More than a year ago, we began following the so-called Ernst
State Secrets Case in Hong Kong. On 23 May 2014, the High
Court of Hong Kong finally concluded that there was no
"reasonable excuse" for EY's failure to comply with
Securities and Futures Commission
("SFC") notices seeking information and
documents, and that EY had "deliberately withheld from
SFC." Though EY has since produced a disc of documents it
held in Hong Kong, EY filed a Notice of Appeal 20 June taking issue
with the Court's position on documents held in the Mainland by
its PRC affiliate, Ernst & Young Hua Ming
When this case kicked off in April 2013, many watched carefully,
wondering how the Court might deal with Chinese state secrets and
archives laws, in addition to others, that supposedly prevented the
cross-border transmission of certain documents, and accordingly,
EY's ability to comply with the SFC notices. These laws
have also been the purported excuse for non-cooperation in
investigations in the United States, and have resulted in bans
and censures of Chinese accounting firms in the United States.* However, the Hong Kong Court emphasized that it
is "concerned with and only with the obligation of EY as a
firm in Hong Kong to comply with the Notices issued under the SFO
as part of the laws of Hong Kong," suggesting a strong
reluctance to interpret the controversial Chinese laws.
In an interesting "eve of trial" twist, EY suddenly
discovered a laptop in Hong Kong that had been used by the EY
partner involved in the engagement with HM. Incidentally,
identification of this engagement partner was only revealed by
affirmation filed in relation to these proceedings, despite
numerous previous requests by the SFC for such
identification. These "sudden," last-minute
discoveries, which included two additional hard drives, alongside
EY's production of a single witness who repeatedly claimed he
either had no personal knowledge or memory of the relevant facts,
led Mr. Justice Peter Ng Ka-fai to conclude EY had been
deliberately withholding information. With respect to any documents
HM may possess in the Mainland, the Court concluded that EY,
subject to any legal restrictions on cross-border transmission, has
a currently enforceable legal right under PRC laws to demand
production of the audit working papers from HM. Thus, EY could not
argue that it did not have possession – including custody or
control – of the documents the SFC sought, whether in the
Mainland or not.
As to whether there was any legal restriction on the
cross-border transmission of documents in the Mainland, the Court
was reluctant to comment on PRC laws, suggesting they were a
"complete red herring" since any legal effect was
hypothetical until any analysis of the actual contents of the audit
working papers could be made:
The burden is on EY to show an
applicable restriction on the transmission of the audit working
papers and other relevant documents from the PRC to Hong Kong. If
it cannot do that by showing the papers or other documents do
contain State secrets or commercial secrets, that is the end of the
matter, as far as EY's case is concerned.
This begs the question as to how EY could possibly submit such
evidence if its submission is that such transmission would be
illegal. However, the Court accepted that if its finding on the
absence of legal impediments under PRC laws is wrong, then it was
EY's (and not the SFC's) burden to make an application to
the China Securities Regulatory Commission for approval.
So far, no hearing date has been set for EY's
* Incidentally, the Hong Kong Court made reference to
these American cases, and have noted that the SFO does not purport
to have any extraterritorial effect in the same way that section
106 of the U.S. Sarbanes-Oxley Act of 2002 does.
This article is presented for informational purposes only
and is not intended to constitute legal advice.
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