Corporate Crime & Investigations Podcast Episode 1: Deferred Prosecution Agreements

In our Corporate Crime & Investigations podcast we look to bring you timely and incisive commentary on key developments in the CC&I space.

In this inaugural episode we take a look at the Deferred Prosecution Agreements (DPAs) landscape. In particular we set in context the latest DPA agreed between the Serious Fraud Office (SFO) and a subsidiary in the Serco Group of companies.

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Moscow Corporate Crime and Investigations Newsletter – July 2019

This newsletter summarises recent Russian regulation, enforcement and court practice developments which may be relevant for doing business in Russia from a corporate crime and investigations perspective.

Additionally, this newsletter spots some US and other relevant developments which should be kept in mind by Russian businesses having foreign parents or operations.

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SFC, CSRC and MOF sign tripartite MOU on access to audit working papers kept in Mainland China

Last week, the Hong Kong Securities and Futures Commission (SFC) signed a tripartite memorandum of understanding (MOU) with the China Securities Regulatory Commission (CSRC) and the Ministry of Finance of the People’s Republic of China (MOF) regarding audit working papers in the Mainland arising from the audits of Hong Kong-listed Mainland companies.

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SFC encourages the industry to keep in mind the ‘spirit’ of the new Internal Investigation Disclosure Requirement introduced to halt the ‘roll’ of ‘bad apples’

On 17 June 2019, Ms Julia Leung (Deputy Chief Executive Officer, Intermediaries) and Mr Wilson Lo (Senior Director, Licensing) discussed the recent initiative by the Securities and Futures Commission (SFC) to halt the ‘roll’ of ‘bad apples’ within the financial services industry at the 2019 SFC Compliance Forum (Forum). The SFC encourages industry participants to have regard to the spirit of the Internal Investigation Disclosure Obligation when assessing whether internal investigations in relation to outgoing licensed individuals should be disclosed to the SFC.

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HKMA reminds registered institutions of their Internal Investigation Disclosure Obligation

Authors: William Hallatt, Hannah Cassidy, Natalie Curtis, Tess Lumsdaine and Isabelle Lamberton

The Hong Kong Monetary Authority (HKMA) has issued a circular to registered institutions (RIs) in relation to the frequently-asked questions (FAQs) released by the Securities and Futures Commission (SFC) on 21 May 2019, which sought to clarify the SFC’s Internal Investigation Disclosure Obligation.

In the circular, the HKMA reminds RIs that they also must comply with the Internal Investigation Disclosure Obligation, when notifying the SFC that an individual has ceased to act as its executive officer (EO), reflecting the SFC’s guidance in Question 9 of the FAQs.

The Internal Investigation Disclosure Obligation

On 1 February 2019, the SFC announced significant changes to its licensing forms and processes. Included in these changes was the introduction of the compulsory Internal Investigation Disclosure Obligation through the new Form 5U, which came into effect on 11 April 2019.

The Internal Investigation Disclosure Obligation requires RIs to provide information to both the SFC and the HKMA regarding:

  • whether departing EOs were the subject of an internal investigation in the six months prior to their cessation; and
  • details of this investigation, if such details have not previously been provided to the regulators.

Firms are also required to notify the SFC and HKMA as soon as practicable if an internal investigation into that individual is commenced subsequent to making the initial notification of cessation (for more details, please see our February 2019 bulletin).

The FAQs

On 21 May 2019, the SFC released the FAQs to clarify various aspects of the Internal Investigation Disclosure Obligation, including:

1. The scope of reportable investigations

It is now clear that the scope of reportable investigations is very wide, given that:

  • firms are required to proactively disclose information about all “investigative actions” (no matter how they are described in internal policies), regardless of whether the subject matter covers regulated or unregulated activities; and
  • no materiality threshold will apply to exclude low-level investigations that are of minimal significance from the obligation.

2. The level of detail required for disclosures

When making an internal investigation disclosure, firms are required to provide information on:

  • factual matters, including a description of the matter, background, relevant dates, duration, the role played by the outgoing employee, and status of the investigation;
  • an assessment of the (potential) impact to the market and clients, and materiality; and
  • if the investigation is completed, the outcome of the investigation and the basis of its conclusion.

3. The confidentiality applied to any disclosures made

In the FAQs, the SFC reiterated its statutory obligation under section 378 of the Securities and Futures Ordinance, and confirmed that it will not disclose information obtained under the new obligation to any other persons, including the outgoing employee and his/her prospective employer, unless otherwise permitted by law.

Although the HKMA’s circular is silent on this point, it is likely that the HKMA will take a similar approach to the sharing of information obtained under the obligation. However, given the scope of the obligation and the sensitive nature of the disclosures, a positive statement from the HKMA would be welcomed.

Final Thoughts

The HKMA’s circular has made clear that the HKMA is supportive of the SFC’s intention to ensure that individuals will no longer be permitted to escape regulatory scrutiny by simply resigning during the course of an investigation.

However, the Internal Investigation Disclosure Obligation is a significant enhancement of the prior notification requirements. We anticipate that firms will face a number of key issues in complying with this requirement, including navigating potential litigation risk from former employees, and considering what constitutes an “investigative action”.

William Hallatt
William Hallatt
Asia Head of Financial Services Regulatory, Hong Kong
+852 2101 4036
Hannah Cassidy
Hannah Cassidy
Partner, Hong Kong
+852 2101 4133
Natalie Curtis
Natalie Curtis
Partner, Singapore
+65 6868 9805
Tess Lumsdaine
Tess Lumsdaine
Registered Foreign Lawyer (New South Wales, Australia), Hong Kong
+852 2101 4122

Isabelle Lamberton
Isabelle Lamberton
Registered Foreign Lawyer (New South Wales, Australia), Hong Kong
+852 2101 4218

Disclosure of internal investigations – the Hong Kong SFC’s FAQs fail to relieve industry concerns

The Hong Kong Securities and Futures Commission (SFC) has released frequently-asked questions (FAQs) to clarify its Internal Investigation Disclosure Obligation – a measure introduced in February 2019 to stop the “roll” of “bad apples” within the financial industry.

The Obligation requires licensed corporations (LCs) and registered institutions (RIs) to provide the SFC with extra information about the circumstances of any licensed employee’s departure. This includes whether the individual was subject to an internal investigation in the six months prior to their departure.

The FAQs cover:

  • what must be reported under the Obligation;
  • the level of detail required for an Internal Investigation Disclosure; and
  • how the SFC will treat the confidentiality of information reported under the Obligation.

While the aims of the Obligation and the clarity provided by the new FAQs are generally welcomed by the industry, serious concerns remain about the practicalities of implementation by firms and the usefulness of the disclosed information to the SFC.

We have been following the developments of the Obligation since its introduction in February and have been part of the industry discussion on this new requirement led by the Asia Securities Industry & Financial Markets Association (ASIFMA). Herbert Smith Freehills and ASIFMA are holding a joint briefing in Hong Kong to explain how the new Obligation and the FAQs will impact LCs and RIs in Hong Kong, and you are welcome to attend.

EVENING SEMINAR IN HONG KONG – 28 May 2019

Date:Tuesday, 28 May 2019
Time:6pm – Registration

6.30-7.30pm – Seminar

7.30-9pm – Cocktail reception

Venue:Eaton Club, 5/F Champion Tower

Three Garden Road, Central, Hong Kong

Please click here to view a map

If you are interested in attending the joint briefing, please email our Events Team for registration.

BACKGROUND

On 20 April 2018, the Financial Stability Board (FSB) released its regulatory toolkit for misconduct risk. Amongst its aims, the FSB encouraged regulators to do more to prevent individuals who engage in misconduct moving between financial institutions without their misconduct being disclosed to their new employer (for further details, please see our April 2018 bulletin).

On 1 February 2019, the SFC announced significant changes to its licensing forms and processes. Included in these changes was the introduction of the new compulsory Internal Investigation Disclosure Obligation through the new Form 5U, which came into effect on 11 April 2019.

Specifically, under the new Form 5U, firms need to:

  • identify whether departing licensed representatives, responsible officers and executive officers (outgoing employees) were the subject of an internal investigation in the six months prior to their departure;
  • provide details of this investigation if such details have not previously been provided to the SFC; and
  • notify the SFC as soon as practicable if an internal investigation into that individual is commenced after making the initial notification of cessation.

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SUMMARY OF THE SFC’S FAQS

Apart from providing an introduction and explaining the purpose of the new Obligation, the SFC has clarified various key aspects of this new requirement, including:

  • the scope of reportable investigations;
  • the level of detail required for disclosures; and
  • the confidentiality applied to any disclosures made.

Scope of reportable investigations

The SFC acknowledges that firms may adopt different terms, such as checking, inquiry, enquiry, review, examination, inspection or investigation, in respect of their investigative actions. However, the SFC has made it clear that it expects firms to proactively disclose information about all “investigative actions” (no matter how they are described), regardless of whether the subject matter covers regulated or unregulated activities.

The SFC has further provided a non-exhaustive list of examples of investigations involving an outgoing employee that should be reported:

  • investigations about suspected or actual breaches of applicable laws, rules and regulations;
  • investigations about suspected or actual breaches of a firm’s internal policies or procedures;
  • investigations about misconduct that is likely to give rise to concerns about the fitness and properness of an outgoing employee;
  • investigations about any matter that may have an adverse market or client impact; and
  • investigations about any matter potentially involving fraud, dishonesty and misfeasance.

In addition, the SFC has clarified that, even where a firm has completed its investigation and made no negative findings against an outgoing employee, the firm will still be required to notify the SFC of the investigation. However, in such situations, only a brief description of the nature of the matter and an explanation about the basis of conclusion will be required.

Whilst it was understood that a firm had to disclose any investigations that began after the departure of its outgoing employee as soon as practicable, the SFC has further clarified that such investigations must be disclosed regardless of the length of time that has elapsed since the outgoing employee left the firm, i.e. there is no time limit on the on-going requirement.

Level of detail required for disclosures

Broadly speaking, firms should disclose information that they can lawfully disclose to the SFC for its thorough understanding of the subject matter of an investigation.

Generally, firms should include in their disclosures:

  • the nature and background of the matter;
  • the date(s) when the matter occurred;
  • the duration of the matter;
  • the role played by the outgoing employee in the matter;
  • the actual and/or potential impact to the market and client(s) and assessment of materiality;
  • the status of the investigation; and
  • the outcome of the investigation and basis of its conclusion (if the investigation is complete).

Where there are any developments such as new information or updates on the status of an investigation that has already been disclosed to the SFC, firms should provide such information to the SFC as soon as practicable, irrespective of whether the investigation had previously been concluded.

Confidentiality applied to any disclosures made

The SFC has reiterated its statutory obligation under section 378 of the Securities and Futures Ordinance (SFO) to preserve secrecy in respect of information obtained during the performance of its regulatory functions including disclosures made to the SFC under the new Obligation and will treat such information as confidential.

In particular, the SFC will not disclose information obtained under the new Obligation to any other persons, including the outgoing employee and his/her prospective employer unless otherwise permitted by law.

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CHALLENGES

Won’t this be a heavy administrative and logistical burden on firms?

The SFC has made clear that no materiality threshold will apply to exclude investigations that are of minimal significance and/or impact to the market and client(s) from the Obligation.

The scope of reportable investigations is therefore very wide given that any and all potentially wrongful acts committed by an outgoing employee could trigger the Obligation regardless of the eventual outcome of investigations.

The administrative and logistical burden therefore imposed on firms raises issues as to the practicality of implementing the requirement properly, especially for smaller firms in Hong Kong with limited resources.

How should firms navigate the potential pitfalls as to conflicts with other laws and regulations?

Whilst the SFC has clarified that disclosures need only be made where the same would be lawful, no further guidance has been published on how this would work in practice.

As such, firms will likely have to consider each reportable investigation on a case-by-case basis and decide whether a disclosure may breach any laws or regulations, e.g. relating to personal privacy, data privacy or employment, in turn increasing the burden on firms to ensure compliance.

What is the utility of collecting so much information and won’t this cause undue delays in the licensing process?

The information collected through the disclosures could potentially assist the SFC in considering whether an individual is a fit and proper person to remain licensed under the SFO.

However, the catch-all nature of the Obligation raises questions as to the utility of this information if the SFC is flooded with disclosure reports that are not relevant for these purposes. It also raises concerns as to the length of time required by the SFC to complete the licensing process in circumstances where a disclosure has been made on Form 5U.

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CONCLUSION

The new Internal Investigation Disclosure Obligation is a significant enhancement of the prior notification requirements. It is clearly the intention of the SFC to ensure that individuals will no longer be permitted to escape regulatory scrutiny by simply resigning during the course of an investigation.

Whilst the enhanced Obligation, which forms part of a broader focus by the SFC on individuals’ fitness and properness, is generally welcomed by industry participants, serious concerns remain about the practicalities and challenges of implementation, as well as the scale and usefulness of the information to be disclosed to the SFC.

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William Hallatt
William Hallatt
Head of Financial Services Regulatory, Asia Hong Kong
+852 2101 4036
Hannah Cassidy
Hannah Cassidy
Partner, Hong Kong
+852 2101 4133
Natalie Curtis
Natalie Curtis
Partner, Singapore
+65 6868 9805
Tess Lumsdaine
Tess Lumsdaine
Registered Foreign Lawyer (New South Wales, Australia), Hong Kong
+852 2101 4122

Jennifer Fong
Jennifer Fong
Associate, Hong Kong
+852 2101 4244

The month ahead in financial services regulatory developments…

In this blog post, we round-up forthcoming developments in the UK and at EU and International levels in financial services regulation for June 2019.

3 Jun
5 Jun
8-9 Jun
  • G20 ministerial meetings:
    • finance ministers and central bank governors (Fukuoka, Japan)
    • trade and digital economy (Tsubuka, Japan)
10 Jun
11 Jun
12 Jun
13-14 Jun
14 Jun
15-16 Jun
19-20 Jun
20-21 Jun
21 Jun
26 Jun
27 Jun
28-29 Jun
29 Jun
  • Deadline for responses to the European Securities and Markets Authority (ESMA) CP on ELTIF RTS
By 30 Jun
End Jun
Jun
Jun/Jul
Jun-Aug

Updated DOJ Guidance Steers Effective Compliance and Remediation Programmes

Authors: Kyle Wombolt, Jeremy Birch and Charlotte Benton

The US Department of Justice Criminal Division (DOJ) has issued updated guidance on the Evaluation of Corporate Compliance Programs (guidance). Under the guidance, DOJ prosecutors evaluate the effectiveness of a company’s compliance programme when conducting an investigation, determining whether to bring charges or negotiating plea or other arrangements.

“Whether in the US, Asia Pacific or elsewhere, the guidance sets out useful prompts for a best practice compliance framework” observes Hong Kong corporate crime and investigations partner, Jeremy Birch. “Given the propensity of regulators to borrow from each other’s procedures and practices, it will also be of interest to companies subject to regulatory scrutiny, investigation or enforcement outside the US, as a benchmark for appropriate remediation and resolution.”

The guidance covers many of the same areas as the previous version, providing additional context to the multifactor analysis of a compliance programme.

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