On 30 December 2021, the Hong Kong Court of First Instance (CFI) issued its judgment in Tam Sze Leung and others v Commissioner of Police  HKCFI 3118, which found the Joint Financial Intelligence Unit's (JFIU) letter of no consent (LNC) regime to be beyond the powers conferred on it by the Organised Serious Crimes Ordinance Cap 455 (OSCO).
The LNC regime operated in the context of section 25A of OSCO and was used by the Commissioner of Police (Commissioner) to effect an informal freeze of bank accounts as a stop-gap measure before a restraint order is obtained from the court. In summary, the Court allowed the judicial review application on three grounds: the LNC regime is ultra vires, not prescribed by law, and fails the proportionality test.
Notably, the Tam Sze Leung judgment did not criticise the JFIU's issuance of consent letters after the filing of suspicious transaction reports (STRs), which served as a defence for the STR reporter to deal with funds subject to the STR under section 25A(2)(a), OSCO, and as upheld by the Court of Appeal in Interush  HKCA 70.
The full impact of the CFI's judgment in Tam Sze Leung remains to be seen as the Court has not determined the relief to be granted to the Applicants, and it noted that any relief granted would not prescribe how the constitutional problems identified in the judgment should be resolved. In addition, the case remains open for the parties to appeal the decision.
This Legal Update outlines the key findings from the CFI judgment and the takeaways for financial institutions in the meantime.
The four Applicants are family members who collectively had 12 bank accounts with several banks in Hong Kong with a combined total balance of around HK$30 million to HK$40 million (Accounts). In December 2020, the Applicants noticed they were unable to withdraw funds from the Accounts. Upon making enquiries, the banks informed the Applicants that they were not in a position to provide reasons for the restrictions imposed on the Accounts. The Applicants and their solicitors inferred from the brief responses that the Commissioner had issued LNCs in respect of the Accounts.
The Applicants' solicitors then wrote to the Commissioner to seek confirmation that LNCs had been issued in respect of the Accounts and to request the legal grounds and basis for issuing the LNCs. On 14 December 2020, the Commissioner responded to state that the Applicants were currently under investigation by the Financial Investigations Division, Narcotics Bureau for a case of dealing with property known or believed to represent proceeds of an indictable offence, and invited the Applicants to contact the Police. The Applicants did not take up the Police's invitation and the Police did not provide any further substantive response to the Applicants' solicitors' subsequent letters.
By way of background, the Applicants' premises had previously been subject to searches conducted in 2019 and 2020 by the Securities and Futures Commission (SFC) in connection with suspected stock market manipulation offences contrary to the Securities and Futures Ordinance Cap 571. Through the judicial review proceedings, it became known that on 25 November 2020, the SFC referred the Applicants to the Police for suspected money-laundering activities under section 25, OSCO.
On 27 November 2020, the JFIU alerted the relevant banks about the investigations and urged them to file STRs with 'clear statements' that LNCs would be issued. As an example, one email from the JFIU to a bank asked for an STR to be filed "asap as LNC will be issued". The banks each filed STRs and received LNCs from the JFIU in December 2020. The Court noted that prior to being contacted by the Police, none of the banks appeared to have had any reason to file an STR in relation to the Applicants or the Accounts.
The LNCs were in place for approximately ten months. They were withdrawn after the Secretary for Justice obtained restraint orders against the Applicants and the Accounts on 11 October 2021.
The Applicants raised six grounds in the judicial review application of which three were successful: ultra vires, not prescribed by law, and lack of proportionality.
In arriving at its decision, the Court highlighted the 'practical reality' that the JFIU's issuance of an LNC will invariably cause banks to 'err on the side of caution' and not deal with the relevant accounts. As a result, the affected accounts are 'informally frozen' for the duration that the LNC remains in effect. More importantly, the Commissioner acknowledged that the purpose of issuing an LNC is to cause the bank recipients to refuse to deal with the affected property, thereby informally freezing such property, to provide a 'temporary stop-gap measure' to ensure that the funds remain available to give effect to restraint orders obtained from the court at a later date. This, the Court noted, was a significant change from the Commissioner's position in Interush, where the Commissioner took the position that the consent regime did not freeze bank accounts.
It was argued on behalf of the Commissioner that there are safeguards for the LNC regime in the Forces Procedure Manual (FPM) that set out the considerations and mechanisms to follow in the issuance of LNCs, including actions to be taken by the Police after an LNC is issued. The Court noted these and accepted that the LNC regime might contribute to the overall objectives of OSCO. However, the Court concluded it is 'implausible' that the legislature intended to enact a 'secret, informal and unregulated asset freezing power'. The Court further explained that to use the express provision relating to consent in section 25A(2)(a), OSCO for the purpose of securing an informal, unregulated freezing of assets is to 'use that power for a purpose other than that for which it was supplied'. Therefore, the Court found the LNC regime as operated by the Commissioner to be ultra vires.
The Court further found that the LNC regime as operated by the Commissioner is not 'prescribed by law'. This requirement necessitates the law in question to be adequately accessible by citizens and formulated with sufficient precision to enable citizens to regulate their conduct. The Court supported this finding by pointing out the divergence in the Commission's own understanding of the true source, nature and extent of the Police's powers under the LNC regime in this case and the lack of clarity in OSCO and the FPM.
Finally, as regards the 'proportionality' ground, the Court confirmed that the LNC regime encroaches on the fundamental right to the use of property under Basic Law, Article 105, but not the right to privacy and family under the Hong Kong Bill of Rights, Article 14. The Court accepted there was an obvious legitimate purpose for the LNC regime and a rational connection to the legitimate purpose of deterring criminal activity by restricting access to the proceeds of crime. However, the LNC regime operated without temporal limitation, with only internal intermittent review of justification, without any proportionality assessment dependent on the length of continued operation of the LNC, and is used by the Commissioner to effect informal freezes of bank accounts. For these reasons, the Court held that the LNC regime fails the proportionality assessment.
What Does This Mean for Banks?
It remains to be seen whether the Commissioner will appeal the CFI's judgment in Tam Sze Leung and whether new legislation will be introduced to replace the LNC regime.
In the meantime, Tam Sze Leung does not affect the obligation of banks to comply with sections 25 and 25A, OSCO. This also means that banks will continue to be exposed to litigation risks arising from customers who may challenge the freezing of accounts pending a formal restraint order. To strike a balance between these considerations, it is good practice for banks to document the grounds, and retain supporting evidence, of its decision on whether to file an STRs and/or to apply restrictions to affected accounts. It is also prudent for banks to periodically review cases where accounts have been frozen for a lengthier period of time, including checking with law enforcement for updates where an STR is filed, to ensure the bank acts and continues to act reasonably and rationally in response to changes in circumstances which may require the bank to revisit its earlier decision to freeze an account. Banks should also regularly review all applicable account terms and conditions to ensure that they are sufficient to permit the bank to conduct all required financial crime risk management activities.
Notwithstanding the criticisms of the LNC regime in Tam Sze Leung, the Court noted that it is open for the Commissioner to express or report suspicions arising from ongoing investigations to financial institutions. This was said to be in line with the Commissioner's wider duties and obligation to take all steps which appear necessary for keeping the peace, preventing crime or protect property from criminal injury. We therefore expect communications on pending investigations to continue between law enforcement authorities and banks. It is, of course, open to banks to request law enforcement authorities to share more details about ongoing investigations; through such interactions, banks are able to make more holistic decisions on the management of affected customers' accounts.
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