Hong Kong’s top court rules on meaning of “reasonable grounds to believe” regarding proceeds of crime.
In HKSAR v Pang Hung Fai1, the Court of Final Appeal in Hong Kong (the CFA) has recently clarified the meaning of “having reasonable grounds to believe” that any property with which a defendant deals is the proceeds of crime. According to the CFA, the test is neither an objective test (judged by a reasonable person) nor a subjective test (judged solely by what the defendant believes) or a combination of the two (judged by what a reasonable person would believe and what the defendant understood). Rather, the judge or jury should ask whether the defendant “ought to have known” that the property with which he or she dealt was the proceeds of crime, taking into account such circumstances as seem reasonable (including, such matters as understood by the defendant as seem reasonable) while also accounting for “irresistible inferences” on the facts.
The CFA’s clarification of the meaning of these words tries to get back to their contextual meaning in the statute, while avoiding the complication of previous appellate court authority that relied on a combination of an objective and subjective test. However, while the clarification of the words (“having reasonable grounds to believe”) in this context is to be welcome as a matter of legal interpretation, it is doubtful that it will affect the outcome of prosecutions in Hong Kong alleged to involve dealing with the proceeds of crime. Rather, judges in the District Court (where there are no juries) and juries in the High Court may continue to draw irresistible inferences of guilt (beyond reasonable doubt) where the circumstances permit.
The principal statute in Hong Kong providing for money laundering offences is the Organised and Serious Crimes Ordinance (OSCO – Cap. 455); in particular, sections 25(1) and 25A. In short, the former provides for the offence of dealing with property “knowing or having reasonable grounds to believe” that it represents the proceeds of crime. The latter provides for failing to report knowledge or suspicion that property (among other things) represents the proceeds of crime as soon as it is reasonable to do so; a timely report is also a defence to the section 25(1) “dealing” offence.
With respect to both offences, there is no need for the prosecution to prove that the property is actually derived from the proceeds of crime. The offences are standalone money laundering offences. There are other similar offences in Hong Kong with respect to drug trafficking and terrorist financing.
As far as we are aware there have been few prosecutions and convictions for the offence of failing to report knowledge or suspicion of the proceeds of crime. This is (in part) because many regulated entities such as banks and financial institutions by and large understand their reporting obligations; as do professions, such as accountants and lawyers. That said, the level (and quality) of reporting is something that the regulatory authorities continue to assess in Hong Kong; particularly, as Hong Kong is due to be evaluated by the Financial Action Task Force (FATF – the inter-governmental body) in its fourth round of mutual evaluations towards the end of 2017 (based on current information). The FATF is also likely to pay more attention to other industries and businesses in Hong Kong, such as (for example): auction houses, estate agents, precious stone dealers and remittance agents. Hong Kong and China are members of the FATF.
In the last few years prosecutions and convictions for dealing with property said to represent the proceeds of crime are becoming quite common in Hong Kong and involve all sorts of individuals; from well-known businessmen to so-called “cash runners”. There have also been recent cases of lawyers being convicted. It is probably fair to state that these convictions have been something of a wake-up call for just about anyone in business in Hong Kong. For now, it appears that prosecution authorities are focusing on the dealing offence and, going forwards, one can expect more such prosecutions.
In short, it was alleged that the defendant allowed his company’s bank account to be used by a friend to launder approximately HK$14m. The money was received from third parties and held in the defendant’s company bank account for approximately four weeks before being paid out to the friend’s company in Cambodia. The money had no apparent legitimate commercial purpose and, in effect, the defendant was allowing his account to be used for banking services by his friend. The defendant had known his friend for a long time, although at the time the money was paid out the friend’s business appeared to have serious financial problems. The defendant was convicted in the District Court of dealing with property said to represent the proceeds of crime contrary to section 25(1) of OSCO and sentenced to two and a half year’s imprisonment. The sentence was upheld on appeal. The defendant appealed to the CFA.
The main issue before the CFA was the correct interpretation of the words “having reasonable grounds to believe” that the money represented proceeds of crime. In the lower courts, based on existing authority, these words had been applied using a combination of an objective and subjective test. The defendant’s appeal argued that (among other things) this test paid insufficient attention to his understanding of the circumstances in which he had dealt with the money received from the third parties on behalf of the friend; the “dealing” being the receipt and/or the payment out of the money. The prosecution did not pursue a case against the defendant (in the alternative) that he “knew” that the money represented the proceeds of crime.
The CFA allowed the defendant’s appeal and set aside the conviction. It also declined to order a retrial. The principal reason for the CFA’s decision to allow the appeal was that it considered the lower courts had misdirected themselves as to the law in interpreting the meaning of the words “reasonable grounds to believe” in this context. In particular, the CFA considered that the Court of Appeal had treated the words to mean (in effect) “could believe”, rather than “would believe” which were more in line with the statutory meaning of the words. Giving the leading unanimous judgment of the CFA, Spigelman NPJ (adopting a typically simplistic approach to statutory interpretation) had this to state: “As I have said above, the statutory words ‘reasonable grounds’ are perfectly understandable. There is no need for an abstract personification for purposes of their application. Similarly, these words can be applied directly and do not need further characterisation as ‘objective’ …
Furthermore, by the use of the word ‘having’, the decision-maker’s attention is directed expressly, by the terms of the section, to the grounds available to the accused. There is no need to further characterise this element as ‘subjective’. Indeed, such language is apt to create confusion …”.2
The judgment goes on to make it clear that in assessing the totality of the evidence, a judge or jury can consider the accused’s perception, although they may also disregard it. Everything (in effect) stands or falls by a test of “reasonableness”3.
The judgment is clearly important as a matter of principle; hence, the appeal to the CFA. That said, for now we are not convinced that going forwards the CFA judgment will result in an increasing likelihood of acquittals in anti-money laundering cases in Hong Kong. Judges (in the District court) and juries (in the High Court) may still rely on circumstantial evidence and/or inferences to convict on the normal standard of proof (namely, beyond reasonable doubt).
The sorts of circumstances that a judge or jury may take into account in assessing guilt, with respect to section 25(1) (“Dealing”) and 25(A) (“Failing to report”) offences involving money or monies worth, typically include (but are not limited to): the size and type of the payment(s), the number of payments and their date range, details of the remitter(s) and/or transferee(s) and the alleged purpose of the payment(s).
Critics of section 25(1) of OSCO have argued that it can result in some naive people being convicted, while the perpetrators of the underlying crime (which need not be proved by the prosecution) escape prosecution. It is possible that, in light of the CFA judgment, prosecutors looking at future prosecutions under sections 25(1) of OSCO could have more sophisticated defendants in mind.
It is also possible that, in light of the CFA judgment, some defendants will amend their Notices of Appeal in pending appeal proceedings arising out of convictions pursuant to section 25(1) of OSCO4. What the outcome in such appeals is remains to be seen; for example, a misdirection on the law can result in an appeal court ordering a re-trial (and not necessarily only an acquittal).
In this particular case the defendant was not ordered to be retried, on account of his personal circumstances; for example, his age, the time he had spent in custody already (four and a half months), the passage of time since the events in question (2008) and, possibly, that the defendant had allegedly leaned more towards “turning a blind eye” (which is no defence to sections 25(1) and 25(A) OSCO offences) rather than being complicit in his friend’s actions.
Other defendants may not be so fortunate and, in any event, a final appeal court is a long way to go for resolution of guilt or innocence. What also comes out of cases such as this is the obligation on all recipients of money (or, indeed, property) to do their own due diligence. Those in business need to pay attention to their KYC (Know Your Client) and Client Due Diligence (CDD) procedures and industry regulations. Those who allow their bank account(s) to be used by others need to pay particular attention5.