The key authorities with investigative power in Hong Kong are the Securities and Futures Commission (SFC), the Independent Commission Against Corruption (ICAC), the Competition Commission (HKCC), the Hong Kong Police Force (HKPF), The Stock Exchange of Hong Kong Limited (SEHK), the Hong Kong Monetary Authority (HKMA), the Inland Revenue Department, the Office of the Privacy Commissioner, the Customs and Excise Department and the Companies Registry. The Department of Justice (DOJ) is empowered to prosecute most criminal offences. The SFC may prosecute certain summary offences, including summary market misconduct offences.2 The DOJ is responsible for prosecuting indictable offences.
In addition to the HKPF, agencies including the SFC, the HKMA, the ICAC and the HKCC may exercise a special power of investigation, namely to carry out dawn raids, permitting entry to a company's offices or an individual's home without notice to investigate relevant potential misconduct. Authorities such as the SFC3 and the HKCC4 are also empowered to compel attendance at interviews. Moreover, unlike interviews before the HKPF or the ICAC where the person under investigation is protected by a constitutional right against self-incrimination,5 the SFC has the power to compel the interviewees to answer questions, where failure to answer or giving a false or misleading answer is a criminal offence.6 In addition, the SFC can compel the production of documents and records7 and obtain a search warrant to search for and seize documents.8
Domestic priorities often affect enforcement activity and the exercise of prosecutorial functions. For instance, anti-money laundering is a current enforcement priority for Hong Kong. In addition, various agencies publish their enforcement priorities each year and allocate their resources accordingly. For example, the SFC's published enforcement priorities for 2018 included corporate fraud (as its top enforcement priority), insider dealing, market manipulation, intermediary and sponsor misconduct and money laundering. The SFC completed a reorganisation of the Enforcement Division and realigned its priorities with those of the SFC as a whole. Under its new 'front-loaded' approach, SFC divisions work closely to tackle increasingly complex regulatory problems as 'one SFC' and focus their resources on the most serious enforcement cases that pose the greatest threats to the markets.9
Some regulatory agencies have published policies to encourage cooperation with their investigations. In April 2019, the HKCC issued the Cooperation and Settlement Policy for Undertakings Engaged in Cartel Conduct (the Cooperation Policy) for undertakings that do not benefit from leniency under the HKCC's existing Leniency Policy for Undertakings Engaged in Cartel Conduct (the Leniency Policy). In August 2018, the HKMA issued its first 'Guidance Note on Cooperation with the HKMA in Investigations and Enforcement Proceedings' (HKMA Guidance on Cooperation), in which it stated that it would give recognition for cooperation and may offer reduction of proposed sanctions. Earlier, in December 2017, the SFC issued its 'Guidance Note on Cooperation' (SFC Guidance on Cooperation), in which it stated that it would recognise and give credit for cooperation during an enforcement investigation when determining the applicable sanction. In addition, the Competition Ordinance (Cap. 619) (Competition Ordinance) provides that the HKCC may, in exchange for a person's cooperation in an investigation or in proceedings, consider entry into a leniency agreement with the party under investigation, with the consequence that it will not bring or continue proceedings for a pecuniary penalty in respect of alleged cartel conduct.
Generally, a person (whether a company or an individual) is not obliged to self-report when it discovers internal wrongdoing; however, there are two key exceptions. First, a person is under a mandatory reporting obligation to the Joint Financial Intelligence Unit (JFIU)10 as soon as is reasonable or practicable if it knows or suspects that any property represents proceeds of an indictable offence or drug trafficking, or is terrorist property.11 Failure to make a notification to the JFIU when required to do so constitutes an offence punishable by a fine of HK$50,000 and up to three months' imprisonment. Second, under the Code of Conduct for Persons Licensed by or Registered with the SFC, registered or licensed persons are required to immediately report to the SFC when there is any real or suspected breach or infringement of or non-compliance with any law, rules, regulations and codes administered or issued by the SFC. In addition, 'failing to promptly and fully report a material breach' may be regarded by the SFC as uncooperative conduct, which will be taken into account by the SFC when considering the appropriate outcome.12
In the SFC Guidance on Cooperation, the SFC recognises voluntary and prompt self-reporting of any regulatory breaches or failings to it as a form of cooperation,13 which will provide the self-reporting person or organisation with the benefit of a reduction in sanction in disciplinary matters. However, in the case of an SFC-licensed corporation or registered institution, mere compliance with self-reporting obligations under the SFC rules14 will not amount to cooperation by itself.15 The SFC may enter into an agreement (Section 201 Agreement) to resolve disciplinary proceedings at an early stage pursuant to Section 201 of the Securities and Futures Ordinance (Cap. 571) (SFO) if it considers it appropriate to do so in the interests of the investing public or in the public interest. Cooperation from the regulated person and the extent and nature of such cooperation are factors considered by the SFC in exercising this discretion. As a general principle, the SFC is more willing to enter into a Section 201 Agreement if the regulated person demonstrates cooperation in the recognised forms,16 or waives legal professional privilege, or commissions third-party reviews and gives directors' undertakings to address the SFC's regulatory concerns in accordance with the SFC Guidance on Cooperation.17
Similarly, early and voluntary reporting of any suspected breach or misconduct is listed as an example of cooperation by the HKMA in the HKMA Guidance on Cooperation. However, the guidance note also provided that merely fulfilling statutory or regulatory obligations (e.g., self-reporting obligations and compliance with statutory investigation requirements) will not constitute cooperation.
The HKCC has also published the Leniency Policy,18 which is meant to grant leniency to encourage self-reporting by companies that may have engaged in illegal activity, such as bid rigging or price fixing. The Leniency Policy provides that leniency is available only for the first member who reports the cartel conduct to the HKCC and meets all the requirements for receiving leniency. In exchange for a cartel member's cooperation in the investigation of the cartel conduct, the HKCC will enter into an agreement with the undertaking not to take proceedings against it for a pecuniary penalty. The HKCC will also agree not to bring or continue proceedings in the Competition Tribunal or commence any other proceedings other than proceedings for an order under Section 94 of the Competition Ordinance declaring that the cartel member has contravened the First Conduct Rule.19 However, a leniency agreement offers no immunity from follow-on actions under Section 110 of the Competition Ordinance against cartel members by persons who can prove they have suffered loss or damage as a result of the cartel.20 Undertakings that do not benefit from leniency under the Leniency Policy can opt to cooperate with the HKCC's investigation under the framework of the Cooperation Policy in exchange for discount to the penalty issued.
ii Internal investigations
The authorities in Hong Kong are generally in favour of companies carrying out their own internal investigations provided they receive the results. The SFC Guidance on Cooperation specifically states that the forms of cooperation include making full and frank disclosure of information regarding breaches or failings and, in particular, providing information and evidence of which the SFC is otherwise unaware, including sharing the results of any internal investigation. However, if there exists a concurrent investigation by the authorities, a company should be cautious and ensure it does not disclose the existence of the authorities' investigations to a third party, including the employees, when conducting an internal investigation.
As in other jurisdictions, the typical means of carrying out an internal investigation include reviewing documents and interviewing relevant individuals. If interviews are conducted in the context of an internal investigation, it is not necessarily common for employees to retain their own lawyers, nor is there such a legal requirement in Hong Kong. Those present at internal interviews usually include in-house legal counsel, compliance or other specialised investigation team members. Depending on the nature and gravity of the potential misconduct, external counsel may also be engaged in the internal investigations.
Hong Kong law recognises legal professional privilege (including legal advice privilege and litigation privilege). Legal advice privilege applies to confidential communications between a lawyer and his or her client that comes into existence for the purpose of giving or obtaining legal advice. Litigation privilege applies to confidential communications between a party or his or her lawyer and third parties that come into existence for the sole or dominant purpose of preparing for actual or contemplated litigation. Thus, documents (e.g., minutes of meetings, interview notes) gathered or generated during an internal investigation for the purpose of giving or obtaining legal advice from a lawyer, or prepared for the dominant purpose of obtaining information or evidence for use in actual or reasonably contemplated litigation, can be privileged. However, one should bear in mind that privilege can be lost by giving or copying privileged documents to a third party, or referring to such documents for non-privileged reasons.
As for waiver of privilege, the SFC Guidance on Cooperation clarifies that a bona fide refusal to waive legal professional privilege attached to a document that would otherwise have to be provided to the SFC will not be regarded as uncooperative conduct, thus acknowledging legal professional privilege as a fundamental right protected by Article 35 of the Basic Law of Hong Kong and Section 380(4) of the SFO. Nonetheless, voluntary waiver of legal professional privilege over any document (including on a limited basis, i.e., the waiver of privilege is restricted to the specific party receiving the disclosed information) may be recognised by the SFC as amounting to cooperation, thus invoking the relevant leniency policy.
The HKMA has taken a similar stance. The HKMA Guidance on Cooperation suggests that the HKMA fully respects a person's right to exercise legal professional privilege and the assertion of this right will not be regarded as uncooperative conduct. Nevertheless, voluntary waiver of legal professional privilege in respect of one or more documents, even on a limited basis, may assist the HKMA's investigation and will be taken into consideration when the HKMA assesses the degree of cooperation provided.
Although whistle-blower reports of potential illegal conduct are far from unknown in Hong Kong, the workplace culture may significantly affect the enthusiasm of some potential whistle-blowers actually to blow the whistle. Employees may hesitate to come forward because of concerns about the effect on their own career prospects. Another reason for there being fewer examples of whistle-blowing than there might otherwise be may be the lack of incentive programmes in most of the regulatory regimes in Hong Kong (although the HKCC has published a leniency policy to encourage whistle-blowing of cartel conduct).
As regards legal protection for whistle-blowers, although there are no stand-alone, comprehensive laws comparable to those in other common law jurisdictions, whistle-blowers can still obtain certain protections under statute or common law in Hong Kong.
First, there is the programme under the Witness Protection Ordinance (Cap. 564), which provides protection and assistance for witnesses whose personal safety or well-being may be at risk as a result of being a witness.21 If the Commissioner of the HKPF or the ICAC decides to include a witness in the protection programme or is assessing that person's qualification for the programme, the relevant approving authority shall take such action as it considers necessary and reasonable to protect the witness' safety and welfare.22
Second, whistle-blowers are protected from dismissal or discrimination under the Employment Ordinance (Cap. 57) if they are giving evidence in proceedings or inquiries relating to the enforcement of labour legislation, accidents or injuries to an employee or breach of the work safety regulations. An employer in violation of such protection by dismissing, threatening to dismiss or discriminating against a whistle-blower may be liable to pay a fine of HK$100,000 or compensate the whistle-blowing employee.
Third, whistle-blowers are protected from a claim of breach of confidentiality by various pieces of legislation and common law in respect of certain specified disclosures. Legislation offering this protection includes the Employment Ordinance (Cap. 57), Drug Trafficking (Recovery of Proceeds) Ordinance (Cap. 405), the United Nations (Anti-Terrorism Measures) Ordinance (Cap. 575) and the Organised and Serious Crimes Ordinance (Cap. 455). Common law also provides protection where it is in the public interest to make a disclosure relating to serious misconduct or important for safeguarding public welfare in matters of health and safety. In certain cases, whistle-blowing of possible corruption or bribery under the Prevention of Bribery Ordinance (Cap. 201) (Prevention of Bribery Ordinance) may constitute such a disclosure and is therefore protected under the common law regime.
A company receiving notification from a whistle-blower should be cautious in managing the information reported and the whistle-blower. Companies listed on the SEHK must follow the 'comply or explain' code provisions in the Corporate Governance Code in the Main Board Listing Rules to require its audit committee to review the arrangements its employees can use to raise concerns in confidence about possible improprieties in financial reporting, internal control or other matters. The audit committee should also ensure that proper arrangements are in place for fair and independent investigation of such matters and for appropriate follow-up action.23
i Corporate liability
When it comes to attributing criminal liability to a corporate entity for the conduct of its employees, whether corporate liability can be established depends on the type of conduct and the responsibility of the employee carrying out the alleged misconduct. If the potential liability arises from a statutory offence that imposes absolute liability on the employer (i.e., there is no need to prove fault on the part of the employer), then any such offences by an employee can result in the employer being held vicariously liable. Otherwise, only offences by senior employees (e.g., directors, senior managers, superior officers), who at the material time were the 'directing mind and will' of the company, can be said to be offences of the company. In such circumstances, a corporate entity may be held liable unless the offence is only punishable by imprisonment or can only be committed by natural persons in their personal capacity. However, as the burden of proof for criminal offences is high (beyond reasonable doubt), there are likely to be practical difficulties in establishing corporate criminal liability. In contrast, a plaintiff need only prove its case on a balance of probability to establish civil liability, a lower burden of proof. In addition, civil actions can offer more flexibility by potentially offering preventative and punitive remedies as well as damages.
As long as there is no conflict of interest arising between an employer and its employees, they can be represented by the same counsel. However, if the employee's anticipated defence may contradict that of the employer, for instance, or the evidence to be given by the employee is against the employer, there may arise a potential or real conflict. In such circumstances, the parties should be represented by separate legal advisers.
The enforcement actions that the SFC may take include disciplinary proceedings, civil proceedings before the Hong Kong High Court, criminal proceedings before the magistrates' courts in Hong Kong, and proceedings before the Market Misconduct Tribunal (MMT).
For criminal market misconduct offences under the SFO,24 a person may face upon conviction on indictment a fine of up to HK$10 million and imprisonment for 10 years, or on summary conviction a fine of up to HK$1 million and imprisonment for three years.25 The SFO also prescribes penalties for offences other than market misconduct.26 For example, a person who breaches Section 114 of the SFO by carrying on regulated activity without a licence is subject to a fine of up to HK$5 million and imprisonment for seven years.
The SFC may also seek civil remedies in either the MMT or the High Court for alleged market misconduct and other breaches of the SFO. These remedies include orders from the MMT, compensation by way of damages and injunctive relief granted by the Court of First Instance of the Hong Kong High Court. Orders available to the MMT include disqualification orders,27 cold shoulder orders,28 cease and desist orders,29 disgorgement orders,30 government costs orders,31 SFC costs orders,32 Financial Reporting Council costs orders33 and disciplinary referral orders.34 The injunctive relief the court may grant includes an order restraining or prohibiting a person from dealing in any specified property,35 an order appointing a person to administer the property of another person36 and other ancillary orders.
Under Part IX of the SFO, meanwhile, the SFC is empowered to discipline regulated persons for alleged misconduct or who may no longer be fit and proper to be licensed or registered. The range of sanctions that could be imposed include:
- revocation or partial revocation of the licence or registration;
- suspension or partial suspension of the licence or registration;
- revocation of approval to be a responsible officer;
- suspension of approval to be a responsible officer;
- a fine (up to HK$10 million or three times the profit gained or loss avoided, whichever is the higher); or
- private or public reprimand.
The range of potential sanctions will vary therefore depending upon the nature of the proceeding. Taking market misconduct as an example, the sanctions will vary depending on whether it is a civil or a criminal proceeding and, if criminal, whether it is on conviction on indictment (prosecuted by the DOJ) or on summary conviction (prosecuted by the SFC). As the civil and criminal regimes under the SFO are mutually exclusive, the SFC can choose only one regime under which to bring an action. Usually the SFC will refer all market misconduct cases to the DOJ for advice on the suitability of instituting prosecution. The SFC also must obtain consent from the Secretary for Justice before commencing an MMT proceeding.
iii Compliance programmes
It is important for companies to establish and maintain effectively functioning internal control mechanisms. Although having a compliance programme itself will not exempt a company from liability, it may be recognised as a mitigating factor in the application of sanctions. It may also reduce the risk of corporate liability arising from a breach by an employee, if it could be established that the employee's misconduct was a result of breach of the internal policies established by the employer.
For implementing and improving anti-corruption compliance programmes, the ICAC has published various guidelines for different types of entities, such as listed companies, the catering industry, schools, etc. In the Corruption Prevention Guide for Listed Companies,37 the ICAC recommends certain components to be covered by a company in its anti-corruption programme: an anti-corruption policy, guidance on ethical standards and anti-corruption for all company personnel, a mechanism for identification and assessment of corruption risk, anti-corruption control, and training and communication. However, these guidelines are more advice than 'best practice', as the Prevention of Bribery Ordinance does not regard compliance programmes as constituting a mitigating factor or allow them to be treated as a means to mitigate corporate criminal liability.
Notably, in the SFC Guidance on Cooperation, instituting necessary enhancements to internal controls and procedures is recognised as a potential rectification measure and form of cooperation. Thus, enhancing a compliance programme may, depending on the stage when cooperation is effected, allow the company to enjoy a reduction of sanction of between 10 and 30 per cent.
iv Prosecution of individuals
If an individual is to be prosecuted by government authorities, his or her employer should be careful in managing its relationships with stakeholders. The company may coordinate with the individual's independent counsel, but should also bear in mind the risk of a conflict of interest arising, as the individual's conduct may have compromised the company's position not only in relation to the substantive offence but also reputationally.
The SFC Guidance on Cooperation does not expressly require a company to dismiss or take disciplinary action against an employee under investigation in order to show cooperation. Conversely, an employee's compliance with a notice to attend an interview, for example, will not be regarded as cooperation that can lead to a leniency benefit.38 Indeed, were an employer to dismiss an employee because of his or her refusal to be interviewed by the company or the regulators, it may risk that dismissal being regarded as a wrongful dismissal and the company may be liable to pay damages. Thus, during the investigation stage, an employer may prefer, at least initially, to exercise its statutory entitlement to suspend an employee for up to 14 days pending the outcome of any criminal proceedings against the employee arising out of or connected with his or her employment.39 If the employee is found liable upon conclusion of the investigation, the company can then take disciplinary measures against that employee.
The company may pay the legal fees for employees under investigation. There is no adverse inference from such an arrangement, as long as the company is not enticing the employee to fabricate evidence.
v Sponsor misconduct
In March 2019, the SFC imposed record-breaking fines (for inadequate due diligence) against several international banks for their work as sponsors in a number of past Hong Kong initial public offerings. Some of the banks were reprimanded and the licence of one of the banks was suspended. As commented by Mr Ashley Alder, the SFC's chief executive officer:
the outcome of these enforcement actions for sponsor failures – particularly failings when conducting IPO due diligence – signify the crucial importance that the SFC places on the high standards of sponsors' conduct to protect the investing public and maintain the integrity and reputation of Hong Kong's financial markets. The sanctions send a strong and clear message to the market that [the SFC] will not hesitate to hold errant sponsors accountable for their misconduct.40
i Extraterritorial jurisdiction
For criminal offences, the courts will be hesitant to claim jurisdiction over conduct occurring outside Hong Kong. However, the SFO extends liability for certain market misconduct taking place outside Hong Kong that affects the Hong Kong markets. This includes false trading, price rigging, disclosure of false or misleading information inducing transactions and stock market manipulation.41
The Competition Ordinance has extraterritorial reach over agreements and conduct conducted outside Hong Kong but that have the object or effect of preventing, restricting or distorting competition in Hong Kong.42
ii International cooperation
With regulatory misconduct becoming increasingly complex and cross-border, regulatory agencies such as the SFC, the ICAC, the HKCC and the HKMA actively seek to enhance cooperation with their overseas counterparts.
This is particularly common with regard to the SFC's regime owing to the globalisation of securities and derivatives markets. In general, the SFC is empowered by Section 186 of the SFO to provide investigatory assistance to regulators outside Hong Kong if the SFC is satisfied that it is desirable or expedient to provide assistance in the interests of the investing public or in the public interest, or the assistance will enable or assist the overseas regulators to perform their functions and the assistance is not contrary to the interests of the investing public or to the public interest.
The SFC is one of the 124 signatories43 to the International Organization of Securities Commission Multilateral Memorandum of Understanding (IOSCO MMOU) concerning consultation, cooperation and exchange of information. It also has bilateral collaborative arrangements for investigatory assistance or exchange of information with various overseas jurisdictions.44 More notably, the SFC maintains a close partnership with the China Securities Regulatory Commission (CSRC) through the IOSCO MMOU, the Memorandum of Regulatory Cooperation, the enforcement memorandum of understanding (MOU) for the Mainland-Hong Kong Stock Connect, the MOU concerning futures, dated December 2017, and the MOU concerning cooperation and exchange of information, dated December 2018.
The international regulatory cooperation can also be illustrated by the framework for extradition and mutual legal assistance. Under the Fugitives Offenders Ordinance (Cap. 503), the DOJ is empowered to handle requests for the surrender of fugitive offenders. As regards providing mutual legal assistance, Hong Kong has mutual legal assistance agreements with 30 jurisdictions under the Mutual Legal Assistance in Criminal Matters Ordinance (Cap. 525)45 for mutual assistance in criminal matters, including assistance in relation to giving evidence, search and seizure, production of material, transfer of persons to give assistance, and confiscation of proceeds of crime.
iii Local law considerations
When several jurisdictions are implicated in an investigation, the first Hong Kong statutory obligations one may have to bear in mind are secrecy obligations, for example those imposed by the SFO46 or the Prevention of Bribery Ordinance.47 Advance approval is needed from the SFC for disclosing relevant non-public information to foreign regulators. In addition, although personal data disclosure with consent is generally allowed under Hong Kong data privacy law, an employer is reminded to review the scope of the general consent (if it exists) given by employees, which may need to be supplemented by consent specific to the relevant investigation.
v YEAR IN REVIEW
The SFC's enforcement actions during 2018 have represented some of its highest-profile activities to date. As stated by Thomas Atkinson, the SFC's executive director of enforcement, in October 2018: 'in terms of the [SFC's] role of gatekeepers of the stock list, [its] sponsor team has [as at October 2018] investigated 30 cases of suspected sponsor misconduct involving 28 sponsor firms and 39 listing applications'.48 This emphasises that the SFC's focus is currently on the work of sponsors in initial public offerings. The penalty imposed on the investment banks was more than HK$700 million, more than the total fines imposed by the SFC in any prior year. In the reporting year 2017 to 2018, the SFC disciplined 15 corporations, two responsible officers and 14 licensed representatives, resulting in total fines of HK$483 million. At the same time, only 280 investigations were started in the reporting year 2017 to 2018, down from 414 in 2016 to 2017.49 This echoes with chief executive officer of the SFC Ashley Alder's suggestion that the SFC's current tactics involve prioritising certain investigations so that the SFC could focus its finite resources on the most important cases.50 The SFC appears to be prioritising and focusing on the high-profile and serious matters, such that it is focusing on quality over quantity; while the number of investigations is getting lower, the aggregate level of fines imposed is getting higher.
Another trend is the SFC's ongoing attempts to strengthen its relationship with its mainland China counterpart, as reflected by the various MOUs it signed with regulators like the CSRC. The SFC also established a cross-divisional risk review group to identify and assess the opportunities and risks they face as well as to engage with stakeholders to understand the potential business and regulatory implications of new and emerging issues.
Another new development by the SFC is in relation to virtual assets, through the publication of the statement on a regulatory framework for virtual asset portfolios managers, fund distributors and trading platform operators in November 2018.
In terms of the HKCC's enforcement actions, the HKCC commenced its first enforcement action against individuals in 2018. It was the first time that the HKCC sought for pecuniary penalties and a director disqualification order to be imposed on individuals as a result of participation in the cartel conduct.51 HKCC appears to want to drive home the message that not only companies, but also individuals who engaged in anti-competitive conduct, may expect to face the consequences of their actions, according to Mr Brent Snyder, chief executive officer of the HKCC.52 The case involved alleged market sharing and price fixing in relation to the provision of renovation services at a subsidised housing estate developed by the Hong Kong Housing Authority. In 2018, the Competition Tribunal heard the first two cases brought by the HKCC in 2017 and the judgments are still pending.
As for the HKMA, its work in 2018 was mainly on the areas of banking stability, smart banking and cybersecurity, implementation of international standards, FATF/APG Mutual Evaluation and financial inclusion and consumer protection. For 2019, operational resilience and technology risk management, and money-laundering or terrorist-financing risk management are its top priorities.53
VI CONCLUSIONS AND OUTLOOK
According to a report issued by the SFC in February 201854 and its annual report for 2017 to 2018,55 the SFC's current enforcement priorities are in relation to corporate fraud, insider dealing and market manipulation, intermediary and sponsor misconduct and money laundering. Corporate fraud, which remains the SFC's top enforcement priority, will also draw the regulator's attention to misconduct, such as issuing false or misleading financial statements, sponsor's failures relating to initial public offering fraud, and failures to manage conflicts of interest by senior management of listed companies.
In response to the increasing complexity of insider dealing and market manipulation cases, the SFC will adopt the 'One SFC' investigatory approach, which emphasises cross-divisional collaboration. Focusing on failings that pose systemic risks, the SFC will deal with breaches by an intermediary together, in the same group, to increase deterrence. Under the new front-loaded regulatory approach, the SFC will also engage in targeted intervention at an early stage to suppress illegal, dishonourable and improper market practices.
Regarding a sponsor's misconduct, the SFC's investigations are extending to more sponsor firms and sponsor principals in 2018, alerting sponsors to maintain the highest standards and to perform due diligence with professional scepticism. The record-breaking fines imposed on the banks in 2019 also reflects the increasingly tough stance taken by the SFC.
As regards anti-money laundering, following the amendments to the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap. 615) that came into effect on 1 March 2018, the SFC also published two relevant guidelines in March 2018 (and updated in November 2018).56 It is very likely that 2019 will see a continuing trend of strengthening enforcement actions against firms with internal control failures related to know-your-client or anti-money laundering requirements.
In respect of cross-border cooperation, with the various SFC-CSRC MOU in place and the rolling out of the reform of Hong Kong's listing regime in 2018 (to attract emerging and innovative companies from mainland China to the Hong Kong capital markets), there is little doubt that the aforementioned cooperation will remain strong (if not grow stronger) in 2019, given the closer connection between mainland China and Hong Kong, at both the regulator level and the market level. Companies under SFC investigation would be wise to consider the consequences of the potential exchange of information and other investigatory assistance between the SFC and the CSRC.
Another observation is that opportunities and challenges coexist in new economies. On the one hand, the new listing regimes in Hong Kong support new economy companies and pre-revenue biotech firms. On the other, the SFC has taken regulatory action against a number of cryptocurrency exchanges and initial coin offering issuers and alerted investors to their potential risks in 2018.57
For the HKCC, with its leadership58 bringing enforcement experience from the United States and the European Union, the HKCC is well equipped to continue bringing high-profile enforcement actions in 2019. As for the type of cases, the chief executive officer of the HKCC has previously stated that even if cartels are 'public enemy number one' for competition enforcers, they are not the 'sole enemy'. The HKCC would actively seek to detect and halt abuses by large firms using their market power to erect barriers to entry or squeeze out competitors. These violations, however, are harder to pursue, as complex economic analysis is needed, which will require the HKCC to devote more resources to its investigations. Nonetheless, companies are reminded to obtain sound legal advice to better understand evolving legal practice in this area and secure protection in current or potential investigations. The first enforcement action by the HKCC commenced against individuals also marks its vision to take actions on not just companies but also individuals. According to the HKCC, insofar as the HKCC may take action against individuals who are involved in anti-competitive conduct, its priority will be to focus on those involved who are part of the management of the company under investigation or who otherwise directed the cartel conduct, rather than frontline staff who followed their directions.59
1 Mark Hughes and Wynne Mok are partners and Kevin Warburton is a counsel at Slaughter and May.
2 See Section 388 of the Securities and Futures Ordinance (Cap. 571) (SFO).
3 See Section 183(1)(c) of the SFO.
4 See Section 42 of the Competition Ordinance (Cap. 619).
5 A person facing a criminal charge shall be entitled to various minimum guarantees, including, among other things, not to be compelled to testify against himself or herself or to confess guilt. See Article 11(2)(g) of the Hong Kong Bill of Rights Ordinance (Cap. 383).
6 See Section 184(2) of the SFO.
7 See Section 183(1)(a) of the SFO.
8 See Section 191 of the SFO.
9 See pp. 6–8 of the SFC Annual Report 2017–2018, available at https://www.sfc.hk/web/files/ER/Annual%20Report/2017-18/Eng/SFC_Annual_Report_2017-18_Eng_Full.pdf, last accessed on 18 April 2019.
10 The JFIU is a joint reach force between the HKPF and the Customs and Excise Department.
11 See Section 25A of the Organized and Serious Crimes Ordinance (Cap. 455) and Drug Trafficking (Recovery of Proceeds) Ordinance (Cap. 405), and Section 12 of the United Nations (Anti-Terrorism Measures) Ordinance (Cap. 575).
12 See Paragraphs 4.3 and 4.4 of the SFC Guidance on Cooperation.
13 See Paragraph 2.1 of the SFC Guidance on Cooperation.
14 Section 12 of the Securities and Futures (Client Securities) Rules, Section 11 of the Securities and Futures (Client Money) Rules and Section 11 of the Securities and Futures (Keeping of Records) Rules, Paragraph 12.5 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (SFC).
15 See Paragraph 3.1 of the SFC Guidance on Cooperation.
16 These forms include voluntarily and promptly reporting any breaches or failings to the SFC, providing true and complete information regarding breaches or failings, acceptance of liability and taking rectification measures. For more details, see paragraph 2.1 of the SFC Guidance on Cooperation.
17 See Paragraphs 6.2 and 6.3 of the SFC Guidance on Cooperation.
18 Leniency Policy for Undertakings Engaged in Cartel Conduct, the HKCC, November 2015, available at https://www.compcomm.hk/en/legislation_guidance/policy_doc/files/Leniency_Policy_Eng.pdf, last accessed on 18 April 2019.
19 The First Conduct Rule prohibits an undertaking to (1) make or give effect to an agreement, (2) engage in a concerted practice or (3) as a member of an association of undertakings, make or give effect to a decision of the association, if the object or effect of the agreement, concerted practice or decision is to prevent, restrict or distort competition in Hong Kong. See Section 6 of the Competition Ordinance (Cap. 619).
20 See Paragraph 1.7 of the Leniency Policy.
21 See Section 2 of Witness Protection Ordinance (Cap. 564).
22 See Section 7 of Witness Protection Ordinance (Cap. 564).
23 See Paragraph C.3.7 of Appendix 14 (Corporate Governance Code and Corporate Governance Report) of the Main Board Listing Rules.
24 Market misconduct includes insider dealing, false trading, price rigging, disclosure of information about prohibited transactions, disclosure of false or misleading information inducing transactions and stock market manipulation.
25 See Section 303 of the SFO.
26 Including failure to disclose interest in securities in accordance with Part XV of the SFO, carrying on a business in a regulated activity without a licence, and issuing unauthorised advertisements, invitations or documents to participate in a collective investment scheme.
27 An order prohibiting a person from being involved in the management of specified corporations. See Section 257(1)(a) of the SFO.
28 An order prohibiting a person from directly or indirectly trading in Hong Kong financial products which the SFC regulates. See Section 257(1)(b) of the SFO.
29 An order prohibiting a person from engaging in any specified form of market misconduct again. See Section 257(1)(c) of the SFO.
30 An order requiring a person to pay the government an amount equal to the profit made or loss avoided as a result of the misconduct. See Section 257(1)(d) of the SFO.
31 An order requiring a person to pay to the government costs of the inquiry, costs incidental to the inquiry and any costs of investigation for the purposes of the inquiry. See Section 257(1)(e) of the SFO.
32 An order requiring a person to pay to the SFC reasonable expenses in relation or incidental to any investigation of their conduct or affairs. See Section 257(1)(f) of the SFO.
33 An order requiring a person to pay to the Financial Reporting Council reasonable expenses in relation or incidental to any investigation of their conduct or affairs. See Section 257(1)(fa) of the SFO.
34 An order giving a copy of the report of the MMT proceedings to any regulatory body that may take disciplinary action against the relevant person. See Section 257(1)(g) of the SFO.
35 See Section 213(2)(c) of the SFO.
36 See Section 213(2)(d) of the SFO.
37 See Section 4.2 of the 'Anti-Corruption Prevention Guide for Listed Companies' issued by the ICAC in December 2016, available at http://cpas.icac.hk/UPloadImages/InfoFile/cate_43/2017/c75487f1-3a08-4ada-980e-7c0e1d5f4cce.pdf, last accessed on 18 April 2019.
38 See Paragraph 3.1 of the SFC Guidance on Cooperation.
39 See Section 11(c) of the Employment Ordinance (Cap. 57).
40 See SFC's press release dated 14 March 2019, 'SFC fines UBS $375 million and suspends its licence for one year for sponsor failures', available at https://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/enforcement-news/doc?refNo=19PR19, last accessed on 18 April 2019.
41 See Sections 295, 296, 298 and 299 of the SFO for criminal offences and Sections 274, 275, 276 (disclosure of information about prohibited transactions), 277 and 278 of the SFO for civil equivalents.
42 See Section 8 of the Competition Ordinance (Cap. 619).
43 Up to 11 January 2019, see www.sfc.hk/web/EN/about-the-sfc/collaboration/overseas/iosco-mmou.html, last accessed on 18 April 2019.
44 For the full lists, see www.sfc.hk/web/EN/about-the-sfc/collaboration/overseas/investigatory-assistance-
and-exchange-of-information.html and www.sfc.hk/web/EN/about-the-sfc/collaboration/overseas/exchange-of-information.html, last accessed on 18 April 2019.
46 See Section 378 of the SFO.
47 See Section 30 of the Prevention of Bribery Ordinance (Cap. 201).
48 Keynote Speech at 2018 Refinitiv Pan Asian Regulatory Summit by Mr Thomas Atkinson, available at https://www.sfc.hk/web/EN/files/ER/Speech%20-%20TA%20at%202018%20Refinitiv_final.pdf, last accessed on 18 April 2019.
49 See p. 67 of the SFC Annual Report 2017–2018, available at https://www.sfc.hk/web/files/ER/Annual%20Report/2017-18/Eng/SFC_Annual_Report_2017-18_Eng_Full.pdf, last accessed on 18 April 2019.
50 Speech on Progress of the SFC's new approach to regulation HKSI Institute Roundtable Luncheon by Mr Ashley Alder, available at https://www.sfc.hk/web/EN/files/ER/PDF/Speeches/Ashley%20Alder_181127.pdf, last accessed on 18 April 2019.
51 See HKCC's press release dated 6 September 2018, 'Competition Commission takes renovation cartel case to Competition Tribunal', available at https://www.compcomm.hk/en/media/press/files/Competition_Commission_takes_renovation_cartel_case_to_Competition_Tribunal_EnglishPR.pdf, last accessed on 18 April 2019.
52 'Competition Matters - Issue No. 8' (January 2019), available at https://www.compcomm.hk/en/media/newsletter/files/Competition_Matters_Jan2019.pdf, last accessed on 18 April 2019.
53 See Hong Kong Banking Sector: 2018 Year-end Review and Priorities for 2019, available at https://www.hkma.gov.hk/media/eng/doc/key-information/speeches/s20190124e1.pdf, last accessed on 18 April 2019.
54 See the SFC's release No. 3 of 2018, 26 February 2018, available at www.sfc.hk/web/EN/files/ER/Reports/Enforcement%20Reporter/Enforcement%20Reporter_Feb2018.pdf, last accessed on 18 April 2019.
55 See note 9 above.
56 'Guideline on Anti-Money Laundering and Counter-Terrorist Financing' (November 2018) and 'Prevention of Money Laundering and Terrorist Financing Guideline' issued by the Securities and Futures Commission for Associated Entities (November 2018), available at www.sfc.hk/web/EN/rules-and-standards/anti-money-laundering-and-counter-terrorist-financing/legal-and-regulatory-requirements.html, last accessed on 18 April 2019.
57 See the SFC's press release dated 19 March 2018, 'SFC's regulatory action halts ICO to Hong Kong public', available at https://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=18PR29, last accessed on 18 April 2019.
58 In 2017, the HKCC appointed Mr Brent Snyder as chief executive officer, formerly Deputy Assistant Attorney General at the US Department of Justice, and Mr Jindrich Kloub as executive director (operations), formerly an official of the Directorate General for Competition at the European Commission.
59 'Competition Commission takes renovation cartel case to Competition Tribunal - Questions and Answers', available at https://www.compcomm.hk/en/media/press/files/Competition_Commission_takes_renovation_cartel_case_to_Competition_Tribunal_EnglishQA.pdf, last accessed on 18 April 2019.