The Court of Final Appeal (“CFA”) has recently clarified the required mental element for the money laundering offence in Hong Kong. In finding that the Court of Appeal had erred in its interpretation, the CFA reformulated the test for determining whether a defendant ‘has reasonable grounds to believe’ that property represented the proceeds of an indictable offence. If the court finds that a reasonable person who shared the knowledge of the defendant would be bound to believe that the property was tainted, the defendant will be convicted. The fact that a defendant did not himself believe that the property was tainted would not be a defence but ‘may well be a mitigating factor when he is sentenced’. Corporations should therefore be vigilant and have rigorous anti-money laundering training and due diligence mechanisms in place to protect themselves from possible money laundering charges.

Section 25 of the Organized and Serious Crimes Ordinance

Section 25(1) of the Organized and Serious Crimes Ordinance, Cap 455 (“OSCO”) provides that a person commits an offence if he deals with any property knowing or having reasonable grounds to believe that such property in whole or in part directly or indirectly represents any person’s proceeds of an indictable offence.

It is plain from the language used that actual knowledge of the proceeds being tainted would lead to a conviction for the offence under section 25(1). However, the construction of the words ‘having reasonable grounds to believe’ has led to some confusion. In particular, the courts have recently been tested on whether an honest belief on the defendant’s part would be a defence, notwithstanding that such belief was not reasonable due to lack of due diligence.

Facts

In HKSAR v Harjani Haresh Murlidhar¹, a contract was made by exchange of emails for the sale of a shipment of fertiliser by Company A to Company B for around US$10 million. Company B was required to make a US$500,000 down payment, with the balance to be paid by letter of credit. The emails were hacked and modified so as to deceive Company B into paying the required deposit (“Tainted Sum”) into a bank account of the Defendant’s company. The Defendant was later arrested after the withdrawal of cash from said bank account and was charged with conspiracy to deal with the Tainted Sum knowing or having reasonable grounds to believe that it represented proceeds of an indictable offence. 

The Defendant’s case was that he was a legitimate businessman and he genuinely believed that the person he was dealing with was an agent acting bona fide on behalf of the principals in the fertiliser deal and the funds in question were derived from a genuine commercial transaction.

Lower Courts’ View

At trial, the court took the view that the defendant had reasonable grounds to believe the property was tainted and convicted the Defendant. The trial judge considered various factors in concluding that there were ‘ample indicia that the funds were from a tainted source’. Amongst those factors was the relatively recent incorporation of the Defendant’s company, the fact that the company had no established business, reputation nor letter of credit expertise, and the significant amount of money in question paid as commission to the Defendant’s company for the simple task of offering a bank account to receive money. The Defendant appealed.

On appeal, the Court of Appeal held that the trial judge had erred by not applying the correct law on the construction of the mental element under section 25(1) of OSCO, which should be a subjective test of belief so that if the court accepts that a defendant held an honest belief, he should be acquitted even if such belief was not reasonable. Nevertheless, the appeal was dismissed on the basis that the Defendant’s claim as to his belief was found to be not truthful. The Defendant appealed to the CFA.

CFA’s decision

The CFA concluded that the Court of Appeal had erred in explaining the test of ‘reasonable grounds to believe’. The CFA confirmed that the test of ‘reasonable grounds to believe’ laid down in previous case law remained the correct representation of the law, which is reformulated as follows:

1. What facts or circumstances, including those personal to the defendant, were known to the defendant that may have affected his belief as to whether the property represented the proceeds of crime (“tainted”)?
2. Would any reasonable person who shared the defendant’s knowledge be bound to believe that the property was tainted?

If the answer to question (ii) is “yes,” the defendant is guilty. If it is “no,” the defendant is not guilty.

This means that, while the court must take into account the matters known to the defendant that might have affected his belief, it did not follow that any weight, let alone decisive weight, should be attached to the defendant’s subjective belief at the time. The test in law remains objective, that is, whether any reasonable person who shared the knowledge of the defendant at the time would have been bound to believe the property was tainted. 

The court acknowledged that cases, albeit rare, may arise where the court holds that any reasonable person in the position of the defendant would have believed that the property was tainted but nonetheless accepts the evidence of the defendant when he says that he did not have such belief. Under such circumstances, the defendant would still be convicted but his honest belief is likely to be a mitigating factor when he is sentenced.

Reflecting on this decision, corporations should continue to implement rigorous anti-money laundering mechanisms, where suspicious transactions are escalated to the relevant department and reasonable follow-up enquiries are made. This can protect the business from allegations of section 25(1) offence because, in the unfortunate event that the Company has been dealing with tainted proceeds unknowingly, evidence that reveals a system with detailed AML/KYC due diligence procedures will support not only an honest belief on the part of the Company, but also a claim that a reasonable person sharing such knowledge at the time of the transaction would not be bound to have believed the property was tainted.

1. [2019] HKCFA 47.↩