Freezing Assets in Cases of Suspected Money Laundering
Constitutionality and Civil Liability

Hong Kong money laundering laws prohibit financial institutions from permitting account holders to deal with their assets where they know or have reasonable grounds to believe that the assets represent proceeds of crime or terrorist funds without the consent of the Joint Financial Intelligence Unit (“JFIU”). Refusal of the JFIU to grant consent can have catastrophic economic consequences for account holders, resulting in a worst case scenario in total loss of liquidity.

In Interush Limited v. The Commissioner of Police, one account holder challenged the constitutionality of the consent arrangement. In its recent decision, the Court of Appeal refused the account holder relief, rejecting the constitutional challenges which were advanced.

BACKGROUND

The Organized and Serious Crime Ordinance (“OSCO”) establishes an anti-money laundering regime which, in broad terms, (i) requires persons, including financial institutions, to report suspicion of money laundering to the JFIU, and (ii) prohibits such persons from dealing in property unless, following such a report, the JFIU consents. In particular:

• Duty to Report – OCSO, s. 25A provides that where “a person knows or suspects that any property… was used in connection with… an indictable offence, he shall as soon as it is reasonable for him to do so disclose that knowledge or suspicion” to the JFIU.

• Bar on Dealing – OSCO, s. 25(1) provides that, unless exempted under s. 25A, 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”.

• Exemption from Bar Based on Consent - Under s. 25A(2)(a), if a person, before dealing with property, “made a disclosure [to the JFIU]… he does not commit an offence under [s. 25(1) if that disclosure is made before he does that act and he does that act with the consent of [the JFIU].”.

Similar provisions adopting substantially similar language appear in the Drug Trafficking (Recovery of Proceeds) Ordinance and United Nations (Anti-Terrorism Measures) Ordinance.

Although strictly speaking the bar on dealing under s. 25(1) applies only where the financial institution has knowledge or reasonable grounds to believe the account assets represents proceeds of a crime, in practice, once a report is made to the JFIU based on mere suspicion, it is highly unlikely an institution would allow an account holder to deal in those assets until it has received JIFU consent under s. 25A(2)(a). In other words, even though the legislative framework contemplates knowledge or reasonable grounds before a financial institution bars an account holder from accessing his assets, such a bar may in practice arise from mere suspicion. In this respect, the regulatory framework and caselaw support a low threshold for suspicion, placing account holders at heightened risk of their assets being, in effect, frozen.

Given the dire economic consequences which can arise where an account holder’s assets are frozen and the absence of any statutory process by which account holders can respond to these circumstances, it is not surprising that a constitutional challenge was made.

DECISION

In the Interush case, a bank made report to the JFIU of money laundering suspicion in respect of accounts held by Interush with that bank. The JFIU refused to consent to dealing by the bank. As a result, the bank suspended the accounts. The suspension continued for over a year before any formal action was taken.

Interush applied to judicially review the decision of the JFIU to refuse consent and to challenge the legislation on the basis of an unconstitutional deprivation of property rights and an unconstitutional restriction on access to the courts. Interush failed at the Court of First Instance and appealed to the Court of Appeal.

At the Court of Appeal, in respect of the constitutional challenge, it was agreed that legislation was rationally connected to the legitimate aim of deterring criminal activity by restricting access to the proceeds of crime. As a result, the issue was whether the legislation was proportional and whether a reasonable balance had been struck between the societal benefits of the legislation and the inroads made by the legislation into the constitutionally protected rights of the individual.

Proportionality

The Court of Appeal rejected Interush’s argument that the legislation was disproportionate to its aims because the “no-consent” regime was too vague, particularly as to how long consent could be refused. In so holding, the court noted that the police had a duty to act reasonably and that, as there is no time frame generally imposed for the investigation of criminal offences, the police had a duty to act within a reasonable time frame. Given the duty to act reasonably within a reasonable time, the court held that the legislation was not too vague. Different cases will differ in the time required for the police to investigate depending on the complexity of the case and the level of precision in specifying the time in legislation must take this into account.

Equally, the Court of Appeal rejected Interush’s argument that there were alternative methods of achieving the legislation’s objectives that were less invasive, particularly given the economic effect on persons whose assets are frozen as well as the difficulties of judicial review or civil claims against a financial institution. In this regard, Interush drew a comparison between the no-consent regime and the restraint order regime under OSCO. Under OSCO, a restraint order is a court order freezing assets given upon application of the JFIU. Significantly, a restraint order is only available in cases where there is a high degree of probability of wrongdoing (i.e. a person is charged with an offence, there is reasonable cause to believe he has committed the offence or there is reasonable cause to believe he has benefited from the offence). Nevertheless, despite this higher degree of probability, a restraint order is time limited to 6 months and a person affected by a restraint order has the right to be heard. In contrast, under the no-consent regime, in practice, assets may be frozen on mere suspicion without limit in time and without any hearing.

The court disagreed with Interush, stating that the no-consent regime did not itself freeze the assets. Instead, the financial institution froze the assets. The court went on to state that in its view, a reasonable balance had been struck between the societal benefits of the “no-consent” regime and the constitutionally protected rights of the individual and that the government should be given a margin of discretion as it was better placed to assess the appropriate means to advance the legislative aims.

The Right to Access to Court

Interush argued that the issuance of a letter of no-consent is a decision that bears on civil rights and obligations and as such, persons affected by such a decision have a constitutional right to a fair hearing before a competent, independent and impartial tribunal established by law. It argued that there was no such tribunal in the “no-consent” regime. The Court of Appeal rejected this argument on the basis that a judicial review is available as well as a civil claim against a financial institution.

Prescribed by Law

Interush advanced a separate constitutional challenge to the legislation on the basis that the “no consent” regime is not “prescribed by law” as it is inconsistent with the principle of legal certainty which requires restraints on rights to be prescribed by laws which are accessible and precisely defined and not left to uncharted administrative discretion. It argued that ss. 25 and 25A provide no guidance as to when consent may be refused and if so, for how long. In this regard, although the police manual sets out criteria relevant to the grant or refusal of consent, the manual was not made available to the public and therefore, does not provide certainty.

As this argument was not raised by Interush at the Court of First Instance, the Court of Appeal declined to express a view on it, taking the position that Interush was not entitled to advance this argument.

Constitutionality of the Respondents’ Decisions

Interush argued that the JFIU acted unconstitutionally by issuing a letter of no-consent to bypass the procedural safeguards for restraint order applications under the OSCO. The Court of Appeal disagreed, commenting that the crucial question in this regard is whether the JFIU have abdicated their statutory functions to proceed with the decision to issue the letter of no consent. Since no bad faith was alleged and in light of the complexity of the case with cross-border elements involved, the JFIU’s decision was not so unreasonable that it could be challenged.

CONCLUSION

The Court of Appeal decision does not provide a satisfactory approach to the lack of safeguards for the protection of property rights where a financial institution makes a suspicious transaction report to the JFIU and freezes client assets on the basis of a no-consent letter from the JFIU. Though there is room for future constitutional challenge, particularly in respect of whether the “no-consent” regime is consistent with the requirement for legal certainty, the decision hints at a heavier burden on financial institutions and other persons to ensure that they do not freeze client assets based on mere suspicion but that they do so on the basis of knowledge or reasonable grounds.