HK court: ‘Informal freeze’ of bank accounts invalid

By Howard Wu

The Hong Kong Court of First Instance held that the “no consent regime” adopted by the police under cap. 455 of the Organised and Serious Crimes Ordinance (OSCO) is unlawful. The court handed down the important judgment in Tam Sze Leung & Ors v Commissioner of Police (2021), on 30 December 2021.

Under the regime, the police issued ‘letters of no consent’ (LNCs) to banks to trigger an informal freeze on accounts suspected of holding proceeds of crime, often in the initial stages of police investigations into cyber fraud or other crimes.

The judge referred to the “important and undisputed need … to combat money laundering and to facilitate the pursuit and confiscation of proceeds of crime” and also noted that, from the police perspective, the regime was “a sharp but essential modern weapon” giving them “the ability to counter-attack”.

This judgment curtails that practice and addresses issues of real public importance, with significant implications for financial institutions and victims of financial crime seeking to recover losses in Hong Kong.

In the 11 months from January to November 2021, more than 500 phishing scams, worth more than HKD1.4 billion (USD179 million) in losses, were reported to the Hong Kong police. The police have been developing and will soon launch free software to help businesses identify phishing scams.

Key takeaways

The court accepted that the police are free to express or report suspicions arising from their ongoing investigations to financial institutions, but rejected the use of LNCs to freeze funds informally.

Although the court gave its reasons, it has not yet given orders for relief. This judgment is likely to be appealed. In the meantime, it is unlikely that this gap can be addressed through legislative amendments, and there will be uncertainty about whether or how this practice can continue. Financial institutions will likely face a greater burden. They can deal with suspicious funds, but only with consent. However, authorities are unlikely to provide their express consent in circumstances involving cyber fraud or other financial crimes.

In practical terms, it is recommended that financial institutions: (1) ensure effective anti-money laundering policies and procedures are developed, implemented and monitored; (2) file suspicious transaction reports (STRs) where appropriate; and (3) carefully assess the terms and conditions with customers to ensure the ability to freeze funds, that is, to not deal with funds suspected to be proceeds of crime.

It is also recommended that business individuals: (1) keep cybersecurity at the top of their agendas; (2) consider cyber insurance; (3) identify any cyber incidents and act quickly. Out-of-court options have been impacted, so victims of financial crime may need urgent injunctive relief through civil litigation to stop funds from being dissipated and maximise recovery prospects; and (4) reassess active recovery strategies if you have been the victim of financial crime.

The regime

Section 25 of the OSCO establishes the offence of dealing with property known or reasonably believed to represent the proceeds of crime.

Section 25A of the OSCO provides that a person dealing with any property should notify the authorities where the person knows or suspects that the property represents proceeds of crime. Section 25A(2)(a) further provides a defence for the person concerned to deal with the property when the person does so with the consent of an authorised officer.

The legislative scheme deprives perpetrators of the proceeds of their criminal conduct and ensures that knowledge or suspicion of such proceeds is reported.

Financial institutions typically notify the police of their knowledge or suspicion under section 25A by filing STRs to the Joint Financial Intelligence Unit, after which it may issue a letter of consent authorising the financial institution to continue dealing with the relevant account.

However, the police have been using this regime to expressly issue LNCs to withhold consent. The practical reality is that financial institutions often err on the side of caution and impose a freeze on the relevant accounts upon receipt of LNCs.

Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Howard Wu (Shanghai) at subscripton ad blue 2022