The proceedings in Tam Sze Leung and Others v Secretary for Justice and Another  HKCFI 2330 can be regarded as a 'sequel' to similar proceedings earlier this year , where the same applicants made a constitutional challenge against the use of "letters of no consent" by the Commissioner of Police to informally freeze bank accounts associated with suspected fraudulent activities (see Hogan Lovells client alert Unfrozen – Hong Kong court rules "informal freezing" of bank accounts unlawful). In that action, the court found that the letters of no consent regime was unconstitutional.
In what may at first appear to be somewhat of a U-turn, on this occasion, the court upheld the constitutionality of the restriction notice regime. The court found that the scope of the SFC's powers and the manner in which they are exercised under the SFO are sufficiently clear.
The court found that, unlike the letter of no consent regime, the restrictive notice regime has sufficient legislative safeguards in place to guard against potential abuse of powers. The restrictions or limitations imposed by restrictive notices are no more than necessary to accomplish the legitimate aim of protecting investors' and the public's interests and strike a balance between encroaching on an individual's constitutionally protected rights and benefits to society.
The letter of no consent regime as operated by the police pursuant to their internal guidelines relates to sections 25 and 25A of the Organized and Serious Crimes Ordinance (Cap. 455) (OSCO).
Section 25 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 to make disclosure (often by way of Suspicious Transaction Reports) to an authorised person if they know or suspect the property to be the proceeds of crime. Section 25A(2) provides a statutory immunity to the section 25 offence, where the person concerned has made a disclosure but obtain consent of an authorised officer to deal with the property in question.
As such, sections 25 and 25A of OSCO do not expressly create a letter of no consent regime and empower the police with an informal power to freeze assets. In practice, the letter of no consent regime created a lot of uncertainty as to the progress of the police's investigation, the considerations are taken into account by the police and how long the freezing measures will remain in place.
In Tam Sze Leung (No.1), the court held that such informal freezing powers cannot be implied into the statute as necessary and the letter of no consent regime was held ultra vires (i.e. unconstitutional). On the other hand, sections 204, 205 and 206 of the SFO expressly authorise the SFC to restrict and prohibit the dealing with assets held in accounts maintained with licensed corporations. Section 207 provides for the circumstances in which the SFC can issue a restrictive notice under sections 204 and 205. Sections 207(a) to (d) relate to market misconduct by licensed corporations while the scope of section 207(e) is much wider in that captures the clients of the licensed corporations for the purpose of protecting the interest of the investing public and general public.
The effect of a restrictive notice is similar to that of a Mareva injunction. It can apply to any property held by a licensed corporation and is not limited to what is suspected to be proceeds of crime or property derived through illegal means.
Grounds for challenge
The focus of argument in the present case is section 207(e) – whether the SFC considers the imposition of the restrictive notice to be "desirable" in "the interest of the investing public and in the public interest" based on the materials it has uncovered in its investigations.
The applicants in these proceedings raised two grounds of challenge:
1. Prescribed by Law - The relevant SFO provisions did not meet the "prescribed by law" requirement as the scope of powers and the manner of their exercise lacked sufficient clarity and the restrictive notice regime lacked proper safeguards against abuse and misuse.
2. Proportionality Test - Even if the relevant SFO provisions are considered sufficiently certain, the interference with an individual's property rights guaranteed by Articles 6 and 105 of the Basic Law goes further than is reasonably necessary.
The "Prescribed by law" requirement
What "prescribed by law" means is that the law must be adequately accessible and sufficiently precise to enable the citizen to regulate their conduct so that they can foresee the consequences which a course of action will entail.
(a) Broad construction of legislation does not mean insufficiently clear
The present case arose from an ongoing investigation in relation to a suspected "ramp and dump" scheme . The court first considered the scope and evidentiary threshold of section 207(e) of the SFO and formed the view that the issuance of restrictive notices can be triggered after balancing (1) the stage of the investigation, (2) the potentiality of the unfavorable outcome which has been identified by the materials generated by the investigation, (3) the apparent need to safeguard the rights of others or protect the public interest, and (4) what the impact will be from the prohibition or requirement in mind.
(b) What is "desirable in the interest of the investing public"
In considering the "desirability" of a restrictive notice in the context of a "ramp and dump" scheme, the issue of a restrictive notice is considered by the SFC to be in the interests of the investing public to preserve funds for possible repayment to those investors who fall victim to the scheme.
(c) Concept of "public interest"
The judgment discussed the concept of "public interest" in section 207(e) of the SFO, which is the "yardstick" guiding the SFC's decision making process. The court did not take this opportunity to provide a definition of "public interest" (and understandably so because the broad drafting of section 207(e) is meant to give flexibility to the SFC decision making process). Instead, the court found that the existence of the review mechanism by the Securities and Futures Appeals Tribunal (SFAT), which publishes reasoned decisions, provides an infrastructure which is conducive to the gradual development on the meaning of section 207(e).
It is worth noting that the meaning of "public interest" differs in different statutory contexts. In previous case law considering section 33 of the Telecommunications Ordinance (Cap. 106), which gives the Chief Executive in Council (CEIC) power to order interception of telecommunications "whenever he considers that the public interest so requires", the court found that section 33 is not formulated with sufficient precision to provide independent judicial oversight of the CEIC's powers and that there are no legislative safeguards against abuse of executive power. However, this is not the position with regards to the restrictive notice regime.
The court considered that there are sufficient safeguards against the abuse and misuse of the SFC's administrative powers. For example, the relevant enforcement division of the SFC carries out periodic reviews of each case where a restrictive notice has been issued. After a restrictive notice is issued, a person can seek consent from the SFC to deal with the assets or seek further review by the SFAT which is a de novo full merits review conducted by a sitting or retired judge and two lay members. With regards to judicial oversight, the SFC's exercise of powers and decisions of the SFAT are subject to judicial and appellate reviews.
It is important to note that the SFAT is composed of a judge and financial industry professionals which makes the SFAT an expert and informed tribunal. While the powers granted to the SFC under the restrictive notice regime are highly intrusive to the individual property rights, the SFAT is well placed to not only take into account the intrusion into individual's property rights, but also to decide the proper weight that should be accorded to that factor.
(e) No time limit
The effect of a restrictive notice can last until trial or further order. In the present case, the restrictive notices affecting the applicants had been maintained for 16 months and yet no charges had been pressed.
In addressing the argument on the lack of time limit of restrictive notices, the court referred to previous case law which stated that the time during which an individual's property right is restricted, will be circumscribed by the requirements of reasonableness in the public law sense and proportionality on a constitutional law level. In other words, instead of considering whether the restrictive notice has been in force for too long, the SFAT will decide whether the duration continues to be reasonable.
Furthermore, it was appreciated that more complex cases require more time for investigation and collection of evidence by the SFC, so it is impossible to predict how long the investigations will take before a decision can be made. Hence, it is unrealistic to set an arbitrary expiry date for a restrictive notice. Yet, the lack of time limit of letters of no consent under OSCO was one of the many factors that contributed to the court taking the view that the letter of no consent regime was unconstitutional.
The Proportionality test
Many aspects of the analysis on the "prescribed by law" requirement overlap with the proportionality analysis.
With regard to the appropriate standard of review, the SFC advocates the "manifestly without reasonable foundation" standard while the applicants advocate the "not more than necessary" standard. In a socio-economic context as the present case, the court tends to adopt the "manifestly without reasonable foundation" standard, in recognition of the government's institutional capacity in making decisions and to allow the government a broad margin of discretion.
It is well established in case law that the four steps of the proportionality test are:
(1) Whether the intrusive measure pursues a legitimate aim.
(2) If so, whether it is rationally connected with advancing that aim.
(3) Whether the measure is no more than necessary for that purpose.
(4) If the intrusive measure passes the first three steps, whether 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 concerned, asking in particular whether pursuit of the societal interest results in an unacceptably harsh burden on the individual.
As regards the first step, the legitimate aim of Part X of the SFO is the protection of investors, creditors of the licence corporation and the public interest. Pending the outcome of an investigation into misconduct in the securities and futures market, the preservation of funds that might otherwise be dissipated, prevention of dealing in proceeds of crime and general deterrence are ways in which the restrictive notice regime under the relevant SFO provisions all can be said to pursue a legitimate aim.
In terms of the second step, although the restrictive notice temporarily deprives a licensed corporation of its funds in the frozen accounts, it ensures that those funds remain available for future orders to be made in respect of them. As such, the restrictive notice regime is rationally connected to the legitimate aim.
With regard to the third step, the court found that the review mechanism by the SFC and the appeal mechanism to the SFAT are "very real" and "not so inadequate as to cause the [restrictive notice] regime to be transparently disproportionate to the problem it seeks to address". The fact that these remedies do not provide immediate redress does not make the regime disproportionate. With the legislative safeguards in place, the restrictive notice regime is no more than necessary to accomplish the legitimate aim.
As for the fourth step, the remedies that the legislation provide do not produce a result that is extremely unbalanced or unfair or one that imposes an unacceptably harsh burden on the individual.
Ultimately, the outcome of this judicial review boils down to legislative intent and the statutory provisions themselves. In contrast to the letter of no consent regime, where the police's powers to freeze assets is without legal basis, the SFC is given wide discretion and power under the SFO to freeze assets with the use of restrictive notices.
To cite the Honourable Mr. Justice Coleman, "the very nature of discretionary power means that it might not always be predictable with certainty as to its application". It is enough that the SFC's discretionary powers can be exercised within a certain scope and in a particular manner with adequate safeguards, including review mechanisms and judicial oversight. As Coleman J put it, "absolute certainty is unattainable, and would entail excessive rigidity…the law must be able to keep pace with changing circumstances."
The legislature envisaged the flexibility required for financial regulators to further their regulatory objectives and discharge their statutory functions in a timely manner. The need for a broadly drafted basis is precisely because trading activities that are subject to the SFC's oversight are dynamic and fluid, and these activities give rise to various forms of misconduct that may fall outside the ambit of those already regulated under the SFO but which deserve to be regulated by the SFC in the public interest.
Authored by Mark Lin, Stephanie Tsui, and Vanessa Hung.