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Hong Kong

Hong Kong regulatory authorities have recently focussed on white collar and financial crime, corporate governance and senior management accountability, book building within the equity and debt capital markets, and financial product suitability. On the cross-border enforcement activity front, the High Court handed down an important judgment which supports the ability of the Securities and Futures Commission (SFC) to share evidence collected, using its investigative powers, with foreign regulators, but recognises that parties may invoke their privilege against self-incrimination in response. This could change the way future SFC enquiries may be conducted. Further, to combat “rolling bad apples” in the regulated sector the SFC has introduced a new obligation to disclose internal investigations of leaving employees. Regulated entities should ensure internal investigations are balanced to manage exposure to claims by former employees.

Investigation trends/developments

Corporate misconduct: 2019 saw high profile joint actions by the SFC, the Independent Commission Against Corruption (ICAC) and the Police including investigations, dawn raids, arrests, and charges laid against the “Enigma Network” or what the SFC refers to as the “nefarious networks” - a group of people who own or control listed companies, licensed dealers, money lenders, financial advisory services and placing agents who have allegedly enriched themselves at the expense of unsuspecting investors. The SFC and the ICAC also signed a memorandum of understanding to strengthen and formalise cooperation in combating financial crime.

Corporate governance: The number of investigations conducted by the SFC relating to corporate governance failures increased 30% from 2014 to 2019.

Book building process: The SFC conducted a thematic review of book building processes in equity and debt capital markets. It concluded that conflicts of interest may arise at various stages of the book building process, including when underwriting syndicates produce connected research, or when they submit fictitious and inflated orders or provide inducement to investors.

Suitability: The SFC has said time and again that the suitability requirement is the cornerstone of investor protection. In December 2019 the SFC launched a joint annual product survey with the Hong Kong Monetary Authority (the HKMA) to better understand market trends and to identify risks associated with the sale of non-exchange traded investment products. Any shortcomings in compliance with the suitability requirement will be the focus of investigations and enforcement actions.

Senior managers: The SFC continues to place a strong emphasis on senior management accountability under the Manager-In-Charge (MIC) regime. By its own admission, the MIC regime is the means to allow the SFC to “quickly identify the individuals to whom we could communicate our supervisory concerns and who could be held accountable for control failures or conduct issues”.

For more information, see Financial Regulatory Focus: Expected Developments in the Year of the Rat.

Internal investigations - key developments

In order to deal with the problem of "rolling bad apples", the SFC has introduced a new measure and issued a FAQ relating to the disclosure of investigations commenced by licensed corporations in the notifications of cessation of accreditation.

Licensed corporations (LCs) and registered institutions (RIs) are required to notify the SFC when a licensed individual ceases to be accredited to the licensed corporation, and to provide information about whether such individual was under any internal investigation within six months prior to his/her cessation of accreditation. If the internal investigation commences subsequent to the notification of cessation of accreditation, the LCs/RIs should also notify the SFC as soon as practicable. This is to address the problem of employees resigning during an internal investigation, expecting that the LCs/RIs would only notify the SFC that the individual simply resigned and not disclosing his misconduct to the SFC.

LCs/RIs should ensure not only a system to comply with the notification requirement, but also that internal investigations and notifications are balanced to manage exposure to claims by former employees.

The HKMA has recently started its own consultation on a similar initiative for the banking sector

Sectors targeted by law reforms or enforcement action

The SFC has publicly expressed its intent to use its powers under the Securities and Futures (Stock Market Listing) Rules (SMLR) to direct the suspension of listed companies’ shares where appropriate. The SFC has repeatedly stated over recent years that it will intervene in suspected cases of serious misconduct involving transactions that: (i) are oppressive or unfairly prejudicial to shareholders or potential investors in a listed company; (ii) involve fraud or other serious misconduct towards a listed company or its shareholders or potential investors; or (iii) result in the shareholders or potential investors in a listed company not being given all information with respect to its business or affairs.  As illustrated from the table below, the number of cases in which the SFC exercised its direct intervention powers increased significantly from 2013 to 2019.

Hong Kong Bar Chart

Cross-border co-ordinated enforcement activity

In AA v The Securities and Futures Commission [2019] HKCFI 246, the High Court rejected an application for judicial review brought against the SFC challenging the SFC’s ability to share information obtained during an investigation with foreign regulators. The decision supports the SFC’s ability to share information with foreign regulators under the Securities and Futures Ordinance (Cap 571, SFO) and the International Organization of Securities Commissions' Multilateral Memorandum of Understanding, but recognises that parties may invoke their privilege against self-incrimination in response. 

The Ministry of Finance of the People’s Republic of China (MOF), the China Securities Regulatory Commission (CSRC) and the SFC have entered into a memorandum of understanding (MoU) concerning the obtaining of audit working papers in the Mainland arising from the audits of Hong Kong-listed Mainland companies. The MoU will facilitate the SFC’s access to audit working papers created by Hong Kong accounting firms in their audits and kept in Mainland China when conducting investigations into Mainland-based issuers or listed companies, and their related entities or persons. This addresses to an extent difficulties perceived by audit firms when required by regulators in one jurisdiction to produce documents considered confidential in the other jurisdiction.

The SFC banned a former responsible officer of a financial institution from re-entering the industry for life, in relation to his conduct connected to 1Malaysia Development Berhad. The individual was found guilty in the US for conspiring to commit money laundering and violation of the Foreign Corrupt Practices Act.


Financial crime issue predictions for 2020

SFC's power to seize digital devices and demand passwords

The recent High Court decision of Cheung Ka Ho Cyril v Securities and Futures Commission and another [2020] HKCFI 270 confirmed the power of the SFC to (i) seize digital devices such as smart phones and tablets in the course of executing a search warrant, and (ii) demand passwords to the seized digital devices and email accounts. The power to compel passwords is notable, given the vast amount of confidential data held in digital devices. In-house counsel should note that any concerns regarding invasion of privacy may be best handled by liaising with the SFC rather than relying on the court to intervene.

For more information, see Hong Kong Court of First Instance confirms SFC's powers to seize digital devices and demand passwords.

Privilege against self-incrimination in regulatory inquiries

In the High Court judgment of AA v The Securities and Futures Commission [2019] HKCFI 246, the Court recognises that a party may invoke privilege against self-incrimination in response to the SFC's notices for information issued before formal investigations were commenced.  A party’s right against self-incrimination in formal investigations is clearly provided for in law.  This decision makes it clear that a similar right exists in the absence of a formal investigation too.  In-house counsel should note that this could change the way future SFC enquiries may be conducted, especially in light of the court’s suggestion in this case that the SFC should, in the future, warn and caution a recipient of a notice (under s181 of the SFO) about the availability of privilege against self-incrimination.

On anti-trust, the Hong Kong Competition Tribunal handed down a decision in Competition Commission v Nutanix Hong Kong Limited [2017] 5 HKLRD 712. In this case, the employees of the respondent companies were required by a notice under the Competition Ordinance to answer questions by the Competition Commission. The employees were held to be the beneficiaries of "direct use prohibition" (i.e. the statement made by an individual cannot be used by the regulator against him) under the Competition Ordinance. However, the individual employees could not refuse to answer questions by the Competition Commission on the basis that such answers may incriminate the employer. The Tribunal rejected the respondent companies' argument to strike out references to the employees' statements on the Competition Commission's originating notice of application, and to debar the Competition Commission from relying upon such statements. This decision suggests corporations under investigation by the Competition Commission should consider engaging separate legal representatives for its employees interviewed by the Competition Commission.

Data privacy – a more aggressive regulatory regime?

The Privacy Commissioner for Personal Data (PCPD) has identified a number of areas of reform to enhance and strengthen the Hong Kong personal data privacy regime. These include: 

  • imposing a mandatory obligation on data users to notify affected data subjects or the PCPD of data breaches if the risk of harm to individuals is substantial; and
  • providing regulatory authorities with appropriate enforcements tools such as the power to impose administrative fines for breaches of data protection law provisions.

We expect to soon see a draft bill. If enacted, these changes would create a more aggressive regulatory enforcement regime for data protection. For more information, see Hong Kong’s Privacy Commissioner for personal data – the end of the paper dragon.

This article is part of the Cross-border White Collar Crime and Investigations Review.  Read our overviews and insights in other jurisdictions here.

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