“No Consent” Letter from JFIU – What it means for Financial Institutions?

Mr Justice P. Li of the Court of First Instance handed down his decision on 5 August 2015 in Interush Limited v Commissioner of Police, HCAL167/2014, in which His Lordship held that section 25A of the Organized and Serious Crimes Ordinance, Cap 455 (“OSCO”) and the “no consent” letter issued by the Joint Financial Intelligence Unit (“JFIU”) in response to a suspicious transaction report (“STR”) are not unconstitutional.  In so doing, His Lordship held that the “no consent” letter does not operate to freeze suspicious property.

This article examines the implications of this decision.

Facts

The facts of this case are straightforward.  Interush was alleged to have operated a pyramid scheme contrary to the Pyramid Schemes Prohibition Ordinance, Cap. 617.  The proceeds arising from the scheme were deposited into bank accounts maintained with Bank of East Asia (“BEA”) and Hang Seng Bank (“HSB”).  Prompted by relevant newspaper coverage, BEA suspended the account (and subsequently made a report to the Police) and HSB filed an STR to JFIU, pursuant to s.25A.  In the meantime, JFIU issued a “no consent” letter to HSB, which meant that JFIU did not consent to HSB dealing with the funds in the account.

Interush challenged the constitutionality of, essentially, s.25A and the “no consent” letter on the ground that they infringed articles 6 and 105 of the Basic Law because they interfered with the use or disposal of the property, i.c. the “no consent” letter had no expiry date and the Government did not compensate Interush for its loss as a consequence of its property being frozen under the “no consent” letter.

Relevant Provisions in OSCO

Section 25 creates the offence of dealing with proceeds of crime when the person knows or has reasonable grounds to believe the property to be so.  It is subject to s.25A.

Section 25A requires a person (an “informant”) to disclose his/her knowledge or suspicion that any property represents the proceeds of crime to JFIU.  If JFIU gives the informant consent to deal with the property, then the informant does not commit an offence under s.25 if he deals with the property.  If JFIU does not give consent to deal with the property (the “no consent” regime), the informant cannot deal with the property because this will constitute a criminal violation of s.25 and the defence in s.25A(2)(a) does not apply or is not available to him.

Section 25A(3)(b) provides that a disclosure shall not render the informant liable in damages for any loss arising out of the disclosure or any act done or omitted to be done in relation to the property in consequence of the disclosure. 

Result

The Judge dismissed Interush’s challenge.  In so doing, the Judge held that:

1. Financial institutions could refuse instructions from their customers and withhold the suspicious accounts on their own initiative.  The “no consent” letter is not a prerequisite to their decision.
2. Section 25A(2)(a) and the “no consent” regime does not operate to withhold or freeze the accounts or property of a suspect.  It only creates a defence for further dealings with the property after disclosure. 
3. It remains for financial institutions to decide whether to honour the instructions of their customers despite their suspicion and the disclosure.
4. The “no consent” regime is amenable to judicial review.
5. In case of any grievance, the owners of the property can sue the financial institution holding the suspicious property.  The suspicion of the financial institution and its consequential acts may be challenged by customers.
6. Whether the defence under s.25A(3) is available to the financial institutions depends on the facts and circumstances of each case.

Comments

JFIU’s “No Consent”

While the Judge said that JFIU’s “no consent” does not operate to freeze the suspicious property, in practice, financial institutions will freeze the account or the suspicious property.  From the financial institution’s perspective, JFIU’s “no consent” reinforces the financial institution’s view on its knowledge or suspicion.  Also, for any financial institution to continue to honour the customer’s instructions would constitute a criminal offence of money laundering under s.25.

Depending on the terms of the contract / account mandate, financial institutions can also rely on the express or implied contractual provisions in the contract / account mandate to refuse to honour the customer’s instructions.

Apart from relying on express terms, financial institutions may rely on case law to argue that there is an implied term in the contract between a customer and the financial institution that in the absence of consent from the authorities, the financial institution is entitled to refuse to process the customer’s instructions if the financial institution knows or suspects that the transaction constitutes money laundering.  Furthermore, there is support from case law that if the law makes it a criminal offence to honour a customer’s mandate, it will be no breach of contract for the financial institution to refuse to honour the customer’s mandate.

In addition, s.25A(3) gives a defence to financial institutions to civil liability arising out of the disclosure or any act done or omitted to be done in relation to the property in consequence of the disclosure.  It should be noted that this defence is applicable only in relation to the property or matter reported to JFIU but not generally or to other property or matter not being the subject matter of the report to JFIU.

Accordingly, in view of the express / implied terms in the mandate and the defence in s.25A(3), in the majority of cases, it would be very difficult to hold a financial institution liable for its decision to refuse dealing with suspicious property in compliance with JFIU’s “no consent” letter.  Since JFIU’s “no consent” letter is amenable to judicial review as the Judge has mentioned in the case, the owner of the property may choose to resolve the dispute by way of judicial review against the police in relation to JFIU’s “no consent” letter instead of litigation against financial institutions. 

JFIU’s “Consent” – Not a Clean Bill of Health

If JFIU gives consent to the financial institution to deal, s.25A(2)(a) provides that with JFIU’s consent, the financial institution does not commit an offence of dealing if it deals with the property.  However, JFIU’s “consent” in relation to the transaction or property in question is not a “clean bill of health” for the continued operation of the account and the financial situation should consider what appropriate actions should be taken to mitigate the risk and examine whether to continue its business relationship with the customer going forward (see the Hong Kong Monetary Authority’s Guideline on Anti-Money Laundering and Counter-Terrorist Financing (March 2015) at para.7.33).

In addition to Hong Kong anti-money laundering laws and regulations, financial institutions would also have to consider the risks to the international aspects of their operations, for example, their risk exposure to sanctions by foreign governments if found culpable in a money laundering case in any jurisdiction.

Financial institutions should ensure that their terms and conditions give them the right to refuse instructions or even terminate the business relationship if to follow such instructions would place them at risk.

JFIU’s Internal Practice

The judgment also reveals JFIU’s internal practice in relation to the continuation of the “no consent” letter.

Once a “no consent” letter is issued by JFIU, it will be reviewed on a monthly basis.  If the extension exceeds 3 months, the Formation Commander will be responsible to review the situation on a monthly basis (para. 61).  Under normal circumstances, a “no consent” letter should not operate for a period exceeding 6 months.  In exceptional cases, the Formation Commander will review the situation critically and consult the Department of Justice for advice (para. 62).

Key Contacts

Joseph Kwan

Partner | Litigation and Dispute Resolution

Email or call +852 2825 9324

Peter So

Partner | Litigation and Dispute Resolution

Email or call +852 2825 9247