Fraud recovery: No Consent Regime ruled unlawful – any other remedies?

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In a very recent and important decision in Tam Sze Leung and Others -v- Commissioner of Police (25/01/2022, HCAL191/2021) [2022] HKCFI 309, the Court of First Instance found that the longstanding practice of the Hong Kong Police Force (the HKPF) informally freezing suspected bank accounts by issuing no consent letters (LNCs) to banks and financial institutions in the context of sections 25(1) and 25A of the Organised and Serious Crime Ordinance (OSCO) was unconstitutional.

This case has attracted wide publicity, yet the outcome is not determined as it is still pending the ultimate relief to be granted by the court and potential appeal to the court of appeal. It remains to be seen whether legislation will be introduced to replace the No Consent Regime.

In short, banks are still required to comply with the obligations provided in sections 25(1) and 25A of OSCO, whereas the victims may now have to apply for more expensive freezing orders from the court than relying on LNCs to freeze the suspected accounts.

Usual Practice of the No Consent Regime

Under section 25 of OSCO, dealing with property known or with reasonable grounds to believe that the property represents the proceeds of an indictable offence is a criminal offence. Section 25A of OSCO also imposes a duty of notifying authorities when anyone is dealing with such related funds. Immunity is provided in section 25A(2)(a) of OSCO that an authorised officer is empowered to give consent to a transaction(s) if a suspicious transaction report has been made under section 25A (1).

In practice, the obligation stated in section 25A of OSCO can be fulfilled by way of Suspicious Transaction Reports (STR) filed by the bank to the Joint Financial Intelligence Unit (JFIU), a department under the HKPF. The JFIU has the discretion to decide on whether consent shall be made to the bank for dealing with the funds, and where necessary, issue a LNC prohibiting the bank from permitting account holders or itself from freely managing the suspected assets in the account.

While the LNC is not a formal restraint or confiscation of the suspected bank account (see Interush Ltd -v- Commissioner of Police [2019] HKCA 70), where consent is withheld, the bank would err on the side of caution and refuse to allow transfer of funds from the suspected account. The practical effect is that the suspected account would be informally frozen. Under normal circumstances, LNC should not operate for more than six months. Victims are still encouraged to obtain a freezing order (and other ancillary orders such as disclosure) from the court to properly freeze the suspected accounts and get to know the sum being held therein and trace the assets.

The new position of the Hong Kong courts – theNo Consent Regime may be unlawful

Background of Tam Sze Leung

The applicants, four members from the same family, were under investigation by the Securities and Futures Commission (SFC) for suspected stock market manipulation in Hong Kong between 2018 and 2020. During the investigation, SFC referred the matter to the HKPF. The four banks filed STRs regarding the applicants’ accounts upon being notified and urged by JFIU and, subsequently, LNCs were issued to the banks. The Applicants only discovered that all their accounts were frozen when they were unable to withdraw funds. The LNCs were in place for around 10 months before formal restraint orders were granted by the court.

Issues

The applicants sought leave for judicial review of the No Consent Regime and raised below six grounds of challenge:

  1. The issue and maintenance procedures of the LNCs are tainted by procedural impropriety and unfairness, due to the lack of notice and reasoning for the issuance of the LNCs, and the lack of opportunity to a fair hearing or to make representations
  2. The LNCs are ultra vires OSCO, as the Commissioner of Police should not have the scope of power to essentially operate a property freezing regime through such practice
  3. The LNCs interfere with the basic law and Bill of Rights, and such interference of constitutional rights is not “prescribed by law”
  4. The LNCs breach the applicants’ right to a fair hearing
  5. The LNCs and the regime disproportionately interfere with property rights and rights to privacy and family
  6. The decisions made to refuse even partial consent to release some funds under the bank accounts were unlawful as the LNCs constituted a ‘blanket freeze’, failing to distinguish between which funds could constitute proceeds of crime and which funds could not

The court accepted the applicant’s challenge and found the No Consent Regime was unlawful on grounds 2 (ultra vires), 3 (not prescribed by law), and 5 (disproportionality).

Rulings

Ultra vires

The court agreed that OSCO did not confer the power on the HKPF to operate a de facto freezing regime. The Commissioner of Police acknowledged that the intention of the LNCs and the regime was to discourage banks from dealing with the suspected funds and assets, informally freezing the related accounts to provide a “temporary stop-gap measure” before the affected victims could obtain relevant orders from the court. The Court held that neither the language nor the purpose of OSCO could have been intended to confer on the HKPF “a secret, informal and unregulated asset freezing power”. Accordingly, the No Consent Regime is ultra vires.

The operation and utilisation of the No Consent Regime to restrict one’s rights to access or use of property required a high threshold of statutory intention to be met. Notably, the court recognised that the HKPF did (and continue to) have a right to notify banks and financial institutions of potential money-laundering, and could remind them to file STRs (or relevant disclosures) under section 25A of OSCO, but the informal freezing powers of the No Consent Regime did not fall under such a duty.

Not prescribed by law

It was held that the No Consent Regime was not prescribed by law. There is no sufficient clarity or certainty in OSCO nor the HKPF’s procedures manual as to the scope of the power and the manner of its exercise, meaning that the regime was not “ adequately accessible” nor formulated with “sufficient precision” to enable a citizen to regulate such conduct. It was questionable whether judicial review or civil proceedings against the banks would provide appropriate remedies or safeguards against abuse of the powers, not least where most contracts between the banks and customers permits the banks to refuse to operate the customer’s account, where it has suspicions relating to money laundering or proceeds of crime.

Further to the Commissioner of Police’s own misunderstanding of the source and nature of the powers under OSCO (evidenced by the stark difference in assertions from Interush, in which the Commissioner of Police expressly stated that LNCs did not operate as informal restraint orders), the lack of procedural safeguards against abuse and the failure of the HKPF to adhere to such procedures manual further indicated ‘systemic problems’ with the regime.

Disproportionately interferes with rights

The court held that the No Consent Regime has failed the proportionality assessment, particularly, the right to the use of property under the basic law. The No Consent Regime can and is operated without ‘temporal limitation yet with only internal intermittent review of justification’, coupled with the option of ‘myriad alternatives’ for the HKPF to adopt to combat money-laundering. It could not be said that ‘a reasonable balance has been struck between the societal benefits of the encroachment and the inroads made into the constitutionally protected rights of the individual’.

Comments and legal implications on asset recovery

The outcome is not final. The court has not made any specific relief and invited parties to make further round of submissions on relief. The court has not discussed whether the decision has any retrospective effect towards LNCs issued in the past, and those which are currently still in place. On 25 January 2022, upon application by the Commissioner of Police, the court had allowed an extension of time to file any notice of appeal of the judgment to 28 days from the date of the court’s decision on relief, costs and consequential matters.

Key takeaways and actions to be taken

Banks

Customers may challenge the freezing of accounts before any formal freezing orders have been made by the court. On the other hand, the banks are still required to comply with sections 25 and 25A of OSCO.

Banks should therefore continue to internally assess risks, closely monitor accounts, maintain good documentation and evidence, ensure effective AML policies are developed and implemented, and file STRs for any suspicious transaction activities.

Victims

Inform the bank regardless of whether an LNC can be issued, upon discovery of fraud, victims should immediately report it to the bank and request cancellation of the suspicious transactions if possible. In some instances, banks may notify each other about relevant transferrals and related fraudulent activities.

Report to the police

The HKPF still play a significant role in combatting financial and cybercrime by commencing the investigation and cooperating with related cybersecurity department and overseas investigative functions.

Take prompt and cost-effective solution

The No Consent Regime used to be a relatively cheaper tool than obtaining a freezing order from the court to prevent further transfer of money obtained with fraud.

Nonetheless, in light of the recent decision holding the No Consent Regime being unconstitutional, while still pending relief and potential appeal, it is uncertain whether the JFIU will be able to issue LNCs in the future.

Victims may now have to urgently apply for freezing orders from the courts to freeze the bank accounts formally and rapidly, as well as disclosure orders against the banks to trace the assets.

As every case concerns different facts, there is no one panacea for all cyber fraud. Each matter requires a suitable tailor-made strategy and it is crucial for victims to be informed and conduct a benefit-cost analysis to devise a strategy which suits the scenario the best.

For instance, victims may take into account the likelihood of money recovery, the amount of money involved, the identity of the fraudster, timeline and whether there is any other asset of the fraudster in Hong Kong and/or overseas, etc. Therefore, victims are advised to instruct a solicitor to apply for formal injunction and/or disclosure order when necessary and appropriate, depending on their own need and situation.

For detailed information of the step-by-step procedures in asset recovery, please see our previous article.

Our experience

Hill Dickinson Hong Kong is well-versed in acting for victims of mistaken and fraudulent transfers, especially in high-value transfers. Together with our London teams (Claire Messer and Toby Miller), the authors have recently successfully secured an urgent Mareva injunction from English High Court to freeze the bank account and disclosure order against the recipient bank, while acting for a victim who had been deceived to transfer about 3 million US dollars from Hong Kong to a virtual bank account in the UK in the context of email fraud. Over 90% of the funds have been successfully frozen, which is incredibly difficult and an unusual achievement in cross-border fraud cases. Summary judgment application has been applied for determination of merits and facilitating the recipient bank to return the remaining balance of funds to the victim.

Conclusion

As virtual banks have grown in popularity globally, identification of fraudsters become more difficult. The nature of virtual banks makes it easier for money mules to open as many bank accounts as possible over a short period of time to dissipate fraudulent funds, with some banks closing such accounts just days after opening. Further, the cross-border element also becomes an increasing challenge that we are willing and able to combat head-on, as global finance becomes more international and accessible. Proceeds can be easily transferred in just a few clicks by the fraudsters to multiple bank accounts and multiple jurisdictions.

Hence, freezing the subject bank accounts and taking steps to trace the second and/or third tier of recipients of funds swiftly is vital to the recovery of assets.

Given that the recent decision has ruled the No Consent Regime to be unlawful, more time constraints may be imposed on asset recovery. Victims are advised to seek legal advice and take legal action immediately to maximise the possibility of the safe return of affected funds.

This article is written by Edward Liu, Partner, Maggie Lee, Associate and Rachel Yeung, Paralegal, Hill Dickinson Hong Kong. Special thanks to Anson Tang.

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