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
The banks’ role in the AML legislative and regulatory framework
While Tam Sze Leung (CFA) will be welcomed by practitioners and victims of fraud for reaffirming the "No Consent Regime" – a very useful tool in freezing assets without spending time and incurring costs to obtain orders from the court – what is perhaps equally as important for banks is the CFA’s practical guidance on what to do when the banks receive information from the police regarding suspicious accounts as follows:
"… Cases like the present, where the police receive information of possible money laundering from a reputable non-banking source, here the SFC, are relatively rare. But in such cases, giving effect to the above-mentioned OSCO provisions and the [Police’s Force Procedures Manual], the sequence of events involving the use of LNCs is likely to run as follows:
(a) Funds are deposited in the customer’s bank account. The bank thereupon incurs a debt to the customer in the amount deposited, usually repayable on demand. That debt, a chose in action, represents the customer’s property held by the bank. [Step 1]
(b) The police intimate their suspicions about an account to the bank. Given the information supplied by the police, the bank will appreciate that there may well be reason to believe that the relevant funds are the proceeds of an indictable offence. The police may request the bank to issue an STR to the JFIU in respect of those funds and may indicate that they intend to issue an LNC. [Step 2]
(c)No doubt after reviewing its own customer records, the bank disables the account, refusing any instructions from the customer to deal with the funds, if the suspicion is not dispelled. It issues an STR to the JFIU. [Step 3]"
(Emphasis added in bold, with steps 4 to 7 and footnotes omitted for present purposes)15
And the CFA sets out what the bank ought to do at Step 2:
“Thus, when at [Step 2] the police inform the bank of their suspicions, OSCO, AMLO and HKMA’s regulatory requirements come into play. The bank undoubtedly appreciates the statutory, regulatory and reputational risks it runs if it should deal improperly with the funds. Of most obvious significance is OSCO section 25(1). Unless, having made due inquiries, the bank is confident that the suspicion is dispelled, it runs the risk of incurring criminal liability under section 25(1) if it deals with the funds since the information provided by the police is likely to constitute reasonable grounds to believe that those funds represent the proceeds of an indictable offence. The desire to avoid such risks therefore motivates the bank to freeze the account. The freeze might have been instigated by the police but it represents the bank’s own act, done in compliance with its legal and regulatory duties.
The bank also comes under a section 25A(1) obligation to report to the police what it knows or suspects regarding those funds (even though the police may have instigated that suspicion). Thus, the request by the police that the bank should issue an STR at [Step 2] represents a request that the bank should comply with its statutory duty of disclosure. It may also reflect the interest of the police in obtaining any useful information possibly known to the bank which may be included in the STR.
In making the [Step 2] communications, the police no doubt expect and intend that the bank should comply with its anti-money laundering obligations and avoid committing the said offences so that the account is frozen and the STR is issued [Step 3]."
(Emphasis added in bold)16
As the CFA emphasised, banks are on the frontline in global AML efforts since generally only banks have knowledge of their customers and their banking activities and are positioned to detect and scrutinise suspicious transactions. Banks should take the initiative to review their internal policies and procedures against the benchmarks set by the CFA.
We have extensive experience advising banks, financial institutions and Designated Non-Financial Professions and Businesses on AML matters, including OSCO, the Anti-Laundering and Counter-Terrorist Financing Ordinance, the new regime for Dealers of Precious Metals and Stones, and other related financial crime laws. Please feel free to contact us to discuss this case or any other AML issues.
- In short, a serious crime.
- OSCO, section 25(1).
- JFIU is responsible for receipt and investigation of STRs.
- OSCO, sections 25A(1) and 25A(7).
- Banks in Hong Kong take their AML obligations seriously and frequently make STRs; the CFA cited a statistic that 207,146 STRs were received between 2018 and May 2021.
- OSCO, section 25A(2).
- Interush Ltd v. Commissioner of Police [2019] 1 HKLRD 892 at [6.19]; Tam Sze Leung v. Commissioner of Police [2022] 1 HKLRD 480 (Tam Sze Leung (CFI)) at [74]. This is also recognised outside Hong Kong where there is similar legislation – see, for example, R (UMBS Online Ltd) v. Serious Organised Crime Agency [2007] Bus LR 1317 at [5] and The Chief Officer, Customs & Excise, Immigration & Nationality Service v. Garnet Investments Limited, Guernsey Judgment 19/2011, 6 July 2011 at [30].
- Tam Sze Leung (CFI) at [24]; Tam Sze Leung v Commissioner of Police [2023] 2 HKLRD 839 (Tam Sze Leung (CA)) at [23].
- Tam Sze Leung (CFI) at [62]-[63], [64(4)] and [75].
- Tam Sze Leung (CFI) at [92].
- Tam Sze Leung and Others v. Commissioner of Police [2024] HKCFA 8 (Tam Sze Leung (CFA)) at [65].
- Tam Sze Leung (CFA) at [71].
- Tam Sze Leung (CA) at [58], endorsed by the CFA in Tam Sze Leung (CFA) at [67].
- Tam Sze Leung (CFA) at [81] and [104]. This, in effect, overruled the CA’s reasoning in Interush.
- Tam Sze Leung (CFA) at [45].
- Tam Sze Leung (CFA) at [48]-[50].
In-depth 2024-096
