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As suggested in my earlier article (see Hong Kong Lawyer November 2009), the international response to the transnational nature of money laundering and the resulting agreements and obligations are part of the origins of and an integral part of all countries’ anti-money laundering approaches, including Hong Kong’s. Irrespective of the origins, as the European Parliament has noted, ‘measures adopted at national or even community level, without taking account of international coordination and cooperation, would have very limited effects’: see Directive 2005/60/EC of the European Parliament and of the Council of 26 October 2005 (the ‘third money laundering Directive’).

The Financial Action Task Force (FATF) is an intergovernmental body set up with the purpose of establishing the standards to combat money laundering and terrorist financing and to develop and promote effective policies for the same purpose both at a national and international level. It aims to provide recommendations on how legal systems and national and financial institutions can best operate to combat money laundering, what measures can be taken internationally and the best practice for international cooperation. The standards have evolved with experience and are presently called the ‘40 Recommendations and 9 Special Recommendations concerning Terrorist Financing’. The standards constitute a comprehensive regime adopted by about 180 countries and territories (more than the current membership of FATF of 33 territories) and a number of international bodies including the UN, the IMF and the World Bank. The standards are extended to other non-FATF member jurisdictions through, principally, the FATF-style regional bodies, such as the Asia Pacific Group (APG) of which Hong Kong, being in the Asia-Pacific region, is also a member. The APG has a number of non-FATF members, for example, Indonesia, Myanmar and Vietnam. FATF and regional bodies like the APG use the same standards to combat money laundering and terrorist financing and are complementary in their work and aims.

Consequently, the 40 Recommendations and 9 Special Recommendations are the world standard. Jurisdictions wishing to fully participate in the world economic system can ill afford to decline adequate adherence. This is particularly so as subscribing jurisdictions are subjected to mutual evaluations conducted by teams composed of public officers from the members themselves, participating under the auspices of FATF or the FATF-style regional bodies, respectively. These evaluations assess and report on the degree of compliance with the standards and effectiveness of the examined jurisdiction’s antimoney laundering approach. The evaluation reports can only be adopted by the consensus of a plenary meeting composed of the members of the pertinent body. It needs to be emphasised, because it informs the approach and culture behind the Recommendations and the associated evaluations, that the mutual report is by the members on a fellow member or prospective member; it is not one determined by the intergovernmental body concerned. There is thus a strong element of self-help. Territories in participating sincerely and fully in the process are foremost contributing to their own fight against transnational crime and by doing so benefiting other territories. Insincere participation would only result in a weaker fight, primarily against that territory’s own transnational crime threat and secondarily weakening the contribution to the fight for other territories. Due to the wide acceptance of the Recommendations, major financial institutions with world presence are increasingly less inclined to operate (save perhaps for mere representative offices, offering limited financial services) in jurisdictions outside the FATF or the network of FATF-style regional bodies.

The relevant FATF recommendations

The extent of the s 25A Organized and Serious Crimes Ordinance (Cap 455) (OSCO) provision and its concerns reflect origins in the international obligations that Hong Kong entered into when it joined FATF in 1991. This is one of the underlying currents to Hong Kong’s legislative approach postulated in these articles.

The s 25A OSCO provision became effective in Hong Kong in 1995 and was partly a response to a number of the 40 FATF Recommendations that were first drawn up in 1990 and revised in 1996 and in 2003 to take into account evolving money laundering typologies. The FATF Recommendations directly relevant to the issue of suspicious transaction reporting for most solicitors (lawyers are regarded as designated non-financial businesses and professions) are:

12. The customer due diligence and record-keeping requirements set out in Recommendations 5, 6, and 8 to 11 apply to designated non-financial businesses and professions in the following situations:

(a) Casinos ...
(b) Real estate agents ...
(c) Dealers in precious metals and dealers in precious stones ...
(d) Lawyers, notaries, other independent legal professionals and accountants when they prepare for or carry out transactions for their client concerning the following activities:

- buying and selling of real estate;
- managing of client money, securities or other assets;
- management of bank, savings or securities accounts;
- organisation of contributions for the creation,
operation or management of companies;
- creation, operation or management of legal persons or
arrangements, and buying; and
- selling of business entities.

(e) Trust and company service providers when they prepare for or carry out transactions for a client concerning the activities listed in the definition in the Glossary.

13. Reporting of suspicious transactions and compliance
If a financial institution suspects or has reasonable grounds to suspect that funds are the proceeds of a criminal activity, or are related to terrorist financing, it should be required, directly by law or regulation, to report promptly its suspicions to the financial intelligence unit (FIU).

14. Financial institutions, their directors, officers and employees should be:

(a) Protected by legal provisions from criminal and civil liability for breach of any restriction on disclosure of information imposed by contract or by any legislative,
regulatory or administrative provision, if they report their suspicions in good faith to the FIU, even if they did not know precisely what the underlying criminal activity was, and regardless of whether illegal activity actually occurred.
(b) Prohibited by law from disclosing the fact that a suspicious transaction report (STR) or related information is being reported to the FIU.

16. The requirements set out in Recommendations 13 to 15, and 21 apply to all designated non financial businesses and professions, subject to the following qualifications:

(a) Lawyers, notaries, other independent legal professionals and accountants should be required to report suspicious transactions when, on behalf of or for a client, they engage in a financial transaction in relation to the activities described in Recommendation 12(d). Countries are strongly encouraged to extend the reporting requirement to the rest of the professional activities of accountants, including auditing.
(b) ...
(c) Trust and company service providers should be required to report suspicious transactions for a client when, on behalf of or for a client, they engage in a transaction in relation to the activities referred to Recommendation 12(e). Lawyers, notaries, other independent legal professionals, and accountants acting as independent legal professionals, are not required to report their suspicions if the relevant information was obtained in circumstances where they are subject to professional secrecy or legal professional privilege.

It must be emphasised that the legal obligation on lawyers in Hong Kong is as set out in OSCO. The FATF Recommendations are standards that member jurisdictions must strive to achieve. A local law should meet the standards but it may exceed them and go further than required in the relevant Recommendations. In some respects, the reporting obligation contained in s 25A does exceed the FATF Recommendations.

OSCO s 25A(1)

This is the legal provision that creates the offence of failing to report to an authorized officer knowledge or suspicion that any property is the proceeds of an indictable offence or connected with or intended to be used in connection with an indictable offence. It is a summary offence punishable by a modest fine and a maximum imprisonment term of
three months: s 25(7). An authorized officer is a police or customs and excise officer or other person authorized by the Secretary for Justice. Naturally, should an individual, particularly an officer of the court such as a solicitor, become reasonably suspicious of a crime, one would, assuming they were not in immediate physical danger, expect them
to report, the crime to the authorities within a reasonable period even without a legal obligation. This may be one justification for the relatively light punishment attached to a conviction for the offence. The provision makes it an offence to fail to report as soon as it is reasonable to do so, knowledge or suspicion that any property possesses the nature described in s 25A(1). The relevant kind of property is defined as that which:

(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.

It is knowledge or suspicion about the quality or nature of property that is criminalised, not specifically a transaction with that property. This is a significant distinction that may not be immediately apparent. It means that someone who comes across relevant information about property and acquires the mental state necessary, and who may not have dealt with that property in any fashion or even possess the ability to deal with that property, is obligated to report their knowledge or suspicion. This is contrary to what a layman might understand from the commonly used expression ‘suspicious transaction report’ that is routinely utilised when discussing this obligation. This much used expression is probably a result of the title of Recommendation 13 (above), even though that Recommendation itself refers not to transactions but to the quality of the funds concerned. Consequently, the actus reus of this offence is the failing to report within a reasonable time after acquiring the knowledge or suspicion concerning the property and involves no dealing with the property, in contrast with the money laundering offence (s 25(1)) that requires dealing as defined in s 2(1) of OSCO.

Property

The property is any kind of property. Section 2(1) of OSCO expressly calls in aid s 3 of the Interpretation and General Clauses Ordinance (Cap 1) (IGCO); not only is this moveable or immoveable property but also includes a chose in action. This is why when offences under OSCO are charged reference should solely be made to ‘property’ without specifying the type of property, thus ensuring charges are expressed not only accurately but succinctly, without unnecessary verbiage that may only serve to obscure.

All natural and legal persons

The word ‘person’ used in the provision is not defined in OSCO, therefore, the word is given the meaning in s 3 of IGCO; that is, all natural and legal persons are subject to the offence. In short, any individual or corporation present in Hong Kong with the appropriate
knowledge or suspicion should make a report to an authorized officer as soon as it is reasonable to do so. In other words, the obligation is not confined to financial institutions or designated non-financial businesses and professions. What is a reasonable period in which to make a report depends on the context. In some situations, this might allow for consultations with colleagues or the obtaining of urgent legal advice from a solicitor or counsel.

Knowledge or suspicion

The mens rea of the offence is clearly subjective. The prosecution must prove that the defendant had actual knowledge or suspicion concerning the nature of the property. In respect of knowledge, little needs to be said, save that proof would have to show beyond reasonable doubt that the defendant was possessed of knowledge of the qualities of the property. This might be easier to prove should there be evidence to the criminal standard that the defendant had participated in the underlying indictable offence producing the proceeds or of his or her participation in the indictable offence connected to or intended to be connected with the property. In the case of someone only tasked with concealing or disguising the property, proving that they had the requisite knowledge, in the absence of admissions, would be considerably more difficult. There is also no objective qualifier such as ‘reasonableness’ for the alternative mental state of ‘suspicion’.

In the case of Hussein v Chong Fook Kam [1970] AC 942 at 948, Lord Devlin defined ‘suspicion’ in the following terms:

“Suspicion in its ordinary meaning is a state of conjecture or surmise where proof is lacking: ‘I suspect but I cannot prove’. Suspicion arises at or near the starting point of an investigation of which the obtaining of prima facie proof is the end.”

Plainly, the threshold for the foundation of a suspicion is a low one. In the case of K Ltd v National Westminster Bank Plc [2006] 4 All ER 907 involving the approximate English equivalent provision to s 25A(1), the court (at 913) made use of a definition of ‘suspicion’
that ‘he or she must think there is a possibility, which is more than fanciful, that the relevant facts exist’ and in appropriate cases be settled in nature. Suspecting property has the quality defined in s 25A(1) that falls a long way short of having demonstrable proof that the property is of that quality. Furthermore, it is a test which has a subjective
foundation. What matters is what the defendant thought, not what the reasonable person would have thought in the particular circumstances. It is a question of fact for the court to be satisfied that the defendant had the suspicion. The proof of a defendant’s subjective state of mind in many circumstances, without admissions, would require evidence of incriminating activity following or at the time of possession of information adequate to cause suspicion in relation to the property. The defendant’s mental state would have to be inferred from his or her conduct relating or connected to that activity. The mens rea of
this offence is therefore in stark contrast to that of the s 25(1) OSCO money laundering offence as described in the first article.

OSCO s 25A(2)

This provision is intended to provide protection to those who make a report to an authorized officer as required in s 25A(1) from committing the money laundering offence under s 25(1) of OSCO in certain specific circumstances. The provision refers to any act in contravention of s 25(1) whether before or after the disclosure. The use of the word ‘act’ is in contrast to the word ‘dealing’ used in the s 25(1) offence. The purpose behind the use of this word instead of the word ‘dealing’ is unclear, but as the acts are in relation to contravention of the s 25(1) offence they must include dealing, a term defined broadly in s 2(1) of OSCO.

In order to benefit from the protection afforded by s 25A(2), the disclosure must be made before the act and following the obtaining of consent of an authorized officer to the act in question; or if made after the act then it is at the discloser’s own initiative and as soon as
reasonable for him or her to make it. The disclosure relates to property, as we have seen, but to benefit from the protection, a disclosure should be made before or after each discrete act. This is because the actus reus for the money laundering offence is the dealing.

The s 25A(2) provision thus creates a strong additional incentive to make reports under s 25A(1), as apart from avoiding commission of the reporting offence by failing to make an appropriate report, a person or corporation may ensure that the far more serious and indictable s 25(1) offence is not committed. This is a real benefit for those advisers such as solicitors, who may have obtained information or been part of property transactions, who then form a suspicion concerning the nature of relevant property. Reference to Annexure 4 of Practice Direction ‘P’ will provide a non-exhaustive list of examples of potentially suspicious situations met by solicitors.

Disclosure by employees to person designated – s 25(4)

Employees have an additional protection in that if they have disclosed their knowledge or suspicion to a person designated as appropriate, in accordance with the procedure established by their employer, it has the effect for them as if they had made the disclosure to an authorized officer.

Tipping off – s 25A(5)

This creates an offence of disclosing to another any matter likely to prejudice any investigation which might be conducted following any disclosure of knowledge or suspicion under s 25A(1). The mental element again is ‘knowing’ or ‘suspecting’ and so the comments made for s 25A(1) are equally valid. The actus reus is the disclosure of any matter that might prejudice the investigation. ‘Matter’ is given its ordinary meaning but is likely to mean almost any information, including hearsay, in any form that could likely prejudice an investigation. The penalties for this offence are ironically more serious than the s 25A(1) offence and can be indictable: s 25(8). This offence satisfies the obligation in FATF Recommendation 14(b) above. There are straightforward defences set out in s 25A(6) that require no comment.

Legal Professional Privilege (LPP)

The s 25A(1) offence is not, as discussed earlier, a provision applicable only to professionals or financial institutions. It does not in itself provide a codified version of LPP, although see the declaration in s 2(1) of OSCO under ‘items subject to legal privilege’. However, OSCO makes it clear for the avoidance of doubt that disclosure
of any matter in relation to the s 25A(1) offence does not require disclosure of items subject to legal privilege: s 2(18). This is consistent with FATF Recommendation 16 above. Practice Direction ‘P’ provides a succinct summary of LPP. LPP does not normally apply to conveyancing transactions, wills and probate and the formation of corporations or trusts, unless they can truly be said to be in connection with or in contemplation of proceedings and for the purposes of those proceedings, or that they (the specific documents concerned) constitute the legal advice between client and adviser. Documents created to further a crime including a conspiracy to commit money
laundering can never be privileged.

Restrictions on revealing disclosure under s 25(A) – s 26

Essentially, the confidentiality of persons who make disclosure are protected. No witness in civil or criminal proceedings is obliged to:

(a) reveal that a disclosure was made under s 25A(1);
(b) reveal the identity of anyone making the disclosure; or
(c) answer questions that might lead to or tend to lead to revealing facts or matters referred to in (a) or (b).

The only exceptions are stated in s 26(2), in prosecutions under s 25, 25A or 26 and where a court is of the opinion that justice cannot fully be done between the parties without disclosure. It can be expected that it would be exceptional circumstances for any disclosure of a person’s identity who made a report under s 25A(1).

The protection is further reflected in the statutory defences to s 25(1), provided for in s 25(2), that refer to intentions to make an appropriate report or reasonable excuse for a failure to make a report in accordance with s 25A(2).

Joint Financial Intelligence Unit (JFIU)

The existence of a financial intelligence unit is a requirement under FATF Recommendation 26. In Hong Kong, this is provided by the JFIU, which is an autonomous unit of the Financial Intelligence division of the Narcotics Bureau of the Hong Kong Police. This unit is called ‘joint’ because the Hong Kong Customs and Excise has joined in its formation with the police and provides personnel for the JFIU.

Whilst reports under s 25A(1) can be made to an authorized officer and that includes all police and customs officers, in practice, such reports should be made to the JFIU. Their contact details are listed in Annexure 5 of Practice Direction ‘P’ and a suggested form of
the report is found in Annexure 6. It is nonetheless wise in the case of solicitors to make a preliminary telephone call to the JFIU to give a basic outline of any possible report and the context of the financial transaction or proposed transaction that may involve the suspicious property. This will provide a sense to the informant of the information that may be pertinent in specific circumstances, and the degree of urgency and significance of the report may thereby be better assessed by the JFIU and the informant respectively.

At present, the JFIU is receiving hundreds, if not thousands of reports per month; the bulk of the reporting is from the larger financial institutions through the electronic internet-like system called STREAMS. Solicitors still generally make their reports by fax or email. Solicitors contemplating a report should consider if the financial institution connected to a property has made or is about to make a suspicious transaction report and whether, taking that consideration into account alone, the absence of a related report from the solicitor would make the solicitor’s firm more vulnerable to proceedings.

The responsibility for reporting, as we have seen, carries with it a criminal penalty that a solicitor ignores at his or her peril. There are, however, benefits to the individual solicitor or firm in making appropriate and timely reports, affording them the possibility of the shield under s 25A(2). The 21st century has been called China’s century, it is undoubtedly one in which combating money laundering has become everyone’s responsibility. 

Gavin Shiu
Senior Assistant Director of Public Prosecutions
Department of Justice