Hong Kong regulatory enforcement newsflash

SFC signs MOU with DOJ

The SFC announced last Friday that it had signed an MOU which formalises and strengthens cooperation between the SFC and DOJ on criminal prosecutions against market participants.

The SFC can prosecute certain summary offences before a Magistrate (by virtue of section 388 SFO), but any prosecutions beyond the realm of section 388 are to be prosecuted by the DOJ.  The aim of the recent MOU is to align the SFC and the DOJ’s efforts in combatting corporate and financial services wrongdoing.

What the MOU says

The MOU, in summary, provides for:

1. The referral of certain cases by the SFC to the DOJ.
2. The DOJ taking into consideration views expressed by the SFC on referred cases.
3. The DOJ’s ability to take over conduct of reviews / appeals stemming from a Magistrate’s decision on section 388 SFO prosecutions.
4. The SFC ability to require the DOJ to review its decision on a case referred to it for advice or decision.
5. A framework for the DOJ’s consent for market misconduct proceedings intended to be brought by the SFC.

The above are largely uncontroversial, with the exception of (b) and (d), which we believe encroach upon the DOJ’s constitutional powers over criminal prosecutions. 

These new measures are almost certainly born of the tension between the SFC and the DOJ during the tenure of Mark Steward and Kevin Zervos, former chief enforcers at those public bodies.

One tiger too many?

As the Chinese saying “a mountain is not big enough for two tigers” goes, so it appeared that our regulatory framework could not sustain the strong personalities of Steward and Zervos during their reign. 
 
The SFC’s frustration with the DOJ was probably part of the reason why the SFC drove an aggressive agenda to stretch the scope of section 213 SFO. Through the Tiger Asia appeals, the SFC created an additional avenue to the civil and criminal regimes, whereby a civil Court can make criminal findings and on the back of that, award damages.

What this means for you

Keith Yeung’s replacement of Zervos as DPP in September 2013 ‘resets’ the SFC-DOJ relationship, which has been vividly described as a divorced couple, finally back on speaking terms.  The recent MOU can be seen as the re-consummation of the SFC and DOJ’s marriage, after months of working out their issues.

The MOU could well usher in a new age of regulation through more severe criminal prosecutions. 

In his last interview with the South China Morning Post, Steward spoke of leaving the legacy he has laid down for market regulation in Hong Kong "It's a bit like jumping off a moving train. The train will keep going, it may even go faster, it may go better than before", and it seems that for criminal prosecutions, the train will be making stops at the higher courts, which it has barely done in the past.

For fearful market participants, one glimmer of light in the MOU is the SFC’s statement that it will not use civil proceedings as a substitute for criminal prosecutions, where the latter should be commenced in accordance with the DOJ’s Prosecution Code. 

If this suggests that the SFC will refrain from bringing section 213 proceedings where criminal prosecution can be pursued, the MOU will at least have partially restricted the (until now) somewhat unrestrained use of section 213, and restored the familiar protections available to those accused of a criminal offence, such as the right to silence and the standard of proof for criminal proceedings, which have been eroded since the section 213 tiger was let out of its cage.

Notes

1. The SFC is empowered by section 388 SFO to bring criminal prosecutions against corporate and financial services wrongdoers for offences under the SFO, the Companies (Winding Up and Miscellaneous Provisions) Ordinance, the Companies Ordinance, and the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance.  The SFC is, however, only empowered to bring prosecutions triable summarily before a Magistrate, which means that any offence triable on indictment or the sanction which would exceed the jurisdiction of the Magistrates Court would have to be prosecuted by the DOJ.

   Notwithstanding section 388 of the SFO, the DOJ’s constitutional power under Article 63 of the Basic Law to handle criminal prosecutions free from interference remains unaffected. As pointed out later in this article, there is an inherent tension between the agreed measures within the MOU and Article 63.

2. The MOU specifies 5 categories of offences that will be referred to the DOJ.  These include:

   1. market misconduct offences under Part XIV of the SFO and offences to fraudulently or recklessly induce others to invest money under section 107 of the SFO.
   2. offences under the SFO and its subsidiary legislation which involve an element of intent to defraud, other than those under Part XIV and section 107 of the SFO.
   3. offences under the Companies (Winding Up and Miscellaneous Provisions) Ordinance, the Companies Ordinance, and the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance which fall within the purview of the SFC.
   4. indictable offences which may be dealt with summarily where the maximum term of imprisonment following conviction on indictment exceeds 2 years’ imprisonment.
   5. any other cases where the SFC considers it necessary to seek advice from the DOJ on whether the case should be prosecuted on indictment.

3. Article 63 of the Basic Law states that “The Department of Justice of the Hong Kong Special Administrative Region shall control criminal prosecutions, free from any interference”.  

   If the DOJ is compelled to take into consideration the SFC's views on prosecution, this would be tantamount to an interference.  By the same token and although a layer removed, for the SFC to require the DOJ to revisit its advice / decision as regards criminal prosecutions, it is hard to see how this does not interfere with the DOJ's control over criminal prosecution.

4. Steward, often described as zealous and creative in the use of the SFO to stifle market misconduct, would have been keen to see criminal prosecutions and sanctions deployed as a deterrent to market wrongdoing.  The SFC, in a 30 August 2013 statement, cites that it has since 2007 conducted almost 300 summary prosecutions with a success rate of over 90%.   In the same statement, the SFC bemoans the fact that no case has been prosecuted on indictment by Zervos during his tenure as DPP, alluding to the lack of resourcing and delays at the DOJ.

   The SFC’s statement was issued in response to statements made by Zervos, where he said that none of the cases referred to the DOJ was worthy of trial in a higher court, and that the SFC should be stripped of its prosecutorial powers in some cases, which conflicted with its roles as investigators and regulators.