The “Letters of No Consent” Regime was held unconstitutional by the Court of First Instance

Authored by: Peter So and Victor Wong

On 30 December 2021, Coleman J delivered an important judgment in Tam Sze Leung v Commissioner of Police [2021] HKCFI 3118, where he held that the regime under which “letters of no consent” (LNC regime) are issued by the Commissioner of Police (Commissioner) in the context of section 25A of the Organised Serious Crimes Ordinance, Cap. 455 (OSCO) is unconstitutional on the grounds of ultra vires, not being “prescribed by law” and being a disproportionate interference with the fundamental right to use property under Article 105 of the Basic Law.

Background

The LNC regime arises out of sections 25 and 25A of OSCO.[1] Section 25 creates the offence of dealing with proceeds of an indictable offence, while section 25A creates the offence of failing to disclose a suspicious transaction. Section 25A(2)(a) of OSCO provides a statutory defence for banks and financial institutions who have reported a suspicious transaction and have obtained the consent of an authorised officer to deal with the property in question. This provision gives rise to the LNC regime. 

Upon receiving a suspicions transaction report, the Joint Financial Intelligence Unit (JFIU) may issue a letter of consent to the party making the disclosure to deal with the relevant funds or a letter of no consent to the party making the disclosure. Where the Commissioner has issued LNCs stating that recipients of the LNCs do not have the Commissioner’s consent to deal with the funds, while the LNCs are not binding upon the recipients, the recipients would invariably follow the LNCs and freeze the accounts.

In this case, the Securities and Futures Commission (SFC) referred the matter to the Police for investigation against the Applicants for the suspected offence of money laundering under section 25 of OSCO, following the SFC’s investigation on suspected stock market manipulation (pump and dump). The Commissioner issued LNCs to four banks, causing around HK$30 million to HK$40 million in 12 accounts to be frozen. The LNCs were in place for roughly 10 months before restraint orders were granted.

The Court of Appeal’s decision in Interush

In Interush Ltd v Commissioner of Police [2019] HKCA 70, [2019] 1 HKLRD 892, Hon Cheung, Yuen JJA and G Lam J unanimously rejected an application by way of judicial review for a declaration that sections 25(1) and 25A of OSCO are unconstitutional for being inconsistent with various protected rights under the Basic Law and the Hong Kong Bill of Rights Ordinance, Cap. 383.

In Interush, the Commissioner took the stance that LNCs do not operate as if they were informal restraint orders. The Court of Appeal in that case held that the restraint order regime in OSCO is not comparable with the LNC regime since as opposed to a restraint order, the LNC regime does not freeze the bank account and the freezing of the account is an act carried out by the financial institution itself. The Court of Appeal concluded that both statutory provisions and the LNC regime are constitutional.

The difference between Interush and Tam

Unlike Interush, the Applicants in Tam did not challenge the constitutionality of sections 25(1) and 25A of OSCO. The Applicants only contested the constitutionality of the LNC regime. Furthermore, unlike Interush, in Tam, the banks had no prior relevant suspicion until being alerted by the JFIU to the fact that investigations concerning suspected money laundering activities were being conducted. The banks were urged by JFIU to file suspicions transaction reports, which the banks subsequently did. Critically, unlike Interush, the Commissioner took the stance in Tam that the LNC regime constitutes an “informal freezing” of bank accounts.

Ground: Ultra vires

The court held that there is a “high threshold” to be met in order to find a statutory intention for the LNC regime to be utilised as it has been used. The court held the view that the LNC regime enables the Commissioner to freeze property indefinitely, without having to satisfy any court that the freezing is appropriate, and without having to meet expressly stated procedural safeguards. In fact, in Tam, the contact from the police triggered an informal freezing of the accounts for around 10 months, a period significantly in excess of the long-stop first 6-month period obtainable from the court by way of the restraint order. The court also held that nothing in the language or purpose of section 25A(2)(a) of OSCO necessitates the implication of the relevant power under the LNC regime. As such, the court held that the LNC regime is ultra vires.

Ground: Not prescribed by law

As to whether the prescribed by law requirement is satisfied, the court considered that (i) there was no sufficient clarity to be found in OSCO itself on the scope of the Commissioner’s power and the manner of its exercise (which perhaps also reflects the fact that the LNC regime is ultra vires), and (ii) the law did not provide adequate effective safeguards against abuse, since the court doubted whether judicial review or civil proceedings against the banks would provide appropriate safeguards against abuse. The court concluded that there are “systematic problems” in the LNC regime.

Ground: Not Proportional

The standard adopted by the court is that the LNC regime should be held lawful unless it is manifestly without reasonable foundation. The court accepted the Applicants’ submissions that there are “myriad alternatives” for the Commissioner to tackle money laundering at an early stage of investigation. In particular, considering that the LNC regime “can operate, and is operated, without temporal limitation yet with only internal intermittent review of justification, itself apparently lacking any proportionality assessment the longer the period of operation continues”, the court concluded that no reasonable balance has been struck between “the societal benefits of the encroachment” and “the inroads made into the constitutionally protected rights of the individual” (i.e. the fundamental right to use of property under Article 105 of the Basic Law).

Implications

Coleman J’s decision overthrows the LNC regime. It remains uncertain as to how authorities will treat the LNC regime as a result of this decision. It is likely that the Commissioner will appeal against this decision. For the time being, until the Court of Appeal clarifies the situation, banks and financial institutions are bound by their statutory duty under OSCO and shall continue to exercise their independent judgment when making reports on suspicious transactions, in particular and if necessary, they should continue to freeze the accounts, whether pursuant to the contractual mandate and/or as a result of the LNC issued by JFIU, in order to protect themselves against the risk of committing the dealing offence under section 25 of OSCO.

^[1] Note that similar provisions exist in section 25A of Drug Trafficking (Recovery of Proceeds) Ordinance (Cap. 405) and section 12 of United Nations (Anti-Terrorism Measures) Ordinance (Cap. 575)

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