The judgment for the much anticipated Ernst & Young case was handed down on May 23, 2014.  The case concerns an application made in 2012 by the Hong Kong SFC to the Hong Kong Court of First Instance under section 185 of the SFO for an inquiry into Ernst & Young's failure to produce documents under various section 183 notices.  The documents were accounting records relating to Ernst & Young's work on the aborted listing of Standard Water Limited.  Ernst & Young alleged (among other things) that the documents were in the possession of its joint venture partner based in China and could not be produced due to restrictions under Chinese law (including but not limited to state secrets laws).

The Hong Kong Court of First Instance held that the relevant documents were in the possession of E&Y and that there was no reasonable excuse for it not to comply with the section 183 notices and that Ernst & Young had "deliberately withheld from SFC information in its knowledge."  The Court of First Instance ordered Ernst & Young to comply with the notices within 28 days and to pay the SFC's costs on an indemnity basis.  The court accepted a witness' opinion that the mainland's secrecy law was designed to "safeguard the security of the state's economy and protect the public interests of society."  As such, the law "does not impose a blanket prohibition on cross-border transmissions of audit working papers to overseas securities regulatory authorities", the court said.  Instead, the law banned only the cross-border transmission of state secrets, but Ernst & Young could not prove its papers contained such information.   

However, the case may prompt the PRC Ministry of Finance officers to propose a rule that would ban foreign auditors from accessing the books of overseas listed Chinese companies and would require them to use their mainland affiliates, who would be strictly subject to PRC state secrecy law. The case illustrates the dilemma faced by the major accounting firms (and their affiliates) working in China that PRC state secrecy law could block them from providing required information to overseas regulators.  Earlier this year, an administrative trial judge of the US SEC issued a decision (which is not immediately effective) which would ban the Big Four's PRC joint ventures from working for US-listed companies for six months, pending further appeal.

See the SFC's press release of 23 May 2014.  For further background on the matter, please see the SFC's earlier press release of 27 August 2012.


The high-profile HK$34 million corruption trial involving (among others) a former Hong Kong Chief Secretary (Hong Kong's number two official), Rafael Hui, and co-chairmen of Sun Hung Kai Properties, one of the world's largest real estate groups, Thomas Kwok and Raymond Kwok, commenced on 7 May 2014.  Thomas Kwok and Raymond Kwok are accused of providing cash, loans and the free use of two apartments to Rafael Hui.  The three men have pleaded not guilty.  The prosecutors opened their case on June 5 after the jury selection process lasted for about a month, and set out the prosecution case that there were "concealed and disguised" payments made to Rafael Hui by the Kwok brothers seeking government favour, according to media reports.

Other defendants include the executive director of Sun Hung Kai Properties, Thomas Chan Kui-yuen, and former Stock Exchange executive, Francis Kwan Hung-sang.  All pleaded not guilty to the charges against them, which involve (among others) conspiracy to offer an advantage to a public servant, misconduct in public office and furnishing false information.  The trial is scheduled to run for 70 days.


The Hong Kong SFC has said in a circular that an inter-governmental agreement between Hong Kong and the US is expected to be signed in relation to the US Foreign Account Tax Compliance Act (FATCA) compliance, which will come into effect in July 2014.  The IGA is intended to facilitate compliance with FATCA by financial institutions in Hong Kong.  Under the IGA, financial institutions in Hong Kong will need to register and conclude separate individual agreements with the US IRS. Under these agreements, these institutions will seek consent of their account holders who are US taxpayers to report their account information to the US IRS annually.  The US has signed an IGA with 34 jurisdictions so far, including some countries with traditionally strong banking secrecy protection such as Switzerland.