Can SFC Demand Documents Across the Border?


Under section 183(1)(a) of the Securities and Futures Ordinance (Cap. 571) (“SFO”), a person whom the investigator has reasonable cause to believe has in his possession any record or document which contains information relevant to an investigation under section 182 of the SFO, shall produce to the investigator any record or document specified by the investigator.  Under section 184(1)(a), a person who, without reasonable excuse, fails to so produce, commits a criminal offence.

It is therefore important for businesses and individuals to determine, when facing a request under section 183(1)(a) of the SFO, whether he could resist such request based on valid “reasonable excuse(s)”.  The recent case of The Securities and Futures Commission v Ernst & Young (a firm), HCMP 1818/2012 (“SFC v EY”), illustrated how the Court should determine the “reasonableness” of excuses to resist production of documents apparently outside Hong Kong.


By an Engagement Letter dated 28 August 2009 between Ernst & Young (“EY”) and Standard Water Limited (“Company”), the Company engaged EY as reporting accountant and independent auditor in its application for initial public offering on the main board of the Stock Exchange of Hong Kong Limited.  The Engagement Letter and a letter regarding EY’s fees incorporated EY’s standard terms and conditions (“General Terms”).  EY had used the services of Ernst & Young Hua Ming LLP (“HM”), a separate legal entity registered with and regulated by the Chinese Institute of Certified Public Accountants and subject to the jurisdiction of the China Securities Regulatory Commission (“CSRC”), to conduct the field work of the audit of the Company, as well as one of its operating subsidiary, in the People’s Republic of China (“PRC”).

On 16 March 2010, EY resigned as reporting accountant and independent auditor with immediate effect, citing “inconsistencies in documentation” as the reason in its letter to the Company.  On 24 March 2010, the Company withdrew its listing application.  After issuing a direction on 9 April 2010 to investigate whether any market misconduct or certain offences under the SFO might have been committed, between 12 April 2010 and 28 October 2011, the investigator of the Securities and Futures Commission (“SFC”) issued 9 notices to EY under section 183 of the SFO (“Notices”).

According to the SFC, EY has failed to, amongst others, provide the audit working papers and other relevant correspondence responsive to the Notices.  As such, the SFC sought an inquiry under section 185 of the SFO into the EY’s said failures, and an order compelling EY to comply with the Notices, if the Court should find that it has no reasonable excuse not to do so.

Possession of Documents

Under section 183 of the SFO, “possession” in relation to any matter includes “custody, control and power” of or over the matter: Schedule 1 of SFO.

After considering the arrangements between EY and HM, the Court held that HM (and its staff) acted as the agent of EY under an agency of entrustment under PRC laws, in carrying out the audit field work.  In particular, it was held that the probable intent between EY and HM, viewed against the General Terms, was that the audit working papers generated by HM’s staff should be regarded as generated by the individuals as EY’s agents and employees, and should be “owned, managed and controlled” by EY.  Therefore, HM had a duty to produce to EY all books and documents in its hands relating to the audit field work, even though they are created by HM (or its staff).  EY, as principal, is entitled to have a presently enforceable legal right under PRC laws to continuing access to, demand production of, and make copies of HM’s records relating to acts done on its behalf, including the audit working papers, even after the termination of the agency.

In the circumstances, the audit working papers are in the “power” and hence “possession” of EY.

Reasonable Excuse

The Court cited Hely J’s decision in Bank of Valletta PLC v National Crime Authority (1999) 164 ALR 45 in assessing the reasonableness of a certain excuse.  In that case, it was held that if a reasonable person in the circumstances would conclude that the Australian public interest in the investigation of criminal activities outweighed any public or private interest in the maintenance of banker/customer confidentiality under Maltese law, then the possibility that the bank would be exposed to criminal liability under Maltese law did not establish a reasonable excuse.  On the other hand, if there were alternative means to obtain the documents without materially adverse consequences to the investigation in Australia, then a real and appreciable risk of prosecution under Maltese law if the documents were produced would constitute a reasonable excuse for non-production.

EY relied on a number of PRC laws submitting that it would be prohibited under those laws to produce the documents requested to the SFC, which is regarded to be outside the PRC.  However, the Court held that those laws are either inapplicable or does not impose a blanket prohibition as such.

First, EY failed to adduce evidence as to the content of the audit working papers and other relevant documents to the effect that they contain State secrets or commercial secrets.  Therefore the State Secrets Law, the Anti-Competition Law and the CPA Law were inapplicable.  Nor did EY adduce evidence to prove that the preservation of the audit working papers and other relevant documents (which are collectively-owned archives) is of value to the State and society or which should be kept confidential, Articles 16, 18, 19 and 25 of the Archives Law were not applicable, either; in particular, as between HM and EY, HM could not use its duty of confidence to the Company in resisting EY’s request.

Second, the Court rejected EY’s contention as regards the Regulation on Strengthening Confidentiality and Archives Administration Relating to Overseas Issuance and Listing of Securities (Circular [2009] No. 29(“Regulation 29”).  The Court preferred the expert evidence submitted by the SFC that the norm is that all audit working papers should be stored in the PRC, and that only those audit working papers which involve state secrets, state security and significant public interest cannot be transmitted overseas without prior approval.  EY has not established by evidence the audit working papers are of such nature.  In fact HM had not raised any issue of Regulation 29 with the CSRC when it refused to produce the audit working papers back in mid-2010 and later said in December 2012 that it was prepared to cooperate with the CSRC.  The CSRC was also not troubled by any issues concerning Regulation 29.

Third, the Court held that the Reply letter dated 26 October 2011 issued by the Accounting Department of the CSRC to the PRC affiliates of international accounting firms was inapplicable, as EY instead of the SFC who would be the requesting party for the audit working papers if the Court grants an Order against EY to comply with the Notices.

Fourth, the Localization Regulation promulgated on 2 May 2012 jointly by the Ministry of Finance, the Industry and Commerce Bureau, the Ministry of Commerce, the State Administration of Foreign Exchange and the CSRC is irrelevant, since the audit working papers belong to EY, a Hong Kong partnership, but not HM, a formerly sino-foreign cooperative accounting firm.

EY’s Liability in the PRC in Producing Documents

The Court was not satisfied that EY would be at a real risk of being subject to criminal, administrative or civil liabilities if it is compelled by a Court Order to produce the audit working papers and other information responsive to the Notices, copies of which are presently in Hong Kong, to the SFC.  In view of the above analysis, there was no prohibition under PRC laws to produce the documents to the SFC.  Further, as EY did not give evidence as to why, how and by whom the said copies were brought to Hong Kong, there was no basis for the Court to find the actus reus of a criminal offence had been committed in the PRC; neither EY nor HM has so far been subject to any criminal prosecution or administrative penalties.  Lastly, EY would have to comply with the Court Order as a matter of Hong Kong law; even if a decision has to be “formally” made to authorise the disclosure to the SFC, there is no reason why it has to be made by an EY partner in the PRC.

In connection to this last point, the Court also held that it was inherently improbable that EY, as the reporting accountant of the Company, did not have any records in its files in Hong Kong in relation to the Engagement and its decision to resign, over and above the limited materials provided to the SFC.

Oppression as Ground for Discretion Rejected

EY pleaded oppression as a ground for the Court to exercise discretion against granting the relief as sought by the SFC.  The relevant test in this regard is whether an order compelling compliance with the statutory notice would be oppressive to the recipient, which the Court noted was a high test.

The Court noted that there was no evidence that HM would refuse to cooperate so that EY would be compelled to take legal action in the PRC.  On the contrary, in the proceedings, EY had repeated emphasised HM’s indication of willingness to cooperate.  All that EY has to do is to urge HM to take steps to “cooperate” by either (i) sending a complete set of the audit working papers and other relevant documents to CSRC for onward transmission to the SFC; or (ii) producing the relevant documents to EY in the PRC for EY to seek whatever clearances as may be required for their onward transmission to the SFC.  In fact, the copies of audit working papers and other archives in Hong Kong would render it unnecessary for EY to ask HM at all.


The Court gave an Order that EY comply with the Notices within 28 days from the date of the Order or such other period as may be agreed in writing between EY and the SFC.  The Court also ordered that EY bear the costs of and occasioned by SFC’s application on an indemnity basis, with certificate for two counsel.

In light of the decision in SFC v EY, it would be difficult for individuals and businesses to rely on prohibition in foreign laws on state secrets, commercial secrets and/or confidentiality, as reasonable excuses to resist production of documents.  While the Court would regard the statutory regime as placing high regard to the protection of the Hong Kong public interest in investigating market misconduct or offences under the SFO on one hand, the burden of proof is on the party/parties resisting production pursuant to a request under section 183 of the SFO, to prove on evidence (in particular the content of the document(s)) that the document(s) are of such nature.

For enquiries, please contact our Litigation & Dispute Resolution Department:

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2014

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