In brief

Since finding that the Police’s use of a “No Consent Regime” (“Regime“) in freezing accounts that contain suspected proceeds of crime was unlawful and unconstitutional, the Hong Kong Court of First Instance has now handed down its decision on relief and costs in Tam Sze Leung & Ors v. Commissioner of Police [2022] HKCFI 772.

The Court declared that the Letters of No Consent (LNCs) in issue and the Regime “as operated” by the Police are: (i) ultra vires Sections 25 and 25A of the Organized and Serious Crimes Ordinance (OSCO) (Cap. 455); and (ii) incompatible with Articles 6 and 105 of the Basic Law, as the Regime as operated by the Police is not prescribed by law and is disproportionate.

As we explained in our earlier alert (link), the Tam Sze Leung case is expected to have significant implications for financial institutions and victims of financial crime.

It remains to be seen whether there will be any appeal against this decision, amendment to the legislation or how the Commissioner of Police will react to this decision in practice. Hence, financial institutions and victims of financial crime should consider strategies to mitigate their risk and, where necessary, secure the funds to maximize the prospects of recovery.

Key takeaways

Financial institutions and companies should have adequate safeguards in place to prevent, detect and mitigate the risks of financial crime. They should also have contingency plans in place for dealing with financial crime as these incidents can happen unexpectedly and may spiral within a short timeframe. Failure to do so may lead to significant pecuniary losses and regulatory consequences.

Time is of the essence when recovering losses in financial crime cases. Victims should act promptly in seeking legal advice, so that necessary measures (such as seeking urgent injunctive relief) may be taken as quickly as possible to limit the damage.

In more detail

The Regime

Our previous alert (link) explained the Police’s long-standing practice of issuing LNCs to effect informal freezes on bank accounts that they suspect contain proceeds of crime. The way that the Police operated the Regime meant that they could potentially freeze property for an indefinite period without being subject to any procedural safeguards or judicial oversight.

The legality and constitutionality of this mechanism was extensively challenged in Tam Sze Leung. After having carefully examined the submissions of both sides, the Court declared that the LNCs in issue and the Regime “as operated by the [Police] Commissioner” are: (i) ultra vires Sections 25 and 25A of the OSCO; and (ii) incompatible with Articles 6 and 105 of the Basic Law, because the Regime as operated by the Police is not prescribed by law and is disproportionate.

With that said, this decision does not appear to go as far as to suggest that the entire Regime is void. The declaration concerns “the No Consent Regime as operated”. Thus, the Court only appears to be suggesting that the manner in which the Regime was used in this case (i.e., the issuance of LNCs on the Police’s own initiative by proactively freezing accounts) is impermissible.¹ It does not appear to bar the Police from issuing LNCs as a reactive measure to suspicious transaction reports filed by individuals or financial institutions. We envisage that the Commissioner of Police is likely to construe this decision narrowly and continue to operate the No Consent Regime in a reactive manner, but this approach may need to be clarified in subsequent cases, or in any appeal in the Tam Sze Leung case.

Practical implications

Both sides will have until at least the end of April 2022 to decide whether to lodge an appeal against this decision. Meanwhile, we can expect to see the following changes in the foreseeable future:

1. The Police are likely to review the validity of their existing LNCs more closely and frequently in assessing whether they ought to be discharged. Indeed, our team has recently encountered cases where the Police indicated that they intend to lift existing LNCs.
2. The Police may be more hesitant about issuing LNCs going forward. They may only do so in a “reactive” rather than “proactive” manner.
3. The Police may lean towards alternatives (e.g., restraint orders under Section 15 of the OSCO) and/or advise victims of crime to take their own steps to freeze funds (e.g., injunctions).

In any event, for victims of fraud, speed is of the essence in detecting and developing a recovery strategy, which may require urgent recourse to the Court.

Given these developments, it is all the more important that financial institutions and victims of financial crime act promptly in seeking legal advice and implementing stopgap measures where necessary.