A relief to victims of fraud: Hong Kong Court of Appeal restores the “Letter of No Consent” regime

On 14 April 2023, the Hong Kong Court of Appeal delivered its decision in Tam Sze Leung & Ors v Commissioner of Police [2023] HKCA 537, overturning the Court of First Instance’s decision which had held that the Letter of No Consent (“LNC”) regime – a longstanding practice operated by the Hong Kong Police which had the effect of creating an immediate if informal freeze on suspicious bank accounts – was, inter alia, unlawful.

Hong Kong is a major money laundering centre and is frequently utilised by fraudsters as a channel to receive payments made by the victims before the monies are dissipated or onward transferred.  Thousands of bank accounts in Hong Kong have been used to collect and launder billions of dollars representing proceeds of crime in the past years.  The availability to the Police of the power to issue LNCs was an essential part of every fraud and asset recovery lawyer’s arsenal of weapons in assisting the victims of fraud in Hong Kong. The loss of that power created great uncertainty for the Police and practitioners alike.

The decision of the Court of Appeal is therefore a significant relief to victims of fraud, as the LNC regime – which had previously been pivotal in temporarily “freezing” fraudsters’ bank accounts allowing the victims time to take action to preserve and recover their stolen assets – is restored and will continue to operate.  

What is the LNC regime?

The LNC regime is derived from sections 25 and 25A of the Organized and Serious Crimes Ordinance (Cap.455) (the “OSCO”), and operates subject to the relevant procedures set out in the Hong Kong Police’s Force Procedures Manual (the “Manual”).

Sections 25 and 25A of the OSCO make it an offence for a bank to deal with property that is known or is reasonably believed to represent the proceeds of crime.  A bank that has knowledge that or suspects that property held in an account maintained by the bank represents the proceeds of crime is obliged to make disclosure of that information to an authorised officer or face criminal liability. Further, a bank that allows monies to be dissipated from an account with notice of a fraud can be held civilly liable to restore such funds.

In practice, a bank (or other financial institution) with knowledge of a fraud would discharge this obligation by filing a suspicious transaction report (“STR”) with the Joint Financial Intelligence Unit (“JFIU”), a government division jointly staffed by the Hong Kong Police and the Customs & Excise Department.  Upon receipt of the STR, the Head of JFIU – a superintendent of the Hong Kong Police – may exercise the power to either give or withhold consent for the bank to deal with the account.  In the event that the Head of JFIU does not consent for the bank to deal with the account, he will issue a letter, commonly referred to as the Letter of No Consent, to the bank indicating that he does not consent to any dealings with the account.

An LNC can be issued very quickly and normally lasts no more than 6 months.  During that period, the Hong Kong Police are expected to progress their investigations and undertake regular monthly reviews of the continuation of the LNC. The Police are also expected to obtain a restraint or confiscation order against the accounts concerned to replace the LNC and thereby continue restricting the operation of the accounts.   

What is the Tam Sze Leung case about?

In Tam Sze Leung, the applicants were family members and maintained several bank accounts with banks in Hong Kong. They were suspected by the Securities and Futures Commission of having committed stock market manipulation through illegal “pump and dump” activities and arranging for other persons to provide false stock trading tips or insider information to the public, thereby earning a profit at the expense of investors who had been misled by their false information.  In assisting the SFC’s investigation, the Hong Kong Police issued LNCs against the applicants’ bank accounts to preserve such profits as had been generated, identifying the proceeds of crime pending further investigation.  

When the applicants’ judicial review of the decision of the Commissioner of Police (to issue and maintain the LNC) was heard at The Court of First Instance before the Honourable Mr Justice Coleman, the Judge held that three out of six grounds advanced by the applicants were made out and declared that the LNC regime was (1) ultra vires of OSCO; (2) not prescribed by law; and (3) involved a disproportionate restriction of the constitutional right to property under the Basic Law. The Court also explained its understanding of how the LNC impacted the bank – by causing it not to deal with the account, thereby effectively causing the bank to de facto ‘freeze’ the account.

The Court of First Instance’s decision created uncertainty about the validity of Letters of No Consent.  Victims of fraud, among others, were concerned that all Letters of No Consent could be withdrawn by the Hong Kong Police without warning at any time, or could be challenged by the account holders through judicial review proceedings on the grounds upheld by Coleman J at first instance.

What is the Court of Appeal’s decision?

The Commissioner of Police appealed against the Court of First Instance’s decision.

The Court of Appeal found itself in “respectful disagreement” with the Court of First Instance Judge in relation to the grounds he upheld. In short, all of the grounds put forward by the applicants to challenge the LNC regime were rejected by the Court of Appeal.  It upheld the operation of the LNC regime as lawful, constitutional and proportionate.

Importantly, the Court of Appeal acknowledged that the LNC regime is not a “secret, informal and unregulated asset freezing power”. On the contrary, the object of the LNC regime was to deter criminal activity by restricting access to the proceeds of crime and that this in itself was a legitimate societal aim.

In reaching its decision, the Court of Appeal considered itself bound by its previous decision in Interush Ltd v Commissioner of Police [2019] HKCA 70, and endorsed its ruling that the LNC regime “is part and parcel of the measures used to combat organised crime in money laundering”. 

The Court of Appeal also clarified that an account is de facto “frozen” by an LNC not because there is any enforceable order made by the Police that operates to restrain a bank from operating the account, but because a bank with notice of the fraud had itself chosen to not comply with its customer’s instructions due to its own concern about potential exposure to criminal liability under the OSCO and civil liability to restore dissipated funds if it dealt with property representing the proceeds of crime.   In other words, the Hong Kong Police have no power – by virtue of the LNC regime or otherwise – to compel the banks to take or refrain from taking any steps in relation to its customers’ accounts. Instead, the police are empowered by OSCO by issuing an LNC to notify the bank that they do not consent to funds in a subject account from being dissipated, or alternatively for the JFIU to give consent to the bank dealing with the account, and thereby giving the bank immunity from criminal liability.

The Court of Appeal also expressed the view that the Hong Kong Police’s power under the LNC regime is not unfettered. The Court of Appeal noted that the Hong Kong Police’s internal guidance over the exercise of the LNC regime provides “sufficient constraints to guard against arbitrary or capricious refusal, 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.”

Key takeaways

• The upholding of the LNC regime will be welcomed by victims of fraud, who continue to benefit from the restoration of the LNC regime.  Time is of the essence for victims of fraud to recover their stolen assets. The LNC regime, which has the practical effect of causing the bank to immediately freeze the relevant bank account, will continue to be a vital instrument for practitioners and fraud victims alike to preserve stolen assets pending the victim’s application for a civil injunction in the Hong Kong Courts.  

• In addition, the LNC regime provides a cost efficient resource for fraud victims.  It is common for victims to rely on the LNC when they do not have the financial resources to apply for an injunction order to restrain the movement of the recipients’ bank accounts pending civil recovery of the stolen monies, or where the amounts involved are not sufficient to justify incurring the costs of applying for injunction. 

• Having said that, this matter concerns the core constitutional right to property and therefore is of great public importance, it is still possible that the applicants will challenge the Court of Appeal’s decision and appeal to the Court of Final Appeal.  We will closely monitor this space.

How we can help 

Our fraud and assets tracing team regularly represents clients in complex, high-value, and multi-jurisdictional fraud cases, including through applications to the Hong Kong Court for urgent disclosure and injunction orders.  We maintain close relationships with a network of leading practitioners in many other jurisdictions to support our domestic and international asset tracing and recovery practice.  

Any victim of fraud seeking relief, or a bank account holder adversely affected or with concerns that they might be adversely affected by a Letter of No Consent, should contact our partners Jeff Lane and Pamela Mak.

Jeff Lane, Sharina Mahtani, Adam Hoi and Ling Meng

If you would like to discuss any of the matters raised in this article, please contact:

Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.