Indefinite Informal Asset Freezes ' The Beginning Of The End?

• Published date: 14 January 2022
• Subject Matter: Finance and Banking, Government, Public Sector, Financial Services, Fund Management/ REITs, Money Laundering
• Law Firm: Baker & Partners
• Author: Mr William Redgrave

For the first time, a court has ruled that the operation of a "no consent" regime is unlawful. Under such regimes the decision of a police officer to withhold consent to move assets, following a suspicious activity report, generates an indefinite "informal freeze" of assets, without any court order or oversight. In Tam Sze Leung and others v Commissioner of Police [2021] HKCFI 3118, the Hong Kong High Court ruled in December 2021 that the Hong Kong no consent regime is unconstitutional.

This is a striking development. Judicial review challenges in recent years to comparable no consent regimes in Hong Kong, Guernsey and Jersey have all been unsuccessful - most recently in Jersey, in Prospective Applicant v Chief Officer of the States of Jersey Police[2019] JRC 161.¹ In the Leung case the facts were different in one significant respect from the previous challenges, and the court used this to justify the difference in outcome.

The court took account of the way no consent regimes operate in practice. It concluded that the Hong Kong police acted unlawfully when withholding consent in order to freeze assets. This decision may open the way to courts in other jurisdictions taking a similar approach, and could hasten the end of the indefinite informal freeze.

The informal freeze

The "informal freeze" is a product of modern anti-money laundering (AML) legislation. It results from an understandable desire to ensure that funds suspected to be connected to crime can be preserved while the suspicion is investigated, in case criminal proceedings are brought. The ultimate aim is post-conviction confiscation. If the funds are not immediately frozen then confiscation may prove impossible.

However informal freezing happens at a very early stage, when no one has been charged, let alone convicted. Often there is not even a criminal investigation in place at the time the funds are "frozen" - and there may never be one. The suspicion may be wrong and there may be nothing unlawful about the funds at all. And the "freezing" is not ordered by a court. It results from the decision of a police officer alone.

This is an entirely separate process from the statutory system of court orders applied for by prosecution agencies, restraining funds pending a criminal prosecution. Restraint Orders are made by a court after a careful review of the evidence and submissions from prosecution and defence, balancing the public interest in restraining funds for possible confiscation against the interference in the (as yet unconvicted) person's right to deal with their own property. The court periodically reviews the order to ensure that it is not in force for too long and that the prosecution is proceeding diligently, and may discharge the order if things are taking too long or the evidence no longer justifies restraint. None of this applies with an "informal freeze": a police officer takes a decision, without having to give any reasons, and the money is frozen indefinitely, with no requirement for any court input or oversight at all.

How can funds be frozen without a court order? AML laws require financial service providers such as banks and trust companies to report suspicions of money laundering (dealing in criminal property) to the local police Financial Intelligence Unit (FIU). These suspicious activity reports (SARs) are considered by the FIU, often in conjunction with agencies in other relevant countries. The FIU then decides whether or not to give consent to the service provider to deal with the funds normally (i.e. to act on their client's instructions). If the FIU withholds consent, then the financial service provider will invariably decide to block the funds and refuse to move them whatever their client says.

Why? Because the service provider is taking the risk of being convicted of money laundering if it pays the suspect funds to the client and the funds turn out to have been criminal property. Making a SAR and receiving consent from the FIU provides a defence to a prosecution for money laundering: without that defence, they are much safer blocking the funds, so they invariably do so. Avoiding committing a crime entitles the service provider to ignore its client's instruction, leaving the client - who may well be entirely innocent of any wrongdoing and may not face any charges - unable to access their funds, indefinitely. And they may receive no explanation for it. Thus the funds are informally frozen. No court has ordered it, but the "no consent" from the police has had the same effect on the funds.

In most jurisdictions the obvious potential unfairness of this position led to strict time limits being imposed, so that consent is deemed to have been given if no court Restraint Order has been applied for within a certain period (varying between countries, from one day to six months). The service provider is then protected from prosecution, so it has no reason to continue blocking the funds.

However such time limits were never imposed in Jersey, Guernsey or Hong Kong, three small jurisdictions with relatively large finance industries.² In those jurisdictions funds can be, and have been, informally frozen for many years, without a conviction or even a prosecution.

Previous attempts to challenge the informal freeze

The lawfulness of such a "no consent" regime was tested in Guernsey in 2011 in Chief Officer, Customs & Excise v Garnet Investments Limited [2011] 19/2011. $36m had been informally frozen in a bank for over six years, and there had been no prosecution, or even a criminal investigation, for the...