The Hong Kong Court of Appeal (Hon Cheung, Yuen and G Lam JJA) in Tam Sze Leung v Commissioner of Police  HKCA 537, has overturned a first instance decision that had found that the use of "letters of no consent" (LNCs) issued by the police to preserve monies held in bank accounts suspected of harbouring the proceeds of crime, was unlawful.
The applicants at first instance were Hong Kong permanent residents and members of the same family. They held between HK$30 to HK$40 million in accounts held at different banks. In December 2020, the applicants discovered that the accounts had become disabled and they were unable to withdraw funds held in the accounts.
The applicants eventually discovered that four LNCs had been issued by the police in December 2020 in respect of the accounts, following their suspected use in suspected stock market manipulation through a "ramp and dump" scheme being investigated by the Securities and Futures Commission (SFC).
Notwithstanding that ultimately no charges were laid against the applicants, the LNCs were in place for a period of roughly ten months before the police obtained formal Restraint Orders over the accounts.
The No Consent Regime
The current "no consent" regime as operated by the police pursuant to their internal guidelines (now public) - Chapters 27-19 of the Force Procedures Manual (No Consent Regime) - relates to the Organized and Serious Crimes Ordinance (Cap. 455) (OSCO).
Section 25 of OSCO provides that it is an offence to deal with property known or is reasonably believed to represent the proceeds of crime. Section 25A requires a person dealing with property to make disclosure to an authorized person if they know or suspect the property to be the proceeds of crime. In addition, section 25A(2)(a) provides a statutory immunity to the dealing offence, where the person concerned has made a disclosure but obtained consent of an authorized officer to deal with the property in question.
Under the No Consent Regime, disclosure under section 25A of OSCO is made by way of Suspicious Transaction Reports (STRs) which, under a practice which has developed over the years, prompts a written response from the police as to whether consent is given to deal with the property in question. If a LNC is issued, the guidelines provide that the police should make "the best endeavour to obtain a restraint or confiscation order as soon as practicable, or, if the property belongs to a victim(s), advise the victim(s) to apply for a civil injunction in respect of the property." LNCs are usually reviewed monthly, and should normally last no more than six months from the date of issue unless there are exceptional circumstances.
Before the first instance judgment, it had been usual for victims of cybercrime to rely on the No Consent Regime to preserve monies held in the accounts suspected of receiving the funds, thereby giving them "breathing space" to seek redress through the courts, commonly through an injunction order.
The applicants sought to challenge, by way of judicial review, the decision of the Commissioner of Police (Commissioner) to issue and maintain LNCs in respect of their bank accounts under OSCO. This was despite the fact that, by the time of the first instance hearing, a Restraint Order had been granted and the LNCs had in effect been withdrawn, and so the application had become academic.
The Honourable Mr. Justice Coleman nevertheless determined that issues of real public importance were raised and in a judgment handed down on 30 December 2021, held that three out of six grounds advanced by the applicants were made out. These were the "ultra vires" ground , the "prescribed by law" ground and the "proportionality" ground (except in relation to rights to private and family life) (see Hogan Lovells alert Unfrozen – Hong Kong court rules "informal freezing" of bank accounts unlawful). The court rejected the challenges on the other three grounds.
In a further decision on relief and costs dated 23 March 2022, Coleman J granted a declaration in favour of the applicants that "the letters of No Consent were, and the No Consent Regime as operated by the Commissioner is (1) ultra vires sections 25 and 25A of OSCO; and (2) incompatible with articles 6 and 106 of the Basic Law, because the No Consent Regime as operated by the Commissioner is not prescribed by law and is disproportionate".
Informal freezing regime?
The Court of Appeal did not accept the concept of the "No Consent Regime as operated by the Commissioner" which the Justices considered had formed the basis of the judge's reasoning in many respects, as well as for distinguishing the earlier Court of Appeal decision in Interush Ltd v Commissioner of Police  HKCA 70, which had upheld the constitutionality of the statutory regime. The Court of Appeal said it was not clear what the phrase “No Consent Regime as operated by the Commissioner” meant.
In the view of the Court of Appeal, the correct legal analysis was that "the account is "frozen" not because there is any enforceable order made by the police…that blocks the account, but because the bank has chosen…not to comply with its customer's instruction, no doubt due to its concern about criminal liability under section 25(1) for dealing with property that represents proceedings of crime. The withholding of consent no more "freezes" an account than the giving of consent compels the bank to release money. The police have no power to require the bank to do anything."
It was part of the duties of the police to take all steps necessary for preventing crime. Nor could the issuance of LNCs be said to be ultra vires. Alerting banks to relevant investigations and suspicions was within the power of the police. If there were proper grounds for alerting the banks, it did not follow "that a subsequent LNC becomes ultra vires simply because the police had "proactively reached out" and alerted the banks to the suspicious circumstances in the first place." The Court of Appeal did not see "how it can be said to be ultra vires for the police to request or recommend compliance" with section 25(1) and 25(A)(1) of OSCO.
"The police have the power to refuse consent and it is not ultra vires for them to inform a bank, as they do in practice by an LNC, that in relation to a particular account, the bank does not have the police's consent to deal further with the funds in that account."
Prescribed by law
The Court of Appeal found that in its judgment, "there is no relevant uncertainty or vagueness in section 25(1) which prohibits dealing with property in specified circumstances, gives rise to concerns on the part of third parties such as banks, and eventually leads them to take steps to prevent any dealing with the property." There were sufficient constraints to guard against "arbitrary or capricious refusal" (to give consent) and “sufficient signposts to give guidance for a citizen, with legal advice, to anticipate the scope of the discretion and the manner of its exercise."
The Court of Appeal noted that "under the fundamental doctrine of precedent", Interush was binding on the judge and on the Court of Appeal unless the view was formed that it was plainly wrong. In the view of the court, "the judge ought not to have entertained the systemic challenge" particularly in view of the fact that the application for judicial review did not mention the ground subsequently relied upon.
The Court of Appeal had held in Interush "that the appropriate standard of review is that of "manifestly without reasonable foundation" and that the system was not inherently disproportionate." The Court of Appeal said it was not satisfied that the decision in Interush was "plainly wrong" as the test required.
The Court of Appeal dismissed the three grounds which had been rejected at first instance but which the applicants continued to argue: the "improper purpose" ground, since the Court of Appeal did not think it was "improper to refuse consent for the purpose of preventing dissipation of the property in question"; the "procedural unfairness" ground, since the applicants had clearly understood that LNCs had been issued against the accounts; and the "fair hearing" ground, since all that was required as "access to an independent and impartial tribunal… with full jurisdiction to deal with the case as the nature of the decision requires."
The Court of Appeal said that it found itself "in respectful disagreement with the judge in relation to the grounds he upheld" and set aside the declaration and order of costs made in the court below.
The decision will be welcomed by victims of cyber fraud, where the early issue of an LNC often plays a vital role in what is always a race against time to preserve potential proceeds of crime.
It will also be welcomed by banks for whom the first instance decision had created a great deal of uncertainty causing them more frequently to have to exercise their judgment whether to continue operation of an account, with only limited facts on which to base their decision.
Authored by Byron Phillips and Nigel Sharman.