Background
For a long time, the Letter of No Consent (“LNC”) in Hong Kong was a practical instrument for law enforcement agents to freeze bank accounts suspected of holding illicit funds. Various ordinances, including the Organized and Serious Crimes Ordinance (“OSCO”), the Drug Trafficking (Recovery of Proceeds) Ordinance (“DTRPO”), and the United Nations (Anti-Terrorism Measures) Ordinance (“UNATMO”) prohibit individuals from engaging in transactions involving property which they have knowledge or reasonable grounds to believe that the same represents proceeds from criminal activity.
How does the LNC work?
The process typically begins when victims of crime report the incident to the police and the relevant bank. Upon receiving and reviewing a complaint related to financial crime, the police take action by issuing a LNC to the relevant bank or financial institution. This action temporarily freezes the bank accounts suspected of being involved in receiving the proceeds of the crime. Alternatively, if a bank notices suspicious activity in a specific account, it can file a suspicious transaction report (“STR”) to the Joint Financial Intelligence Unit (“JFIU”), operated jointly by the Hong Kong Police Force and the Hong Kong Customs & Excise Department, which then conducts an analysis to determine whether to issue a LNC.
Purpose of the LNC
The temporary freeze resulting from the issuance of the LNC allows victims time to apply for an injunction from the Court. In some cases, accounts remain informally frozen under the LNC until the victims obtain a judgment against the wrongdoer and successfully recover the funds. This prolonged freeze without a Court Order has led to many judicial challenges.
Evolution of the LNC
The above timeline of landmark cases illustrates the evolution and development of the LNC. These cases shed light on how the No Consent regime has evolved and the challenges it brings. We provide a brief summary below.
The Interush Era
In the Interush case, a police investigation uncovered a pyramid scheme involving Interush Limited and Interush (Singapore) Pte Limited. Hang Seng Bank Limited (“Hang Seng”), which held the accounts of the involved parties, filed a STR due to suspected money laundering activities. The JFIU issued a LNC to Hang Seng, indicating they did not consent to the bank handling the suspicious funds. The Applicants claimed significant financial losses resulting from the account suspension and challenged the constitutionality of the No Consent regime. The Court ruled that the provisions did not infringe on property rights and recognized the No Consent regime as essential in combating organized crime and money laundering.
The Post Tam Sze Leung Era
In Tam Sze Leung & Ors v Commissioner of Police [2021] HKCFI 3118, Tam and others were investigated for suspected stock market manipulation. The police informed banks about the investigation and requested them to file STRs, leading to the issuance of LNCs and the freezing of funds. The Court of First Instance held that the LNCs and the No Consent regime operated by the Commissioner of Police were ultra vires and disproportionate, and were not prescribed by law.
Following their successful challenge as to the constitutionality of the No Consent regime, the same applicants experienced their first setback in a separate proceeding known as Tam Sze Leung and others v Secretary for Justice and Another [2022] HKCFI 2330 when the Court reaffirmed the Securities & Futures Commission of Hong Kong’s (“SFC”) statutory authority under the Securities and Futures Ordinance to impose prohibitions or restrictions on the dealing with assets held in accounts maintained with licensed corporations by way of a Restrictive Notice (“RN”). In this case, the Court further clarified that when the SFC seeks to issue a RN based on the grounds of being desirable in the interest of the investing public or the public interest, it must consider the potential negative outcome and weigh the impact of the prohibition or requirement in its decision-making process.
Then, in the case of Tam Sze Leung & Ors v Commissioner of Police [2023] HKCA 537, the Court of Appeal (“CA”) overturned the Court of First Instance’s decision, ruling that it is not ultra vires for the police to issue LNCs to banks. The CA referred to the Interush case, highlighting the necessity of sections 25 and 25A of the OSCO and the No Consent regime in combating money laundering and organized crime in Hong Kong.
Current Status and Implications
The applicants in Tam Sze Leung & Ors v Commissioner of Police [2023] HKCA 959 have been granted leave to appeal to the Court of Final Appeal (“CFA”), and the case is to be heard in the first quarter of 2024. The final decision of the CFA is eagerly awaited, as it will have substantial implications for fraud victims on how they safeguard their stolen funds and seek restitution. Moreover, our highest Court’s decision will also impact compliance obligations of banks and financial institutions when dealing with funds suspected of being proceeds of criminal activity.
Practical Tips for Victims of Fraud
In response to cases involving suspected money laundering or fraud, time is always of the essence. Besides reporting the matter to the police and relevant banks and financial institutions promptly, you should also consider the following:
Disclosure Order
Disclosure orders such as a Norwich Pharmacal Order, also known as a Third Party Disclosure Order, is a legal remedy derived from common law and frequently employed in recovering fraudulent funds. This order is directed at banks and financial institutions and seeks disclosure of information pertaining to specific bank accounts and is often the first step to take if a victim of fraud has little knowledge on where the misappropriated funds are, or if a tracing exercise is required. In the case of A1 & ANOR V R2 & ORS [2021] HKCFI 650, the Court suggested that applications for Norwich Pharmacal discovery should be made either on an inter partes basis, involving both parties or on an ex parte basis with notice and that the banks and financial institutions should be given a sufficiently long notice period to allow them to present their arguments to the Court as to why discovery should not be granted.
So, once the location and details of the misappropriated funds are confirmed, what other interim measures are available as the LNC is not a freezing Order granted by the Courts in Hong Kong? You may consider the following two reliefs available:
Mareva Injunction
A Mareva injunction, if granted, has the effect of temporarily restraining the defendant from removing, dissipating, and transferring assets away from the jurisdiction pending final judgment. The initial application for a Mareva injunction is usually made ex parte (by the plaintiff only).
A Mareva Injunction is an equitable yet draconian remedy and the Court will only issue it when it is fair and appropriate to do so. To obtain a Mareva Injunction, the applicant must establish the following essential elements:
1) A good arguable case on a substantive claim against the defendant;
2) The defendant possesses assets located in the jurisdiction;
3) The balance of convenience supports the granting of the injunction;
4) There exists a real risk of the defendant dissipating their assets before the court can render a final judgment; and
5) Monetary damages ordered by the Court cannot be an adequate remedy for the plaintiff and the plaintiff is able to compensate the defendant for loss and damages arising from the granting of the injunction.
Proprietary Injunction
A proprietary injunction, on the other hand, is granted if the Court is satisfied that the Plaintiff has a proprietary claim over a Defendant’s assets. It seeks to preserve the assets of the defendant until judgment is obtained by the plaintiff so the assets are returned to the plaintiff.
The threshold for obtaining a proprietary injunction is comparatively lower when compared to a Mareva injunction. To successfully apply for a proprietary injunction, there must be a serious question to be tried. Additionally, granting the injunction must be deemed convenient and favourable in terms of overall circumstances. There is no need for the Court to consider the risk of dissipation of assets by the defendant.
Obtaining judgment followed by a Garnishee Order
A Garnishee Order may be sought subsequent to obtaining a judgment in favour of the plaintiff, allowing the plaintiff to reclaim defrauded funds (either entirely or partially) from the temporarily frozen money either under the LNC or from the pool of funds frozen by the relevant injunctions.
These civil actions, coupled with the issuance of a LNC, offer legal avenues to safeguard assets, prevent fraudsters from disposing of funds, and for victims to recover defrauded funds associated with money laundering or unlawfully obtained proceeds of crime.
How can we assist?
If you suspect that you have been a victim of a fraud or have concerns about money laundering, our experienced team specializing in financial crime and asset recovery can offer confidential and customized advice and support you in pursuing the appropriate legal remedies to address your or your corporation’s legal needs.
Postscript: The CFA decision in Tam Sze Leung & Ors v Commissioner of Police [2024] HKCFA 8
The Court of Final Appeal (“CFA”) delivered its judgment in the case of Tam Sze Leung & Ors v Commissioner of Police on 10 April 2024, addressing four questions of law raised by the appellants as follows:-
Question 1 focused on whether the LNC issued by the Commissioner of Police (“CP”) was ultra vires or issued for an improper purpose. The CFA held that the police actions were lawful under the Police Force Ordinance (“PFO”) which were aimed at preventing and combatting money laundering. This argument was therefore dismissed accordingly.
Question 2 involved a constitutional challenge against the CP’s issuance of LNCs, alleging violations of property rights, the right to private and family life, and access to legal advice under the Basic Law and the Bill of Rights. The CFA determined that the police’s temporary actions did not infringe upon these rights as alleged and were lawful and proportionate in balancing anti-money laundering objectives and respecting individual property rights.
Question 3 addressed the fairness of the hearing regarding the issuance of LNCs. The CFA concluded that the police’s actions did not interfere with property rights or constitute a determination of rights in a lawsuit. It emphasized that police investigations of suspected money laundering did not require a public hearing or adjudicative forum. Those aggrieved by these actions may seek relief through judicial review if they believed their rights were infringed.
Question 4 examined the relevance of the Interush decision to the current appeal. The CFA clarified that the present appeal was limited to challenges against the LNC regime and did not directly challenge the constitutionality of specific provisions of the OSCO. The CFA also expressed skepticism about the impact of the LNCs on property rights and questioned the reasoning behind the Interush decision. It noted differences in the approaches between the two cases and casted doubt on the relevance of the Interush decision to the current appeal.
Overall, the CFA upheld the legality and proportionality of the police actions in issuing LNCs, emphasizing the importance of countering money laundering while respecting individual rights, which is undoubtedly good news for victims of fraud and deception amidst the prevalence of fraudulent schemes nowadays.
