Court of Final Appeal explains Money Laundering Law

We previously reported on the conviction and sentencing of a solicitor, Wu Wing Kit, for money laundering. Since that judgment, there has been a significant Court of Final Appeal judgment in respect of the test to be applied by the court when determining whether a person is guilty of an offence under Section 25(1) of the Organized and Serious Crimes Ordinance (OSCO), i.e. whether he knew, or had reasonable grounds to believe, that property he dealt with was the proceeds of an indictable offence.

HKSAR v Pang Hung Fai (FACC 8 of 2013)

On 10 November 2014, the Court of Final Appeal quashed the conviction of Pang Hung Fai (Pang), who had been convicted (and sentenced to two and a half years’ imprisonment) under section 25(1) of OSCO.

Background

Pang and a Mr Kwok Wing (Kwok) had been close friends for 30 years. Kwok was the chairman and a major shareholder of Tack Fat Group International Limited (Tack Fat), a Hong Kong listed company. Kwok caused a total of 40 million share options to be granted to two mainlanders, which were exercised two days later. However, Tack Fat never received any money for the shares. Subsequently, all 40 million shares, in the name of the two mainlanders, were sold on the stock market. Pang had no knowledge of the share dealings between Kwok, the two mainlanders, and Tack Fat.

Subsequently, at Kwok’s request, Pang allowed HK$14million to be transferred from the two mainlanders’ Hong Kong bank accounts and deposited into a bank account of Mickles International Limited (Mickles), a Hong Kong company of which Pang was a director and sole shareholder. Unknown to Pang, the money deposited into the Mickles account was derived from the sale of shares and had been fraudulently obtained from Tack Fat. Twenty six days later, the same amount was, at Kwok’s request, remitted by Pang from Mickles’ bank account to a bank account of a company in Cambodia controlled by Kwok.

Pang was subsequently charged with money laundering.

The Prosecution’s case

The prosecution’s case against Pang under section 25(1) was based on its claim that he had reasonable grounds to believe that the property with which he dealt was the proceeds of an indictable offence. The prosecution relied on the following matters:-

1. the quantum transferred (HK$14 million);
2. manner and origins of the transfer (two deposits from two Hong Kong accounts held by two unknown mainlanders);
3. the transnational dimension of the transfer (mainlanders paying HK$14 million into Pang’s bank account for onward transmission to a Cambodian bank account);
4. HK$14 million transferred to avoid deposit in Kwok’s Hong Kong business or personal bank account;
5. Pang receiving and holding HK$14 million for 26 days in an inactive business bank account in Hong Kong;
6. neither Pang nor Kwok giving any reason why it was necessary for the HK$14million to be deposited into Pang’s company account before it was remitted to Cambodia;
7. Pang executing all of Kwok’s instructions without delay, question or report to the authorities;
8. Pang making no inquiry about the names of the mainlanders, precise amount of money, length of time the money would be in his account or nature of the transaction when he agreed to hold the money in his account;
9. when told about the incoming money from Kwok by his accounting manager, Pang telling him that he did not know the nature of the money;
10. without having seen Kwok for 4 weeks, Pang arranging for his accounting manager to transfer the HK$14 million to Kwok’s designated bank account, without making any inquiry;
11. although both had loaned each other money in the past, Kwok had never before asked Pang to hold money temporarily for him.

Pang’s Defence

Pang’s defence was essentially that, on entirely reasonable grounds, he had trusted Kwok implicitly, having known him for over 30 years, never having known him to be dishonest and Kwok being the chairman of a listed company. Accordingly, Pang said, he had no reason to suspect that the money remitted to his account had anything to do with any criminal offence. Further, Pang asserted that he did not consider HK$14 million a large amount, regarding it as “practically small change” for someone as wealthy as he believed Kwok to be.

Pang was convicted after trial and his conviction was upheld on appeal. He then appealed to the Court of Final Appeal.

Court of Final Appeal’s Decision

Pang’s appeal against conviction had been dismissed by the Court of Appeal, but the Court of Final Appeal granted Pang leave to appeal, limited to a number of questions. The Court of Final Appeal quashed the conviction. Two of the questions (with the Court of Final Appeal’s answers) were as follows:-

Question 1: When seeking to determine whether a person has reasonable grounds to believe that the property dealt with represents the proceeds of an indictable offence (and has therefore committed an office under section 25(1)), are they entitled to take into account the Appellant’s perception and evaluation of the facts known to him as constituting or contributing to reasonable grounds for believing that the property does not represent such proceeds? (Emphasis in italic)

Answer: Yes. Accordingly, since the lower courts had not taken into account Pang’s defence of the trust that existed between himself and Kwok, they had failed to take into account Pang’s own perception and evaluation of relevant facts. The appeal would therefore be allowed on this ground.

Question 2: In determining the objective element of the offence, what is the appropriate standard to be applied in evaluating the content of a reasonable man’s belief?

Answer: In determining whether the defendant’s grounds of belief are reasonable, the test is whether any reasonable person looking at the grounds “would believe” that the property dealt with represents the proceeds of an indictable offence, rather than a test of “could believe“. The Court of Appeal had erred in following an earlier case and applying the “could believe” test, which is an inappropriately low standard, compared to the “would believe” test. The appeal would therefore also be allowed on this ground.

What is the relevant test now?

The Court of Appeal had used the following test for determining whether Pang had reasonable grounds for believing that the money in question was the proceeds of an indictable offence:

“The First step in determining whether a defendant had reasonable grounds to believe is to identify all the facts known to the defendant that relate to dealing with property……These facts may, depending on the circumstances of each case, extend beyond those relating to just the dealing with the property and include facts known to the defendant about other persons or circumstances……The second step is to process those facts through the mind of the common sense, right-thinking member of the community and determine whether this person, possessed of these facts, objectively would consider them sufficient to lead a person to believe that the property in question constitutes the proceeds of an indictable offence. When this reasonable person considers the facts objectively it means he does so uninfluenced by the personal beliefs, perceptions or prejudices of the defendant.”

However the Court of Final Appeal said the better and less complicated test was that used in Seng Yuet Fong v HKSAR [1999] 2 HKC 833, as follows:-

“To convict, the jury had to find that the accused had grounds for believing; and there was the additional requirement that the grounds must be reasonable: that is, that anyone looking at those grounds objectively would so believe.”

The Court of Final Appeal preferred this test because it:-

1. retained the word “grounds” as appearing in section 25(1), rather than replacing it with “facts” as in the test applied by the Court of Appeal;
2. avoided “subjective” terminology and any contrast with “objective” terminology. Such terminology, the Court of Final Appeal said, was apt to confuse;
3. focused attention on the accused, rather than on the abstract “reasonable person” or “right-thinking member of the community“;
4. Avoided the language of “steps” and, like section 25(1) itself, propounded a compound test.

Commentary

Two important legal points arising from the Court of Final Appeal’s decision are:

1. When deciding whether a defendant has “grounds” to believe (that any property represents the proceeds of an indictable offence), “grounds” should not be limited to facts and can also include the beliefs, perceptions or prejudices of the defendant. The judge or jury can give such weight to an accused’s beliefs, perceptions or prejudices as he or she believes is warranted. i.e. are the defendant’s grounds “reasonable”?
2. In determining whether the defendant’s grounds of belief are reasonable, the test is whether any reasonable person looking at grounds “would believe” that the property dealt with represents the proceeds of an indictable offence rather than a test of “could believe“.

The net result is that the Court of Final Appeal has raised the standard for conviction to an appropriate level.

The Court of Final Appeal said that reasonable grounds for belief is something less than knowledge, but nevertheless, the maximum penalty (14 years’ imprisonment) was the same for knowledge. This was, the Court of Final Appeal said, of critical significance when determining the nature and strength of the mental element that must be established by the prosecution beyond a reasonable doubt. Only a test which states that those “grounds” would lead to the “belief” is appropriate.

It will be noted that the court did not order a re-trial because it did not think it would be in the interests of justice to do so. The court noted that Pang was 69 years old and had served 4.5 months of his sentence, his business had suffered due to his conviction, the events were already over 6 years old and the prosecution case was not strong, i.e. Pang had suffered enough. However, the court did not completely exonerate Pang, noting that there could have been a basis for a suspicion of Kwok.

The Court of Final Appeal judgment in Pang Hung Fai is to be welcomed. It has clarified the law on the Section 25(1) money laundering offence. It will provide helpful guidance to Hong Kong courts on the determination of future money laundering cases and any appeals against existing money laundering convictions that come before them. For instance, we note that Mr Wu Wing Kit is appealing against his conviction and, no doubt, he will rely to some extent on the decision in Pang.

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Peter So

Partner | Litigation and Dispute Resolution

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