Hong Kong Court’s Final Confirmation of the “Letter of No Consent” Regime: Implications for Banks, Bank Customers and Fraud Victims

On April 10, 2024, the Hong Kong Court of Final Appeal (CFA) handed down the long-awaited judgment of Tam Sze Leung and Others v. Commissioner of Police [2024] HKCFA 8 (CFA Judgment), which settles, once and for all, the question of the legality and constitutionality of the Letter of No Consent regime (Regime) under the Organized and Serious Crimes Ordinance (Cap. 455) (OSCO).

Section 25A of OSCO provides immunity to those who deal with property that they know or have reasonable grounds to believe represents proceeds of crime, which would otherwise be an offense under Section 25(1), if they file a Suspicious Transaction Report (STR) to the Joint Financial Intelligence Unit and obtain its consent to deal with such money. The Regime is often deployed by the Hong Kong Police (Police) in fraud cases by issuing a Letter of No Consent (LNC) to the relevant banks, which then commonly take steps to informally freeze relevant bank accounts to prevent dissipation of funds suspected to be proceeds of crime. Banks commonly comply to bring themselves within the immunity provided for in Section 25A of OSCO.

While Hong Kong’s lower court previously ruled that the Regime was unlawful, the ruling was overturned on appeal. The CFA Judgment now confirms the validity and constitutionality of the Regime.

Background

In about 2019, investigations conducted by the Securities and Futures Commission (SFC) indicated that the appellants (Appellants) might have participated in market misconduct and earned over HK$300 million, which was suspected to have been channeled through various bank accounts and partly transferred to unknown parties. The SFC referred the matter to the Police for investigation of suspected money laundering, and in November 2020, the Police invoked the Regime by writing to the Appellants’ banks, which prompted the banks to file STRs. Formal LNCs were then issued to the banks indicating that they do not have Police consent to operate the Appellants’ accounts.

On discovery of their inability to withdraw funds, the Appellants requested the banks to explain the situation and return all account balances. The banks refused and indicated that they were prohibited by law from disclosing the relevant information. The Appellants then requested that Police confirm that LNCs had been issued to the banks and to reveal the legal basis. The Police confirmed that the Appellants were being investigated for money laundering and invited them to contact the Police for further investigation.

Procedural History

Judicial Review

The Appellants made a judicial review application to the Hong Kong Court of First Instance (CFI), alleging that the Regime and the LNCs issued to the banks were illegal and unconstitutional.

On December 30, 2021, the CFI held that the Regime was illegal and unconstitutional because (i) it was ultra vires (i.e., beyond the powers of OSCO) as the relevant sections do not empower the Police to effect an indirect and informal freeze of a bank account by issuing an LNC (which in effect prompts a bank to freeze the account) without involving the courts; (ii) the restriction does not meet the requirement of being “prescribed by law” (i.e., sufficiently clear in scope and manner of exercise); and (iii) it disproportionately interferes with fundamental rights such as the right to use property. The Regime and the LNCs being issued to the banks in the present case were then declared unlawful by the CFI on March 23, 2022.

Appeal

On appeal by the Police, on April 14, 2023, the Court of Appeal (CA) overturned the CFI’s decision and ruled that (i) both the Regime and the issue of the LNCs were not ultra vires, primarily because the Appellants’ accounts were conceptually frozen by the banks that had decided not to comply with the Appellants’ withdrawal instructions considering the potential criminal liability rather than by the Police through an order; and (ii) it was lawful and proper under the common law for the Police to either refuse consent for banks to deal with funds or communicate suspicions to banks as part of their duties to take all necessary steps to prevent crime and dissipation of proceeds of crime.

Contrary to the CFI’s decision, the CA considered the relevant sections in OSCO to be sufficiently clear and supported by clear policies and procedures of the Police on issuing LNCs, while there are other private law remedies available to the customer in case of aggrievances, so the Regime overall did not fall foul of the “prescribed by law” requirement.

Final Appeal

The Appellants then lodged a final appeal to the CFA based on four questions of law, on which the CFA held as follows while affirming the CA’s decision:

1. Not ultra vires or for improper purpose — The CFA clarified that apart from the common law, the source of power for the Regime is in fact the Police Force Ordinance (Cap. 232) (PFO), which Section 10 provides for Police duties, including to take lawful measures to prevent and detect crimes and to prevent injury to property. LNCs were efforts in line with such duties, to seek information from banks in aid of investigations and to prevent crime and dissipation of proceeds of crime. The CFI’s previous finding of ultra vires was based on a reading of OSCO and was therefore wrong. The CFA further reaffirmed that the freeze was effected by the banks, which were motivated to meet their anti-money-laundering obligations and to avoid criminal sanctions. Given such clarifications, the alleged misuse of power for improper purposes by the Police is also conceptually wrong.
2. Not unconstitutional for violating or disproportionately restricting fundamental rights — As it was ultimately the banks’ decision to freeze the accounts, it cannot be said that the Police had taken steps to prevent the Appellants from using their property, so it is wrong to say the Police had infringed the Appellants’ right to use their property. Further, the PFO and the relevant Police manual provide clear provisions on the Police powers and the principles concerning investigations and communications with banks, so there was no legal uncertainty concerning Police powers. Separately, the Regime serves legitimate aims, being to facilitate investigation and detection of crime and to deny access to proceeds of crime, all of which are of vital importance to Hong Kong as a major financial center. The CFA considered that there is a reasonable balance between the interference with the Appellants’ use of their funds and the relevant anti-money-laundering objectives.
3. No procedural unfairness — Similarly, because it was the banks that decided to freeze the accounts, it is nonsensical to suggest that any right to a fair and public hearing was infringed because the Police were not the party who froze the accounts and did not have to determine the Appellants’ rights as the court does in the legal proceedings. In any event, the Appellants could still pursue civil proceedings against the banks for withholding their funds and/or commence judicial review proceedings against the Police, as they had done. There was therefore no procedural unfairness.
4. No need to revisit Interush — As to the Appellants’ fourth question of whether the case of Interush Ltd v Commissioner of Police [2019] 1 HKLRD 892 stands correct in holding that the Regime is a necessary and proportionate restriction on the right of enjoyment of private property under the Basic Law, the CFA analyzed how the Appellants framed the issue and considered it unnecessary to revisit Interush as that case was premised on a constitutional challenge against Sections 25(1) and 25A of OSCO, whereas in the present case, the Appellants actually sought to challenge the Regime and the issuing of the LNCs. The CFA’s analysis was that Police did not engage constitutional rights in their acts in the present case.

The CFA therefore dismissed the Appellant’s appeal on such basis.

Implications and Takeaways

Some key implications and takeaways:

Banks

1. With the confirmed validity and constitutionality of the Regime, banks now have assurance that pending a restraint order, they are expected to treat any LNCs seriously when considering next steps with respect to the customer accounts in question.
2. Banks should not rely on reminders from the Police. To comply with anti-money-laundering requirements and secure immunity under Section 25A of OSCO, banks should exercise independent judgment and continue to stay vigilant in monitoring account activity to identify funds that are potentially proceeds of crime. In case of suspicion, banks should take the initiative to file a STR even in the absence of a Police request to do so.
3. Banks should regularly review existing contracts with customers, and where necessary, consider updating the relevant terms and conditions to expressly provide that the banks are entitled to refuse to operate the customer’s account in appropriate circumstances where there is suspicion relating to money laundering or proceeds of crime, so as to minimize the risk of claims by customers.

Customers

4. Customers should recognize that banks have legal duties and bear potential criminal consequences under OSCO should they allow accounts with suspicious transactions to be operated without successfully securing Police consent. Banks therefore commonly adopt a cautious and conservative approach in such situations.
5. In case of an unexplained freeze of a bank account, customers may first try to clarify the reason with the bank. If it is believed to be related to a LNC but there is no formal court order issued, the customer should seek legal advice to consider the most appropriate steps to be taken.

Fraud Victims

6. With the Regime being finally affirmed, there is greater comfort to fraud victims that bank accounts suspected to contain proceeds of crime may be temporarily frozen by banks on receipt of a notice from the Police, possibly before civil proceedings can be commenced. If you suspect that you are a victim of fraud and have concerns that your funds may be transferred and dissipated to certain bank accounts, you should immediately report the matter to the Police and engage lawyers to advise on the most appropriate legal options.