Policy and practice

Hong Kong: Securities regulator takes a more aggressive stance towards corporate misconduct

The past few months have witnessed a renewed attempt by the Securities and Futures Commission (“SFC”) to adopt a more proactive/aggressive enforcement approach towards misconduct by listed companies. 

During an address to the Chamber of Hong Kong Listed Companies at the end of last year, the SFC’s Chairman Carlson Tong unveiled a “new corporate regulator approach”, as a result of market concerns over serious corporate misconduct by Hong Kong-listed companies. According to Mr Tong, a major priority for the SFC would be to take on broader, more proactive supervision of conduct of listed companies, which would result in more surveillance, analysis and enforcement work by the SFC. The role that the SFC is required to perform under the inside information disclosure regime and in response to case referrals from the Stock Exchange would also be expanded. The latest move was described by Mr Tong as a “significant step in the development of [the SFC’s] role as a statutory regulator”.

To implement the above policy objective, the SFC has set up a new Corporate Regulation team under its Corporate Finance division, which has been tasked to:

  • review company announcements, circulars and reports;
  • monitor press reports and analyst research;
  • conduct periodic in-depth review of each company and adopt risk-based criteria to focus on particular companies, for example companies with history of losses, frequent corporate restructuring, changes of auditors, etc.

The SFC’s focus on corporate misconduct was again highlighted by the Financial Times in March, which reported that the SFC was planning to boost its corporate investigations staff by over 10 per cent and has built up a new litigation team to speed up probes. According the SFC’s Chief Executive Ashley Alder, the regulator’s concern was that investigations were taking too long to be completed, while cases increased both in volume and complexity.

Increased SFC activities in the area of corporate governance has already been reported, and with both the statutory inside information disclosure regime and the new IPO sponsors regulations now being fully operational, more high profile enforcement work targeting listed companies and their executives/advisers can be expected. 

UK: SFO's expectations for companies self-reporting and hoping for DPA

In a speech at PWC on 6 March 2014 entitled “Ethical Business Conduct: An Enforcement Perspective”, David Green, director of the Serious Fraud Office (“SFO”), set out the reasons why, in his view, companies should self-report financial wrongdoing. He also outlined the potential benefits of deferred prosecution agreements (“DPAs”) for companies who do choose to self-report. He acknowledged that there are still difficulties with the DPA process, highlighting in particular:

  • whether the 30% guideline discount on the financial penalty (the same as that given on a guilty plea) is enough;
  • the absence of any prohibition in the underlying legislation or code of conduct on DPAs on the supply by the prosecutor of information to third parties where permitted by law;
  • that the problem of the identification principle remains. Mr Green said again, “if prosecution of a corporate is so difficult, why should a company enter into a DPA?” and repeated his suggestion that an amendment to section 7 of the Bribery Act to create the corporate offence of a company failing to prevent acts of financial crime by its employees could help deal with this issue.

Most interestingly, Mr Green set out what the SFO would expect from companies by way of cooperation during an investigation and negotiation for a DPA. He summarised the SFO’s expectations as “cooperation, cooperation and cooperation.” He said that the SFO would expect:

  • “a waiver of privilege, where necessary. This applies particularly to privilege which is often claimed, dubiously, over accounts given by witnesses in internal investigations. Of course, waiver cannot be compelled, but waiver of privilege where necessary would be an obvious sign of cooperation;
  • an admission of guilt: again, this cannot be required but the same applies;
  • prompt notification of the problem to the prosecutor;
  • full disclosure of the extent of wrongdoing: holding something back or trying to hide something would be anathema to the process;
  • compensation to victims;
  • disciplinary action against wrongdoers;
  • appropriate amendment to corporate structures”.

He added, “don't try and spin your way to a particular outcome by judicious leaking of selected information. Do not try and conduct DPA negotiations through the media.”

U.K.: The SFO faces further criticism

The SFO is in trouble again after it was revealed that part of the £19 million emergency funding it sought early this year has been used to settle outstanding VAT liabilities. The revelation was made in a report published by the Commons Justice Committee on 28 February 2014. The payment, which is reported to amount to less than £2 million, relates to VAT wrongfully reclaimed between 2009 and 2012 and associated fines.

The SFO has sought a total of £24 million in emergency funding this financial year, with most of it ring-fenced to resource three major SFO investigations: Libor; Rolls-Royce; and Barclays/Qatar. David Green, director of the SFO, has said that he may be seeking more for trials and to defend the agency against the claim brought by the Tchenguiz brothers, who are currently seeking £300 million in damages for their unlawful arrest and investigation in 2011.

The Attorney General, Dominic Grieve, has been asked to consider whether the resourcing provision for the SFO is sustainable.