Regulatory investigations in Hong Kong cover enquiries, interviews or raids by regulators or enforcement authorities in relation to corruption, corporate fraud, white-collar crime, breach of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited and market misconduct in the securities market governed by the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) (the “SFO”). In this article, we examine some of the core issues in relation to regulatory investigations which both corporations and individuals should be aware of so that they could be well prepared in the face of a regulatory investigation.
Commencement of a regulatory investigation
A regulatory investigation usually commences when the regulator detects some irregularity concerning a regulated corporation or individual, but occasionally it can also be the result of proactive reporting by a corporation to its regulator when it detects non-compliance or as a result of a whistleblower complaint. In fact, failure to notify the regulator upon discovering non-compliance may have serious ramifications, as millions of dollars of fines could be imposed on corporations for failing to report non-compliance to the regulator in a timely manner. For example, pursuant to paragraph 12.5 of the Securities and Futures Commission (“SFC”)’s Code of Conduct, licensed persons are required to report to the SFC immediately for any material breach, infringement or non-compliance. Therefore, regulated corporations should always bear in mind that it is their responsibility to take initiative to report non-compliance or suspected non-compliance to its regulator promptly and that they should not wait until the regulator comes knocking on its door.
Importance of seeking legal advice
At the outset, a corporation or individual should always seek legal advice when faced with a regulatory investigation. A corporation or person subject to a regulatory investigation has obligation to provide information to the regulators. At the same time, they are also entitled to certain rights. Seeking legal advice will ensure that they are fully aware of what such rights are and that they will not accidentally waive them during the course of a regulatory investigation.
Even in the face of a regulatory investigation, a corporation or person should be fully advised that there are certain information or documents which they need not hand over to the regulators. For instance, they need not hand over information or documents which are subject to legal professional privilege (“LPP”). Under common law, LPP includes both legal advice privilege and litigation privilege.
Legal advice privilege covers communications between lawyers and their clients created for the dominant purpose of obtaining or giving legal advice. Litigation privilege, on the other hand, covers communications between lawyers and their clients, or lawyers or their client and a third party, created for the dominant purpose of litigation which is either in progress or in contemplation. A corporation or person should be careful not to hand over documents which are subject to LPP to the regulator. In practice, many corporations often instruct their lawyers to review all potential documents to be handed over to a regulator in order to ensure that they do not accidentally waive LPP.
In Hong Kong, the doctrine of limited waiver of privilege has been considered by the Court of Appeal in Citic Pacific (No 2) v Secretary for Justice [2012] 2 HKLRD 701. As a result, documents subject to LPP may be handed over to a regulator on a “limited waiver” basis, meaning that privileged documents can be provided to the regulator solely for the purposes of its investigation and the regulator cannot transfer or disclose the document to third parties for a derivative purpose. In certain circumstances, it is possible for a regulator to offer leniency to a corporation which is willing to waive privilege over its documents.
In certain types of regulatory investigations, the right of silence may not be available. For instance, the SFO requires any person who is subject to or assisting in an investigation to answer any questions raised by the SFC in the interviews and/or to produce any documents as specified by it. Refusal to answer questions or produce documents is a criminal offence. Accordingly, there is no right to silence under the SFO. However, a person subject to an investigation under the SFO can make a claim to the privilege against self-incrimination when providing answers and/or documents to the SFC. Upon making such a claim, the answers and/or documents produced by such person will not become admissible in evidence in criminal proceedings against the person.
The above are some of the obligations imposed on, and rights available to, a corporation or person subject to a regulatory investigation. As such, it is important for one to receive legal advice at the outset and during the course of a regulatory investigation so as to be fully apprised of one’s obligations and rights.
The secrecy obligation
A person assisting in or subject to an investigation is usually subject to the secrecy obligation. A regulated corporation and its employees should be careful not to disclose details relating to the regulatory investigation to any other person. For example, section 378 of the SFO imposes a secrecy obligation on persons subject to an investigation under section 183 of the SFO. The secrecy obligation is subject to limited exceptions, such as disclosure to employers, insurers and legal advisers, or disclosure of the fact that a person is bound by the secrecy obligation.
Searching premises
During some regulatory investigations, the regulator may wish to conduct a surprise raid at a corporation’s place of business. The regulator will need to obtain a search warrant issued by a magistrate to enter and search such premises. When the regulator arrives with a search warrant, it is important for the corporation’s representative or legal advisors to check the search warrant to ensure that: (i) it is issued no more than seven (7) days prior to the search; (ii) there is a proper description of the nature of the alleged offence (a search warrant may be defective if the description of the alleged offence is framed too broadly); (iii) the location of the premises subject to the search is correct; and (iv) the persons entering into the premises and undertaking the search are those authorized under the warrant.
In the event of a surprise raid conducted by a regulator on a corporation’s place of business, it is inevitable that there would be disruption to the corporation’s normal operations during the day of the search. In order to minimize such disruption, the corporation should, under the advice of its lawyers, agree on a “search protocol” with the regulator. Pursuant to the protocol, the corporation could possibly obtain information from the regulator as to the type of documents which it is looking for. To facilitate their search, the corporation could then indicate to the regulator as to where those relevant documents are located. It is advisable that the corporation’s legal team be present during the raid so that the lawyers can advise against any inadvertent disclosure to the regulator of any documents subject to LPP.
In addition, it is recommended that corporations should ensure that its electronic data backup system is well equipped to function in case any electronic devices are seized in order to minimize disruption to normal business. In a previous judicial review application brought against the SFC, the Hong Kong Court held that the SFC has power to seize electronic devices such as computers and mobile phones during a search on a corporation’s premises. Further, the SFC may issue a notice to require the provision of login names and passwords to email accounts and digital devices. Therefore, corporations should be prepared that they and their staff may be required to hand over electronic devices or email account information at any time during the course of a regulatory investigation.
Regulators may also request to speak to specific employees of a corporation during a raid. If the questions are framed in a way to enable the raid to be conducted in an effective manner (e.g. questions relating to the logistics of the raid), employees should endeavour to answer those questions so that they would not be seen as causing disruption to the search. However, if the regulators ask substantive questions about the content of the investigation (e.g. questions which are related to the potential non-compliance being investigated), employees should obtain legal advice before deciding to provide any information. If circumstances permit, the corporation’s legal advisors should request the regulator to issue the requisite notice pursuant to the relevant ordinance so that any person answering their questions and/or producing any documents to them may properly make a claim to the privilege against self-incrimination, if any.
Proactive remediation
If the regulatory investigation reveals any potential misconduct on the part of the corporation, the corporation should seek legal advice and revamp its own policies and procedures to demonstrate to the regulator that it is taking proactive steps to rectify any shortcomings and that it will seek to prevent recurrence of the potential misconduct. Taking proactive steps to remedy shortcomings can sometimes lead to a more favourable outcome for the corporation, such as a lesser penalty being imposed.
YYC Legal LLP is in Association with East & Concord Partners (Hong Kong) Law Firm.
This material has been prepared for general informational purposes only and is not intended to be relied upon as professional advice. Please contact us for specific advice.