United States: SEC Sanctions Chinese Accounting Firms For Refusal To Surrender Documents

On February 6, 2015, the U.S. Securities and Exchange Commission (SEC) imposed sanctions against four China-based accounting firms for their refusal to surrender documents in conjunction with an investigation of potential accounting fraud and corruption in China.  These sanctions highlight the intensifying challenges multinational companies face when asked to participate in U.S. discovery of data stored in China, and emphasize the increasing importance of creative but sound solutions for dealing with U.S. discovery obligations in China.

Background

In the matter In re BDO China Dahua CPA Co., Ltd., an SEC administrative law judge (ALJ) found that Deloitte Touche Tohmatsu Certified Public Accountants Limited, Ernst & Young Hua Ming LLP, KPMG Huazhen (Special General Partnership) and PricewaterhouseCoopers Zhong Tian CPAs Limited Company violated Section 106 of the Sarbanes-Oxley Act by willfully refusing to surrender documents to the SEC.  The SEC had requested China-based documents from the four accounting firms in conjunction with an investigation into nine Chinese companies that held U.S.-based securities.  The firms refused to comply with the document requests on the grounds that Chinese laws prevented the production of the requested documents to the SEC.  The SEC instituted public administrative proceedings against each of the firms, in turn leading the ALJ to sanction the firms.  The firms settled with the SEC by agreeing to pay $500,000 and admitted that they did not produce documents prior to the commencement of the proceedings in 2012.  The SEC retained authority to impose additional remedial measures on the firms if future document productions fail to meet specified criteria, including an automatic six-month bar on a single firm's performance of specific audit work, commencement of a new proceeding or the resumption of the current proceeding.

U.S. Discovery of Foreign Accounting Firms

The Sarbanes-Oxley Act of 2002 requires public accounting firms to provide audit workpapers and related documents to the SEC upon request.  Section 106(b)(1), as amended by Dodd-Frank in 2010, governs the production of audit workpapers by foreign firms, stating,

If a foreign public accounting firm issues an opinion or otherwise performs material services upon which a registered public accounting firm relies in issuing all or part of any audit report or any opinion contained in an audit report, that foreign public accounting firm shall be deemed to have consented to produce its audit workpapers for the Board or the Commission in connection with any investigation by either body with respect to that audit report and to be subject to the jurisdiction of the courts of the United States for purposes of enforcement of any request for production of such workpapers.

The SEC's ability to obtain foreign firms' workpapers is an essential component of fraud and corruption investigations.  In reaction to the sanctions, the director of the SEC's Enforcement Division stated that "obtaining an audit firm's workpapers is critical to enforcement staff's ability [to] adequately protect investors from the dangers of accounting fraud."

China's Data Protection and Secrecy Landscape

There is no single or overarching law governing the protection of electronic data in China.  Multinational companies are left to piece together a data protection regime from various authorities throughout the country, including the following three regulations:

  • The 2012 Decision on Strengthening Online Information Protection prohibits companies and individuals from improperly obtaining, selling or providing personal digital information, and obliges certain types of entities to collect, use, preserve, manage and otherwise handle personal data in accordance with specific principles.  
  • The Law of the People's Republic of China on Guarding State Secrets, formulated "for the purpose of guarding state secrets, safeguarding state security and national interests and ensuring progress of reform, of opening to the outside world, and of socialist construction," 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."  This law sets out six categories of state secrets, and also includes a seventh ambiguous catch-all category defined as "other matters that are classified as state secrets by the state secret-guarding department," giving Chinese enforcement authorities broad discretion to define what information constitutes a state secret. 
  • The State Security Law of the People's Republic of China provides that "[a]ny organization or individual that has committed any act endangering the State security of the People's Republic of China shall be prosecuted according to law."  The law defines "acts endangering State security" to include actions such as "stealing, secretly gathering, buying, or unlawfully providing State secrets."  Intentional and negligent violations of this law could result in criminal prosecution or other disciplinary sanctions.

The Right Solution

There is an obvious conflict between a need in the United States to receive information and China's desire to protect it.  Navigating U.S.-driven discovery of Chinese entities is a complex endeavor that invariably involves questions surrounding the transfer of data from China.  Many companies deal with U.S. discovery obligations by simply moving large tranches of data from China to the United States for the review and production of that information.  Others, such as the four accounting firms in this case, take the opposite approach and categorically refuse to produce any documents altogether.  Neither end of the spectrum is effective.  The right solution in any particular case typically focuses on a defensible process that involves the collection, processing and analysis of documents by Chinese-qualified lawyers through the use of a secure Chinese environment in order to identify which data can be transferred from China to the United States.  A combined U.S.-China team of lawyers and technology professionals who are well versed in both Chinese data protection laws and U.S. discovery requirements can help guide multinational companies safely through the complicated process that led to the significant sanctions recently imposed on the four accounting firms involved in the In re BDO China Dahua CPA Co., Ltd., matter.

SEC Sanctions Chinese Accounting Firms For Refusal To Surrender Documents

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Cadwalader, Wickersham & Taft LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions