The freezing of customer bank accounts for money laundering reasons

17 September 2020, Banking & Finance , Anti-Money Laundering, Legal Alert by Simon Deane, Raymond Leung

There a number of reasons why Hong Kong banks freeze a customer’s bank account but this article is limited to exploring why Hong Kong banks may be required to do so for money laundering reasons.

The money laundering offence in Hong Kong law

The offence of “money laundering” is prosecuted in Hong Kong under section 25(1) of the Organized and Serious Crimes Ordinance, Cap. 455 (“OSCO”).

To paraphrase from the definition contained in the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, Cap. 615, “money laundering” is an act that cleanses the connection between the proceeds of criminal acts and the criminal acts that generated such proceeds.

The proceeds may take the form of any financial value including but not limited to cash.

However, the section 25(1) offence is wider than just acts of money laundering. 

The offence is one of “dealing”[1] with “property”[2] where a person knows or has reasonable grounds to believe that it represents the proceeds of an “indictable offence”[3].

Hence, press reports of money laundering convictions may not involve any money laundering acts in the layman’s sense of the expression but result from dealing with property:

  • that is known to the accused to represent criminal proceeds; or
  • in respect of which the accused had information based on which he could reasonably be expected to suspect that the property represented criminal proceeds.

An important point to note is that the penalty for dealing with property known to represent criminal proceeds and dealing with property when a person is deemed to have information which ought reasonably to give him grounds to suspect the property represents criminal proceeds is the same.

Money laundering obligations in Hong Kong law

Under section 25A of the OSCO, every person in Hong Kong has an obligation to file reports (“Suspicious Transaction Reports” / “STRs”) with the Joint Financial Intelligence Unit (“JFIU”) in respect of property that is known or suspected to represent the proceeds of an indictable offence (“suspicious property”); and property that will be used in connection with an indictable offence, regardless of the legality of the source of the property.

The failure to comply with this reporting requirements under the OSCO is a criminal offence which is punishable by a fine of up to HK$50,000 and 3 months imprisonment.

The “consent to deal” defence against the money laundering offence

In addition to fulfilling the reporting obligation under the OSCO, the filing of STRs with the JFIU has one further purpose – seeking permission from the JFIU for any person filing a STR to “deal” with the property identified in an STR.

The “consent to deal” provision is set out in section 25A(2)(a) of the OSCO. 

“Consent to deal” is the legal “get-out-of-jail-free” card for dealing with suspicious property - it is a legal defence against the section 25(1) “money laundering”/ “dealing” offence for a person who subsequently deals with suspicious property. 

A person who deals with suspicious property without receiving this explicit “consent to deal” from the JFIU remains exposed to the risk of committing the “money laundering” offence, notwithstanding that the person has submitted an STR to the JFIU.

Therefore, a person filing an STR should not do anything with the property unless he obtains the consent to deal or, in the event a “consent not given”, gets further directions pursuant to a court order.

One should also note that a person filing an STR, and in fact ANY person who knows or even so much as suspects an STR exists, should not disclose any information to any person that would likely prejudice an investigation that might be conducted following the filing of the STR.  This would violate the law against “tipping-off” which is punishable by fine of up to HK$500,000 and 3 years imprisonment.

The distinction between properties reported in an STR and the section 25(1) “dealing” offence

As stated above, the reporting obligation under section 25A of the OSCO applies to:

1) 

property known or suspected of representing the proceeds of an indictable offence; and

2) 

property that is intended to be used in connection an indictable offence.

However, a Court of Final Appeal decision provides the judicial precedent that clean funds used in connection with an indictable offence should not be considered to be “proceeds of an indictable offence”. 

This means that whilst the reporting obligation under section 25A of the OSCO applies to clean funds used in connection with indictable offences, “dealing” in clean funds, even if the “dealing” is connected to an indictable offence, will not be punishable under the section 25 “dealing” offence as clean funds do not represent criminal proceeds.

Hong Kong banks freezing customer accounts because of possible money laundering reasons

Let’s imagine a situation where a bank receives a letter from the Police stating that a customer of the bank is involved in a criminal investigation and the bank should provide assistance.  This letter may also include a friendly suggestion that the bank files an STR to obtain consent to deal with the relevant customer’s funds.

The bank will need to consider the legal issues in the request for assistance from the Police.  In addition, it will need to decide whether the request for assistance from the Police constitutes grounds to suspect the customer’s funds represent the proceeds of an indictable offence, or will be used in connection with an indictable offence, i.e. is the reporting obligation under s.25A of the OSCO triggered? 

In this particular situation, no one would fault the bank for erring on the side of caution and taking the defensive filing approach by submitting an STR to the JFIU based on the request for assistance by the Police as a reasonable ground for suspicion.  There is also a remote hope that the submission of an STR may result in a consent being granted permitting the bank to continue to provide normal services to the customer.  

However, it is also possible that consent will not be granted.  The OSCO has no provisions for appealing a denial of consent, not least because only the bank and the JFIU would know about the STR. The customer wouldn’t know about the STR, let alone be able to appeal its determination.

The first the customer would know that something was amiss would be when an attempted use of banking services is denied.

So, the customer’s position is that its funds and services are frozen and the bank is prohibited from disclosing the reasons to the customer. 

Lawyers and others familiar with AML laws may be able to figure out why an account is frozen by a bank but the average customer, unfamiliar with AML laws and regulations, is likely to be in a dark and perplexing bind.  It would not be surprising if the affected customer draws adverse conclusions as to the bank’s reasons for freezing the account.  The truth is likely to be an objective application of the law: that the bank has not received consent to deal and does not wish to run the risk of committing the OSCO “dealing” offence.  Furthermore, the bank is prevented by the “tipping-off” provisions of the OSCO from telling its customer that the bank cannot deal with his funds as the JFIU has not issued a consent to deal.

It is hoped that readers will find the above analysis helpful in understanding one of the reasons why a Hong Kong bank may have frozen a customer’s bank account for no apparent reason.  Perhaps some sympathy may be due to the bank involved. 

As the torrents of less informed and unsympathetic comments condemning the banks for freezing customer accounts swirl in the Roman circus that is the online world, it is hoped at least this article can shed some light on the dilemma banks sometimes face and why the most appropriate response to such comments from the banks, if any, would be: “We do not comment on our customers’ private account information.  However, we are committed to complying with the laws and regulations in the jurisdictions where we operate”.  In other words, adopting the immortal words of Francis Urquhart: “You might very well think that; I couldn’t possibly comment.”

 

[1]“dealing” (again, to paraphrase the definition in section 2 of the OSCO) is essentially taking any degree of control over property and making use of property

[2]“property”, paraphrasing, is any financial value

[3] as distinct from less serious “summary offences”