Recent cases have renewed concerns among practitioners of international arbitration and litigation about the breadth of Chinese state secrecy laws and the effect these laws may have on disputes involving Chinese companies.
SEC Moves Against Accounting Firms
In the first week of December 2012, proceedings were issued against the Chinese subsidiaries of five large accounting firms, Deloitte Touche Tohmatsu ("Deloitte"), Ernst & Young ("E&Y"), KPMG, PricewaterhouseCoopers and BDO China Dahua, charged with breaking US securities laws by the US Securities and Exchange Commission ("SEC") for refusing to disclose documents related to accounting fraud investigations at nine Chinese companies. The SEC said that the companies refused to cooperate and impeded the government's investigations notwithstanding the companies' reliance on Chinese state secrecy laws. In response, the companies noted the difficulties of navigating the conflicting disclosure laws of the United States and China, and expressed hope that US and Chinese regulators will sort out these conflicts.
Cases Against E&Y and Deloitte
In August, Hong Kong’s securities regulator, the Securities and Futures Commission, took E&Y to court, seeking records related to the failed listing application of Standard Water, a Chinese company and former E&Y client, on the Stock Exchange of Hong Kong. Under the Hong Kong Securities and Futures Ordinance, E&Y has an obligation to provide the records unless it can demonstrate a "reasonable excuse" for not doing so. E&Y refused to provide the records, citing Chinese state secrecy laws. In September, the Hong Kong Court of First Instance ordered E&Y to explain its basis for relying on Chinese state secrecy laws in refusing to turn over the requested accounting records. The court has not yet ruled on whether E&Y has demonstrated a “reasonable excuse.”
The case in Hong Kong parallels a case in the United States that began approximately one year earlier. In September 2011, the SEC asked a federal court to order Deloitte to turn over work papers from an audit performed on Longtop Financial Technologies, a Chinese company, in connection with an SEC investigation into possible accounting fraud. Deloitte has claimed that the turnover of the requested information would violate Chinese state secrecy laws. The federal court action against Deloitte was reactivated after previously having been stayed.
The outcome of the dispute against E&Y will have important implications on the issue of the extra jurisdictional effects of the Chinese secrecy laws. For the moment, the affected companies are stuck in regulatory limbo. If the court finds that Chinese state secrecy laws excuse E&Y’s failure to disclose information, Chinese companies will be in an even stronger position to withhold documents based on those laws.
The Breadth of Chinese State Secrecy Laws
The Law of the People’s Republic of China on Guarding State Secrets defines “state secrets” as “matters that have a vital bearing on state security and national interests and, as specified by legal procedure, are entrusted to a limited number of people for a given period of time.” The law contains seven categories of state secrets, including a catch-all provision that covers “other matters that are classified as state secrets by the state secret-guarding department.”
This definition is notoriously vague, and Chinese authorities have been known to bring prosecutions for violation of the state secrecy laws even when the protected nature of the information is highly questionable. For example, in 2010, a Chinese-born United States citizen, Xue Feng, was convicted of divulging state secrets after helping his American employer purchase a commercial database on Chinese oil resources that was not declared protected information until after his detention.
Implications for Disputes Involving Chinese Companies
Because so many Chinese-based companies have dealings with the Chinese government and/or with state-owned enterprises, there is a high likelihood that these companies have been exposed to information that arguably contains state secrets, at least as the Chinese authorities might broadly interpret that concept. This has important implications for parties on both sides of an international dispute involving a Chinese company. Companies involved in international arbitration against a Chinese company can expect that it may refuse to fulfill some or all of its disclosure obligations on the basis that disclosure would violate Chinese state secrecy laws. If this occurs, the opposing party should ask the tribunal to require the Chinese company to make a showing that the requested information is in fact a state secret. Reference can be made to Article 9(2) of the IBA Rules on the Taking of Evidence in International Commercial Arbitration, which provides, in part, that the tribunal may exclude information from disclosure if a “compelling” showing is made that the information has special political or institutional sensitivity. However, because of the wide scope of the “state secrets” definition under Chinese law, it may be difficult to obtain disclosure of information alleged to be subject to these laws.
On the other side, Chinese companies should carefully review any documents potentially responsive to disclosure requests to determine whether they contain information subject to Chinese state secrecy protections. If secret information is found, the company should consider whether this information can be redacted from the document in question in order to allow for disclosure of the document. If not, the company should be prepared to make a showing to the opposing party, and potentially the tribunal, that the requested information is protected from disclosure by the Chinese state secrecy laws. There is also a risk that the party requesting the disclosure of protected information, if ordered to be disclosed by an arbitral tribunal, could face consequences under Chinese state secrecy laws. Given the complexity of the arguments surrounding the construction and effects of Chinese secrecy laws, how an arbitrator will rule when faced with the issue of disclosure is uncertain, though it is likely that an arbitrator would be slow to make an order that puts a party in potential breach of penal sanctions under Chinese law.