Key takeaways

This decision provides significant relief to victims of fraud and marks the end of a landmark challenge to the legality of the Regime. LNCs are an important and effective tool to prevent the dissipation of misappropriated funds, due to the relatively short time it takes for the Police to issue an LNC. The CFA clarified that the decision to freeze a customer account is one that ultimately belongs to financial institutions themselves (and not the Police), and stems from compliance with the financial institutions' own legal and regulatory obligations. As such, financial institutions should ensure that there is an adequate framework in place allowing them to investigate potential money laundering and freeze customer accounts. Ineffective safeguards expose financial institutions to potential criminal liability (where they deal with illicit funds with the requisite knowledge or suspicion), as well as potential civil liability (where they refuse to comply with a client instruction to release the funds without the contractual power to do so).

In more detail

Tam Sze Leung & Ors v Commissioner of Police

As explained in our earlier client alert (here), the applicants (as appellants in the CFA hearing) were four account holders who were suspected of involvement in market manipulation by way of a "pump and dump" scheme. In November 2020, the relevant banks were notified of the investigation by the authorities and were urged to file Suspicious Transaction Reports, which they did. The Police then issued LNCs over the subject bank accounts in December 2020, which led to the banks freezing the funds in the accounts.

In December 2021, the Court of First Instance held that the Regime "as operated" by the Police is ultra vires and unconstitutional. In April 2023, the Court of Appeal (CA) upheld the validity of the Regime. The appellants were then granted leave to appeal to the CFA on the basis that the issues at stake are of general or public importance. On 10 April 2024, the CFA affirmed the validity of the Regime. The CFA's reasoning is as follows:

The Regime is not ultra vires and is for proper purpose

The CFA affirmed that the Police's power to issue LNCs derives from Section 10 of the Police Force Ordinance (PFO), which empowers the Police to take lawful measures to prevent the dissipation of suspected proceeds of crime. The Regime is not ultra vires of the Organised and Serious Crimes Ordinance (OSCO), as claimed by the appellants, because Section 25A(2) of the OSCO¹ is principally concerned with the conferring of immunity in cases where disclosure has already been made. The Police's withholding of consent to deal with funds under Section 25A(2) amounts to the withholding of immunity against liability for dealing with proceeds of crimes under Section 25(1) of the OSCO.

The CFA also affirmed the CA's ruling that the Police do not directly freeze or order financial institutions to freeze customer accounts. Rather, financial institutions must decide for themselves whether there is a need to freeze accounts in order to comply with their anti-money laundering obligations and other regulatory requirements. LNCs are a temporary measure aimed at preventing the dissipation of suspect funds pending further investigation. They are consistent with, and do not constitute a misuse of, powers conferred by the PFO.

The Regime does not infringe any fundamental rights

The CFA rejected the argument that there was a violation of the appellants' constitutional right to property. Its rationale to this is that the Police do not directly freeze customer accounts or make a crucial contribution to a financial institution's decision to freeze accounts.

Even if Police action indirectly led to the account freeze, the CFA determined that such action: (i) is "prescribed by law" (by combined effect of the PFO and the Police's Force Procedures Manual) in that it is governed by clear and accessible legal provisions; and (ii) has a legitimate aim of facilitating the investigation and detection of crime. Any interference with the use of funds is of a limited nature and finite duration. There is a reasonable balance between the anti-money laundering aims of society and the protection of individual property rights.

No procedural unfairness

The CFA also rejected the appellant's argument that the Regime lacks procedural fairness. The Police are fully entitled to maintain confidentiality in its investigation. This avoids prejudicing the investigation and is in line with the statutory purpose of the OSCO.

The CFA reiterated that the appellants were not denied of the right to make representations as they were repeatedly requested to assist in the investigation but chose to exercise their right of silence instead. In any event, the appellants were able to seek relief against the bank through the court.

Concluding remarks

The CFA's judgment confirms that LNCs are a critical weapon against money laundering and financial crime. This brings finality to this issue, which means that LNCs will remain an important tool for victims. In this regard, any knowledge or suspicion of crime should be reported to the Police and relevant financial institutions as soon as possible in order to trigger an informal freeze (whether or not pursuant to an LNC).

1 Section 25A(1) and (2) of the OSCO reads:

"(1) Where a person knows or suspects that any property—
(a) in whole or in part directly or indirectly represents any person's proceeds of;
(b) was used in connection with; or
(c) is intended to be 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, together with any matter on which that knowledge or suspicion is based, to an authorized officer.

(2) If a person who has made a disclosure … does any act in contravention of section 25(1) (whether before or after such disclosure), and the disclosure relates to that act, he does not commit an offence under that section if—
(a) that disclosure is made before he does that act and he does that act with the consent of an authorized officer; or
(b) that disclosure is made—

(i) after he does that act;
(ii) on his initiative; and
(iii) as soon as it is reasonable for him to make it."