Anti-Money Laundering: Letter of No Consent Regime

Though the Hong Kong Court of Appeal upheld the constitutionality of the “no consent” regime in Interush Ltd. v. Commissioner of Police [2019] HKCA 70, a recent decision held that the regime was unconstitutional where, for the purpose of freezing a bank account, the police had pro-actively issued a letter of no consent (“LNC”) to a bank without any suspicious transaction report having been first filed by the bank. In this article, we explore the decision and provide our observations on the state of the law. If you’d like more information on the application of anti-money laundering laws, please contact one of our AML lawyers.

On December 31, 2021, in Tam Sze Leung v. Commissioner of Police [2021] HKCFI 3118, the Hong Kong Court of First Instance (“CFI”) determined that the so-called “letter of no consent” regime (“No Consent regime”) under which letters of no consent (“LNCs”) are issued by the Commissioner of Police to pro-actively freeze bank accounts is ultra vires sections 25 and 25A of the Organized and Serious Crimes Ordinance (“OSCO”) and is unconstitutional.

Background

Under sections 25 and 25A of OSCO and similar sections in the Drug Trafficking (Recovery of Proceeds) Ordinance (“DTRPO”) and the United Nations (Anti-Terrorism Measures) Ordinance (“UNATMO”), no person may deal with any property if they know or have reasonable grounds to believe that the property in whole or in part directly or indirectly represents any proceeds of an indictable crime. However, the person may deal with such property if, having disclosed to an authorized officer (meaning an officer of the Joint Financial Intelligence Unit (“JFIU”) which is jointly operated by the Hong Kong Police Force and the Hong Kong Customs & Excise Department) knowledge or suspicion that such proceeds may be connected with crime, they have received the consent of an authorized officer. Though it is clear that the police have power under those sections to give or refuse consent where a bank discloses a suspicion that bank balances may be connected to crime, in practice, the police have been proactively refusing such consent through issuing LNCs even where banks have yet to disclose any suspicion.

In this case, under the No Consent regime, the police proactively issued letters indicating that if the banks had disclosed suspicion that bank balances represented proceeds of crime, the police would not consent to the banks dealing with those balances, and invited the banks to file suspicious transaction reports (“STRs”). Until receipt of such letters, the banks had no reason to suspect that the balances in the accounts belonging to those persons may have been involved in any crime. The police conceded that their objective in issuing the letters and the invitations was to freeze the bank accounts of these persons before court proceedings to obtain a restraint order on the bank balances.

Importance of LNCs and No Consent Regime

Letters of no consent issued under the No Consent regime have been used by the police to informally freeze bank accounts before formal restraint orders on those bank accounts are applied for and obtained from the court.

The No Consent regime is an important tool in fraud cases as fraud victims often lack the resources to apply to court for an injunction to freeze a potential fraudster’s bank accounts, and banks are not generally inclined to freeze a customer’s accounts simply because someone claims that the bank’s customer is a fraudster. A failure to freeze these accounts in a timely manner pending a determination as to whether the bank customer did engage in fraud will often be fatal to any recovery should a determination be made that the bank customer is a fraudster, as such a failure will allow a multi-jurisdictional dissipation of the proceeds of the fraud in the intervening time, such that it becomes uneconomical and impracticable to trace these proceeds.

Constitutionality of LNCs and No Consent Regime

A concern with the No Consent regime is that it does not afford sufficient due process for the person whose property is frozen. In the case of a bank customer, the freezing by the bank of the customer’s account through issuance of a letter of no consent can have catastrophic consequences, potentially depriving the customer of the ability to meet expenses necessary for daily living or for the continued operation and viability of its business. These consequences may arise without the customer having any knowledge of the letter of no consent having been issued and before the customer having any court free avenue to challenge or even make representations as to the veracity of the allegations underlying the letter of no consent.

Interush Distinguished

The Court of Appeal held in Interush that the statutory scheme for banks to freeze accounts and for police to give or refuse consent to dealing in those accounts did not give rise to a proper constitutional challenge. However, in Tam Sze Leung, the CFI distinguished the Interush decision on the basis that the Interush ruling was made in the context where the banks themselves suspected that their customer’s bank balances may have represented proceeds of crime and suspended the customer’s bank accounts, and that although the police issued letters of no consent, these were issued following STRs filed by the banks and the banks themselves having suspended the customer’s bank accounts.

LNCs and No Consent Regime Ultra Vires OSCO

The court in Tam Sze Leung held that the No Consent Regime was ultra vires OSCO even though the regime might be said to contribute to the overall objectives of the legislation. The original purpose of the legislation providing for the police to issue letters of consent was to protect persons who had reported suspicion of money laundering so they could safely deal with property where the police did not believe those suspicions were borne out. However, the No Consent Regime instead acted as a police weapon to provide for a temporary freezing of property on the basis of the police’s own suspicions without court oversight afforded with restraint orders.

LNCs and No Consent Regime Not Prescribed by Law

The court in Tam Sze Leung held that OSCO itself provided insufficient clarity and certainty as to the scope of the power of the police to issue letters of no consent, the manner in which such a power could be exercised and the safeguards against the exercise of that power. It thus found the No Consent Regime is not prescribed by law and thus, unconstitutional.

Though the Court of Appeal in Interush commented that a bank customer could seek redress against a freezing of his bank account through the courts and the police themselves could exercise their discretion to give or refuse consent consistent with property rights, it did not determine whether the No Consent regime was prescribed by law.

Proportionality

The CFI noted in Tam Sze Leung that there was no time limitation in a freezing of property as a result of the issuance of a letter of no consent, a freeze would be subject only to internal police review on an intermittent basis and such a review did not take into account the length of time property had been frozen. The CFI further noted the purpose of the No Consent regime was specifically being used to effect an informal freezing of bank accounts. As a result, the CFI held that the No Consent regime is a disproportionate interference with property rights and is thus, unconstitutional.

Looking to the Future

The Commissioner of Police has intimated that it may wish to appeal the decision but such an appeal awaits a decision as to the relief to be given, which, as of the time of the publication of this article, has not yet been made.

One question the decision raises is how victims of fraud might seek to freeze bank accounts believed to have been involved in the fraud with resort to the courts. Though victims may seek an injunction, some victims may be deterred from so doing given concerns about costs.

Conversely, the decision brings much needed attention to the need for mechanisms to enable a bank customer whose accounts have been frozen based on police suspicion of fraud, and who believes that the freezing of his accounts is unjustified, to unfreeze his accounts without resort to the courts.