As in many other parts of the world, fraud in Hong Kong has surged in recent years, driven in large part by online scams, cybercrime, investment fraud and telephone deception. Last year, the incidence of fraud-related cases jumped by 45 percent from 2021, accounting for almost 40 percent of crimes in Hong Kong – losses totalled nearly HK$5 billion in 2022 alone. Victims (many of them cold-calling) often enquire whether reporting to the Hong Kong police can provide any assistance.[1]
In a timely decision, the Court of Appeal (CA) in Tam Sze Leung v Commissioner of Police,[2] has allowed an appeal reinstating the “Letter of No Consent” (LNC) regime, a long-standing and favoured instrument of enforcement under the Organised and Serious Crimes Ordinance (OSCO). The decision was delivered in April and takes immediate effect. It means that, upon application by a victim or at their own volition, the police can once again issue LNCs, which normally result in banks “freezing” accounts suspected of holding the proceeds of crime.
In this update we briefly explain how the regime works, highlight salient aspects of the decision, and explore the implications for key stakeholders: victims, financial institutions, and account holders wrongfully subjected to an LNC-induced “freeze”.
Letters of No Consent – how do they work?
An LNC is not an order, nor is it “enforceable”. In short, it is a warning. An LNC from the police[3] follows the discovery of funds suspected to be linked to crime. Such a discovery may originate with the bank holding the funds, the police, or indeed a victim who reports to the police.
The diagram below illustrates the process.
The CA noted that from 2018 until May 2021, the police received more than 200,000 STRs, of which less than 2% resulted in the issuance of LNCs.
The CA decision
In 2020, the police had contacted the applicants’ banks, notifying them that the applicants were suspected of involvement with market manipulation and money laundering activities. The police requested the banks to file STRs for the applicants’ accounts, following which the police issued LNCs. The Court of First Instance had ruled that the LNC regime “as operated” by the Hong Kong police was ultra vires and unconstitutional, as an “informal” asset freezing mechanism.
The Commissioner of Police successfully appealed the CFI decision.
In overturning the CFI’s decision, the starting point for the CA was the interplay between a bank’s contractual obligations and the OSCO criminal provisions. The Court explained:
“… the account is “frozen” not because there is any enforceable order made by the police (like a Mareva injunction granted by a civil court) that blocks the account, but because the bank has chosen, whether or not permissibly under the banking contract, 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 proceeds 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. What the police are empowered by the statute to do is to give consent, as an authorised officer, for an act in contravention of section 25(1), i.e. a dealing with the property. Coupled with prior disclosure under section 25A(1), such consent immunises the bank from criminal liability under section 25(1).”
Even in situations where the police themselves precipitated an STR by alerting a bank to funds under suspicion, the CA was unpersuaded that a subsequent LNC would become ultra vires just because the police had proactively reached out. It was not beyond police powers to alert banks to relevant investigations, nor was there any legislative requirement for disclosures to be self-initiated.
Various other arguments (such as improper purpose) were also rejected.
Implications
Following the CA’s decision the LNC regime is back in business. Depending on who you are, this could have different implications:
1. Victims of Fraud
Victims of fraud can once again avail themselves of the LNC regime as a means of preserving assets derived from crime, buying time while police investigation is ongoing. If the bank has not already issued an STR, a victim can report to the police and the police can request one from the bank.
An LNC can sometimes be obtained before an injunction or freezing order from the courts (and at lower cost). Depending on how the account holders react, different options may then be considered. Assuming the LNC meets resistance from the account holder, a victim may have to seek a formal restraint / freezing order, in case the LNC is lifted. However, it was not unheard of, before the CFI decision, for account holders (if they were fraudsters) to abandon the impugned account upon learning of police involvement – and in that event, victims could normally serve a writ, and apply for default judgment and garnishee orders. The usefulness of an LNC of course depends on the existence of meaningful assets in Hong Kong, since there is no extraterritorial effect.
In deciding whether to issue an LNC, the police consider whether it is necessary, proportionate and reasonable. Also relevant: the prospects of obtaining a confiscation order, the nature and seriousness of the offence, the laying of a charge and prospects of conviction, the value of the proceeds in question and the likelihood of the victim obtaining an injunction within a reasonable time.
2. Banks
Even where an LNC is issued by the police, it remains for the bank to decide how to react, something the CA described as an “unenviable position”. Either: (1) accede to account holders’ instructions (and potentially “deal” with the proceeds of a crime); or (2) freeze the accounts (and potentially breach contractual duties to customers).
The CA noted that a bank’s contractual duties to account holders can be suspended either by operation of law or else by express or implied contractual terms (thereby turning on the precise facts giving rise to the suspicion, and the terms of the banking agreements).
However, the CA did not directly discuss whether an LNC (or asking for an STR) from the police would be determinative in excusing a bank from its contractual obligations, potentially putting banks in a difficult situation where the LNC is not supplemented with detailed information, and the bank is unable to verify the suspicions itself. Difficult calls such as these are not eased by the scarcity of available time to make decisions where there is an imminent risk of dissipation.
While the Hong Kong courts have not yet addressed the issue, the English courts have generally upheld the lawfulness of banks’ decisions to decline services where potential criminal liability is at stake (including based on implied terms). We expect a Hong Kong court would take a similar stance.
Even so, the best hedge for financial institutions is clearly to ensure that banking services contracts are drafted with appropriate breadth and clarity, to ensure that an alert or LNC from the police provides of itself a well-founded basis to suspend services. This is especially important where the terms and conditions include an entire agreement clause (as is often the case), excluding reliance on implied terms. Prudent drafting would also address issues such as whether the bank has unbridled discretion to suspend accounts, whether notice is required before any suspension, and the reasonable duration or extent of any “freeze”.
It is advisable for banks to have robust compliance policies in place, so that the critical questions arising when LNCs or alerts are issued can be addressed without delay. Such policies should reflect the institutions’ contractual rights, the obligations under OCSO and offer guidance as to what constitutes “reasonable grounds” for suspicion, what further information or investigation may be required before implementing a freeze, and address issues such the duration of account freezes.
3. Account holders
To avoid the severe disruption of an account freeze, it is vital for corporate account holders to have an effective anti-money laundering system in place to identify suspicious financial activity and root it out before it escalates to the level of an STR or LNC.
A key theme in the CA’s decision is that the final call to freeze an account rests with the bank. The corollary, of course, is that customers who find their accounts have been wrongfully frozen should take the matter up with the bank, not the police. Any disputes with the bank will be resolved according to the dispute resolution provisions featured in the agreement with the bank.
Lastly, if there is a specific allegation that, by withholding consent, the police have acted in bad faith or irrationally, this would be subject to the court’s supervisory jurisdiction in judicial review.
Any reference to “Hong Kong” or “Hong Kong SAR” in this article shall be construed as a reference to “Hong Kong Special Administrative Region of the People’s Republic of China”.
Reference
[1] Certainly, if there is any insurance to be claimed, reporting is often a prerequisite.
[2] Tam Sze Leung & Ors v Commissioner of Police [2023] HKCA 537
[3] The Joint Financial Intelligence Unit (JFIU) was set up by OSCO to handle suspicious transaction reporting, including the LNC regime. It is staffed by the Hong Kong Police Force and Customs & Excise Department. In this article, references to the police include the JFIU.
