Court of Appeal confirms constitutionality of money laundering provisions

In our 8 September 2015 newsletter, we reported a judicial review application made by Interush Limited on the constitutionality of ss. 25(1) and 25A of the Organized and Serious Crimes Ordinance, Cap. 455 (OSCO). The judicial review was dismissed by the Court of First Instance. Interush appealed the decision and the Court of Appeal again dismissed the application on 17 January 2019.

Background

As stated in our earlier newsletter, 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 the Joint Financial Intelligence Unit (JFIU), pursuant to s.25A of OSCO. 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. The CEO of Interush was charged with “money laundering” under s.25(1) of OSCO, but was acquitted.

The Appeal

On appeal, Interush’s case focused on the property rights (under Articles 6 and 105 of the Basic Law) and access to court rights (under Articles 35 and 80 of the Basic Law and Article 10 of the Hong Kong Bill of Rights).

The Court of Appeal began its analysis with the view that s.25 merely sets out the creation of the money laundering offence.  It could not be held to have an effect on the property rights of Interush. The Court of Appeal then went on to analyse the constitutionality of s.25A. The Court first accepted that the “Letter of No Consent” does not by itself freeze the accounts of the Interush but has affected the use by Interush of its money in the bank accounts. Where consent is withheld, the bank “invariably errs on the side of caution and refuses to make the payment. The result is that the account is ‘informally frozen’ for so long as the bank has the relevant suspicion and the police do not consent”.

The Court of Appeal held that property rights are engaged. The Court, by applying the Court of Final Appeal’s judgment in Hysan Development Co Ltd v Town Planning Board (2016), rejected the Government’s argument that property rights in this case are not engaged because of the assumption of risks by the applicants (that the money in banks may be seized) when they entered into a commercial transaction with their banks which is subject to the provisions of OSCO regarding suspicion of money laundering.  Property rights are to be guaranteed by clear and accessible laws, and not, for instance, left to uncharted administrative discretion. The words “in accordance with law” in Articles 6 and 105 of the Basic Law do not qualify or limit the protection conferred by the two Articles; on the contrary, the phrase confers the added protection of legal certainty such that the subject matter of the Articles (property rights) are to be regulated by laws which are accessible and precisely defined.

The Court of Appeal then considered whether the infringement of property rights is justified under the proportionality test. The test was whether the measure was “manifestly without reasonable foundation”, which was to allow the legislative and executive authorities latitude or a “margin of discretion” to decide on the legitimacy of their societal aims and the means to achieve them since they are better placed to make the assessment.

On the issue of proportionality, the Court of Appeal found that there is an implied duty of all persons exercising public power, such as the police, to act reasonably. The assessment of the police to make an arrest or to investigate can only be challenged on the basis that it is Wednesbury unreasonable, namely perverse. The Court considered that there is no time frame under Hong Kong law for investigation of crime or time limit to prosecute any indictable offence; the time and method taken by the police to investigate must necessarily depend on the complexity of the case; and the level of precision required of a law must depend on the subject matter of the law in question. It concluded that the procedural steps in the Police’s Force Procedures Manual implementing the consent regime in question does not fall foul of the proportionality requirement.

Interush further challenged the consent regime as draconian, as the indefinite freezing of accounts of unlimited value can critically damage individuals and businesses. There is no right to compensation, even where there is complete innocence of wrongdoing.  Jurisdictions such as Canada, Australia and New Zealand do not vest authorities with power to withhold consent to deal with customer funds. The Courts can ring‑fence suspected proceeds of crime by granting a freezing/restraint order at the investigative stage.

The Court of Appeal held the view that if the bank subsequently determines that there are no reasonable grounds to believe that the money has that character, then it is free to deal with the account even though the police, in response to the STR, issued a letter of no consent. The availability of the restraint order regime at a later stage does not point towards a consent regime at an earlier stage being disproportionate, when investigations are ongoing. In any event this must be an area where the legislative and executive authorities must be accorded with the margin of discretion on why they had chosen to adopt the measures in such a manner. The Court’s view is that a reasonable balance has been struck between the societal benefits of the consent scheme and constitutionally protected rights of the individual. It cannot be said that the pursuit of the societal interest results in an unacceptably harsh burden on the individual.

G Lam J took the view that it is not helpful to compare the Hong Kong scheme to schemes in different jurisdictions because there are variations in the interlocking parts of the law in those jurisdictions. For example, in the UK, a restraint order may be granted soon after a criminal investigation, but in Hong Kong, it can only be granted after proceedings have been instituted, which is a significantly later stage.

The Court of Appeal also held that the access to Court rights of Interush have not been engaged because of the judicial remedies available to the applicants by way of judicial review and civil claim against the banks.

Commentary

The Court of Appeal has confirmed the constitutionality of the current consent regime on a systemic level, subject to the implied duty of the enforcement agencies to act reasonably. The particular acts of the enforcement agencies are subject to judicial review on a case-by-case basis.

Financial institutions should be aware of the implications of this judgment. Although it was said by the Court of Appeal that they could deal with the money in the account even when a letter of no consent is issued, if they determine that there are no reasonable grounds to believe that the money is proceeds of crime, such circumstances (particularly when it is the financial institution who filed an STR) would be very rare. Financial institutions dealing with such proceeds without consent would not be afforded with a defence under s.25A(2)(a) of OSCO and are at risk of breaching the money laundering offence under s.25 of OSCO.  Extreme caution should be exercised and strong justification supported by documents will be required before considering dealing with suspected assets without consent.