Hong Kong court reaffirms use of ‘no consent’ scheme for preserving assets

‘No consent’ letters are issued to banks by the police, withholding the police’s consent for the bank to deal with funds that are potentially proceeds of crimes. The Court of First Instance in December 2021 held that the scheme was unlawful and inappropriately interfered with constitutional rights.

In April 2023, the Court of Appeal has upheld an appeal by the Hong Kong SAR Police Commissioner, dismissing the first instance judgment for judicial review and setting aside the declaration made by the court below. However, while the no consent scheme is held to be lawful, the appeal court emphasised that the regime does not give police the power to ‘compel’ banks to freeze customer funds and banks should still make their own judgment.

Banks are reminded to carefully assess the risk of committing money laundering offences in deciding whether to freeze funds in customers’ bank accounts. To minimise the risk of breaching their contracts with customers, banks should also conduct their own investigations on the suspicious activities instead of solely relying on police intel on crime.

What is the ‘no consent’ scheme?

To combat corporate crime and money laundering, sections 25 and 25A of the Organized and Serious Crimes Ordinance (Cap 455) (OSCO) were enacted in Hong Kong SAR to prohibit dealing in the proceeds of crime and to introduce a positive duty to disclose known and suspected proceeds of crime to the regulators. A person can gain immunity to deal with the proceeds if they make a disclosure to regulators before dealing with those proceeds and receive police consent.

In December 2021, in a case brought by Tam Sze Leung against the Commissioner of Police the Court of First Instance held that the no consent scheme is unlawful, outside the powers created by statute, not otherwise prescribed by law and inappropriately interferes with constitutional rights. In a further decision on relief, the court made a declaration that the letters of no consent and the ‘no consent regime as operated’ by the Police Commissioner is ‘ultra vires’ – beyond lawful authority and powers of sections 25 and 25A of OSCO – and incompatible with the Basic Law.

Since then, there had been lingering concerns about how the judgment would reshape banks’ actions and the interplay between regulators and financial institutions.

What did the Court of Appeal decide?

The Court of Appeal stated that the concept of a ‘no consent regime as operated by the Commissioner’ as not clearly defined, although it formed the basis of the lower court's reasoning in many respects. Therefore, the applicants’ challenge left doubt as to what precisely had been held to be unlawful, and to the continued effect of OSCO which remains intact. The court then dismissed each of the grounds for judicial review in turn.

The Court of Appeal also clarified that the starting point should be that it is the banks that owe a debt to their customers and banks will have ‘dealt with’ the proceeds if they repay that debt to customers by releasing funds in the bank accounts.

The police are merely empowered by OSCO to give consent and have no power to require banks to do anything. Therefore, whether to freeze or release the funds in a bank accounts is ultimately the banks’ own decision. The court provided further guidance that whether banks are entitled to freeze the funds depends primarily on two matters: whether banks are at risk of committing money laundering offences if they allow the accounts to be operated; and the terms of the banking contracts.  

There was a complaint that the banks concerned simply froze the accounts based on the police’s warning of suspicious activities without conducting any internal investigations themselves. The Court of Appeal held that banks may breach their contracts with customers by wrongfully freezing bank accounts without having any knowledge or reasonable grounds to believe they represented proceeds of crimes, depending on the terms of the banking contracts.

However, this does not mean that the police acted beyond their powers. The availability of remedies in private law for violations of property or contract rights justifies the statutory scheme.

Co-Written by Joyce Chow of Pinsent Masons.