The International Investigations Review: Hong Kong
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,6 where failure to answer or giving a false or misleading answer is a criminal offence.7 In addition, the SFC can compel the production of documents and records,8 including digital devices (e.g. mobile phones and computers), information stored in or accessible through them and relevant access means (e.g. login names, passwords),9 and obtain a search warrant to search for and seize documents and records.10
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 2019 included corporate fraud and IPO sponsor misconduct (both being top enforcement priorities), insider dealing, market manipulation, intermediary misconduct including mis-selling of financial products and money laundering.11 In October 2019, Ms Julia Leung, the SFC's deputy chief executive officer, commented that the SFC was currently conducting a thematic review of the book building process in both equity and debt capital markets,12 indicating an emerging focus of the SFC's enforcement action in 2020 and beyond. Under the 'front-loaded' approach introduced in 2017, the SFC focuses on the greatest risks facing the markets and intervenes at an earlier stage to address persistent problems and pre-empt the fallout from emerging threat.
Some regulatory agencies have published policies to encourage cooperation with their investigations. In April 2020, the HKCC published a revised 'Leniency Policy for Undertakings Engaged In Cartel Conduct' (the Leniency Policy for Undertakings)13 expanding upon the previous framework for leniency application established in November 2015. The HKCC also concurrently issued a 'Leniency Policy for Individuals Involved in Cartel Conduct' (the Leniency Policy for Individuals),14 which for the first time allows an individual to report cartel conduct to the HKCC in exchange for leniency. Both policies were issued under the Competition Ordinance (Cap. 619) (Competition Ordinance), which 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. 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 Leniency Policy for Undertakings. So far as other agencies are concerned, 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. 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.
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)15 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.16 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.17
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,18 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 rules19 will not amount to cooperation by itself.20 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,21 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.22
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 for Undertakings and the Leniency Policy for Individuals to grant leniency to encourage self-reporting by companies and individuals that may have engaged in illegal activity, such as bid rigging or price fixing. Under these policies, leniency is available only for the first undertaking or individual involved in cartel conduct, who reports the cartel conduct to the HKCC and meets all the requirements for receiving leniency, provided that the undertaking or individual is not a ringleader of the cartel conduct. For individual applicants, leniency under the Leniency Policy for Individuals is only available before the granting of a marker to an undertaking under the Leniency Policy for Undertakings. In exchange for an undertaking's or individual's cooperation in the investigation of the cartel conduct, the HKCC will enter into a leniency agreement with the undertaking or individual and agree not to take any proceedings against them in any court in relation to the reported cartel, including proceedings for an order under Section 94 of the Competition Ordinance declaring that the undertaking or individual has contravened the First Conduct Rule.23 Under the previous leniency policy which allowed the HKCC to seek an order declaring contravention of the First Conduct Rule, there was a risk that the order may form the basis for follow-on damages claims by victims of the cartel conduct.24 Undertakings that do not benefit from leniency under the Leniency Policy for Undertakings 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. In addition, the SFC now requires a licensed corporation (or a registered institution) to disclose information about certain internal investigations against a licensed representative or responsible officer (or in the case of a registered institution, an executive officer) who ceases to act in such capacity.25 In conducting an internal investigation, where 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 leniency policies for both undertakings and individuals 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.26 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.27
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 Organized 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.28
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,29 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.30 The SFO also prescribes penalties for offences other than market misconduct.31 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,32 cold shoulder orders,33 cease and desist orders,34 disgorgement orders,35 government costs orders,36 SFC costs orders,37 Financial Reporting Council costs orders38 and disciplinary referral orders.39 The injunctive relief the court may grant includes an order restraining or prohibiting a person from dealing in any specified property,40 an order appointing a person to administer the property of another person41 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; and
- 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 its anti-corruption guide for listed companies,42 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.43 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 employer's decision as to whether or not to terminate the contract of employment under section 9 of the Employment Ordinance.44 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 and May 2019, the SFC imposed record-breaking fines totalling HK$813.7 million against several international banks for their nadequate due diligence while acting 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.45
In October 2019, Ms Julia Leung, the SFC's deputy chief executive officer, reiterated the message that in respect of sponsor supervision the SFC have little tolerance for misconduct and will be resolute in upholding conduct standards,46 after highlighting five major failings in sponsor due diligence work as identified in a previous thematic inspection report.47
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.48
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.49
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 signatories50 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.51
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, the MOU concerning cooperation and exchange of information, dated December 2018 and the MOU concerning the obtaining of audit working papers in the Mainland arising from the audits of Hong Kong-listed Mainland companies, dated July 2019.52
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 in force under the Mutual Legal Assistance in Criminal Matters Ordinance (Cap. 525)53 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 SFO54 or the Prevention of Bribery Ordinance.55 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.
Year in review
2019 marks the 30th anniversary of the SFC and has seen some of its highest-profile activities to date, despite the unprecedented political and social challenges Hong Kong has been faced with since the second half of 2019. As stated by Julia Leung, the SFC's deputy chief executive officer, in October 2019: '[t]he SFC imposed fines of over $900 million in disciplinary actions against eight sponsor firms and three sponsor principals over the past 30 months'.56 While this emphasises that the SFC's focus is currently on the work of sponsors in initial public offerings, an emerging focus for 2020 and beyond is the book building processes in both equity and debt capital markets, in respect of which the SFC is doing a thematic review. In the reporting year 2018 to 2019, the SFC disciplined 21 corporations, four responsible officers and 10 licensed representatives, resulting in total fines of HK$940 million, almost twice the amount of the last reporting year. At the same time, only 238 investigations were started in the reporting year 2018 to 2019, down from 280 in 2017 to 2018 and 414 in 2016 to 2017.57 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.58 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 counterpart in Mainland China, as well as other local regulators. With respect to mainland China, the SFC has signed various MOUs with regulators like the CSRC, including one concerning the obtaining of audit working papers in the Mainland arising from the audits of Hong Kong-listed Mainland companies, entered into by the SFC, the CSRC and the Ministry of Finance of the People's Republic of China in July 2019. Locally, the SFC entered into an MOU with the ICAC in August 2019 to formalise and strengthen cooperation between the two authorities in respect of mutual provision of investigative assistance and capacity building.59 In April 2020, the SFC entered into an MOU with the HKCC to enhance cooperation and exchange of information between the two regulators.60
Another new development by the SFC is in relation to virtual assets. The SFC introduced a new regulatory framework for virtual asset trading platforms in November 209, which addresses key regulatory concerns in such areas as the safe custody of assets, know-your-client requirements, anti-money laundering and market manipulation, etc.61
In terms of the HKCC's enforcement actions, the HKCC continued the momentum in its fight against cartel conduct. Since 2019, the HKCC has brought three enforcement actions in respect of alleged cartel conduct such as price fixing, market sharing and bid-rigging. Notably, in addition to penalties against companies, the HKCC sought for pecuniary penalties and director disqualification orders against individual directors allegedly involved in the cartel conduct in its most recent four enforcement actions. This echoes with the message from the HKCC that not only companies, but also individuals who engaged in anti-competitive conduct may expect to face consequences for their actions.62 In 2019, the HKCC also welcomed two favourable judgments from the Competition Tribunal in the HKCC's first two enforcement actions brought in 2017, finding multiple companies liable for bid-rigging (in the first case), and price-fixing and market sharing (in the second).63 In April 2020, the Competition Tribunal further rendered a judgment on pecuniary penalties against the companies found liable for price-fixing and market sharing in the second case.64 On the policy front, the HKCC published a new Leniency Policy for Individuals and an updated Leniency Policy for Undertakings in April 2020, in order to further encourage cooperation with its cartel enforcement.
As for the HKMA, its work in 2019 was mainly on the areas of banking stability, smart banking, implementation of international standards, FATF/APG Mutual Evaluation, consumer and investor protection, green and sustainable banking and capacity building. For 2020, credit risk management, supervision of virtual banks, operational and technology risk management, investor and consumer protection in digital age are among its top priorities.65
Conclusions and outlook
According to the SFC's annual report for 2018 to 2019,66 the SFC's current enforcement priorities are in relation to corporate fraud, IPO sponsor misconduct, insider dealing, market manipulation and intermediary misconduct including mis-selling of financial products and money laundering. In respect of tackling misconduct by listed companies, according to a recent SFC Regulatory Bulletin, the SFC seeks to address regulatory concerns such as concealed share ownership and control, suspect valuations, warehousing of shares and nominee arrangements and highly dilutive rights issues.67
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 concluded a number of high-profile sponsor misconduct cases in 2019, meting out penalties which include record-breaking fines totalling HK$813.7 million on five prominent banks for their inadequate due diligence work as sponsors in past IPOs, alerting sponsors to maintain the highest standards and to perform due diligence with professional scepticism. The record-breaking fines also reflect the increasingly tough stance taken by the SFC, which will likely remain the case in 2020.
As regards anti-money laundering, the SFC reprimanded and fined a brokerage HK$15.2 million in February 2019 for failures in complying with anti-money laundering and counter-terrorist financing regulatory requirements when handling third-party fund deposits.68 This represents the largest fine ever imposed under the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap. 615). Two months later in April 2019, the SFC further prohibited a member of the brokerage's senior management who was also a responsible officer from re-entering the industry for 10 months.69 It is very likely that 2020 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 a growing number of SFC-CSRC MOU in place and Hong Kong's listing regime continuing to attract high-profile listings by mainland China-based companies,70 there is little doubt that the aforementioned cooperation will remain strong (if not grow stronger) in 2020, 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, including the assistance the SFC may receive in obtaining audit working papers stored in mainland China under an MOU signed in July 2019.
Another observation is that opportunities and challenges coexist in new economies. On the one hand, the new listing regimes in Hong Kong, as reformed in 2018, support new economy companies and pre-revenue biotech firms. On the other, the SFC stepped up its regulatory oversight over virtual asset trading platforms in November 2019 by introducing a licensing regime that brings certain platforms within its supervisory remit. While the new regime is still at a nascent stage, the SFC already made it clear that a breach of a licensing condition would be considered 'misconduct' under the SFO, potentially resulting in disciplinary action by the SFC.71
For the HKCC, with its leadership72 bringing enforcement experience from the United States and the European Union, and following the aforementioned favourable rulings from the Competition Tribunal in 2019 and 2020, the HKCC is likely to continue the momentum in enforcement action by bringing high-profile enforcement actions in 2020 and beyond. As for the type of cases, while all six enforcement actions the HKCC has taken so far have targeted cartel conduct, Mr Brent Snyder, chief executive officer of the commented in April 201973 that the HKCC were prepared to take enforcement action against non-cartel cases and had a diverse range of ongoing investigations including those under the Second Conduct Rule74 and non-cartel contraventions of the First Conduct Rule.75 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 most recent four enforcement actions, all involving penalties sought against individuals, also mark its vision to continue 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.76
1 Wynne Mok is a partner 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 183(1)(c) of the SFO.
7 See Section 184(2) of the SFO; Note that pursuant to Section 187 of the SFO, such answers as an interviewee is compelled to give may not be used in subsequent criminal proceedings against the interviewee due to his or her constitutional right against self-incrimination.
8 See Section 183(1)(a) of the SFO.
9 See Cheung Ka Ho Cyril and others v. Securities and Futures Commission  HKCFI 270, a judgment made by the Court of First Instance of the Hong Kong High Court on 14 February 2020.
10 See Section 191 of the SFO.
11 See pp. 8-10 and 66-72 of the SFC Annual Report 2018–2019, available at www.sfc.hk/web/files/ER/Annual%20Report/2018-19/Annual%20Report%202018-19_EN.pdf, last accessed on 3 May 2020.
12 Speech on Supervising sponsors in a changing IPO landscape at Hong Kong IPO Conference 2019: IPO Sponsors and Regulations by Ms Julia Leung, available at www.sfc.hk/web/EN/files/ER/PDF/Speeches/IPO%20Sponsors%20and%20Regulations%20-%20Keynote%20Speech_final_INT.pdf, last accessed on 3 May 2020.
13 Leniency Policy for Undertakings Engaged in Cartel Conduct, the HKCC, April 2020, available at
www.compcomm.hk/en/legislation_guidance/policy_doc/files/Leniency_Policy_Undertakings_E.pdf, last accessed on 3 May 2020.
14 Leniency Policy for Individuals Involved in Cartel Conduct, the HKCC, April 2020, available at
www.compcomm.hk/en/legislation_guidance/policy_doc/files/Leniency_Policy_Individuals_E.pdf, last accessed on 3 May 2020.
15 The JFIU is a joint reach force between the HKPF and the Customs and Excise Department.
16 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).
17 See Paragraphs 4.3 and 4.4 of the SFC Guidance on Cooperation.
18 See Paragraph 2.1 of the SFC Guidance on Cooperation.
19 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).
20 See Paragraph 3.1 of the SFC Guidance on Cooperation.
21 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.
22 See Paragraphs 6.2 and 6.3 of the SFC Guidance on Cooperation.
23 The First Conduct Rule prohibits an undertaking from (1) making or giving effect to an agreement, (2) engaging in a concerted practice or (3) as a member of an association of undertakings, making or giving 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).
24 However, under the revised Leniency Policy for Undertakings, the HKCC may still issue an infringement notice to successful leniency applicants, who only report after the HKCC has opened an assessment or commenced an investigation, requiring them to admit a contravention, in order to permit the initiation of follow-on damages proceedings against them, if the victims have initiated follow-on action against other undertakings found to have contravened the First Conduct Rule.
25 See the SFC's Circular to announce new licensing forms and mandatory electronic submission of annual returns and notifications, available at www.sfc.hk/edistributionWeb/gateway/EN/circular/doc?refNo=19EC5, last accessed on 3 May 2020; also see the FAQs published by the SFC clarifying certain aspects of the disclosure requirement, available at www.sfc.hk/web/EN/faqs/intermediaries/licensing/disclosure-of-investigations-commenced-by-licensed-corporations.html#1, last accessed on 3 May 2020.
26 See Section 3 of Witness Protection Ordinance (Cap. 564).
27 See Section 7 of Witness Protection Ordinance (Cap. 564).
28 See Paragraph C.3.7 of Appendix 14 (Corporate Governance Code and Corporate Governance Report) of the Main Board Listing Rules.
29 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.
30 See Section 303 of the SFO.
31 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.
32 An order prohibiting a person from being involved in the management of specified corporations. See Section 257(1)(a) of the SFO.
33 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.
34 An order prohibiting a person from engaging in any specified form of market misconduct again. See Section 257(1)(c) of the SFO.
35 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.
36 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.
37 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.
38 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.
39 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.
40 See Section 213(2)(c) of the SFO.
41 See Section 213(2)(d) of the SFO.
42 See Section 4.2 of the 'Anti-Corruption Programme – A 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 3 May 2020.
43 See Paragraph 3.1 of the SFC Guidance on Cooperation.
44 See Sections 9 and 11(1)(b) of the Employment Ordinance (Cap. 57). Section 9 allows an employer to terminate an employment contract without notice or payment in lieu, if an employee: (1) wilfully disobeys a lawful and reasonable order; (2) misconducts himself or herself, such conduct being inconsistent with the due and faithful discharge of his duties; (3) is guilty of fraud or dishonesty; and (4) is habitually neglectful in his or her duties.
45 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 www.sfc.hk/edistributionWeb/gateway/EN/
news-and-announcements/news/enforcement-news/doc?refNo=19PR19, last accessed on 3 May 2020.
46 See footnote 12.
47 Namely: (1) adopting a box-ticking approach; (2) ignoring red flags; (3) deficient interview practices; (4) over-reliance on experts and third parties; and (5) improper supervision and inadequate resources.
48 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.
49 See Section 8 of the Competition Ordinance (Cap. 619).
50 Up to 26 September 2019, see www.sfc.hk/web/EN/about-the-sfc/collaboration/overseas/iosco-mmou.html, last accessed on 3 May 2020.
51 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 3 May 2020.
52 Both the China Securities Regulatory Commission and the Ministry of Finance of the People's Republic of China are parties to this MOU. See www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/corporate-news/doc?refNo=19PR61, last accessed on 3 May 2020.
54 See Section 378 of the SFO.
55 See Section 30 of the Prevention of Bribery Ordinance (Cap. 201).
56 See footnote 12.
57 See p. 72 of the SFC Annual Report 2018–2019, available at www.sfc.hk/web/files/ER/Annual%20Report/
2018-19/Annual%20Report%202018-19_EN.pdf, last accessed on 3 May 2020.
58 Speech on Progress of the SFC's new approach to regulation HKSI Institute Roundtable Luncheon by Mr Ashley Alder, available at www.sfc.hk/web/EN/files/ER/PDF/Speeches/Ashley%20Alder_181127.pdf, last accessed on 3 May 2020.
59 See SFC's press release dated 19 August 2019, 'SFC and the ICAC sign MoU to strengthen cooperation in combating financial crime', available at www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=19PR80, last accessed on 3 May 2020.
60 See SFC's press release dated 28 April 2020, 'SFC signs MoU with Competition Commission', available at www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=20PR39, last accessed on 3 May 2020.
61 See Position paper - Regulation of virtual asset trading platforms, available at www.sfc.hk/web/EN/files/ER/PDF/20191106%20Position%20Paper%20and%20Appendix%201%20to%20Position%20Paper%20 (Eng).pdf, last accessed on 3 May 2020.
62 'Competition Matters – Issue No. 8' (January 2019), available at www.compcomm.hk/en/media/newsletter/files/Competition_Matters_Jan2019.pdf, last accessed on 3 May 2020.
63 See HKCC's press release dated 17 May 2019, 'Competition Commission welcomes judgments in Hong Kong's first two competition cases', available at www.compcomm.hk/en/media/press/files/
20190517_Competition_Commission_welcomes_judgments_in_Hong_Kong_s_firs t_two_competition_cases_eng.pdf, last accessed on 3 May 2020.
64 See HKCC's press release dated 29 April 2020, 'Competition Commission welcomes first judgment on pecuniary penalties in Hong Kong competition law regime', available at www.compcomm.hk/en/media/press/files/EN_PR_CC_welcomes_first_judgment_on_pecuniary_penalties_20200429.pdf, last accessed on 3 May 2020. See Hong Kong Banking Sector: 2019 Year-end Review and Priorities for 2020, available at www.hkma.gov.hk/media/eng/doc/key-information/speeches/s20200117e1.pdf, last accessed on 3 May 2020.
65 See Hong Kong Banking Sector: 2019 Year-end Review and Priorities for 2020, available at www.hkma.gov.hk/media/eng/doc/key-information/speeches/s20200117e1.pdf, last accessed on 3 May 2020.
66 See footnote 11.
67 See the SFC Regulatory Bulletin Issue No.4, February 2020, available at www.sfc.hk/web/EN/files/ER/images/20010153-SFC-Regulatory%20Bulletin(e).pdf, last accessed on 3 May 2020.
68 See the SFC's press release dated 18 February 2019, 'SFC reprimands and fines Guosen Securities (HK) Brokerage Company, Limited $15.2 million for breaches of anti-money laundering regulatory requirements', available at www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=19PR10, last accessed on 3 May 2020.
69 See the SFC's press release dated 23 April 2019, 'SFC bans former responsible officer of Guosen Securities (HK) Brokerage Company, Limited for 10 months', available at www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=19PR33, last accessed on 3 May 2020.
70 For example, Chinese e-commerce giant Alibaba, with an existing primary listing on the New York Stock Exchange, achieved a secondary listing in Hong Kong in November 2019.
71 See footnote 61.
72 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.
73 Keynote Speech on The Hong Kong Competition Ordinance 3rd Anniversary at British Chamber of Commerce and Freshfields Breakfast Briefing by Mr. Brent Snyder, available at www.compcomm.hk/en/media/campaigns_events/completed/files/20190430_BritCham_Freshfields_Breakfast_Briefing_Speech.pdf, last accessed on 3 May 2020.
74 The Second Conduct Rule prohibits an undertaking that has a substantial degree of market power in a market from abusing that power by engaging in conduct that has as its object or effect the prevention, restriction or distortion of competition in Hong Kong. See Section 21 of the Competition Ordinance (Cap. 619).
75 See footnote 23.
76 'Competition Commission takes renovation cartel case to Competition Tribunal – Questions and Answers', available at www.compcomm.hk/en/media/press/files/Competition_Commission_takes_renovation_cartel_case_to_Competition_Tribunal_EnglishQA.pdf, last accessed on 3 May 2020.