Secretary for Justice v. Shin Dong Ki and Others

CACV 29/2023

[2025] HKCA 65

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 29 OF 2023

(ON APPEAL FROM HCMP NO 1998 OF 2019)

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J U D G M E N T

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Hon Zervos JA (giving the Judgment of the Court):

1.This is an appeal of the decision of Johnny Chan J (the Judge) on 14 July 2022 (the Decision), refusing an application to discharge a restraint order he made on 13 November 2019 and varying the restraint order by reducing it to approximately HK$77.5 million (the equivalent of US$10 million).

2.The Secretary for Justice was the applicant for the restraint order as required by the legislation, and is the respondent in this appeal. The appellants are husband and wife, Shin Dong Ki and Shin Min In Sook, and eight corporate entities that were the respondents in the application for the restraint order. For the sake of consistency, we will refer to the individual respondents by their designations in the application before the Judge.

The background facts

3.The background facts and circumstances are mainly distilled from the court papers of the criminal proceedings against various persons and entities in the Republic of Korea (South Korea) that provided the basis for the Secretary for Justice’s application for the restraint order.

The South Korean criminal proceedings

4.The CJ Group is a South Korean conglomerate operating internationally. At the material time, Lee Jay Hyun (Lee) was the Chairman of the CJ Group and a Joint Representative Director of CJ Corporation (the holding company) and CJ CheilJedang Corporation. As the largest shareholder of CJ Corporation, which was in charge of the overall business management of the CJ Group, Lee had management and control over each affiliate company.[1]

5.Since 1993, Shin Dong Ki (R1) held a series of senior positions within the CJ Group and was variously involved in managing the financial affairs of Lee. In various capacities, and with others, he assisted Lee in evading his tax liabilities, namely capital gains and dividend income derived from Lee’s interests in the CJ Group, and misappropriating company funds.

6.From 1993 to September 2004, R1 worked in the CJ Group’s Hong Kong branch office and together with Kim Seung Soo, he was in charge of managing Lee’s overseas assets in Lee’s name or “borrowed names”. From October 2004 to December 2007, he was the Vice President of the Chairman’s Office in charge of the management of the finances of the CJ Group’s affiliates and Lee’s domestic and overseas assets in Lee’s name and “borrowed names”. From January 2008 onwards, he was the Representative Director of CJ Global Holdings Co Ltd, a Hong Kong subsidiary of CJ CheilJedang Corporation and CJ China Limited, and together with Seong Yong Jun, he was in charge of administering the management of Lee’s overseas assets in Lee’s name and “borrowed names”.[2]

7.R1 was a defendant, together with Lee and others, in a series of criminal proceedings in South Korea, facing charges of tax evasion, embezzlement and criminal breach of fiduciary duty. On 14 February 2014, the Seoul Central District Court found R1 guilty of these charges and passed a sentence of 3 years’ imprisonment suspended for 5 years and a suspended sentence of a fine.[3] R1 lodged an appeal against his convictions and sentence with the Seoul High Court. On 12 September 2014, the Seoul High Court upheld R1’s convictions, except for the charges relating to criminal breach of fiduciary duty, and his sentence.[4] The prosecution and R1 appealed the Seoul High Court’s decision to the Supreme Court. On 10 September 2015, the Supreme Court ruled that the High Court’s determinations relating to the charges of criminal breach of fiduciary duty should be reversed, and remitted R1’s case to the Seoul High Court for redetermination.[5] On 15 December 2015, the Seoul High Court maintained its previous decision but reduced R1’s sentence to 2 years and 6 months’ imprisonment, suspended for 4 years, and a suspended sentence of a fine.

8.The Seoul High Court found Lee and R1 guilty of conspiring with various others to commit a series of revenue and fraud offences relating to the CJ Group, specifically of conspiring with others not to file the tax base for capital gains and dividend income derived from Lee’s shares in CJ Corporation and CJ CheilJedang Corporation through stock accounts in “borrowed names” from 2003 to 2007. As a result, Lee evaded substantial sums of capital gains tax and global income tax.

9.In 2003, Lee conspired with others to fabricate the expenses of the CJ Group, reducing its tax liability for the tax year of 2003. In addition, Lee and R1 conspired with others to “tamper” with the books of the CJ Group from 2003 to 2005 and “stashed” 12,480,000,000 Won of the CJ Group funds for Lee’s personal use. They evaded corporate tax of 1,263,600,000 Won for 2003; 1,404,000,000 Won for 2004 and 650,000,000 Won for 2005.

10.Lee and R1 were found guilty of conspiring with others to increase Lee’s overseas assets by using CJ International Asia Pte Limited (CJIA), a Singaporean company of the CJ Group. It was alleged that in December 2010, Lee and R1, together with others, sold all the equity shares of CJIA to Tiger Galaxy Limited (R7) for US$905,000. Through R1, Lee established R7, a British Virgin Islands company, of which he was the beneficial owner. On the instructions of Lee and R1, together with others, CJIA paid US$10 million to R7 as dividends from 2011 to 2012, which R1 wired the entire amount to Lee, who was liable to pay tax on the global income. Lee failed to file the tax base by 31 May of the following year. It was found that Lee and R1 conspired with others to utilise R7, in wiring the dividends overseas, namely to the United States for the purpose of purchasing artworks, to evade Lee’s tax liability. As a result, they made it difficult for the tax authority to discover that the dividends were income belonging to Lee, who failed to file the tax base of the dividend income. The global income tax evaded was the aggregate sum of 2,354,660,000 Won for the tax year of 2011 and 1,709,354,000 Won for the tax year of 2012.[6]

11.The nature and extent of R1’s culpability in the revenue and fraud offences perpetrated by Lee on the CJ Group was summarised by the Seoul High Court in the following sentencing remarks:[7]

“Each of the crimes committed by Defendant Shin Dong Ki in this case, was such that, as an executive member in charge of finance for the CJ Group Chairman’s Office, he had managed Defendant Lee Jay Hyun’s domestic and overseas assets; orchestrated execution of various activities relating to the crime of tax evasion amounting to a total of approximately 22.2 billion Won, such as evasion of capital gains tax and global income tax in respect of Defendant Lee Jay Hyun’s domestic shares held in borrowed names, evasion of global income tax using overseas paper companies and evasion of corporate income tax in the tax years 2004 and 2005 by creating the Off-Balance Sheet Funds. Defendant Shin Dong Ki also participated in the embezzlement of approximately 7.7 billion Won in Defendant Lee Jay Hyun’s embezzlement of the CJ China funds, and each count of misappropriation relating to CJ Japan. The severity of the offence works unfavourably for Defendant Shin Dong Ki.

Meanwhile, the fact that Defendant Shin Dong Ki has no criminal record, has admitted to most crimes during investigations and showed remorse, committed each crime above pursuant to orders and authorisation by Defendant Lee Jay Hyun, the Group Chairman, and thus had no ultimate decision-making power, nor did he personally profit from committing each crime. Also, the taxes which Defendant Shin Dong Ki assisted in evasion have all been paid, and the aggrieved affiliates do not want Defendant Shin Dong Ki to be punished because damage from embezzlement and misappropriation has mostly been restored or the loss was never materialised. Moreover, Defendant Shin Dong Ki appears to have played an important role in suspending the creation of the Off-Balance Sheet Funds which was closely linked to the crime of corporate tax evasion in this case as well as he was not heavily involved in the tax evasion of the tax year 2004. All of the above works in favour of Defendant Shin Dong Ki.

Based on the totality of circumstances, including the circumstances mentioned above and all the factors which appear in the pleading such as Defendant Shin Dong Ki’s age, character, living environment, family relationship, motive and background of the crime, the means and the outcome, the circumstances after the crime, and having taken into account the recommended sentencing range and standard of probation according to the Sentencing Guidelines determined by the Supreme Court Sentencing Commission, this Court hereby determine the sentence as set forth in the order of judgment.”

12.It is noteworthy that the Secretary for Justice’s application for the restraint order focused solely on the tax evasion by Lee of the dividend payments of US$10 million to R7, which was established by Lee with R1 as his nominee. R7 operated a bank account with the ANZ Bank in Hong Kong (account number 0120613793) and R1 was the sole signatory. Between 13 June 2011 and 6 March 2013, CJIA transferred to R7, its sole shareholder, dividend payments of US$10 million out of profits of CJIA. The funds were then transferred to a bank account in Singapore of Legend Marker Limited (Legend Marker), which Lee used to purchase artwork in other countries, including the United States.

13.The police made enquiries of CJ China Limited, which is wholly owned by the CJ Group, regarding, amongst other things, the transaction between CJIA and R7. The company stated that the monies paid by CJIA to R7 were dividends to R7 as the shareholder of CJIA and produced Directors’ Resolutions in support of the transaction.[8]

The Hong Kong restraint proceedings

14.R1 is a permanent resident of Hong Kong, who left Hong Kong for South Korea on 10 May 2013 and has not returned. It is said that he has no intention of returning to Hong Kong as he currently resides with his wife in Ho Chi Minh City, Vietnam. A meeting was held on 19 August 2013 between his legal representative and the Hong Kong police to discuss the disposal of the funds in his accounts. Accordingly, as early as August 2013, R1 knew the Hong Kong police were conducting an investigation into his affairs.

15.In July 2013, the appellants’ bank accounts were frozen by the relevant banks pursuant to Letters of No Consent issued by the Joint Financial Intelligence Unit of Hong Kong.

16.On 8 May 2014, the police obtained a warrant of arrest against R1 for the offence of dealing 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) (OSCO).[9] The particulars of the offence read:[10]

“SHIN Dong-ki, between 2^nd July 2008 and 30^th June 2013 you used a bank account in the name of Century Concord Ltd of Coutts & Co Ltd account number 88018035 to deal with property, namely HK$96,146,762.66 knowing or having reasonable grounds to believe that this property in whole or in part, directly or indirectly represents the proceeds of an indictable offence.”

17.On 31 October 2019, the Secretary for Justice made an ex parte application to the Judge for a restraint order against the appellants pursuant to section 15(1), which he granted on 13 November 2019, restraining the appellants from removing from Hong Kong and in any way disposing of, dealing with, or diminishing the value of their property. The return day for an inter partes hearing was fixed for 28 February 2020.[11]

18.The application for the restraint order was supported by an affirmation of Senior Inspector Li Kin Sum dated 18 October 2019.[12] The basis of the application was essentially set out in the following paragraphs:

“8. This is a suspected money laundering investigation arising from a piece of confidential intelligence in 2013. The police subsequently obtained the judgments of the Seoul Central District Court and the Seoul High Court (collectively ‘the Korean judgments’).

9. The judgment of the Seoul Central District Court stated that on 2014-02-14, LEE Jae-Hyun (‘LEE’), the Chairman of CJ Group, was convicted of (1) raising KRW60.4B (HKD392.6M) of slush fund; (2) dodging some KRW25.1B (HKD163.2M) in tax; and (3) causing financial losses to the group in the process of buying two buildings in Tokyo. In the same set of legal proceedings, R1 was convicted for his role in assisting LEE to set up shell companies to evade taxes and to operate overseas slush fund of the following offences:

(a) Evasion of tax: between 2004 and 2007, and between 2011 and 2012 (total amount of tax evasion: KRW22.3B, approximately HKD144.6M);

(b) Embezzlement of corporate funds: between 2011 and 2014 (total amount of damage sum: KRW5.5B, approximately HKD35.8M);

(c) Breach of trust: between 2006 and 2007 (total loss: KRW30.9B, approximately HKD200.8M).

10. In particular, according to the judgment of the Seoul Central District Court (at page 6), R1 and others acting on LEE’s instruction transferred USD10M from CJ International Asia Pte Limited to R7. R1 then transferred the entire payment to LEE, who should have filed total income assessment with the relevant tax office by 31^st of May in the following year. However, they conspired to use R7[13] as a vehicle to transfer the sum to the United States and other foreign countries to purchase art works, thereby making it difficult for the taxation department to track and reveal the fact that the sum was in fact owned by LEE. LEE evaded total income tax amounting to KRW2,354,660,OOO in year 2011 and KRW1,709,354,000 in year 2012.

11. This specific finding and R1’s conviction were affirmed by the Seoul High Court (at page 79 of the judgment). However, R1’s original sentence of three years’ imprisonment was suspended by the Seoul High Court for five years. (English translation of the Korean judgments are exhibited as LKS-4.)

12. Given the lack of genuine business of the BVI companies owned by R1 and the transfer of ownership of three companies from R1 to R2 and change of the account signatory (which will be explained below), there are reasonable grounds to believe that the credit balance in the accounts maintained by R1 were the crime proceeds of his convicted case in Korea. Financial investigation revealed that R1 and R2 maintained or had control over a total of 18 bank accounts with seven different banks in Hong Kong. Between 2013-07-19 and 2017-01-03, Letters of No Consent were issued against the concerned bank accounts to avoid dissipation of the funds.

…

58. It can be seen from paragraph 36 above that a total sum of USD10M (the difference of USD40 could be due to bank charges) was transferred from CJ International Asia PTE Limited’s bank account in Singapore to R7’s A/C 12 in Hong Kong. This entire sum was transferred from R7 to Legend Marker Limited’s bank account in Singapore. This is consistent with the findings in the Korean judgments. According to Ms LEE Cho-yiu, Julia, Legend Marker Limited is a BVI company (Companies Registry Number 1616159) incorporated on 2010-11-19 and its beneficial owner is R1. In other words, the sum of USD10M was transferred from Singapore to Hong Kong and then back to Singapore for no apparent reason, and R7’s bank account in Hong Kong was being used as a temporary repository of fund.

59. The general reply given by CJ China Limited did not really explain anything because whatever the payments are called, it does not alter the fact that R7 received USD10M from CJ International Asia PTE Limited, not to mention the careless manner in which the relevant documents were prepared.

60. It is highly suspicious that R1 transferred the ownership of three companies with the largest amount of assets to R2 and changed the authorised signatory of some accounts shortly before his departure from Hong Kong in May 2013. Having considered all the circumstances of the case, there are reasonable grounds to believe that the USD10M in R7’s account is proceeds of an indictable offence and R1 had dealt with it.” (Emphasis added)

19.In granting the restraint order, the Judge was satisfied that proceedings were instituted in Hong Kong against R1 for the specified offence of dealing with property known or believed to represent proceeds of an indictable offence, contrary to section 25(1); the proceedings had not been concluded; there were reasonable grounds to believe that R1 had benefited from the specified offence; and the amount of R1’s benefit exceeded HK$100,000.

20.On 6 April 2020, by consent of the parties, the restraint order was extended and continued until further order of the court.[14]

21.On 9 September 2021, the appellants applied to the Judge to discharge or vary the restraint order, which was heard on 24 December 2021.[15] In support of the application, R1 filed an affirmation dated 2 September 2021. He stated that the basis of the application, amongst other grounds, was that he had not benefited from the alleged offence of money laundering, and alternatively, if he had received a benefit, the value of the restrained funds significantly exceeded the value of the alleged benefit and the restraint order should be limited to US$10 million only, which was the alleged amount of the benefit.[16]

22.After a review of the affirmations and the South Korean judgments, the Judge handed down his Decision on 14 July 2022, refusing to discharge the restraint order but varying the amount under restraint to approximately HK$77.5 million. The Judge found, amongst other things, that R1 had benefited to the extent of US$10 million deposited into R7’s bank account of which he had legal and sole operational control.

The grounds of appeal

23.Leave was granted to the appellants to appeal the Decision on Ground 1 by the Court of Appeal on 31 August 2023, and Grounds 2 and 3 by the Judge on 20 January 2023. The grounds can be summarised as follows:

Ground 1: The Judge erred in finding that it could not be said that the US$10 million deposited to R7’s bank account did not represent proceeds of an indictable offence and that R1 could have been convicted of the offence of money laundering.[17]

Ground 2: The Judge erred in finding that there was evidence that R1 benefited from the alleged money laundering offence.[18]

Ground 3: The Judge erred in finding that the value of the benefit obtained by R1 was not the amount of tax R1 helped Lee to evade, but instead the money transacted.[19]

24.The appellants seek orders that the Decision be set aside and the restraint order be discharged, or in the alternative, the restraint order be varied to the effect that the total restrained amount be limited to the actual benefit obtained by R1, and that the excess funds be released.

The statutory framework

25.The power to make a restraint order is provided by section 15, which read together with section 14 and Order 117 of the Rules of the High Court (Cap 4A, Sub Leg), set out the circumstances and procedures for the application, variation and discharge of a restraint order.

26.Section 15 materially provides:

“(1) The Court of First Instance may by order (referred to in this Ordinance as a restraint order prohibit any person from dealing with any realisable property, subject to such conditions and exceptions as may be specified in the order.

(2) A restraint order may apply—

(a) to all realisable property held by a specified person, whether the property is described in the order or not; and

(b) to realisable property held by a specified person, being property transferred to him after the making of the order.

…

(4) A restraint order—

(a) may be made only on an application by the prosecutor;

(b) may be made on an ex parte application to a judge in chambers; and

(c) shall provide for notice to be given to persons affected by the order.

(5) A restraint order—

(a) may be discharged or varied in relation to any property; and

(b) shall be discharged on the conclusion of the proceedings or application concerned.

(6) An application for the discharge or variation of a restraint order may be made by any person affected by it.

…”

27.Section 14 addresses both restraint orders (section 15(1)) and charging orders (16(1)) and sets out the requirements and conditions upon which the Court of First Instance must be satisfied before granting the order sought. The section reads:

“(1) The powers conferred on the Court of First Instance by sections 15(1) and 16(1) are exercisable where—

(a) proceedings have been instituted in Hong Kong against the defendant for a specified offence or—

(i) an application for a confiscation order has been made in respect of the defendant where section 8(1)(a)(ii)[20] or (7A)[21] is applicable; or

(ii) an application has been made under section 20(1A)[22] in respect of a confiscation order made against the defendant;

(b) the proceedings have not, or the application has not, as the case may be, been concluded;

(ba) subject to subsection (1A), if section 2(15)(aa) is applicable to an offence, the Court of First Instance is satisfied that, in all the circumstances of the case, there is reasonable cause to believe that the defendant may be charged with the offence after further investigation is carried out; and

(c) the Court of First Instance is satisfied that there is reasonable cause to believe—

(i) in the case of an application referred to in paragraph (a)(ii), that the Court of First Instance will be satisfied as specified in section 20(1A);

(ii) in any other case, that the defendant has benefited from that specified offence.

(1A) Subject to subsection (1B), where a power conferred on the Court of First Instance by section 15(1) or 16(1) is exercisable only on the ground mentioned in subsection (1)(ba), then the Court of First Instance shall specify a date on which any restraint order or charging order arising from that ground shall expire, being a date—

(a) subject to paragraph (b), not later than is reasonably necessary for the purposes of the investigation concerned mentioned in subsection (1)(ba); and

(b) in any case, not later than 6 months after the date on which that order is made.

(1B) The Court of First Instance may extend a restraint order or charging order mentioned in subsection (1A)—

(a) on the ground only that the Court of First Instance is satisfied that the defendant will be charged with the offence concerned after further investigation is carried out;

(b) subject to paragraph (c), not longer than is reasonably necessary for the purposes of that investigation; and

(c) in any case, for not more than 6 months.

(2) Those powers are also exercisable where the Court of First Instance is satisfied—

(a) that, whether by the laying of an information or otherwise, a person is to be charged with a specified offence; and

(b) that there is reasonable cause to believe that he has benefited from that specified offence.

(3) For the purposes of sections 15 and 16, in relation to the exercise of those powers at any time before proceedings have been instituted, references in this Ordinance—

(a) to the defendant shall be construed as references to the person referred to in subsection (2)(a);

(b) to the prosecutor shall be construed as references to the person who the Court of First Instance is satisfied is to have the conduct of the case for the prosecution in the proposed proceedings; and

(c) to realisable property shall be construed as if, immediately before that time, proceedings had been instituted against the person referred to in subsection (2)(a) for a specified offence.

(4) Where the Court of First Instance has made an order under section 15(1) or 16(1) by virtue of subsection (2), the Court of First Instance shall discharge the order if proceedings in respect of the offence are not instituted within such time as the Court of First Instance considers reasonable.”

28.It is required that proceedings have been instituted in Hong Kong against the defendant for a “specified offence”, which under section 2(1) means:

“(a) any of the offences specified in Schedule 1 or Schedule 2;

(b) conspiracy to commit any of those offences;

(c) inciting another to commit any of those offences;

(d) attempting to commit any of those offences;

(e) aiding, abetting, counselling or procuring the commission of any of those offences;”

29.In order for proceedings to have been instituted against the defendant for a “specified offence”, section 2(15) provides:

“(a) when a magistrate issues a warrant or summons under section 72 of the Magistrates Ordinance (Cap. 227) in respect of the offence;

(aa) when a person has been arrested for the offence and released on bail or has refused bail;

(b) when a person is charged with the offence after being taken into custody without a warrant; or

(c) when an indictment is preferred by the direction or with the consent of a judge under section 24A(1)(b) of the Criminal Procedure Ordinance (Cap. 221),

and where the application of this subsection would result in there being more than one time for the institution of proceedings, they shall be taken to have been instituted at the earliest of those times.”

30.The court must be satisfied that there is reasonable cause to believe that the person has benefited from the “specified offence”. A person’s proceeds of a specified offence are defined in section 2(6) as follows:

“(a) a person’s proceeds of an offence are—

(i) any payments or other rewards received by him at any time … in connection with the commission of that offence;

(ii) any property derived or realised, directly or indirectly, by him from any of the payments or other rewards; and

(iii) any pecuniary advantage obtained in connection with the commission of that offence.

(b) the value of the person’s proceeds of that offence is the aggregate of the values of—

(i) the payments or other rewards;

(ii) that property; and

(iii) that pecuniary advantage.”

31.It is stated under section 2(8) that for the purposes of the Ordinance,

“a person who has at any time … received any payment or other reward in connection with the commission of an offence or an organized crime has benefited from that offence or organized crime, as the case may be.” (Emphasis added)

32.The property that may be restrained under a restraint order is laid out in section 15(2), which provides that a restraint order may apply to all realisable property held by a specified person, whether or not the property is described in the order, and property transferred to him after the making of the order. Under section 12(1), realisable property includes (a) any property held by the defendant; (b) any property held by a person to whom the defendant has directly or indirectly made a gift; and (c) any property that is subject to the effective control of the defendant.

33.Order 117, rule 4, materially provides that an application for a restraint order under section 15 may be made by the Secretary for Justice ex parte by summons, and that such an application:

“(2) … shall be supported by an affidavit, which shall—

(a) state, as the case may be, the grounds for believing that—

(i) the defendant has benefited from a specified offence; or

…

(b) state, as the case may be—

(i) that proceedings have been instituted against the defendant for a specified offence (giving particulars of the offence) and that they have not been concluded;

…

(4) Unless the Court otherwise directs, an affidavit under paragraph (2) may contain statements of information or belief with the sources and grounds of the information or belief.”

34.It is further provided under Order 117, rule 5(2) that unless the court otherwise directs, a restraint order made ex parte shall have effect until a day fixed for the hearing inter partes of the application.

35.The standard of proof to determine an application for a restraint order or a confiscation order is on the balance of probabilities. This is provided for by section 8(8B), which specifies that the standard of proof required to determine any question arising under OSCO as to (a) whether a person has benefited from a specified offence or offences; (b) whether a person has benefited from organized crime; and (c) the amount to be recovered in his case in pursuance of a confiscation order shall be on the balance of probabilities.

36.As provided under section 19(2), the purpose of a restraint order is “… making available for satisfying the confiscation order or, as the case may be, any confiscation order that may be made in the defendant’s case the value for the time being of realisable property held by any person by the realisation of such property.” This was reinforced by Ribeiro PJ in Secretary for Justice v Tam Kit I:[23]

“26. A central objective of OSCO is to authorise the confiscation of property representing the value of the proceeds of crime is which are ‘specified offences’ or ‘organised crimes’. The persons targeted are those who benefited from such crimes by receiving payment or some other reward in connection with the commission of such offences. COs [Confiscation Orders] confiscating such persons’ property are issued to implement that objective and ROs [Restraint Orders] are made in support of existing or prospective COs. The provisions which govern the making and discharge of COs set the context in which the provisions governing the making and discharge of ROs to be construed.”

37.The provisions in section 8 enable the Secretary for Justice to apply for a confiscation order where a person has been convicted of a specified offence and is about to be sentenced for it; and where proceedings for a specified offence have been instituted against the person but have not been concluded because he or she has died or has absconded. The court determines whether the person benefited from the offence before deciding whether to make a confiscation order, and if it decides to make the order, to determine upon the quantum of recovery.[24]

An application for a restraint order

38.A judge of the Court of First Instance is empowered to make a restraint order, prohibiting a person from dealing with any realisable property. The power is exercisable where (1) proceedings have been instituted in Hong Kong against the defendant for a specified offence: section 14(1)(a); or (2) an application for a confiscation order has been made where the defendant has died or absconded: section 14(1)(a)(i) (section 8(1)(a)(ii) or (7A) is applicable); or (3) an application has been made for a confiscation order against the defendant under section 20(1A): section 14(1)(a)(ii).

39.In order to make a restraint order where proceedings have been instituted in Hong Kong against a defendant for a specified offence under section 14(1)(a), the court must be satisfied as follows:

(1)  the prosecutor makes the application supported by an affidavit: section 15(4) and Order 117, rule 4(1) and (2);[25]

(2)  proceedings have been instituted in Hong Kong against the defendant for a specified offence: section 14(1)(a):

(i)  the “proceedings” instituted against the defendant are defined under section 2(15) (a warrant has been issued against the defendant or he or she has been arrested, charged or indicted); and

(ii)  the “specified offence” laid against the defendant is an offence specified under section 2(1);

(3)  there is reasonable cause to believe that the defendant has benefited from the specified offence: sections 14(1)(c)(ii) and 14(2) (the proceeds of the specified offence or offences are in total at least $100,000: section 8(4));

(4)  the supporting affidavit states:

(i)  the grounds for believing that the defendant has benefited from the specified offence (giving particulars of the offence): Order 117, rule 4(2)(a); and

(ii)  that proceedings have been instituted against the defendant for the specified offence (giving particulars of the offence) and that they have not been concluded: Order 117, rule 4(2)(b)(i); and to the best of the deponent’s ability, gives full particulars of the realisable property in respect of which the order is sought and specify the person holding such property: Order 117, rule 4(2)(c).

40.The supporting affidavit may contain statements of information or belief with the sources and grounds of the information or belief: Order 117, rule 4(4); and unless otherwise directed by the court, the ex parte order shall have effect until a day fixed for the hearing inter partes of the application: Order 117, rule 5.

41.The present case involves a restraint order made on the footing that the proceedings had been instituted in Hong Kong against R1 for a specified offence, namely the offence of money laundering, which is listed as a specified offence under item 16 of Schedule 1 of section 2(1)(a).[26] The issue of an arrest warrant against R1 for the offence was the means by which proceedings were instituted as provided by section 2(5). The proceedings for the offence of money laundering had not been concluded[27], and the Judge was satisfied that there was reasonable cause to believe that R1 had benefited from the offence[28].

The offence of money laundering

42.Commonly referred to as money laundering is the offence under section 25(1), dealing with property known or believed to represent proceeds of an indictable offence. It has been stated that money laundering is the processing of criminal proceeds in order to disguise their illegal origins.

43.Section 25(1) provides that a person commits an offence of money laundering 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.

44.Section 2(1) defines the following:

“‘dealing’, in relation to property referred to in section 15(1) and 25, includes—

(a) receiving or acquiring the property;

(b) concealing or disguising the property (whether by concealing or disguising its nature, source, location, disposition, movement or ownership or any rights with respect to it or otherwise);

(c) disposing of converting the property;

(d) bringing into or removing from Hong Kong the property;

(e) using the property to borrow money, or as security (whether by way of charge, mortgage or pledge or otherwise).”

“‘property’ includes both movable and immovable property within the meaning of section 3 of the Interpretation and General Clauses Ordinance (Cap. 1).”

“‘reward’ includes a pecuniary advantage.”

45.In HKSAR v Yeung Ka Sing Carson [29], the Court of Final Appeal explained that section 25(1) did not define the actus reus as dealing with the proceeds of an indictable offence, but as dealing with “property” which the defendant knew or had reasonable grounds to believe represented the proceeds of an indictable offence. The quality of the goods being such proceeds was, therefore, an element in the mens rea, not the actus reus. Consequently, it was not necessary for the prosecution to prove, as an element of the offence, that the proceeds being dealt with were, in fact, the proceeds of an indictable offence.

46.After reviewing a line of Hong Kong authority, the Court of Final Appeal in HKSAR v Harjani Haresh Murlidhar [30], reformulated the test regarding the element of “having reasonable grounds to believe” as follows:

(a)   what facts or circumstances, including those personal to the defendant, were known to him that might have affected his belief as to whether the property was tainted? Where the defendant gave evidence of facts and matters that affected his belief about the nature of the property, the court had to decide whether he was, or might be, telling the truth about the existence of these facts and matters;

(b)   would any reasonable person who shared the defendant’s knowledge be bound to believe that the property was tainted (the Question)? Where the court found that the defendant was, or might have been, telling the truth about the existence of facts and matters that he claimed affected his belief, the court must take those facts and matters into account when answering the Question; and

(c)   if the answer to question (b) was “yes”, the defendant was guilty. If it was “no”, the defendant was not guilty.

A person’s proceeds of an offence

47.In HKSAR v Li Kwok Cheung George [31], the Court of Final Appeal examined the ambit of the offence of money laundering by reference to the definition of “a person’s proceeds of an offence”.

48.The Court explained that the offence under section 25(1) was committed where a person dealt with property knowing or having reasonable grounds to believe that the same represented the proceeds of an underlying indictable offence (often referred to as “the predicate offence”). The concept of dealing with “proceeds of an indictable offence” envisaged two separate transactions. First, that the predicate offence had been committed. Second, that there had been an act amounting to “dealing” with the proceeds of that predicate offence.[32]

49.The ordinary meaning of the word “proceeds” in the phrase “represents any person’s proceeds of an indictable offence” in section 25(1) required the property dealt with to be something which was generated by a predicate offence. In defining the ambit of “any person’s proceeds of an indictable offence” under section 2(6)(a), the Court noted that under section 25A, which imposed a duty to report suspected money laundering offences, used the same phrase but expressed the provision in paragraphs (b) and (c) of section 25A(1) to cover property which “was used in connection with” or which “is intended to be used in connection with” an indictable offence. The Court held that section 2(6)(a) only applied to tainted payments and required more than just some general, unspecified connection between the payment and the offence. It was pointed out that due weight had to be given to the words “or other rewards” in the phrase “payments or other rewards”, which made it clear that the contemplated payment must be in the nature of a reward. Accordingly, “clean money” not paid or received in the nature of a reward in connection with the commission of the predicate offences did not qualify as the proceeds of such an offence for the purposes of section 25(1).[33]

50.The Court also observed that in line with the pervasive object of stripping away the economic benefits obtained by a defendant in connection with the commission of the predicate offence, property ought not to be held to be a particular defendant’s “proceeds” unless he had gained an economic benefit from such property. It was noted that a further aspect of “benefit” that arose in the context of the confiscation regime is applied to persons who subsequently dealt with the proceeds of the predicate offence. It was explained that before a confiscation order could be made against such persons, they must also be shown to have benefited from those proceeds as required by section 8(4), even though such benefit need not be shown to prove liability under section 25(1). It followed that under section 2(6)(a), the payments in question must be “in the nature of a reward” received in connection with the commission of the predicate offence.[34]

The basis of the restraint order application

51.On 31 October 2019, the Secretary for Justice made an ex parte application for a restraint order against the appellants pursuant to section 15(1), which the Judge granted on 13 November 2019.

52.It is a condition for a restraint order that proceedings have been instituted in Hong Kong against a defendant for a specified offence (section 14(1)(a) and (b)). In the present case, this condition had been satisfied by the issue on 8 May 2014 of an arrest warrant against R1 for the offence of money laundering (sections 2(1), 2(15) and item 16 of Schedule 1).

53.In granting the application in these circumstances, the court had to be satisfied that there was “reasonable cause to believe that the defendant had benefited from that specified offence” (section 14(1)(c)).

54.In making the application, the Secretary for Justice must file an affidavit that states the grounds for believing that the defendant has benefited from the specified offence and that proceedings have been instituted against the defendant for the specified offence and they have not concluded (Order 117, rule 4(2)(a) and (b)).

55.An issue that had not been raised by the parties, which concerned this Court, was the difference between the basis of the application and the particulars of the specified offence.

56.The specified offence alleged that R1, between 2 July 2008 and 30 June 2013, used a bank account of Century Concord Ltd (R3) of Coutts & Co Ltd to deal with HK$96,146,762.66 knowing or having reasonable grounds to believe it represented the proceeds of an indictable offence. In contrast, the basis for the application was that R1 assisted Lee to transfer US$10 million from CJIA’s bank account in Singapore to R7’s bank account in Hong Kong and back to Singapore into Legend Marker’s bank account. The funds were further transferred to overseas entities to purchase artwork.[35]

57.Whilst it was alleged that there was widespread misappropriation of company funds and tax evasion by Lee, which R1, together with others, was largely involved over the years, the restraint order application was limited to R1’s conviction by the South Korean court of assisting Lee in evading the tax on US$10 million that R1 transferred through R7’s bank account.

58.It was submitted in support of the application that R1 might have committed the offence of money laundering when he dealt with the US$10 million, which was a “benefit” received by R1.[36]

59.The Judge agreed with the Secretary for Justice’s application as encapsulated in his following remarks:

“67. Although the benefit obtained by Lee in the tax evasion scheme is the amount of tax evaded from the Korean tax authority and Lee had repaid the amount of tax evaded to the Korean authority, this Court must bear in mind that, under the regime of the relevant provisions in OSCO, the benefit obtained by R1 in Hong Kong in the present case on a charge of money laundering, is the total amount laundered through R7’s bank account. Upon finding by the court that R1 has benefited to the extent of US$10 million deposited to R7’s bank account, which he had legal and sole operation control, a confiscation order can be made against R1 for the benefit received by R1 in Hong Kong.

68. It is common ground that for the US$10 million, there has been no recovery from anyone in Hong Kong. There is no double recovery for the alleged offence of money laundering and it is not disproportionate to identify the figure of US$10 million as the amount of R1’s benefit.”

Ground 1 – Clean money

60.The appellants refer to the requirement that in issuing or maintaining a restraint order, the court must be satisfied there is reasonable cause to believe that the defendant has benefited from the specified offence: section 14(1)(c)(ii). The issue engaged in this ground is whether R1 had benefited from the specified offence of money laundering under section 25(1) as particularised in the warrant of arrest.

61.In deciding whether the US$10 million was “clean money” or “proceeds of an indictable offence”, the Judge noted that the offence of money laundering “requires proof that by dealing with the US$10 million knowing or having reasonable grounds to believe that it in whole or in part directly or indirectly represented proceeds of an indictable offence.”[37]

62.The Judge considered that the funds “started off as clean money”, but did not remain that way. He adopted the Secretary for Justice’s summary of the conduct of the underlying predicate offence, which he described as follows:[38]

“36. … Given the fund flow, the fact that the bank account of Legend Marker in Singapore to which the sum of US$10 million was transferred was under the control R1 and the fact that R1 further transferred the sum to other countries for the purpose of purchasing art works, there is ample evidence that R1 had genuine power of deposition [sic] or control over the US$10 million deposited to R7’s bank account. The sum of US$10 million was transferred from Singapore to Hong Kong and then back to Singapore, and then the sum was further transferred to the US and other countries to buy art works. On the materials before this court, there is ample evidence that R1 took active steps to conceal the provenance of the US$10 million by layering and converting it to something else, making it more difficult for the law enforcement agencies to detect it. Although the US$10 million was ultimately returned to Lee when the sum was deposited into R7’s bank account, there is evidence that the sum was payment or other reward received in connection with the tax evasion perpetuated in Korea.”

63.On the basis of the above findings, the Judge went on to hold:[39]

“39. … The Korean Courts found that acting on Lee’s instruction, R1 and two others caused dividend in the amount of US$10 million to be paid from CJ International Limited (‘CJIA’) to R7. R1 then transferred the entire sum to Lee, who should have filed total income assessment with the Korean tax office by 31 May in the following year. However, R1 and Lee conspired to use R7 as a vehicle to transfer the US$10 million to the United States and other countries to purchase art works, making it difficult for the taxation department to trace and find out that the sum was actually owned by Lee. On the above factual matrix, the Applicant is right to submit that as soon as Lee and R1 hatched a plan to transfer the sum to Lee, at the same time concealing it from the Korean Tax authority, the whole sum of US$10 million was tainted because it became the very subject matter of the tax evasion scheme. The US$10 million was money or property resulted from the crime of tax evasion and received by R1 on account of the commission of the crime of tax evasion.”

64.The appellants submit that the Judge was correct to hold that the funds started out as “clean money” but misapplied section 25(1) in finding that the funds qualified as proceeds of an indictable offence when Lee and R1 hatched a plan to disguise Lee’s receipt of the dividends when paying the funds through R7’s bank account in Hong Kong.

65.The appellants argue that the funds were dividends and, therefore “clean money”. They advance three points in support of their argument:

(1)  The dividends were not proceeds of a crime because they were not “in the nature of a reward”. The appellants refer to the Court of Final Appeal’s interpretation of section 2(6)(a)(i) in George Li.

(2)  The money laundering offence does not extend to a person’s intended use of property in connection with an offence.

(3)  The Judge’s finding was contrary to various local and overseas authorities, which have held that the property must be the proceeds of tax evasion or money representing such proceeds.

66.The appellants contend that the dividends were not proceeds of tax evasion or cheating the revenue because, at the time of the transfer, no tax evasion or cheating the revenue had yet been committed: the tax was due after the dividends were transferred. In support of this argument, it is pointed out that the South Korean courts found that Lee “is obligated to file with the relevant tax office the tax base for the global income by May 31 of the year following the year when the income was realised.”[40] There were seven dividend deposits into R7’s bank account, totalling approximately US$10 million. According to the prosecution case, the dividends were in three tranches and the relevant tax base should have been filed by 31 May 2012, 31 May 2013 and 31 May 2014.[41]

67.The appellants acknowledge that where it is shown that the relevant property came from some identifiable act or acts committed overseas, it will be caught by section 25(1) if such conduct constitutes an indictable offence in Hong Kong, irrespective of the legal position in the jurisdiction where such conduct took place: section 25(4); HKSAR v Yang Sigai [42]. It is accepted that tax evasion and cheating the public revenue are justiciable in Hong Kong. However, the appellants argue that at the time of the transfer of each tranche there was no immediate obligation to disclose the funds of the corresponding tranche to the South Korean tax authority, and no false tax return for those funds had been made for the relevant tax period. It is contended that as there was no tax evasion or cheating the revenue at the relevant time, the dividend payments were not the proceeds of any tax evasion or cheating the revenue. The appellants further argue that a conspiracy to evade taxes at the time the dividends passed through the Hong Kong bank account would not have generated any unlawful proceeds because the tax became due and payable in the following year in South Korea, and therefore, dealing in the dividends could not constitute money laundering.

68.The respondent accepts that the Judge was correct in holding that the dividends of US$10 million by CJIA to R7 started as clean money, but argues that they were later tainted by tax evasion in South Korea. It is submitted that “R1 took active steps to conceal the provenance of the funds by layering and converting it to something else. There was a prima facie case that R1 and/or others intended and had taken steps to cheat the South Korean tax authority.” Hence, a pecuniary advantage was obtained by those behind the scheme and, pursuant to section 12(12) they should be treated as if they had obtained a sum of money equal to the value of that advantage.[43] Section 12(12) reads:

“Where a person obtains a pecuniary advantage in connection with the commission of an offence, or the commission of one or more organized crimes, he is to be treated for the purposes of this Ordinance as if he had obtained in connection with that offence or those crimes, as the case may be, a sum of money equal to the value of that advantage, and the other provisions of this Ordinance shall be construed accordingly.”

Discussion

69.According to the findings of the South Korean courts, R1 was extensively involved in assisting Lee in revenue and fraud offences as early as 2003. However, the basis of the Secretary for Justice’s application for the restraint order against R1 and others was limited to the evasion of the tax liability on the dividend payments of US$10 million from CJIA to R7, for the income tax years of 2011 and 2012.

70.It is significant that the Secretary for Justice did not make the application against R1 and others in respect of any other criminal offence or offences, except for the conspiracy between Lee and R1 together with others to evade the tax liability of the dividend payments of US$10 million. However, the specified offence laid against R1 in the restraint order application was for money laundering between 2 July 2008 and 30 June 2013 of HK$96,146,762.66 through a bank account of Century Concord Ltd (R3) with Coutts & Co Ltd, account number 88018035.

71.As we have noted, it is a requirement under Order 117 that an application for a restraint order must be supported by an affidavit stating the proceedings have been instituted against the defendant for the specified offence, giving particulars of the offence, and the grounds for believing that the defendant has benefited from the specified offence. In purported compliance with this requirement, Senior Inspector Li Kin Sum in her affirmation stated that a warrant of arrest had been issued against R1 for the offence of dealing with property known or believed to represent the proceeds of an indictable offence, which particularised the offence in respect of the funds in the bank account in R3’s name with Coutts & Co Ltd. However, the proceeds of the indictable offence and the benefit from the specified offence were stated to be the US$10 million passing through R7’s bank account.[44] It is clear that the transactions in R3’s bank account with Coutts & Co Ltd had nothing to do with the dividend payments of US$10 million transacted through R7’s bank account.[45]

72.It should be noted that pursuant to the restraint order dated 30 November 2019, the sum of HK$97,861,550.11 was restrained from twenty-four bank accounts in the name of the appellants, including the balance in R7’s bank account of HK$94,071.58.[46] It appears that since July 2013 these funds were frozen by Letters of No Consent[47], and since 5 December 2017, additional funds of HK$5,892,035.85 in the bank accounts of R7, R8 and R9 were withheld pursuant to Letters of No Consent[48].

73.As is readily apparent, the particulars of the specified offence concern an entirely different criminal offence from the one that formed the basis of the restraint order. It begs the question, how can a court be satisfied there is reasonable cause to believe that R1 has benefited from the specified offence when an unrelated offence of tax evasion was particularised as the basis for the restraint order. As set out in the supporting documents of the application, the US$10 million in question was not part of the funds as alleged in the specified offence and could not have been a predicate offence to the money laundering as particularised.[49]

74.In the premises, it cannot reasonably be argued that the benefit R1 derived from the specified offence of money laundering was US$10 million. There was a further complication in relation to the basis of this restraint order because the offence concerned the tax evaded in respect of the dividend payments of US$10 million, and the South Korean judgments confirmed that the tax liability had been fully paid.[50]

75.Clearly, the restraint order did not satisfy the requisite requirements and conditions and should be discharged.

Ground 2 – Absence of benefit

76.The appellants contend that the Judge wrongly applied George Li in holding that R1 had a genuine power of disposition or control over the US$10 million that had been passed through R7’s bank account.

77.The appellants advance three points in support of this ground. First, the Judge’s reasoning was contrary to the holding in George Li, that before a confiscation order could be made against a person who dealt with the proceeds of an indictable offence, the person must be shown to have benefited from those proceeds. It is pointed out that such a benefit need not be shown to prove liability for the offence of money laundering under section 25(1), but is a condition of making a confiscation order.

78.As explained by the Court of Final Appeal in George Li, a section 25(1) offence, “the predicate offender is benefited by obtaining the proceeds”, and “the property he obtains are his payment or other reward received in connection with his commission of the predicate offence”.[51] The Court went on to say that a further aspect of “benefit” arises in the context of the confiscation requirement as applied to persons who subsequently deal with the proceeds of the predicate offence. They must also be shown to have benefited from those proceeds as required by section 8(4),[52] even though such benefit need not be shown to prove liability under section 25(1) but as a condition of making a confiscation order. The Court gave the following illustration of these principles in practice:[53]

“(a) X is a drug trafficker who has just sold a consignment of drugs to a buyer and received a suitcase containing HKD3 million in banknotes in payment.

(b) X asks his friend Y (who knows where the money comes from) to deliver the suitcase to Z, a professional money launderer. Y receives nothing for doing this, merely acting because of his friendship with X.

(c) Z receives the money and is allowed to keep $100,000 as his fee after having dealt with the balance of the HKD3 million on X’s behalf in ways designed to conceal its criminal origins.

(d) X commits the predicate offence of drug trafficking and the HKD3 million constitutes its proceeds with X obviously benefiting to the extent of HKD3 million. A confiscation order in the amount of HKD3 million can in principle be made against X.

(e) Y commits a s.25(1) offence since he deals with the HKD3 million which he knows or has reasonable grounds to believe represent X’s proceeds of the predicate drug trafficking offence. However, since Y has not himself benefited, no part of the HKD3 million constitutes ‘his proceeds’ of the predicate offence and the s.8(4)(a) requirement of a benefit to Y is not satisfied. No confiscation order can be made against Y although he can be otherwise sentenced[54] for the s.25(1) offence.

(f) Z commits a s.25(1) offence since he deals with the HKD3 million which he knows or has reasonable grounds to believe represent X’s proceeds of the predicate drug trafficking offence. His benefit from those proceeds is his fee of HKD100,000 and a confiscation order can be made against him to that extent. He can of course also be otherwise sentenced for the s.25(1) offence.

(g) We might add that a confiscation order can be made against X in respect of the HKD3 million proceeds, permitting restraint and receivership orders, etc, to be made to secure his property for eventual confiscation by invoking the ancillary provisions of OSCO where, for instance, the money is intercepted in Y’s or Z’s possession but X has absconded.”

79.It is argued that the Judge’s ruling is contrary to the facts of the case as set out in the South Korean court decisions, where R1 was acting on Lee’s instructions in dealing with the funds. The South Korean court found that (1) Lee established R7 through R1, (2) that Lee had the actual ownership and control of R7, and (3) that following Lee’s instructions, R1 wired the entire amount of the dividends to Lee. Lee and R1 had conspired to use the funds “in wiring the dividends overseas, such as to the United States, purchasing art pieces with such wired dividends”.[55] The South Korean court also found that R1 “had no ultimate decision-making power, nor did he personally profit from committing each crime”.[56]

80.The appellants submit that R1 received no real benefit as it was plain he was acting on Lee’s instructions to use the funds, namely transferring the funds abroad to purchase artwork. Accordingly, it is contended that R1 had no genuine power of disposition or control over the funds which belonged to Lee. At most, R1 was “Y” in the example given by the Court of Final Appeal in George Li.

81.Secondly, the Judge erred in ruling that the circular fund flow was sufficient to find that R1 had a genuine power of disposition or control over the US$10 million.

82.Thirdly, the Judge wrongly applied R v Allpress (Sylvia)[57], which was contrary to George Li, when he ruled that the money passing through R7’s bank account over which R1 had legal ownership and practical control, giving rise to a chose in action, thereby constituting a benefit for the purposes of confiscation.

83.Accordingly, it is submitted that in the circumstances, R1 had not benefited from the predicate offence of tax evasion in South Korea nor the alleged offence of money laundering in Hong Kong to satisfy the requirements of section 2(8) and section 14(1).

84.The respondent argues that the basis of the restraint order was whether there was reasonable cause to believe that R1 had benefited from the specified offence of money laundering (section 14(2)(b)), and therefore, whether R1 had benefited from the predicate offence of tax evasion was irrelevant.

85.As stated in George Li, to come within the terms of “proceeds of an indictable offence” under section 2(6)(a) the payment must be envisaged to be received “in connection with the commission of” the predicate offence.[58] The contemplated payment must be in the nature of a reward received in connection with the commission of the relevant offence. It has to be “a recompense or return or remuneration or incentive for or in connection with doing or having done something” (the predicate offence), and “must derive from or be generated by, or be received on account of, commission of the offence.”[59] It was emphasised that section 2(6)(a) only applies to tainted payments, hence “clean money” which is not paid or received in the nature of a reward in connection with the commission of the predicate offence, does not qualify as the proceeds of such an offence for the purposes of section 25(1).[60]

86.It is contended by the respondent that when the US$10 million was deposited into R7’s bank account (R1 being the beneficial owner of the company), R1 received “a payment or other reward in connection with the commission of money laundering”. R7 received seven payments from CJIA (from its bank account in Singapore) between 13 June 2011 and 6 March 2013, with nine withdrawals to Legend Marker (in its bank account in Singapore) between 13 June 2011 and 16 April 2013. The respondent submits that R7’s bank account in Hong Kong was used as a temporary repository of the funds. It is argued that the funds transferred to Legend Marker’s bank account in Singapore were under the control of R1, which he further transferred to other countries for the purpose of purchasing artwork. The respondent submits that “R1 had genuine power of disposition [sic] or control over the US$10 million deposited into R7’s bank account, hence it was payment or other reward received in connection with the tax evasion perpetrated in South Korea, albeit the sum was ultimately returned to Lee.”[61]

Discussion

87.There are two issues that we need to consider in addressing this ground. First, what was the nature of the funds and the role and involvement of R1 in dealing with them. Secondly, what was the nature of the payment or other reward obtained as part of this tax evasion scheme.

88.The difficulty with the respondent’s submission is that it is inherently inconsistent. As stated in George Li, the payment must be envisaged to be received in connection with the commission of the predicate offence, which as alleged by the respondent, is tax evasion. However, the subject of the purported predicate offence (dividend payments of US$10 million through R7’s bank account) had nothing to do with the money laundering offence as particularised in the charge against R1 (the use of R3’s bank account with Coutts & Co Ltd in respect of approximately HK$96 million). In any event, the tax alleged to have been evaded in respect of the US$10 million would have been a portion of those funds. There is a further difficulty with the respondent’s argument as the tax evaded has been paid, which means that the amount of money that is said to represent the proceeds of an indictable offence in this application has been recovered by the relevant authorities.

89.The respondent resists the suggestion that R1’s conduct corresponds with “Y” in the illustration provided in George Li. It is argued that “Y” was merely delivering a suitcase containing cash and that he had not benefited from the offence of money laundering, hence, no confiscation order could be made against him. It is submitted that R1 not only received the funds through R7’s bank account but also took active steps to conceal its provenance, making it difficult for the authorities to detect the movement of funds. This submission focuses on the criminality involved in relation to the offence of money laundering, rather than on whether the funds were a payment or other reward received in connection with the commission of the predicate offence, namely tax evasion. In the circumstances, R1’s conduct would fall within the category of “Y”.

90.The respondent further submits that R1 had a high degree of decision-making power over how to deal with the tainted proceeds, notwithstanding the finding of the South Korean court that he did not have “ultimate” decision-making power as he acted on Lee’s instructions. The respondent points out that the evidence showed that R1 had legal ownership of R7 and practical control over the US$10 million deposited into R7’s bank account. It was argued that this was the same position as the case of Morris in R v Allpress, who was a solicitor using his client’s account to deposit funds from a revenue fraud and paid out as disbursements for the benefit of the fraudster. The judge was not satisfied with the evidence of Morris that he was a bare trustee or nominee in relation to the funds in the account, and he made a confiscation order for a relatively minor amount compared to the amount of money involved.

91.We do not consider the case of Morris in R v Allpress to be apposite as the facts and circumstances of that case are more intricate and complicated than suggested by the respondent.

92.As we have already indicated, there are two fundamental problems with the basis of the restraint order. First, the purported predicate offence did not arise from the money laundering offence alleged in the charge against R1. Secondly, it cannot be shown that R1 derived a benefit from the purported predicate offence as the proceeds of the crime were the tax evaded on the US$10 million which had been paid.

Ground 3 – Benefit limited to tax evaded

93.This ground only arises if the funds passing through R7’s account are considered to be a benefit for R1 from the specified offence. It is contended that the value of such benefit is not the full sum of the US$10 million (being the dividend income received by Lee through R7), but rather the value of the tax evaded, which amounted to approximately HK$27 million.

94.The appellants refer to the decision of the English Court of Appeal in R v Ahmad [62], in which it was held that where funds are paid through bank accounts in a tax evasion scheme, the “benefit” obtained is not the “cost of committing the crime” (in the present case, the total value of the funds passing through the bank accounts) but the amount of tax which ought to have been paid on those fund.[63] It is pointed out that the predicate offence forming the basis of the money laundering charge, as stated in the restraint order application, is tax evasion, where the amount evaded is the tax liability on the legitimate dividends of US$10 million transferred through R7’s bank account.

95.The appellants argue that the Judge wrongly applied R v Fulton [64] to justify the confiscation of the full amount as a benefit. They take issue with the Judge’s rejection of their submission that the value of the benefit should be measured by the amount of tax evaded. The Judge said:

“69. … It is true that as far as Lee is concerned, the amount of tax he evaded was HK$27 million. As for R1, he did not himself evade any tax. Applying the reasoning of Fulton to the present case, the benefit received by R1 should not be measured by reference to the amount of tax he helped Lee to evaded. If R1 had executed transactions intended to disguise the tax evasion and hide the proceeds of it, which took the form of evaded tax, R1 committed criminal conduct from which he had benefited.”

96.The appellants contend that Fulton should not be followed because (1) it applies the reasoning of Allpress on the meaning of a benefit, which is contrary to the reasoning of the obiter remarks in George Li; and (2) it can be distinguished from the present case because in Fulton the funds passing through the bank accounts were not legitimate trades, whereas in the present case the funds passing through R7’s bank account were legitimate dividend payments to Lee.

97.The respondent contends that a similar argument advanced by the appellants was rejected by the English Court of Appeal in Fulton. In that case, the defendant, a foreign exchange dealer, was involved in laundering the proceeds of fraud that resulted in a substantial loss to the revenue authorities. He was convicted of conspiracy to disguise, convert or transfer criminal property.[65] He was aware that the trades he carried out on behalf of a client, one of the principal figures in the conspiracy, were not legitimate trades but the laundering of illegal funds. It was held that the benefit obtained by the defendant in cheating the revenue would depend upon the particular facts and circumstances of the case, and there was no principled basis for measuring his benefit by reference only to the amount of tax cheated when it was not he who had evaded it. The respondent relies on the following remarks in Fulton:[66]

“The nature of money laundering offences is such that those guilty of committing them, or conspiring to do so, may be found in confiscation proceedings to have derived greater benefits than those involved directly in cheating. We do not see this as anomalous; it is a consequence of the legislation, which we must apply, and flows from the nature of money laundering offences …”

98.The respondent submits that as the background of the case was the tax evaded by Lee in South Korea, this was not R1’s benefit. R1 faces an allegation of money laundering, and the benefit he obtained was the total amount laundered through R7’s bank account in Hong Kong.

Discussion

99.There is a fundamental misconception in the respondent’s submissions. Applying George Li, “any person’s proceeds of an indictable offence” under section 25(1) is in respect of the predicate offence, which in the present case is tax evasion. The tainted payment or other reward is the portion of the US$10 million that represents the tax liability to the relevant authorities in South Korea. However, as already noted, the tax liability central to this case was not the subject of the specified offence of money laundering, and in any event, the tax evaded had been paid to the relevant authorities in South Korea.

100.The restraint order was wrong because it was granted for the offence of tax evasion, which was not specified as the offence and where no benefit could be shown to have been derived by R1 from that offence. The restraint order was in wide terms, issued in respect of HK$97,861,550.11 held in twenty-four bank accounts variously in the names of the appellants.[67] Notwithstanding the financial enquiries of R1 concerned his involvement in widespread criminal conduct in assisting Lee to evade tax and misappropriate funds of the CJ Group, the basis of the restraint order application was limited to the tax liability in respect of the dividend payments of US$10 million to R7.

101.The respondent referred to Fulton to contend that the benefit derived from a money laundering offence where the predicate offence was cheating the revenue consisted of the funds that were laundered. This is a misunderstanding of the Court of Appeal’s comments in Fulton, which need to be read in their proper context. In that case, the appellant was a foreign exchange dealer who was involved in laundering the proceeds of a significant fraud involving an estimated loss to the revenue authorities in excess of £17 million. He was aware the trades which he carried out were not legitimate trades but the laundering of illegal funds. In other words, the sum of the trades that he carried out represented entirely the proceeds of crime, namely the amount of tax evaded, and he knowingly played a significant role in laundering these funds.

102.The Court found that the appellant had been acting as a money launderer, and his employment had merely been the context in which he had been able to carry out large scale money laundering, and that he played a central role in the scheme, taking a share in the proceeds.

103.The Court accepted that where a person cheats the public revenue, the benefit for confiscation purposes is the amount of tax evaded by that person: R v Ahmad. The appellant had not evaded any tax himself, and he was not liable for the amount of tax evaded as a result of the fraud. The appellant’s part in the conspiracy was to execute transactions intended to disguise the fraud and hide the proceeds of it, which took the form of evaded tax. By taking part in that conspiracy, he committed criminal conduct from which he benefited. The amount of the benefit he received, as determined by the application of the ordinary language of sections 76(4) and 76(7) of the Proceeds of Crime Act 2002, was the value of the property he obtained as a result of or in connection with his criminal conduct. The Court explained that there was no principled basis for measuring his benefit from the criminal conduct by reference only to the amount of tax cheated when it was not he who had evaded it. [68]

104.We observe that the confiscation order was in the sum of £104,228, which was clearly based on a determination of the appellant’s actual benefit in laundering the funds involved, and was not, as implicitly suggested by the respondent, the entire sum of the evaded tax in excess £17 million. The Court in Fulton was not attributing all the laundered money as the appellant’s benefit, emphasising that the benefit was the value of the property he obtained as a result or in connection with his criminal conduct.[69] Such a determination will depend upon the particular facts and circumstances of the case and the actual benefit derived by the person taking everything into account.

105.When addressing the issue of whether the US$10 million was “clean money”, the Judge relied on the respondent’s submission that, applying Fulton, R1 by executing transactions intended to disguise the fraud and hide the tax evasion proceeds of it, committed criminal conduct from which he had benefited and a confiscation order could be made by reference to the money transacted by R1, that is the sum of US$10 million.[70] He specifically referred to the following remarks in Fulton when dealing with the issue of proportionality and double recovery:[71]

“77. The nature of money laundering offences is such that those guilty of committing them, or conspiring to do so, may be found in confiscation proceedings to have derived greater benefits from those involved directly in cheating. We do not see it as anomalous; it is a consequence of the legislation, which we must apply, and flows from the nature of money laundering offences. …”

106.The quoted remarks were saying no more than when considering the issue of confiscation flowing from a money laundering offence, a person may have derived a benefit greater than the actual cheating involved. Assessing the benefit derived by a defendant from an offence would depend upon the form and nature of the tainted property, the facts and circumstances of the case, and the defendant’s receipt of any payment or other reward or the obtaining of any pecuniary advantage in connection with the commission of the offence, or any property derived or realised from the payments or other rewards (section 2(6)). The Judge accepted that Lee obtained the benefit of the tax evasion scheme in the amount of the tax evaded, which he had repaid. However, he appears to have applied the decision of Fulton on the basis that because the charge against R1 was money laundering, he derived a benefit of the total amount laundered through R7’s bank account. He reinforced his finding that R1 had benefited to the extent of US$10 million deposited into R7’s bank account on the basis that R1 had legal and sole operational control of the bank account. With respect, Fulton was wrongly applied in determining the benefit derived by R1 in respect of the dividend payments of US$10 million.

107.It is clear from the South Korean court judgments that the amount of tax evaded has been paid, and there is no outstanding payment or other reward paid or received in connection with the commission of the relevant offence, namely tax evasion in respect of the dividend payments of US$10 million.[72]

Conclusion

108.It follows from what we have said that we order that the Decision be set aside and the restraint order is discharged.

109.We have heard submissions on costs. As there is no dispute that costs of this appeal should follow the event, we order the respondent to pay the appellants’ costs of the appeal.

Mr Andrew Li, SPP and Mr Matthew Hui, PP, of the Department of Justice, for the Respondent (Applicant)

Mr Wayne Walsh SC and Mr Fergus Tam, instructed by Haldanes, for the Appellants (Respondents 1 to 10).