The Hong Kong Court of Final Appeal (CFA) has upheld the conviction of tycoon Carson Yeung for money laundering. In doing so, it has provided important clarification as to what it means to have “reasonable grounds” to believe that property represents the proceeds of crime under the Organized and Serious Crimes Ordinance (OSCO).

In particular, the decision in HKSAR v Yeung Ka Sing Carson[2] (Yeung Case) reinforces that “reasonable grounds” should take into account the personal beliefs, perceptions and prejudices of the person involved. However, it also sets clear limits and clarifies that where a defendant’s avowed beliefs are so “far-fetched and bizarre” they are not believed by the court, then the court can come to its own decision based on the weight of the evidence.

The Yeung Case is pivotal not only for wealthy individuals, but also financial institutions and other persons who process payments or engage in other types of transactions. Actual knowledge is not required for money laundering - making it essential to know when to be suspicious.

This alert describes the key facts and takeaways from the Yeung Case, together with our comments on some open questions – particularly for financial institutions and other large corporates - that continue to make identifying suspicion a challenging topic.

Key facts

Carson Yeung, a prominent Hong Kong businessman and ultimate owner of Birmingham City F.C., deposited over HKD271 million into five separate accounts through over 900 individual deposits between 2001 and 2007. Yeung alleged that the money had legitimate sources, including his casino winnings, share earnings and return on investments. He was charged with five counts of money laundering under section 25(1) of the OSCO.

Section 25(1) of the OSCO makes it an offence for a person to deal with any property while knowing or having reasonable grounds to believe that the property represents any persons’ proceeds of an indictable offence. The essence of Yeung’s defence was that the funds could not represent the proceeds of an indictable offence as he had reasonable grounds to believe it came from legitimate sources.

Yeung was convicted of the five charges in the District Court and sentenced to a total of six years’ imprisonment. The Court did not believe Yeung’s explanation of the source of the money, and it was found that he had reasonable grounds to believe that the money was the proceeds of crime.

The Yeung Case – important takeaways

After the Court of Appeal dismissed Yeung’s appeal, Yeung appealed to the CFA in 2014. The CFA unanimously dismissed the appeal on 11 July 2016. Key aspects of the decision were as follows:

1. The defendant’s personal characteristics matter

First, the CFA confirmed the test articulated in an earlier case[3] (Pang Case) to determine whether a person had reasonable grounds for the relevant belief under OSCO.

Briefly, in that case, Pang, the accused, allowed two strangers’ cheques worth HKD14 million to be deposited into his accounts and remitted abroad at the request of Kwok, a close friend. Those funds were the proceeds of a fraud committed by Kwok, and Pang was convicted of money laundering at first instance. Unlike in the Yeung Case, the CFA quashed Pang’s conviction for money laundering on appeal.

Importantly, the CFA held that in determining whether a person has reasonable grounds for the relevant belief, the prosecution must prove that:

  • Limb 1: existence of grounds – the accused had grounds for believing the property represented the proceeds of crime; and
  • Limb 2: reasonableness – a reasonable person looking at those grounds objectively would believe the property represented the proceeds of crime.

The CFA found that, although others might have been suspicious of the transaction, the District Court had failed to take into account the fact that Pang himself trusted Kwok due to a long personal and business relationship, and that Pang thought of Kwok as a wealthy businessman with factories significantly larger than his own, being unaware of Kwok’s financial difficulties. In determining what a reasonable person would have believed, the CFA found that the District Court should have taken these factors into its consideration. The CFA therefore overturned Pang’s conviction.

In the Yeung Case, the CFA endorsed this test and clarified its application. The CFA held that:

  • an examination of the accused’s state of mind might be relevant in determining whether the requisite reasonable grounds existed; and
  • the state of mind of the accused can serve as evidence that Limb 1 of the test was not satisfied – that is, to demonstrate that they had no grounds for believing the property represented the proceeds to crime.

However, here, Yeung’s testimony that the funds had legitimate sources was not believed at trial. Accordingly, the CFA found that there was no credible evidence that Yeung’s state of mind negated the existence of grounds for believing the funds were the proceeds of crime. Consequently, the CFA held that the requisite reasonable grounds were made out on the evidence presented by the prosecution - effectively, he should have known or suspected something was awry.

2. The facts are critical

Yeung’s conviction, when contrasted with Pang’s acquittal, throws into sharp relief the highly fact-sensitive nature of money laundering.

For example, where the conduct in question involves a number of transactions over a long period, with large sums being transferred, it may be difficult for a person to explain why they had no reasonable grounds for suspicion. The Pang Case involved two linked transactions conducted at a friend’s behest. In contrast, the Yeung case involved a large number of transactions spanning several years, with a far larger overall sum.

The following table summarises the key differences between the two cases, together with our observations.

Fact

Pang Case

Yeung Case

Our comments

Transaction elements

Number of transactions alleged

Two remittances for the account of a company owned by the defendant

963 deposits into five bank accounts in the defendant’s name or his father’s name

As noted above, a large number may make it more difficult to explain why there were no reasonable grounds.

Amount alleged to have been laundered

HKD14,049,380

HKD721,287,607

The same applies, although this can be highly contextual.

Duration alleged

Several months

Around six years

As above.

Defendant characteristics

Defendant’s credibility as a witness

Viewed by trial judge as a mostly honest and reliable witness

Not seen as a credible witness by the trial judge

Credibility is fundamentally critical in any case relying on witness testimony.

Actual knowledge of money laundering

Not alleged by prosecution

Not alleged by prosecution

While not present here, the availability of evidence showing actual knowledge would effectively provide a “slam dunk” case for the prosecution.

Origin of the funds transmitted, as claimed by the Defendant

Money of a long-time business and personal friend, who the defendant believed to be honest and extremely wealthy

His own gambling winnings and capital gain on share investments

Has a close relationship with credibility - the alleged source must be convincing when viewed in light of all the evidence available.

Defendant’s wealth generator

Owner of garment manufacturing business

Operation of hair salons, according to tax returns

Can be relevant depending on the facts – in some cases, this might suggest certain business connections, while in others it might highlight disparities between conduct / lifestyle and actual wealth.

3. Prosecution does not need to prove the property was in fact the proceeds of crime

The CFA also confirmed the finding in a 2007 CFA decision[4] that it is not necessary to prove that the property with which the accused dealt in actual fact represents the proceeds of an indictable offence. Section 25(1) of the OSCO merely requires the accused deal with the relevant property, with a clear statutory intention to avoid imposing any requirement to show that the property actually represents the proceeds of crime.

4. Rule against duplicity confirmed for money laundering cases

Finally, the CFA addressed the application of the rule against duplicity to money laundering offences. In summary, the rule against duplicity requires that a count in indictment must set out only one offence, and not more than one. The rule is recognised in the Indictment Rules (Cap. 211C).

The CFA confirmed that in the money laundering context, where a number of acts associated with money laundering are connected in such a way that they can be regarded as forming part of the same transaction, then they can be charged in a single count unless there is some risk of injustice. The CFA subsequently found that the transactions in the Yeung Case could be aggregated due to the multiplicity of acts alleged and the common purpose of concealment.

Why this case matters

The Yeung Case clarifies important principles relating to the subjective elements of the money laundering offence. However, it also demonstrates that every case is unique and must be considered on its own facts. Where the prosecution is able to show clear indicia of money laundering, and the facts are difficult to explain, this can provide an insurmountable hurdle for the accused. That is, it may be difficult for the court to believe an explanation from the accused as to why they did not have reasonable grounds to believe that property represents the proceeds of crime.

This is importantly not only for OSCO purposes, but for offences that use similar tests, such as the Drug Trafficking (Recovery of Proceeds) Ordinance (Cap. 405), the United Nations (Anti-Terrorism Measures) Ordinance (Cap. 575) and the Weapons of Mass Destruction (Control of Provision of Services) Ordinance (Cap. 526).

For organisations, particularly large multinationals, the Yeung Case emphasises the need for a sophisticated approach to anti-money laundering and terrorist financing controls. In particular, regulators expect financial institutions to have smart analytics to pick up transaction patterns, a significant pool of trained operations staff to assess exceptions, and trained staff to pick up on dodgy customers.

Other outstanding questions remain – especially for financial institutions and large corporates

The Yeung Case is not the final word on identifying suspicion and preventing money laundering.

A few key questions remain:

  • How much due diligence is enough? That is, when have you done enough to assure yourself that there is no money laundering? This can depend on who you are. Financial institutions, lawyers and others have the benefit of specific legislation or regulatory rules that define the due diligence steps that are required. While this does not deal with every possible circumstance, it is helpful to signal what the regulatory expectations are, and can provide a useful reference tool for other organisations.
  • What level of tainting is enough? The boundaries of “proceeds of crime” have not been fully tested by the courts. That is, how proximate does money or other property need to be to the crime to remain "dirty"? How long before they have been successfully “cleansed” and integrated? One important point to remember here is that the OSCO refers to any property that “in whole or in part directly or indirectly represents any person’s proceeds of an indictable offence”.
  • When does a legal entity know or suspect something? The principles relating to the attribution of knowledge for corporations are very complex, particularly for large organisations. They can also vary from one jurisdiction to another and be especially challenging in the context of outsourced activities. For example, if a trade processor sitting in India comes across something suspicious in an invoice, when will this suspicion be attributed to the bank for which they are processing the trade? What is buried in transaction records that a financial institution should have picked up?
  • Where is knowledge or suspicion relevant? For example, if a money laundering reporting officer (MLRO) or senior supervisor sitting in another country becomes aware of a matter, does that trigger a suspicious reporting obligation in that other country? This particular question often comes down to a combination of black letter law, practical and policy considerations.

Each of these questions need to be analysed carefully on a case-by-case basis. While they are not settled points of law, reasonable conclusions can be drawn.