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Clifford Chance

Clifford Chance

Regulatory Investigations and Financial Crime Insights

Global Investigations Review (GIR)'s Corporate Investigations Guide for Hong Kong – high profile investigations, regulatory developments and key principles

GIR has published the seventh edition of its practical guide for external and in-house counsel, compliance officers and accounting practitioners. Members of the Clifford Chance global RIFC practice are editors and authored several chapters including the Hong Kong chapter.

In the Hong Kong chapter of the Practitioner's Guide to Global Investigations 2023, members of the Clifford Chance Litigation and Dispute Resolution (L&DR) team, Donna Wacker, Jonathan Wong, Michael Wang and Anita Lam answer 78 questions regarding corporate investigations in Hong Kong, including the recent high-profile investigations, changes to emerge in the next year and other key principles and hot topics.

In terms of the recent focus of investigations, there has been continuing attention on combating corporate fraud and misfeasance by listed and other companies, as well as members of their senior management, including combating misappropriation of assets and false or misleading / inflated IPO prospectuses or financial statements involving fictitious transactions or other false accounting. Often the fraud targeted also entails other serious white-collar crime such as bribery, money laundering and/or forgery. In one such enforcement action, the Securities and Futures Commission (SFC) obtained a first of its kind court order to compel the chairman and executive director of the company in question to purchase the shares held by other shareholders at a price to be determined by the court after he was found to have orchestrated a scheme to falsify the company's bank balances. In addition, in this fight against fraud, new conduct requirements began to apply in relation to bookbuilding and placing activities in August 2022. This followed a thematic review by the SFC of licensed intermediaries engaged in equity and debt capital market activities. The new requirements seek to address conflict of interests and transparency. This focus, with one of the aims to improve the quality of auditing of listed companies, is supplemented by the transfer of regulatory powers from the self-regulating Hong Kong Institute of Certified Public Accountants (HKICPA) to the independent Financial Reporting Council (FRC) in October 2022.

Another enforcement priority is the tackling "ramp and dump" schemes often conducted using social media platforms and accounting for a significant percentage of SFC's market manipulation investigations. The SFC works with other regulators in this regard including the Independent Commission Against Corruption (ICAC) and Hong Kong Police. One weapon in the SFC's arsenal is a restriction notice to freeze a suspect's assets held with licensed corporations; in the regard, the SFC recently succeeded in securing a dismissal of a judicial review challenge of such power.

In terms of key regulatory or legislative changes to address corporate misconduct, the SFC published a consultation seeking to broaden its enforcement powers in June 2022. One of the more contentious proposals is the SFC's plan to extend section 213 of the Securities and Futures Ordinance (Cap. 571) (SFO) to empower it to have the ability to apply to the court for restoration, damages, and other civil remedial orders after its exercise of disciplinary powers under section 194 or section 196 for misconduct or unfitness. This proposal has generated some concern for its potential breadth of application and the need for clarity as to the stated targeting of ‘serious’ misconduct and what this means in terms of the type of misconduct potentially giving rise to investor compensation. This should be considered against the background of a consultancy study being conducted (as commissioned by the government’s Working Group on Class Actions) on the potential and likely economic and other effects on Hong Kong if a class action regime is to be introduced.

A licensing regime for virtual asset exchange operators will be introduced on 1 June 2023. This means that such operators will be subject to very similar SFC investigation, disciplinary and civil powers as intermediaries carrying out traditional securities and futures activities. This will go some way in putting Hong Kong in line with the Financial Action Task Force's (FATF) recommendations to combat money laundering and terrorist financing in relation to virtual asset service providers. This is also accompanied by regular reminders to investors of the risks of virtual asset platforms with the most recent in December 2022 warning of the risks associated with offers of virtual asset deposits, savings, earnings or staking services including those arising from fraud, hacking, collapse, or unregulated platforms.

The strengthening of co-operation between the SFC and the CSRC in cross-border investigations continues, particularly concerning market manipulation in the context of the China-Hong Kong Stock Connect programme. As a recent example, the CSRC assisted the SFC in obtaining restoration orders against those engaged in insider dealing in the shares of TeleEye.

The Hong Kong chapter of GIR also addresses the key principles and hot topics of corporate liability, compliance programmes, cyber-related issues, data protection, attorney-client privilege, exterritorial effect of criminal law, cross border investigations and information sharing, economic sanctions enforcement, whistle-blower protection and employee rights, internal investigations, reporting to authorities, responding to notices and subpoenas, witness interviews, dawn raids and search warrants, penalties, immunity and leniency cooperative agreements, and publicity and reputational issues.

For a description of the publication, see here. The team will be circulating the Hong Kong chapter to key clients and contacts, and are happy to discuss.

The Clifford Chance APAC L&DR team also authored the Singapore and Australia chapters of GIR. For more on recent high-profile investigations and anticipated regulatory developments in Singapore, see here.

For more on recent high-profile investigations and anticipated regulatory developments in Australia, see here.

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