Turning Financiers into Launderers: What do They Need to Know


Introduction

On 11 July 2016, the Court of Final Appeal (‘CFA’) handed down the judgment in HKSAR v Yeung Ka Sing, Carson case. The ruling alters the elements of mens rea required to satisfy the offence of money laundering and will have a significant impact on the way these cases are prosecuted and defended, facilitating the bringing of more prosecutions alleging money laundering but requiring a sharp focus on the defendant’s knowledge or belief of whether the property represented the proceeds of an indictable offence.

The Organised and Serious Crimes Ordinance 1995

Money laundering falls under s. 25(1) of the Organized and Serious Crimes Ordinance (‘OSCO 1995’) the terms of which are as follows:

“Subject to section 25A, a person commits an offence if, knowing or having reasonable grounds to believe that any property in whole or in part directly or indirectly represents any person’s proceeds of an indictable offence, he deals with that property.”

The Facts of Yeung Carson

Mr Yeung was convicted of five charges of money laundering. He dealt in sums exceeding HK$700 million, in five different bank accounts between 2001-2007. The prosecution did not seek to identify any predicate offences from which the money was said to have derived. Instead the case centred on the allegation that Mr Yeung must have had reasonable grounds to believe that the property was the proceeds of an indictable offence. The case was supported by evidence given by a forensic accountant as to the existence of various ‘hallmarks of money laundering’. Mr Yeung denied knowledge of where the property had come from and asserted that he believed it to have been legitimate. He was convicted.

The Issues in Yeung Carson

On appeal, the Court of Appeal granted leave to appeal against conviction on two main grounds:

  1. Under s.25 OSCO, is it necessary for the prosecution to prove, as an element of the offence, that the proceeds being dealt with were in fact proceeds of an indictable offence?
  2. In considering the mens rea element of s.25, what does ‘having reasonable grounds to believe’ mean? To what extent does a trial judge need to make positive findings as to a defendant’s belief? In particular, where the trial judge rejects the defendant’s testimony, to what extent can the judge remain oblivious to the defendant’s actual reasons for dealing with the proceeds?

Issue 1: ‘The Proceeds Issue’

(i) The CFA’s Decision

The CFA noted that the issue had already been dealt with by the Appeal Committee in HKSAR v Wong Ping Shui (2001), which held that it was not necessary to prove that the property represents the proceeds of an indictable offence. In that case it was held that the feature of the property representing proceeds is an element of mens rea not the actus reus of the offence. The ordinance already clearly defines the actus reus as dealing with property that the defendant believes represents proceeds.

Nevertheless, defence counsel submitted that the words ‘that property’ at the end of s.25(1) attached to the proceeding phrase ‘any person’s proceeds of an indictable offence” meant that the actus reus should be interpreted as requiring that the property in fact represented some proceeds of an indictable offence.

The CFA held that the words ‘that property’ referred to the same property that was used earlier in the section in relation to the mens rea requirement — the property that the defendant had reasonable grounds to believe is the proceeds of an indictable offence. In essence, the CFA defined the mens rea thus: that the defendant knew or had reasonable grounds to believe that any property represents such proceeds. The actus reus is satisfied when that property is dealt with by a defendant. The CFA stated that:

“Against that background, the fact that the present offence is defined as dealing with any property rather than dealing with ‘the proceeds of an indictable offence’, strongly indicates that the statutory intention is to avoid imposing any requirement of proof that the property dealt with actually represents the proceeds of indictable crime.”

The CFA was keen to stress that it was not persuaded that constitutionally protected property rights are engaged, nor that s.25(1) creates ‘a thought crime’. It noted that:

“A person who is convicted of dealing with property in one or more of the ways listed in OSCO s2…can hardly be said to have been convicted merely on the basis of his thoughts.”

This is because the actus reus defined under s.2 of OSCO 1995 requires that it be proved that the defendant performed one of a limited range of acts in relation to the property:

a) receiving or acquiring;
b) concealing or disguising;
c) disposing of or converting;
d) bringing into or removing from Hong Kong; or
e) using the property to borrow money, or as security.

(ii) Comparison with English Law

In deciding Yeung Carson, the CFA also accepted that its decision would create significant differences between Hong Kong and UK law. Money laundering offences in the UK were created by the Proceeds of Crime Act 2002 (‘POCA 2002’) which replaced offences created by s49(2) of the Drug Trafficking Act 1994 and section 93C(2) of the Criminal Justice Act 1988. The POCA 2002 provisions, by their definition of ‘criminal property’, do not require proof of a specific predicate offence, but expressly require that the property dealt with to be the actual proceeds of crime, even if only on a ‘general deficiency’ basis. Yeung Carson broadens the scope of the money laundering offences in Hong Kong beyond those of the UK.

(iii) Implications of the Decision

The policy behind the Hong Kong approach is compelling. The predicate offence is one that is likely to have taken place in one or more foreign jurisdictions with limited evidence available as to its particulars or the party who committed it. Such difficulties leave it difficult to prove in Hong Kong courts, particularly where the proceeds of such crimes are likely to have passed through various layers and transformations specifically designed to conceal provenance.

The Hong Kong approach is logical in the sense that it has connected the Ordinance to the wrong-doing it was intended to target — dealing with funds with actual or constructive knowledge that they are the proceeds of crime. It makes clear that Nelsonian blindness as to the provenance of the property is unacceptable.

As noted by the CFA, when the OSCO was originally enacted in 1994 it did require proof of the tainted provenance of the laundered property. However, the legislature radically re-cast the offence in 1995, as it was concerned that individuals were avoiding prosecution.

The current approach outlined by the CFA enables more effective prosecution of money laundering by side-stepping the obstacle of having to establish predicate offences. It therefore follows that businessmen in Hong Kong need to exercise particular caution when handling property in circumstances that may give rise to a suspicion that the property being dealt with is proceeds of an indictable offence. By simply acquiring any property, whether it be proceeds of crime or not, the actus reus of s.25 will be satisfied.

Individuals can therefore no longer choose to ignore suspicious circumstances or hope that a lack of cooperation from foreign jurisdictions will cause a prosecution to fail before it has begun.

Issue 2: ‘The Mens Rea Issue’

Having dealt with the ‘Proceeds Issue’, the CFA then drew its attention to the mens rea of s.25: “knowing or having reasonable grounds to believe” that the property was the proceeds of an indictable offence. The CFA sought to clarify the mens rea element in light of the CFA’s decision in HKSAR v Pang Hung Fai [2014] 17 HCFAR 778.

Prior to that decision, the lower courts had consistently adopted the approach laid down by Mayo JA in HSKAR v Shing Siu Min 2 HKC 818:  namely, an objective and subjective test. In that instance, the Court of Appeal looked first to see if there were objective grounds that the individual was a drug dealer and then examined whether the defendant knew of these grounds.

(i) The Facts in Pang Hung Fai

Mr Pang, was charged with a s.25 offence. He had allowed HK$14 million – the proceeds of fraud – to be paid into his account by two mainland Chinese individuals. He subsequently remitted the money to a company controlled by a friend, Mr Kwok, in Cambodia.

The prosecution argued that based on the factual circumstances and the amount involved, the defendant had reasonable grounds to believe that the property represented the proceeds of an indictable offence. The defence asserted that Mr Pang had acted at the request of an old friend, Kwok.  In the past, the two had given each other large unsecured, interest-free loans.  Pang therefore argued that he had no reason to suspect that those cheques had anything to do with a criminal offence.

(ii) Court of Appeal in Pang Hung Fai

The Court of Appeal in Pang Hung Fai stated that the conventional two-step approach ought to be adopted with the steps reversed, such that a Court would examine first subjective knowledge and second objective grounds. The Court held that the first step is to “identify all the facts known to the defendant that relate to the dealing with property”. The second step is then to process these facts through the mind of the “common sense, right thinking member of the community” and determine objectively whether that member would consider them sufficient to lead a person to believe that the property is the proceeds of an indictable offence.

The Court should take into account all the facts and circumstances known to the defendant, and it should exclude certain “subjective elements” so that they do not adulterate what must be an objective assessment. These include:

 “blinkers… not worn by the reasonable man. It simply means the personal beliefs, perceptions or prejudices of the applicant are removed from the assessment process”.

 The Court of Appeal disregarded the argument that Mr Pang implicitly trusted his friend and upheld the conviction.

(iii) CFA in Pang Hung Fai

The CFA unanimously quashed the conviction after reconsidering Mr Pang’s perceptions of the relevant facts. They emphasised that the threshold set in the Court of Appeal was too low and it was incorrect to discount Mr Pang’s desire not to think ill of a friend.

It was held that in order to convict, the accused must be shown to have had reasonable grounds to believe.  The Court of Appeal had diverted from this central principle by introducing the concepts of objective and subjective, and in postulating a two-step test which could inappropriately restrict the range of matters taken into account in considering what grounds were available to the accused.

The CFA also emphasised that the applicable standard was whether, on the grounds available to him, the accused would, not could, have been led to have the requisite belief. This increased the threshold set out in the Court of Appeal. Spigelman NPJ pointed out that this reflects a significant mens rea element in the second limb of the offence and imports a strong element of moral blame towards the defendant. This is the conduct that the offence was meant to target.

The position in Pang may be summarised thus:

a) When seeking to determine whether a person has reasonable grounds to believe that the property dealt with represents the proceeds of an indictable offence, a court is entitled to take into account the defendant’s perception and evaluation of the facts known to him as constituting or contributing to reasonable grounds for believing that the property does not represent such proceeds. 

b) In determining whether the defendant’s grounds of belief are reasonable, the test is whether any reasonable person looking at the grounds “would believe” that the property dealt with represents the proceeds of an indictable offence, rather than a test of “could believe” which is an inappropriately low standard.

iv) CFA in Yeung Carson: ‘Having Reasonable Grounds to Believe’

The CFA affirmed its decision in Pang Hung Fai and stated that s.25 requires proof that the defendant had the requisite reasonable grounds to believe. It was held that the test for establishing mens rea is set out in Seng Yuet Fong [1999] 2 HKC 833.

“To convict, the jury had to find that the accused had grounds for believing; and there was the additional requirement that the grounds must be reasonable: That is, that anyone looking at those grounds objectively would so believe.”

 In this context, the CFA held that in answering the mens rea issue, the examination of the defendant’s state of mind may be relevant for two purposes: an inculpatory and exculpatory one. First, it is relevant to ask (inculpatory) whether, on the reasonable grounds proven to have been available to him, Mr Yeung would have been led to have the requisite belief. Second, it is relevant to examine any personal beliefs, perceptions and prejudices that Mr Yeung can be said to have ‘had’ and which may therefore exclude his culpable state of mind (exculpatory).

v) CFA’s Decision

The CFA held that Mr Yeung testified and called evidence with a view to providing an innocent explanation for the funds flowing through his bank accounts and to negate the existence of reasonable grounds on his part to believe that such funds were the proceeds of crime. His account was disbelieved almost in its entirety. That left the CFA with the task of deciding whether, on the evidence which it did accept, s.25 offences were established beyond reasonable doubt. It held that they were so established. The CFA determined that it was not an error of law to reach the conclusion and Mr Yeung’s appeal was therefore dismissed.

The Yeung Carson case is a strong reminder of the importance of compliance in order to safeguard against illegal activities such as money laundering. Importantly, the CFA’s decision emphasises that if a person does not know but has reasonable grounds to believe that funds are tainted, the law gives him the means to protect himself from liability by disclosing those grounds to the authorities in order to facilitate further investigation under s.25A. Professionals should always stay alert and, most importantly, disclose any suspicious transaction once reasonable grounds exist to believe it relates to money laundering.

Conclusions

The combined effect of the CFA’s decision in dealing with issues one and two in Yeung Carson, has shifted emphasis away from the s.25 actus reus elements towards mens rea. The exact nature of the proceeds concerned in each case is no longer relevant for a finding of guilt. It will be the defendant’s belief that will limit his liability, and a report to the Joint Financial Intelligence Unit in Hong Kong of any suspicious transactions under s.25A will help to shield him from prosecution.

In HKSAR v Wu Wing [2014] HKEC 1554, DCCC No 1022 of 2012 (paragraph 125) the Court cited with approval Practice Direction P. The PD provides general guidance to solicitors about anti-money laundering measures and contains mandatory requirements for law firms to make reasonable efforts to identify and verify the true identity of all clients requesting their services, as well as applying the appropriate level of due diligence in other cases where they hold or transfer client monies. The Court held that observance of that practice direction and a close focus on s25 OSCO will help professionals to know when to comply with reporting requirements. Otherwise, following Yeung Carson, even dealing with legitimate funds might result in a conviction.

 

Oliver Glasgow QC

Leon Kazakos