Genuine Belief that Proceeds are “Clean” is not Necessarily an Answer to a Charge of Money Laundering

On 5 December 2019, the Hong Kong Court of Final Appeal (“CFA”) handed down its decision in HKSAR v Harjani Haresh Murlidhar [2019] HKCFA 47. In its judgment, the CFA reformulated the test for determining whether a person is guilty of money laundering.  The decision reminds individuals and businesses of the need to be vigilant as to the legitimacy of the proceeds which they handle.

Background

The appellant (hereafter “Defendant”) was charged with conspiracy to deal with property known or believed to represent proceeds of an indictable offence, contrary to section 25(1) of the Organized and Serious Crimes Ordinance (Cap. 455) (“Money Laundering Offence”).

At first instance, the main issue was whether the Defendant knew or believed that the proceeds withdrawn from his company’s bank account represented the proceeds of an indictable offence.

These proceeds were obtained by co-conspirators in an email fraud. In essence, the Defendant’s defence was that he was a legitimate businessman with the funds in question deriving from a genuine commercial transaction. The Defendant claimed specifically that he was asked to execute a letter of credit and to receive the deposit and letter of credit proceeds in his company’s account. The reward for doing so and for providing inspection services at shipment would be 15% of the contract price, with the Defendant’s company getting 12% (US$1,294,560) and a co-conspirator receiving the other 3% (US$323,640).

The Judge at first instance found the Defendant’s belief to be unreasonable and ill-founded and accordingly convicted the Defendant. In doing so, he held that even if the Defendant held an honest belief that the source of the money was legitimate, in order to establish a defence to the Money Laundering Offence, that belief must also be reasonable.

On appeal, the Court of Appeal held that the Judge was wrong to require an honest belief to be reasonable before the defence can be established. The conviction was, nevertheless, upheld since the Judge had, in the Court of Appeal’s view, correctly reached a conclusion that the Defendant’s claim as to his belief was not truthful.

Decision of the CFA

The CFA unanimously upheld the conviction, further finding that it was the Court of Appeal, rather than the first instance Judge, which had erred in its analysis of the Money Laundering Offence. In particular, even if the Defendant was found to genuinely believe that the money he was dealing with was clean, but if any reasonable person in the position of the Defendant would believe that the property was tainted, the Defendant would be guilty of the Money Laundering Offence.

The CFA was not of the view that its decision was changing the law. However, for clarity, it set out a reformulated test for determining whether a person is guilty of the Money Laundering Offence:

1. What facts or circumstances, including those personal to the defendant, were known to the defendant that may have affected his/her belief as to whether the property was 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?
3. If the answer to question (2) is “yes”, the defendant is guilty.  If “no”, the defendant is not guilty.

Considerations

Some commentary has questioned whether the CFA’s approach would unfairly render genuinely gullible people guilty of the Money Laundering Offence. Others have similarly highlighted the fact that the reformulated test only envisages the hypothetical “reasonable person” sharing a defendant’s knowledge, and not that defendant’s reasoning or perception.

There are two points to consider in relation to these concerns:

First, as the CFA pointed out, there are two interrelated questions to address: (i) is a defendant telling the truth when he or she says that the property was tainted; and (ii) could a reasonable person in the position of that defendant have failed to believe that the property was tainted? Practically speaking, the Court will usually give the same answer to both questions.

Second, where the Court accepts that a defendant did not himself or herself believe that the property was tainted but nevertheless convicts – this will be a mitigating factor in sentencing.

In effect, the decision incentivises individuals to ask robust questions when faced with funds of questionable origin rather than take comfort in a defence that he or she had a “genuine” belief in the propriety of the funds. If the money laundering laws are to be effective, this must be the correct approach. There is also an expectation that the Department of Justice will carefully consider its public interest discretion under the Prosecution Code before deciding to prosecute individuals who are clearly of lower than normal reasoning ability.

The takeaways for all businesses (not just financial institutions and professional service firms) are as follows:

• Ask a lot of questions in relation to new business propositions to ensure that they are legitimate. Vague answers, for instance, in relation to the exact sums of money involved in a deal, or who the investors are, should be treated as red flags.

• If a counterparty is providing unduly generous terms that do not make commercial common sense, it is prudent to enquire why. The same applies if unusual instructions or conditions have been introduced into a deal.

• Background checks should be carried out on new clients, suppliers, investors or key intermediaries.

• Unusual movement of money (e.g. in an indirect way) or requests to use a different account are clear warning signs that should be acted on.

• If someone has asked to make large payments in physical cash, this should also be treated as a warning sign.

• Proper training should be given to all staff so they can spot and escalate these and other signs of money laundering.