What happened in Tam Sze Leung?
Members of the family in Tam Sze Leung were accused of a ‘pump and dump’ scheme. They had not been arrested or charged with any crime, but their bank accounts were all subject to LNCs issued by the police. When the family challenged this, the police refused to withdraw the LNCs or provide consent for the family to deal with their monies.
The Organized and Serious Crimes Ordinance (Cap. 455) (OSCO) provides for an offence when a person deals with property that they know or suspect to represent the proceeds of crime. It also compels anyone with such knowledge or suspicion to file a suspicious transaction report (STR) with law enforcement.
Immunity may be granted if a person files an STR and obtains consent to deal with the property under suspicion. If consent is not given, the asset is effectively frozen as no one would take the risk of dealing with it.
The High Court found that (a) OSCO did not confer powers for the police to operate a de facto property freezing regime; (b) the family’s constitutional rights were interfered with; and (c) the LNCs disproportionately interfered with rights to property under Hong Kong’s basic law.
Cryptocurrency exchanges and operators
Prior to the decision in Tam Sze Leung, there was no question regarding the legality of the informal police freeze regime as the regime was confirmed by the Court of Appeal to be constitutional in Interush Ltd. v. Commissioner of Police [2019] 1 HKLRD 892.
As such, the police routinely issued LNCs to banks and companies in reported cases of theft or misappropriation. For example, in Yan Yu Ying v. Leung Wing Hei [2021] HKCFI 3160, the police were able to quickly issue LNCs and freeze 999 bitcoins after the initial report of theft.
Following the decision in Tam Sze Leung, cryptocurrency exchanges and other operators would do well to take note of the following:
- Reliance upon police-issued LNCs may not be adequate justification to refuse customers access to their cryptocurrency accounts and other assets held by the exchanges/operators.
- In any event, there remains a positive statutory duty to file an STR pursuant to OSCO if the exchange/operator knows or has reason to believe that it holds the proceeds of crime.
- Great care should be taken not to tip off customers that an STR has been filed or of any other matter which is likely to prejudice any investigation following the STR.
Victims of cryptocurrency fraud
Victims of cryptocurrency fraud may still wish to file a report with law enforcement in Hong Kong in the first instance. However, it is unlikely that the police will issue LNCs preemptively following the Tam Sze Leung decision.
If victims of cryptocurrency fraud wish to prevent dissipation of crypto-assets, they should seek immediate legal advice and apply for a civil injunction as soon as possible to prevent the onward transfer of stolen assets to countries with little to no protection from the law. As can be seen from the case of Yan Yu Ying, the courts in Hong Kong are quite willing to grant a proprietary injunction for bitcoins and other cryptocurrency in circumstances where an arguable case on ownership and a real risk of dissipation can be established.
Unsure about how to trace, freeze and recover stolen cryptocurrency? Consider our high-level overview of common law remedies available in Hong Kong and Singapore.
For tips on how to obtain critical information to help you assess your case, we have previously explored how courts in common law jurisdictions order disclosure and the nuclear option for parties possessing relevant information in the United States.
Client Alert 2022-006
