Hong Kong’s top court clarifies mental element in money laundering offence

In the recent case of HKSAR v Pang Hung Fai (FACC 8/2013), the Court of Final Appeal (the CFA) offered, for the first time, authoritative guidance on the mental element of “having reasonable grounds to believe” under section 25(1) of the Organized and Serious Crimes Ordinance (Cap 455) (the OSCO).

Section 25(1) makes it an offence for anyone to deal with any property while "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. The CFA's judgment in effect overturns previous Court of Appeal (the CA) jurisprudence and offered much-welcomed clarity on the subject.

Background

The Appellant had been close friends with a Mr Kwok, who was the chairman and major shareholder of a Hong Kong listed company, for 30 years. Their families were close and they often socialised with each other. The Appellant had always found Kwok to be scrupulous, and the two had trusted each other with unsecured, interest-free loans which were unfailingly repaid.

In 2008, Kwok had asked the Appellant to allow a sum of HK$14 million to be deposited into the Appellant’s bank account, and to hold the same for Kwok. The Appellant agreed without asking any questions, because (i) he trusted Kwok and did not believe Kwok would do anything dishonest; and (ii) he believed that HK$14 million was “small change” for someone of Kwok’s wealth. Shortly afterwards, the Appellant transferred the money to Kwok’s bank account in Cambodia, again on Kwok’s instructions and without raising any questions.

It transpired that the money had been obtained from the listed company under a fraudulent scheme perpetuated by Kwok and his accomplices. The Appellant was charged under s 25(1) of the OSCO, on the basis that he “had reasonable grounds to believe” the money represented proceeds of an indictable offence.

Proceeding in the courts below

The Appellant was tried in the District Court without a jury. The trial judge applied a line of CA cases (stemming from HKSAR v Shing Siu Ming [1999] 2 HKC 818), and held that proving a defendant “had reasonable grounds to believe” in fact required proof of two elements, one after the other:

1. Objective element: there were grounds that a common sense, right-thinking member of the community would consider were sufficient to lead a person to believe that [the property represented proceeds of an indictable offence]. (emphasis added)
2. Subjective element: those grounds were known to the defendant.

The trial judge considered the facts surrounding the money transfer, e.g. the large sum involved, and concluded that a “reasonable person” would have been “put on immediate alert” and “would be really worried”. He then found that these facts were known to the Appellant. Accordingly, he convicted the Appellant.

The CA upheld the conviction. However, it preferred to reverse the order of the 2-step approach. The reason is because by first addressing the objective element, one may only refer to what the prosecution has proven rather than what the prosecution has proven was known by the defendant. This will limit the range of relevant circumstances to be considered by the jury/judge. The first step, according to the CA, was to “identify all the facts known to the defendant” that relate to the dealing with the property. The second step was to process these facts through the mind of the “common sense, right-thinking member of the community”. However, the CA found no prejudice was caused by the order in which the trial judge considered the two elements. The CA hence dismissed the appeal.

Significantly, in both the District Court and the CA, it was held that the personal beliefs, perceptions or prejudices of the Appellant should not be taken into account in applying the tests outlined above.

Issues for the CFA and answers

The two issues before the CFA were:

1. Could the Appellant’s perception and evaluation of objective facts be taken into account as constituting or contributing to reasonable grounds for believing that the property does not represent proceeds of an indictable offence?
2. What is the appropriate standard to be applied in evaluating the content of the reasonable man’s belief?

The CFA answered question (1) in the affirmative, and, in doing so, criticised the previous approach adopted by the courts, noting as follows:

1. The previous approach had the effect of replacing the statutory word “grounds” with the word “facts”. The latter is a narrower concept, and may not necessarily include an accused’s belief, perception or prejudice. However, a belief, perception or prejudice may fit quite readily within the concept of a “ground”; and
2. The courts below held that if an accused’s belief, perception or prejudice was taken into account, this would turn the objective test into a subjective one. According to the CFA, this showed that the lower courts had been distracted by labels such as “objective” and “subjective”, which were not in the statute, and had applied these labels rather than the words of the statute.

Since the lower courts did not take into account the Appellant’s case on the trust that existed between himself and Kwok, they had failed to take into account the Appellant’s own perception and evaluation of relevant facts. The appeal was allowed on this ground.

On question (2), the CFA held that the correct test is whether any reasonable person looking at those grounds “would believe” that the property dealt with represents the proceeds of an indictable offence rather than a test of “could believe”.

The CFA noted that the test that emerged from previous CA jurisprudence, i.e. whether “a common sense, right-thinking member of the community would consider [the grounds] sufficient to lead a person to believe”, in fact amounted to a test of “could believe”. This was an inappropriately low standard, since:

1. Money laundering is a serious offence which leads to a maximum penalty of 14 years’ imprisonment. The maximum penalty applies regardless of whether the accused had actual knowledge or “reasonable grounds to believe”.
2. Only when a test of “would believe” is adopted can there be a strong sense of moral blame that is commensurate with the seriousness of the offence.

Accordingly, the appeal was also allowed on this ground.

Commentary

An offence under s 25(1) of the OSCO is triable either by a judge alone in the District Court, as in this case, or by a jury in the High Court. In the context of a jury trial, previous CA jurisprudence necessitated references to the abstract concepts of a “reasonable person” or “right-thinking member of the community”, or labels such as “objective” and “subjective”. The CFA observed that these phrases were likely to confuse the jury and may jeopardise them in making a just and fair decision.

The CFA’s judgement is a welcome remedy to this position and one which also refocuses attention on the wording of the statute, rather than the “apt-to-confuse” labels.

The decision by the CFA clarifies two important issues:

1. When deciding whether a defendant has “grounds” to believe (that any property represents the proceeds of an indictable offence), “grounds” should not be limited to facts alone but can also include the beliefs, perceptions or prejudices of the defendant. The judge or jury can give such weight to an accused’s beliefs, perceptions or prejudices as he or she believes to be appropriate. i.e. are the defendant’s grounds “reasonable”?
2. In determining whether the defendant’s grounds of belief are reasonable, the test to be applied is whether any reasonable person “would believe” that the property represents the proceeds of an indictable offence rather than the weaker test of “could believe”.

There have only been a limited number of CFA cases dealing with money laundering and this is the first time that the CFA has considered the mental element of the offence under s 25(1) of the OSCO. As a result of the decision, the CFA has raised the standard for conviction to an appropriate level, taking into account both the seriousness of the offence and the statutory maximum.