Reed Smith In-depth

Key takeaways

  • “No Consent Regime” upheld by Court of Final Appeal
  • Police may instigate freezing of bank accounts
  • Banks must make decisions as gatekeepers of AML regime, with the court’s guidance

On 10 April 2024, the Hong Kong Court of Final Appeal (CFA) put an end to questions surrounding the use of the "No Consent Regime" by the authorities to informally freeze bank accounts, holding that the use of letters of no consent (LNCs) to instigate the bank’s disablement of their customers’ accounts is legal.

The CFA reiterated banks’ responsibilities as gatekeepers of the anti-money-laundering (AML) regime and provided useful guidance as to the steps banks should take when they receive information about suspicious accounts from the police, within the context of the AML legislative and regulatory framework in Hong Kong.

The "informal freezing" regime

At the heart of Hong Kong’s AML legislative framework is the money laundering offence under the Organized and Serious Crimes Ordinance (Cap. 455) (OSCO):

  • Money laundering offence: If a person deals with any property knowing or having reasonable grounds to believe that such property, directly or indirectly, represents the proceeds of an indictable offence,1 the person commits an offence.2
  • Duty to disclose: If a person knows or suspects that any property represents the proceeds of crime, that person is under a legal duty to report this to the Joint Financial Intelligence Unit (JFIU)3, failure to make such disclosure is, in itself, an offence.4 Such disclosure is commonly known as a suspicious transaction report (STR)5 and should include any matter on which that knowledge or suspicion is based.
  • Consent to deal: If a person submits an STR and obtains the JFIU’s consent, then the person does not commit a money laundering offence by dealing with the property. In other words, submitting an STR provides a possible defence against, or immunity from, liability under the money laundering offence.6

As recognised by various judges in the past, if the JFIU withholds consent to deal and instead issues an LNC, a bank will "invariably err on the side of caution" and freeze the relevant customer’s account.7 This is sometimes referred to as the "informal freezing" regime.

The challenge against the "No Consent Regime"

The "No Consent Regime" was upheld as constitutional by the Court of Appeal (CA) in Interush Ltd v. Commissioner of Police in 2019. In that case, the court dismissed a challenge that argued the "No Consent Regime" under OSCO was inconsistent with the property rights protected under articles 6 and 105 of the Basic Law. In rejecting the challenge, the CA held that while the constitutional property rights were engaged by the "No Consent Regime", the restriction is proportionate in pursuing a legitimate aim.

In December 2021, to the surprise of many, the Court of First Instance did not follow Interush and ruled in Tam Sze Leung v. Commissioner of Police that the "No Consent Regime" was unconstitutional and unlawful. In this case, instead of responding to STRs filed by banks, the police (acting on information obtained from the Securities and Futures Commission (SFC)) sent emails to four banks to "recommend" or “request" that they file STRs.8 In some of these emails, the police indicated that LNCs would be issued. LNCs were promptly issued by the police upon receiving STRs from the banks.

Based on the police’s confirmation that they are indeed using the issuance of LNCs for the purpose of creating an "informal freezing" regime (instead of being operated as a responsive regime, triggered when an STR is received),9 the judge distinguished Interush and held that this is using the power to grant or withhold consent (and hence immunity against liability under the money laundering offence) under section 25A(2) of OSCO for an improper purpose not intended under OSCO and is thus ultra vires.10

Both the CA and CFA disagreed with the judge. The CFA said that the judge was wrong to confine himself to OSCO when searching for statutory authorisation. The CFA ruled that, in informing the banks of suspicions relating to a bank account, the police were fulfilling their duties under the Police Force Ordinance (Cap. 232) (PFO), i.e., taking lawful measures to prevent and detect crimes and offences and to prevent injury to property.11

The CFA held that the PFO allows the police to instigate the freezing of customers’ accounts by banks to prevent the dissipation of funds pending further investigation.12 However, like the CA, the CFA is of the view that the police’s LNCs do not freeze bank accounts – the freezing of accounts is the bank’s decision:

"The withholding of consent no more ‘freezes’ an account than the giving of consent compels the bank to release money. The police have no power to require the bank to do anything."13

The CFA went one step further in relation to property rights, holding that given the freezing of account remains the bank’s doing, property rights are not engaged by the withholding of consent by the police.14