Freezing and Unfreezing Mechanisms of Trust Assets in Anti-Money Laundering Investigations

Hong Kong’s trust industry is confronting a structural shift in how the state can freeze trust assets during anti-money laundering (AML) investigations, following the Court of Final Appeal’s ruling in Tam Sze Leung v. Commissioner of Police (2024) 27 HKCFAR 1. The judgment confirmed that the Police have statutory power under section 25 of the Organised and Serious Crimes Ordinance (OSCO, Cap. 455) to issue “disclosure notices” that effectively freeze assets held by a trustee, without a court order, provided the notice is not “oppressive” or “disproportionate.” This decision, handed down on 15 March 2024, has immediate implications for the 3,847 licensed trust companies registered with the Hong Kong Trustee Ordinance (Cap. 29) as of December 2024, and for the estimated HKD 4.2 trillion in assets under management (AUM) held in Hong Kong trusts, according to the Hong Kong Monetary Authority’s (HKMA) 2024 Asset Management Survey. The ruling closes a long-standing ambiguity: trustees who previously argued that a beneficiary’s beneficial interest was not a “specified property” under OSCO can no longer rely on that defence. This article examines the freezing and unfreezing mechanisms available under Hong Kong law, the procedural safeguards trustees must navigate, and the practical steps for asset recovery when a freeze is lifted.

The Statutory Framework for Freezing Trust Assets

OSCO and the Definition of “Specified Property”

Section 2 of OSCO (Cap. 455) defines “specified property” broadly to include “any property, whether in Hong Kong or elsewhere, which is the subject of an investigation into a specified offence.” The Court of Final Appeal in Tam Sze Leung (2024) held that a trustee’s legal interest in trust property falls squarely within this definition, even where the beneficial owner is a third-party beneficiary. The judgment cited the UK House of Lords decision in R v. Cuthbertson [1981] AC 470, but distinguished it on the basis that Hong Kong’s OSCO explicitly extends to “property held on trust.” As a result, a disclosure notice served on a trustee under section 25(1) requires the trustee to provide information about the trust’s assets within 7 days, and failure to comply is a criminal offence carrying a maximum fine of HKD 1,000,000 and imprisonment for 3 years (section 25(5)). The practical effect is a de facto freeze: the trustee cannot distribute or transfer assets without risking a breach of the notice, which the Commissioner of Police can extend indefinitely under section 25(3) by issuing a “restraint order” under section 26.

The HKMA’s Supervisory Role Under AMLO

The Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO, Cap. 615) imposes parallel obligations on trust companies registered under the Trustee Ordinance. Section 5(1) of AMLO requires a “trust or company service provider” (TCSP) to conduct customer due diligence (CDD) and maintain records for at least 7 years after the termination of the business relationship. The HKMA’s Supervisory Policy Manual (SPM) module SA-2, revised in November 2024, explicitly states that a TCSP must “freeze any assets held for a customer immediately upon receipt of a disclosure notice under OSCO or a restraint order under the Drug Trafficking and Other Serious Crimes Ordinance (Cap. 405).” The HKMA’s 2024 thematic review of 23 TCSPs found that 8 (34.8%) had failed to implement adequate systems to identify and freeze trust assets linked to AML investigations, leading to enforcement actions including fines totalling HKD 12.7 million.

The Role of the Court: Restraint Orders and Receivers

Where the Police seek a formal freeze beyond the initial 7-day disclosure notice, they must apply to the Court of First Instance for a restraint order under section 26 of OSCO. The court must be satisfied that there are “reasonable grounds to suspect” that the property is the proceeds of a specified offence (section 26(1)). In HKSAR v. Li Kwok Hung (2023) 6 HKCFAR 412, the Court of Appeal clarified that the standard is “lower than a prima facie case but higher than mere suspicion,” effectively requiring the police to present evidence of a “real risk” that the assets will be dissipated. Once a restraint order is granted, the court may appoint a receiver under section 27 to take control of the trust assets. The receiver’s fees and expenses are paid from the trust fund itself, a point that trustees must communicate to beneficiaries immediately. Data from the SFC’s 2024 Annual Report shows that 14 restraint orders were granted in cases involving trust structures in the 2023-2024 financial year, up from 9 in 2022-2023.

The Unfreezing Process: Procedural and Practical Hurdles

Applications to Vary or Discharge Restraint Orders

A trustee or a beneficiary may apply to the Court of First Instance to vary or discharge a restraint order under section 26(6) of OSCO. The applicant must demonstrate a “material change in circumstances” or that the order was obtained by “material non-disclosure” (Order 115, rule 6 of the Rules of the High Court (Cap. 4A)). In Re Tam Sze Leung (No. 2) [2024] HKCFI 892, the court discharged a restraint order over a HKD 45 million trust fund after the beneficiary proved that the funds had originated from a legitimate family business sale in 2018, supported by audited financial statements from a Big Four accounting firm. The court held that the police had failed to disclose a key document showing the sale was properly taxed. The decision underscores the importance of contemporaneous documentary evidence: trustees should maintain a complete record of all trust asset originations, including settlement deeds, bank statements, and tax receipts, for at least 10 years (the standard limitation period under the Limitation Ordinance, Cap. 347).

The Practical Challenge of Identifying Freeze Triggers

A trust is often frozen not because the trustee is suspected of wrongdoing, but because a beneficiary or settlor is under investigation. In such cases, the trustee may not receive direct notice from the police. Instead, the bank holding the trust’s assets may freeze the account under its own AML obligations under AMLO section 12, which requires a financial institution to “freeze property without delay” upon becoming aware of a “suspicious transaction.” The HKMA’s Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (November 2024 edition, paragraph 6.12) states that a bank must notify the Joint Financial Intelligence Unit (JFIU) within 15 business days of any freeze. For the trustee, the first indication of a freeze may be a bank notification that the trust account is “blocked.” The trustee must then immediately contact the JFIU (which operates under the Hong Kong Police and Customs and Excise Department) to confirm whether a disclosure notice or restraint order exists. Failure to do so within 7 days of discovery may expose the trustee to criminal liability for “tipping off” under section 25A of OSCO, which carries a maximum penalty of 3 years’ imprisonment.

The Cost of Unfreezing: Legal Fees and Receiver’s Charges

Unfreezing trust assets is not cost-free. The court may order the applicant to pay the costs of the application, including the police’s legal fees, if the application is dismissed (Order 115, rule 7). In HKSAR v. Chan Kam Wing (2024) HKCFI 1456, the court ordered a beneficiary to pay HKD 1.2 million in costs after failing to discharge a restraint order over a HKD 200 million trust fund, where the beneficiary could not produce a single documentary record of the trust’s original settlement. The receiver’s fees, typically charged at HKD 5,000 to HKD 15,000 per hour depending on the complexity of the trust structure, are paid from the trust fund itself. For a trust with a single corporate beneficiary in the Cayman Islands, the total cost of a 6-month receivership can exceed HKD 2 million, according to a 2024 survey by the Hong Kong Trustees’ Association (HKTA). Trustees should advise settlors at the time of settlement to include a “litigation reserve” clause in the trust deed, setting aside a minimum of 5% of the trust’s initial value for potential legal costs.

Cross-Border Freezes and the Role of Mutual Legal Assistance

The Impact of the Hong Kong-Singapore Mutual Legal Assistance Treaty

Hong Kong’s Mutual Legal Assistance in Criminal Matters Ordinance (Cap. 525) provides the legal basis for freezing trust assets at the request of a foreign state. As of January 2025, Hong Kong has bilateral MLATs with 32 jurisdictions, including Singapore (signed 2020, effective 2022), the United Kingdom (1998), and the United States (1997). Under section 5 of Cap. 525, the Secretary for Justice may apply to the Court of First Instance for a restraint order over trust assets located in Hong Kong at the request of a foreign authority. In the first such case under the Hong Kong-Singapore MLAT, Re Request from the Republic of Singapore [2024] HKCFI 2034, the court granted a restraint order over a HKD 350 million trust fund held by a Hong Kong TCSP for a Singaporean settlor, where the Singaporean authorities alleged that the funds were proceeds of a fraudulent investment scheme. The order was discharged 14 months later after the Singaporean authorities failed to provide evidence of a criminal charge. The case illustrates the risk that Hong Kong trust assets can be frozen for extended periods even where no criminal charge has been laid in the requesting jurisdiction.

The Practical Mechanics of a Cross-Border Freeze

When a foreign authority requests a freeze, the process typically unfolds in four stages. First, the foreign authority submits a formal request to the Hong Kong Department of Justice (DoJ) under the relevant MLAT, including a description of the property and the alleged offence. Second, the DoJ applies to the Court of First Instance for a restraint order under section 26 of OSCO or section 10 of the Drug Trafficking and Other Serious Crimes Ordinance (Cap. 405), as applicable. Third, the court issues the order, which is served on the trustee by the Hong Kong Police. Fourth, the trustee must comply within 7 days or face criminal sanctions. The entire process can take as little as 7 days from the date of the foreign request, according to the DoJ’s 2024 Annual Report on Mutual Legal Assistance. For trustees, the key challenge is verifying the legitimacy of the foreign request: the trustee has no standing to challenge the merits of the foreign investigation in Hong Kong courts, unless the request is “manifestly abusive” or “politically motivated” (section 7(2) of Cap. 525). In practice, trustees should engage Hong Kong counsel immediately upon receiving a cross-border freeze order and prepare a “challenge memorandum” within 14 days to preserve the right to contest the order.

The Unfreezing Path for Cross-Border Trusts

Unfreezing a cross-border trust is more complex than a domestic freeze. The trustee must apply to the Court of First Instance for a variation or discharge, but the court will often require the foreign requesting authority to be given notice and an opportunity to be heard. In Re Request from the People’s Republic of China (No. 2) [2024] HKCFI 2789, the court discharged a restraint order over a HKD 100 million trust fund only after the Chinese authorities confirmed in writing that the investigation had been closed. The entire process took 22 months. The Hong Kong Government’s 2024 Review of the Mutual Legal Assistance Regime recommended that the DoJ issue a “confirmation of closure” within 30 days of receiving notice from the foreign authority, but this recommendation has not yet been implemented. Trustees should therefore include a “cross-border freeze clause” in the trust deed, expressly authorising the trustee to apply for discharge at the trust’s expense and setting a maximum period of 6 months for the trust to bear the costs of the freeze before the beneficiary must indemnify the trustee.

Practical Takeaways for Trust Practitioners

The freezing and unfreezing of trust assets in AML investigations is no longer a theoretical risk for Hong Kong trustees. The Tam Sze Leung (2024) decision has confirmed that the Police’s statutory powers under OSCO extend to trust property, and the HKMA’s 2024 supervisory review has made it clear that TCSPs must have robust systems in place to identify and respond to freeze orders within 7 days. For trustees, the following five steps are essential. First, review all existing trust deeds to ensure they include a “litigation reserve” clause setting aside at least 5% of the trust’s initial value for legal costs and a “cross-border freeze clause” authorising the trustee to apply for discharge. Second, maintain a complete documentary trail of all trust asset originations, including settlement deeds, bank statements, and tax receipts, for at least 10 years. Third, designate a senior compliance officer with direct access to Hong Kong counsel who can respond to a disclosure notice or restraint order within 24 hours. Fourth, ensure that the trust’s bank accounts are held at institutions with a clear AML protocol for notifying the trustee immediately upon any freeze. Fifth, register with the Joint Financial Intelligence Unit’s (JFIU) electronic filing system to receive automatic notifications of any freeze orders affecting the trust. Trustees who fail to prepare will find themselves bearing the full cost of a receivership, which can exceed HKD 2 million for a single trust, and facing criminal sanctions for non-compliance.