cap. 455) (“OSCO”). The Court ruled that the long-standing use of “letters of non-consent” (“LNC(s)”) by the Police to freeze bank accounts suspected of holding proceeds of crime is unlawful (Please refer to our newsletter of February 2019 ‘Navigating the money laundering minefield – the Court of Appeal dismissed the constitutional challenge against the “no consent” regime’ for the earlier status of this area of law).

Background

The no consent regime

Under section 25 of the OSCO, it is an offence to deal with property known or reasonably believed to be the proceeds of crime. Pursuant to section 25A of the OSCO, the parties concerned will have a defence with respect to a “dealing” offence under section 25 of the OSCO where they have made disclosure to the authority and have obtained consent from an authorized officer to deal with the said property. In practice, to rely on the statutory defence under section 25A of the OSCO, for suspicious money laundering cases involving bank accounts, the financial institutions make disclosure by filing the Suspicious Transaction Reports (“STRs”) to the Joint Financial Intelligent Unit (“JFIU”). The JFIU may issue letters of consent authorizing the parties making disclosure to continue dealing with the funds. However, the Commissioner of Police (“Commissioner”) had been issuing LNCs to withhold consent at the early stage of investigation, and practically the recipient banks were procured to impose a freeze on the accounts in question so as not to risk breaching the criminal offence of “dealing” under section 25 of the OSCO.

Facts

The four Applicants in the present case were members of the same family, and were under investigations by authorities for being suspected of committing market misconduct offences under the Securities and Futures Ordinance (Cap.571) as well as money laundering activities. The JFIU alerted several banks with whom the Applicants hold accounts in respect of the investigations, and urged the banks to file appropriate STRs. Upon the STRs being filed to JFIU, LNCs were issued to the relevant banks, causing the funds in amount of around HK$30 to 40 million to be frozen. The LNCs were maintained for around 10 months, and were only withdrawn after the Court granted restraint orders against the Applicants and their accounts in October 2021.

The judicial review

The Applicants sought leave from the Court to apply for judicial review of the No Consent Regime as explained above. The following 6 grounds of challenge were raised by the Applicants:-

The issue and maintenance of the LNCs are tainted by procedural irregularities and unfairness, in that there was a lack of notice, reasons given or the possibility of a fair hearing;

The LNCs are ultra vires OSCO, which does not empower the Commissioner to operate a de facto property freeze regime;

The LNCs interfere with the Applicants’ constitutional rights, and such interference is not prescribed by law;

The LNCs breach the Applicants’ right to a fair hearing;

The No Consent Regime and the LNCs disproportionately interfered with the Applicants’ rights to property under the Basic Law, and right to privacy and family under the Bill of Rights; and

The decisions to withhold even partial consent to release funds were unlawful.

The Court held that Grounds 2, 3 and 5 are made out, and dismissed the remaining grounds.

Ground 2: Ultra vires

On Ground 2, the legal principle applied by the Court is that any action taken by the public body must be justified by positive law, or otherwise is unlawful. Since the OSCO does not contain any express restrictions on rights, the Court would have to decide whether sections 25 and 25A of OSCO (“Provisions”) were intended by the legislature to empower the Police and other law enforcement agencies to adopt the No Consent Regime as currently being operated. The Court noted that with constitutional rights at stake, there is a high threshold to be met before the Court will find the existence of such legislative intention.

Taking into account the fact that the OSCO expressly provide other asset freezing mechanisms with substantive and procedural safeguards, the Court held that it was highly unlikely that the legislature would intend the Provisions to confer an unregulated and informal freezing power on the Police without review mechanism or limitations on the circumstances in which any informal freeze could be imposed. The Court also considered the legislative history of the OSCO, from which it was evident that the legislature was concerned with limiting executive powers to restrain property without court orders. As such, the Court found that nothing in the language or the purpose of the Provisions necessitates the implication of a power to operate the No Consent Regime, and the steps taken by the Police exceeded the powers conferred by the Provisions.

Ground 3: Not prescribed by law

It is common ground that the means by which the government may restrict fundamental rights must be both clearly prescribed by law and proportionate. On the issue of “prescribed by law”, the Applicants submitted that the OSCO sets out no limit or safeguards at all against the power to issue the LNCs, such that the power is subject to abuse. This is in contrast to the evidential threshold, scope, time limit, judicial oversights and procedures specified in other sections of the OSCO. 

Considering that (1) there has been a “major divergence or development” in even the Commissioner’s own understanding of the nature and extent of the power under the No Consent Regime and (2) judicial review or civil proceedings against the banks may not provide appropriate safeguards against abuse, the Court held that there was no sufficient clarity as to the scope of the power and the manner of its exercise and the law does not provide adequate safeguards against abuse. The Court concluded that the No Consent Regime as operated by the Commissioner is not prescribed by law. 

Ground 5: Disproportionate interference with fundamental rights

On the issue of proportionality, the Court was satisfied that there is a legitimate purpose of deterring criminal activity by restricting access to proceeds of crime. The Court also found that there is a rational connection between the purpose and the operation of No Consent Regime. The point in question is whether the No Consent Regime is more than necessary for that legitimate purpose, applying the standard of “manifestly without reasonable foundation”.

The Court agreed with the Applicants that there are numerous alternatives for the Commissioner to take in tackling money laundering at early stage of investigation with clearly defined powers and safeguards. Referring to the fact that the No Consent Regime had been operated with only internal intermittent review which itself also lacks proportionality assessment, the Court did not find a reasonable balance has been struck between the benefits of combating money laundering and the rights to property which are protected constitutionally. It was concluded that the No Consent Regime as operated by the Commissioner did not satisfy the requirement of proportionality.

Conclusion

This judgment is important as a long-standing practice of the Police to impose informal freeze on the bank accounts suspected of holding proceeds of crime with the LNCs has been held to be unlawful. However, the Court has not yet granted any relief to the parties. It is also expected that the judgment may be reviewed on appeal. It remains to be seen whether and how the practice under the No Consent Regime will continue.

In light of the change in practice in respect of the No Consent Regime, financial institutions should review and update their anti-money laundering policies and procedures. In particular, without the issuance of LNCs, the banks would need a decision mechanism as to whether to informally freeze the suspected accounts, in order to ensure compliance with the OSCO.

Since the issuance of LNCs play an important role in avoiding dissipation of traceable assets at the early stage of criminal investigation, the judgment also has significant implications for the victims of crime, including the victims of cyber fraud scams which become more prevalent in recent years. The victims of crime should obtain legal advice for other methods to preserve traceable assets with certainty, such as seeking urgent injunction from the Court.

Given that a formal asset freezing regime was introduced into Hong Kong since the implementation of the Hong Kong National Security Law and the Implementation Rules of the Hong Kong National Security Law, the administration and legislature might seek to amend the OSCO to align with the formal asset freezing regime so that law enforcement agencies may retain this effective tool to combat money laundering.