In Tam Sze Leung & Ors v Commissioner of Police  HKCFI 3118, a judicial review case, the Court of First Instance found the longstanding practice of the Hong Kong Police in effecting an informal freeze against bank accounts through the use of “letters of no consent” (LNCs) (the No Consent Regime) to be unconstitutional.
The No Consent Regime as operated has hitherto provided a speedy and cost effective practical means of freezing funds in Hong Kong accounts, which has provided vital assistance to clients which have been the victims of online fraud cases (e.g. CEO fraud) at a time when these are prevalent in Hong Kong. Unfortunately, we have a great deal of experience dealing with this kind of fraud – Hong Kong is very commonly used as a conduit for it. It is very easy for a newly established Hong Kong company to open a bank account in the territory, and given Hong Kong’s role in the global economy it appears that instructions by fraudsters to make payments to accounts held in Hong Kong banks have been acceptable as credible by all too many victims of phishing or other cyber frauds. Once the funds are paid into accounts here, in the words of the Hong Kong Court, they “can disappear at the push of a button”.
The LNC regime
In Hong Kong, there is a legal obligation to report suspicious transactions under sections 25 and 25A of the Organised Serious Crimes Ordinance (Cap 455) (the OSCO), by way of suspicious transaction reports (STRs), as soon as a person knows or suspects that any property: (1) is proceeds of drug trafficking or an indictable offence, or terrorist property, (2) was used in connection with drug trafficking, an indictable offence or terrorist act, or (3) is intended to be used in drug trafficking, an indictable offence or terrorist act.
Section 25A(2)(a) of the OSCO is the provision which gave rise to the No Consent Regime:
“(2) If a person who has made a disclosure referred to in subsection (1) does any act in contravention of section 25(1) (whether before or after such disclosure), and the disclosure relates to that act, he does not commit an offence under that section if—
(a) that disclosure is made before he does that act and he does that act with the consent of an authorized officer……” (Emphasis added)
In practice, the Commissioner of Police (the Commissioner) would issue LNCs to financial institutions, proactively stating that he does not give the financial institution consent to deal further with funds in certain accounts, by reason that such funds are believed to hold the proceeds of crime. An LNC would further remind the financial institution that, dealing with property known or reasonably believed to represent the proceeds of an indictable offence, and disclosing this information to any unauthorised person, including the account holder, are criminal offences.
In light of the fact that the Court will not be prescribing how the constitutional problems of the No Consent Regime “as operated” should be removed or resolved, it is unclear (at least at this moment) whether there is a way for the Hong Kong Police to operate the No Consent Regime (or something like it) lawfully.
Further, the case is subject to appeal. The Government may even be interested in pushing for a new legislation, or revisions to the Police’s Force Procedures Manual, to revamp the No Consent Regime in such a way that its operation is less likely to be found unconstitutional going forward.
For the victims of fraud seeking recovery of funds misappropriated from them, the costs of making a report to the Hong Kong Police, who could then effectively freeze the fraudster’s account by issuing an LNC under the No Consent Regime, have been much lower than, say, those of obtaining an urgent ex parte Mareva (asset freezing) injunction. Taking advantage of the informal freeze, and the likelihood that the fraudsters would abandon the account on finding out that the Police were interested in it, the victims could issue and serve a writ on the Hong Kong company holding the account, and then apply for default judgment and orders garnishing any funds remaining in the account up to the amount of his loss at a relatively low cost. However, if Tam Sze Leung does bring about a systemic change to the No Consent Regime as operated, this might mean in the future that the victims of fraud can no longer rely on a relatively easy-to-obtain “informal” account freeze via the Police. This could make recovery of misappropriated funds more difficult and, in some cases, financially not viable. This will serve only to increase the already huge amounts lost to fraud in Hong Kong.
For financial institutions, the legal obligation to report suspicious transactions by way of STRs remains unaffected by Tam Sze Leung. They should still assess carefully whether to honour the clients’ instructions in light of the possible risks of criminal liability, and take independent decision as to whether to freeze the accounts that may hold crimes of proceeds.
The full impact of Tam Sze Leung remains to be seen. We will closely watch this space.
For a more detailed overview of the Court decision, including the background facts, grounds for judicial review and the Court’s reasoning, please see our e-bulletin here.