Solicitor Convicted of Money Laundering

On 19 September 2014, Wu Wing Kit (Wu), a solicitor and partner of Hong Kong law firm, Fred Kan & Co (FKC), was sentenced to 6 years’ imprisonment for money laundering. This case highlights the importance of solicitors carrying out due diligence in respect of their clients’ identity and the transactions instructed to be carried out, in particular, the source of any funds that are to pass through or be held in the solicitor’s bank accounts, and if there are grounds to support a suspicion, solicitors should make a report to the Joint Financial Intelligence Unit (JFIU).

Section 25 of Organized and Serious Crimes Ordinance (Cap. 455)

Wu was convicted under section 25 of the Organized and Serious Crimes Ordinance (Cap 455) (OSCO) which provides that “a person commits an offence if, knowing or having reasonable grounds to believe that any property in whole or in part directly or indirectly represents any person’s proceeds of an indictable offence, he deals with that property.” “Dealing” includes receiving or acquiring, concealing or disguising, disposing or converting property or bringing it into or removing it from Hong Kong.

Background

Jack Chen (Chen) was the executive director and joint chairman of Natural Dairy (NZ) Holdings Limited (Stock Code 462), a company listed on the Hong Kong Stock Exchange (Listco).  Chen negotiated with May Wang (Wang) for the Listco to acquire some New Zealand companies owned by Wang, which companies were to acquire 22 dairy farms in New Zealand.  Under the agreement, Listco would purchase 20% of Wang’s interest in the New Zealand companies for the consideration of NZ$100 million.  Wang’s companies received about NZ$25 million from the Listco and then remitted about NZ$13.7 million (equivalent to HK$73.7 million) to Chen’s company.  Out of HK$73.7 million, Chen then remitted HK$68.95 million to FKC’s Client Account, which Wu (on Chen’s instructions) subsequently paid to Chen’s wife.  Chen was subsequently alleged to have accepted an advantage from Wang for procuring Listco to acquire Wang’s companies in New Zealand.  Both Wu and Chen’s wife were charged with money laundering.

Lawyer’s Testimony

On Wu’s own testimony, he said that Chen told him that there was an agreement to purchase Chen’s wife's entitlement to receive the proceeds under another agreement (which agreement Wu had knowledge of) by an investor behind Chen.  Chen wanted Wu to represent the investor.  Wu responded that he could not as there was a potential conflict of interests.  Chen asked Wu whether the money could go through FKC’s Client Account to Chen’s wife because the investor wanted a solicitors’ firm to witness the money actually received by Chen’s wife the following day.  Chen added that it was a bit urgent and asked Wu to do him the favour.  Wu agreed to help Chen.

The Court did not accept Wu’s own testimony and in response, found that:-

1. Wu did not ask Chen who was providing the money;
2. Wu could have reckoned at once, by his knowledge of the value of another agreement, that a preliminary payment of HK$68.95 million at such a short notice would be an unusually large proportion of the purchase price and it would be unusual for such a preliminary payment to be paid before the parties had decided on the terms of the agreement; and
3. Wu’s role in agreeing to transfer the money to Chen’s wife was reduced to a bank account holder who let someone use the bank account and Wu did not tell Chen that the bank record would itself be solid evidence of the payment to Chen’s wife without involvement of a solicitor.

Practice Direction P 

Practice Direction P provides general guidance to solicitors about anti-money laundering. It also contains certain mandatory requirements for law firms to make reasonable efforts to identify and (in certain circumstances) verify the true identity of all clients requesting their services and to apply the appropriate level of due diligence (as prescribed in the Practice Direction) in cases where they act in respect of certain activities such as, for example, financial transactions and other transactions involving custody of funds by the law firm as stakeholder or escrow agent or transfers of funds through their bank accounts.

The Court referred to various possible outcomes for Wu, namely:-

1. If Wu was not in breach of Practice Direction P, he would be acquitted.
2. If Wu was in breach of Practice Direction P because of innocent error of judgment, negligence or inadvertence, he would be acquitted of the criminal charge, but remain subject to disciplinary charges.
3. If Wu clearly and deliberately breached Practice Direction P when dealing with the HK$68.95 million, the court would apply the legal principles pertaining to the offence of money laundering to consider the charge against him.

While the Court said that compliance with Practice Direction P would have saved Wu, the focus should not be so much on Practice Direction P, which does not have the force of law, but rather on s.25 of OSCO. The point to address is whether the person, when dealing with the property, knows or has reasonable grounds to believe that the property represents proceeds of an indictable offence.  If Wu had followed Practice Direction P diligently, he may have realised that the situation was one that required him to comply with the reporting requirement under s.25A of OSCO, i.e. send a report to the JFIU and thereby obtain immunity under s.25A of OSCO from the offence under s.25 of OSCO.

Indeed, compliance with Practice Direction P may not have saved Wu if, having done the required due diligence, he still failed to conclude that the transaction was suspicious and make a report.  The test is what a reasonable, right thinking member of the community would have thought, not whether Wu followed the Law Society's Practice Direction.

Court’s Findings and Sentence

The Court found that:-

1. At any time before and after he dealt with the money, Wu had never attempted to obtain any information on the nature and intended purpose of the transaction and source of the funding and there was no apparent reason why he did not make those enquiries.
2. It was Wu’s deliberate choice not to make the enquiries and had nothing to do with error of judgment, negligence or inadvertence.
3. Wu knew that the amount was unusually large in his professional practice and that Chen’s instruction was unusual, as the money was destined to go from the husband’s company’s bank account to the wife’s account the following day through FKC.
4. Wu knew that Practice Direction P expected a solicitor in his situation of dealing with client’s or potential client’s money to make enquiries to obtain information on the nature and intended purpose of the transaction and source of the funding.

The Court held that Wu, having the above facts, would objectively consider them sufficient to lead a person to believe that that the money constituted proceeds of an indictable offence.

In sentencing Wu to six years’ imprisonment, the Court took into account that Wu had over 20 years’ legal practice, specialising in commercial matters, meaning that he had adequate experience and reasonable grounds to believe that the money in question constituted the proceeds of crime. The Court reduced the starting point of six and half year’s imprisonment by six months, after taking into account Wu’s participation in charitable work and his role of family breadwinner.

Comments

This case highlights the importance of solicitors carrying out due diligence in respect of their clients’ identity and the transactions instructed to be carried out, in particular, the source of any funds that are to pass through or be held in the solicitor’s bank accounts.

Section 25 of OSCO will be applicable not only when the launderer deals with the proceeds when he knows the money to be proceeds of an indictable offence but also when he has reasonable grounds to believe it to be so.  What a person genuinely believed does not establish “having reasonable grounds to believe” or not.  The Court will decide “having reasonable grounds to believe” in an objective manner by establishing what information a person had and whether a right-thinking, common sense member of the community ought to have reasonable grounds to believe that the property represented proceeds of an indictable offence (HKSAR v Pang Hung Fai [2013] 4 HKC 366).  This is a case where the Court took the view that there were sufficient red flags which, when viewed objectively, would have led a right-thinking, common sense person to have reasonable grounds to believe that the money constituted proceeds of an indictable offence.

Practitioners should pay attention to any red flags and make inquiries to obtain information on the nature and intended purpose of the transaction and the source of funding in compliance with Practice Direction P, especially when the amount is substantial in nature and the money is passing through the solicitors’ firms’ client account between related parties within a short period of time.  Practitioners should constantly assess any matters which may raise suspicions and consider making a report to the JFIU in order to obtain immunity afforded by OSCO.

According to the lawyer’s own testimony, he was told by the client that the transfer was urgent and the client asked him to do him a favour and the lawyer agreed to help him.  Urgency is not a valid defence.  Doing a favour to a client may attract serious consequences. This case is a serious reminder to busy practitioners not to overlook their professional obligations in dealing with urgent requests by clients, especially when it relates to the handling of money or other property.

In any event, the reporting obligation under s.25A of OSCO accommodates the filing of reports after dealing with the property if the person making the report does so as soon as it is reasonable for him/her to make it and on his/her own initiative.

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