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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: …READ FULL ARTICLE
This memorandum was prepared for general purposes only. It is not intended to be comprehensive in its scope and it is recommended that a client seeks professional legal advice.
By Valarie Fung, Partner at YYC Legal
6 August 2024