On August 19, 2019, the Hong Kong Independent Commission Against Corruption (“ICAC”) and the Hong Kong Securities and Futures Commission (“SFC”) signed a Memorandum of Understanding (“MoU”) to formalize and strengthen their cooperation in investigating financial crime. The objective of the MoU is to enhance collaboration between the ICAC and the SFC, and increase the overall effectiveness of both agencies in combating illegal activities affecting the integrity and reputation of Hong Kong’s securities and futures markets. Given the greater regulatory scrutiny that is expected in the wake of the MoU, it is important to understand the investigative and prosecutorial tools that are available to these enforcement agencies.
Key things to know about the MoU:
- Referral of Cases. Under the MoU, the ICAC and the SFC will actively consider whether each should refer matters to the other agency in discharging their respective duties. One agency may refer a matter to the other agency for the evaluation of possible action if it considers that the suspected misconduct falls outside its function; if the other agency would be better placed to handle the case; or if it would be duplicative to conduct a parallel investigation. The MoU underlines that the ICAC’s function is to combat corruption, while the SFC’s main responsibilities are to maintain integrity of the market, protect public investors and regulate market misconduct.
- Joint Investigations. The ICAC and the SFC may commence joint investigations. A joint investigation task force comprising members from both sides will be set up for each such joint investigation to ensure timely exchange of information and efficient coordination. The joint task force will determine an investigation plan and investigative responsibilities as well as the coordination of evidence collection, and will meet at agreed regular intervals to review the investigation progress.
- Exchange and Use of Information. The ICAC and the SFC will exchange information in accordance with applicable laws in a way which is conducive to the MoU’s objectives, in order for each agency to assist the other in discharging its functions. The recipient agency will not disclose information received from the other agency without its prior written consent, unless required or permitted by law. Each agency will maintain confidentiality of any non-public information and will use it only in accordance with applicable laws and the MoU. The agencies may establish safeguards as necessary and appropriate to protect the confidentiality of the information exchanged.
- Mutual Provision of Investigative Assistance. The ICAC may request assistance from the SFC if the ICAC reasonably believes that it is necessary to have the opinion of a market expert during its investigation. The SFC will offer its in-house market experts or will recommend potential independent experts to assist the ICAC. Each agency will consider requests for other types of investigative assistance on a case-by-case basis.
- Capacity Building. The ICAC and the SFC will coordinate their training initiatives and organize joint training opportunities to improve the capacity and effectiveness of their staff in performing their respective functions. To mark the agencies’ efforts in capacity building, a three-day joint investigation training workshop focusing on historic instances of corruption and market misconduct by listed companies was held after the MoU signing ceremony, which allowed seasoned anti-graft and market regulation experts to share their knowledge in combating financial crime.
Prior Joint-Enforcement Efforts
Prior to signing the MoU, the ICAC and the SFC had conducted two joint operations. In December 2017, they cooperated for the first time to investigate illegal activities involving a Hong Kong listed company, Convoy Global Holdings Limited (“Convoy”). Following the joint operation, Convoy’s offices were raided, relevant individuals were arrested, and the trading in Convoy’s securities was (and remains) suspended. The agencies found that Mr. Cho Kwai Chee (“Cho”), the former director and a shareholder of Convoy, conspired with others and dishonestly caused a subsidiary of Convoy to acquire a company substantially owned by Cho at a consideration of over HKD 89 million without proper disclosure under, or compliance with, the listing rules. Cho failed to disclose to the Stock Exchange of Hong Kong Limited (“SEHK”) that he was the substantial shareholder and the de facto director of Convoy. On 16 May and 22 July 2019, Cho and five other individuals were prosecuted by the ICAC for conspiracy to defraud the SEHK, the board of directors, the shareholders, and the investors of Convoy. Legal proceedings are ongoing, and the agencies continue to collaborate on this matter.
Pursuant to the second joint operation, commencing on 23 June 2019, the SFC and the ICAC searched two listing sponsor firms’ offices. In addition, the ICAC searched a number of other premises, including the offices of two Hong Kong-listed companies (the ICAC and the SFC have not disclosed the names of the two listed companies) and a financial printing company. The former Joint Head of the IPO Vetting Team of the Listing Department of the Hong Kong Exchanges and Clearing Limited (“HKEX”) was arrested, as well as two of his associates, for suspected corruption in relation to the vetting of listing applications of the two listed companies. As part of these coordinated actions, the SFC is conducting an ongoing review of the manner in which the SEHK (the SEHK is a subsidiary of the HKEX. The HKEX is an SEHK-listed company (stock code: 388)) has administered listing and other matters which may be relevant to the investigation. The cooperation between the agencies reflected concerns in the market regarding the for-profit nature of the HKEX and its authority in vetting listing applications. The joint investigation is still ongoing.
- Traditionally, the ICAC and the SFC conduct investigations separately, as they operate under different legal regimes (the ICAC was established under the Independent Commission Against Corruption Ordinance (“ICACO”) Cap. 204 and its legal powers and duties are set out in the ICACO, the Prevention of Bribery Ordinance, Cap. 201 and the Elections (Corrupt and Illegal Conduct) Ordinance, Cap. 554. The SFC was established under the repealed Securities and Futures Commission Ordinance, Cap.24 and continued in existence by the Securities and Futures Ordinance (“SFO”), Cap. 571. The SFC administers the SFO, certain provisions in the Companies (Winding-Up and Miscellaneous Provisions) Ordinance, Cap. 32, the Companies Ordinance, Cap. 622, the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance, Cap. 615, and Financial Institutions (Resolution) Ordinance, Cap. 628) and have different focuses. While the ICAC is given the statutory power to investigate corruption, the SFC’s main responsibility is to regulate market misconduct. The MoU signifies the determination of the ICAC and the SFC to combat corruption and illegal misconduct relating to the securities and futures markets in Hong Kong and a recognition of the need for fuller cooperation to perform their functions effectively. The MoU is designed to enhance efficiency, minimize the duplication of effort between the agencies, and to enable the different skill sets and expertise possessed by each agency to be more efficiently deployed to maintain the integrity of the Hong Kong market and tackle serious financial crime.
- There will be a boost to the agencies’ effectiveness in fighting illegal activities in a joint investigation due to the combination of their respective investigative powers:
- Under section 183 of the Securities and Futures Ordinance (“SFO”), Cap.571, the SFC can compel a person to attend an interview to answer questions relating to the matters under investigation. During an interview under section 183 of the SFO, there is no right to remain silent on the basis of self-incrimination, and a failure to answer questions or to answer fully is a criminal offence (see section 184 of the SFO). Section 187(2) of the SFO prohibits direct use of compulsorily obtained information as evidence in criminal proceedings against the interviewee. However, such evidence may be used in subsequent criminal proceedings by the SFC and/or the ICAC against others (including co-conspirators of the interviewee). Derivative use of this information is also permitted, which allows the SFC and/or the ICAC to use any other materials which the compulsorily obtained information has led the investigators to identify, or has helped them to identify, in criminal proceedings against the interviewee and/or others (there is no “derivative use immunity” under Hong Kong law. See HKSAR and Lee Ming Tee  1 HKLRD and Koon Wing Yee v SFC  HKEC735). While there was already a legal basis under section 378(3)(i) of the SFO for the SFC to share compulsorily obtained information with the ICAC, the MoU has now formalized the information exchange mechanism which is conducive to the MoU’s objectives and is designed to help the agencies discharge their respective functions.
- Similarly, under section 14(1) of the Prevention of Bribery Ordinance (“POBO”), Cap. 201, the ICAC can hold an interview under compulsion, and failure to comply without reasonable excuse is a criminal offence (see section 14(4) of the POBO). Section 20 of the POBO prohibits direct use of any compelled information as evidence to incriminate the interviewee in criminal proceedings, but the agencies are not prohibited from using such information in criminal proceedings against any other person (including co-conspirators of the interviewee). The ICAC and/or the SFC may also use any evidence which the compelled information helps them to obtain against the interviewee and/or others in any subsequent proceedings (derivative use of the information obtained under section 14(1) of the POBO is allowed. See A and Commissioner of Independent Commission Against Corruption (2012) 15 HKCFAR). While there is no similar legal provision expressly applicable to the ICAC as section 378(3)(i) of the SFO (discussed above), the MoU has now made it explicit that the ICAC may share information with the SFC in accordance with applicable laws.
- Listed companies in Hong Kong, and licensed persons as well as registered institutions regulated by the SFC, are expected to be subject to greater scrutiny by the regulators in respect of financial crimes and corruption activities in the securities and futures markets. It is also important to understand the investigative powers of the respective authorities and available procedural safeguards in enforcement proceedings in order to ensure that any search, interview or arrest is conducted properly and that the legal rights of the company or individual being investigated have been fully respected. As regulatory issues and compliance risks have become more complicated and intertwined in a more stringent Hong Kong enforcement landscape, it is critical to consult both capital markets and anti-corruption counsel promptly upon the emergence of potential compliance issues.