Hong Kong’s Court of Appeal (“CA”) has overturned the 2021 decision of the Court of First Instance in which the Court of First Instance had held that the longstanding use of the “letter of no consent” (“LNC”) regime as operated by the Hong Kong Police under the Organised and Serious Crimes Ordinance (“OSCO”) – which had been routinely used by the police to impose an informal freeze on suspicious bank accounts – was unlawful.
Up to the 2021 decision in Tam Sze Leung & Ors v Commissioner of Police [2021] HKCFI 3118, the police had been able to assist the victims of financial crimes, including, in particular, on-line frauds and cybercrimes, where misappropriated funds or monies representing the proceeds of crime ended up in bank accounts held in Hong Kong by issuing LNCs to the banks in question effectively informally and temporarily “freezing” the accounts. In practice, the police often were able to issue such LNCs much more quickly than victims could otherwise obtain freezing orders from the Court in civil proceedings. The LNC regime, therefore, was a very important tool among those available to the police, as well as victims and the legal practitioners assisting them, in preserving and recovering victims’ stolen assets.
By determining that the LNC regime as operated by the police was unlawful, the 2021 Tam Sze Leung decision created a high degree of uncertainty for the police, victims, financial institutions and legal practitioners alike.
The LNC regime – S.25 and S.25A OSCO
Under S.25 OSCO, it is an offence to deal with property known or reasonably believed to represent the proceeds of crime. S.25A requires those dealing with such property to notify the police if they know or suspect it to be the proceeds of crime by filing suspicious transaction reports (“STRs”) with the Joint Financial Intelligence Unit (“JFIU”) (a unit jointly staffed by the police and the Customs & Excise Department). Upon receipt of an STR, the JFIU would then consider either giving consent for dealing or withholding consent by issuing an LNC.
In practice, however, rather than issuing LNCs upon the receipt of STRs, in many cases the JFIU was urging banks to issue STRs and to freeze the accounts following which the JFIU would issue LNCs stating that the recipient banks were not authorised to deal with the funds – thereby informally freezing the accounts in question.
The Tam Sze Leung case
In Tam Sze Leung, the Applicants were suspected of involvement in a “pump and dump” stock market manipulation scheme being investigated by the Securities and Futures Commission (“SFC”). The SFC referred the matter to the police, as a result of which the JFIU notified banks with which the Applicants held accounts, urging them to issue STRs in accordance with the provisions of S.25A OSCO, which the banks duly did. Thereafter, the JFIU issued LNCs to the banks, causing around HK$30-40 million to be frozen.
The Applicants sought judicial review of the Commissioner of Police’s decision to issue the LNCs, raising 6 grounds of challenge to the legality and constitutionality of the “no consent” regime.
On 31 December 2021, Coleman J (at first instance) accepted three of the 6 grounds advanced by Applicants, namely that the LNCs (1) were ultra vires of OSCO; (2) were not prescribed by law; and (3) disproportionately interfered with the Applicants’ property rights. See our article on the first instance decision for further details of Coleman J’s judgment.
In a further decision on relief and costs dated 23 March 2022, Coleman J granted a declaration in favour of the Applicants that the LNCs were, and the LNC regime as operated by the Police is (1) ultra vires sections 25 and 25A OSCO; and (2) incompatible with articles 6 and 105 of the Basis Law because the LNC regime as operated by the police was not prescribed by law and was disproportionate.
The appeal
The Commissioner of Police appealed. In short, the CA found itself “in respectful disagreement with the judge in relation to the grounds he upheld”, rejected all of the 6 grounds advanced by Applicants at first instance and upheld the operation of the LNC regime as lawful, constitutional and proportionate.
The ultra vires and improper purpose grounds
The CA disagreed that the LNC regime enabled the Police to operate an “informal and unregulated freezing power”. The CA found that accounts are not “frozen” because of any enforceable order made by the Police (like a Mareva injunction granted by a civil court) but, rather, because the bank itself chooses not to comply with its customer’s instructions for fear of attracting criminal liability under S.25(1) OSCO for dealing with property that represents proceeds of crime.
In his first instance decision, Coleman J appears to have been concerned that the banks’ suspicions were derived from the police and that it was the contact from the police informing the banks of the pending investigation that triggered the “freezing” of accounts. However, the CA found that it was clearly within the Police’s powers to alert banks to relevant investigations and suspicions and that it does not follow that a subsequent LNC becomes ultra vires simply because the Police had “proactively reached out” and alerted the bank to the suspicious circumstances in the first place and/or requested or recommended the issuance of an STR.
Similarly, the CA rejected the Applicants’ alternative argument that the LNCs were issued for the improper purpose of securing an informal, unregulated asset freeze such that their issuance was ultra vires S.25A(2)(a) OSCO. The CA held it was not improper for the police to refuse consent to dealing for the purpose of preventing dissipation of the funds in question noting there was no suggestion in this case that the police did not have reasonable suspicion that the funds were derived from criminal conduct.
The not “prescribed by law” ground
The Applicants contended that the interference by the power to issue LNCS with their fundamental rights (e.g. property rights under the Basic Law) was not “prescribed by law” because S.25A(2)(a) OSCO does not adequately indicate the scope of the power or manner in which it should be exercised. Coleman J concluded there was no clarity to be found in OSCO itself and that the same applied to the procedures to be followed in the applicable police manual upon receipt of an STR.
The CA rejected this, finding that although the police’s discretion to give or refuse consent to dealing under S.25A(2)(a) OSCO is without specific fetters or parameters, there are sufficient constraints to guard against arbitrary or capricious refusal and sufficient signposts to give guidance for a person, with legal advice, to anticipate the scope of the discretion and manner of its exercise in order to challenge decisions in appropriate cases. The CA concluded, consequently, that the LNC regime does not fall foul of the prescribed by law requirement.
The proportionality ground
In the first instance decision, Coleman J found that the LNC regime as a whole interfered disproportionally with rights, and in particular with property rights enshrined in the Basic Law.
The CA held that Coleman J ought not to have entertained a systemic proportionality challenge given that the Applicants’ application for judicial review did not make a systemic proportionality challenge against sections 25 and 25A of OSCO, but merely a fact specific challenge that the LNCs in this case disproportionally interfered with their property rights.
The CA further noted that the CA had previously considered and rejected a systemic proportionality challenge against sections 25 and 25A of OSCO in Interush Ltd v Commissioner of Police [2020] HKCA 70, where the legality of the police’s informal freezing regime was confirmed to be constitutional. The CA held that under the fundamental doctrine of precedent Interush was binding authority on the court of first instance, and on the CA, unless the CA subsequently formed the view that it was plainly wrong – which the CA was not prepared to do in this case.
Other grounds
The CA considered but dismissed the other three grounds which had been rejected by Coleman J at first instance but which the applicants continued to argue, namely the “procedural unfairness” ground, the “fair hearing” ground, and the “blanket freeze” ground.
Implications
The CA’s confirmation that the LNC regime under OSCO is lawful and constitutional is welcome. It enables the police to continue to provide timely assistance to victims of fraud and other crimes to help with recovery of stolen assets where time is of the essence to prevent dissipation.
The temporary freeze effected by the LNC regime provides victims with time to apply for their own freezing order from the Court in civil proceedings or in other cases enables the victims to ascertain whether the amounts informally frozen justify the expense of applying for their own freezing order. In cases where the amounts involved might not justify the costs of applying for a civil freezing order, or where victims might not have the financial resources to do so, victims might rely on the informal freeze to obtain default judgment quickly against the wrongdoer and then garnish the frozen accounts for the return of their monies.
The CA’s decision will also be welcomed by financial institutions for whom the first instance decision had created much uncertainty. The CA’s decision provides assurance and guidance for financial institutions by reaffirming of the status of the LNC regime and the use of LNCs in Hong Kong. However, as the CA’s decision makes clear, ultimately the decision on whether to comply with an LNC or to execute an account holder’s instructions over funds that may represent proceeds of crime rests with the financial institutions themselves, requiring them to balance their contractual duties owed to and commercial relationships with their customers against potential criminal liability if permitting dealing with property that represents proceeds of crime.
The article updates the case analysis published on 17 June 2022 “Informal Police Freezing Regime Found to Be Unlawful” which was originally featured on Hong Kong Lawyer
