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SFC and ICAC Joint Operations to Fight Financial Crimes

Is a wave of “housecleaning” coming in the Financial Markets? 


Recently, the Securities and Futures Commission (“SFC”) and the Independent Commission Against Corruption (“ICAC”) have unprecedentedly launched two joint operations in July and August 2021 in two consecutive months.

On 7 July 2021, in a joint operation codenamed Sea Pearl, the ICAC arrested a senior executive of a listed company who was suspected to have offered advantages to the staff of an underwriter in the initial public offering of the company. By way of collaboration, the SFC and the ICAC searched a number of premises including the offices of the listed company and one of the IPO underwriters. [1]

About a month later on 12 August 2021, the SFC and the ICAC jointly mounted another operation codenamed “Jade Qilin”, during which the ICAC arrested five persons including an incumbent executive director and a former executive director of a listed company who have been alleged to conspire with others to accept advantages for granting substantial amounts of loans to a number of companies and renewing the loans, whilst the borrowers were controlled by the arrested senior executives of the listed company or their associates. The listed company suffered losses as the repayments of the loans were largely defaulted. The SFC and the ICAC searched various premises including the office of the listed company. [2]

This article intends to answer the take-away from the above news.

The Effective Combination of the SFC and ICAC

The above joint operations are not the first time for the SFC and the ICAC to cooperate in their investigation. There has been similar cooperation for many years between the SFC and the Commercial Crime Bureau (“CCB”), who are known to swap intelligence on suspects.

The first known joint operation between the SFC and the ICAC took place in December 2017 against Mr Cho Kwai Chee the former executive director and shareholder of Convoy Global Holdings Limited (“Convoy”). He had been prosecuted for conspiring with others to defraud Convoy’s management so as to cause the Convoy’s subsidiary to acquire a company substantially owned by Mr Cho without proper disclosure. Mr Cho along with others were prosecuted in 2019 but later acquitted after trial.

The second-time joint operation was against the former Joint Head of the IPO Vetting Team of the Listing Department of the Hong Kong Stock Exchange for suspected corruption and misconduct in public office in relation to the vetting of listing application of two listed companies. The ICAC and the ICAC searched the offices of two sponsor firms and the two listed company in June 2019. The said former Joint Head together with another were later prosecuted and their 30-days trial has recently concluded and both defendants were acquitted after trial.

The above pilot schemes seem to have made the ICAC and SFC realise the strategic and synergetic advantages of their cooperation. On 19 August 2019, the SFC and the ICAC entered into a Memorandum of Understanding (“MoU”) to formalise and strengthen cooperation in the combating financial crime which covers referral of cases, joint investigations, exchange and use of information etc.[3]

Based on the public information, the joint investigations Sea Pearl and Jade Qilin are the first two joint operations after the implementation of the MoU.

But what exactly makes the cooperation between the SFC and the ICAC so effective to the extent that the two agencies need to sign the MoU? The answer lies in their inherent investigatory powers vested by the laws.

The SFC Investigation 

As empowered by the Securities and Futures Ordinance (“SFO”), the most powerful tool of the SFC is to compel the person under investigation to produce documents and records, to provide explanations to enquiries and attend interviews by issuing the investigation notice under the SFO as part of their operations. The said person has to comply with the investigation notices and cannot remain silent during the enquiries, failing which he or she would be committing criminal offences under the SFO.

Despite having such a powerful tool kit, the SFC is not equipped with the power to arrest. Therefore, in a normal SFC investigation which requires preservation of evidence, instead of issuing an investigation notice to compel production of records/documents which may give time for the person under investigation to tamper with the evidence, the Enforcement Division’s operations would involve conducting home/office raids  via a search warrant obtained from the Court, during which the SFC would seize any items relating to their investigation. In most circumstances, the SFC’s top priority is to seize the electronic devices such as the mobile phone, computers and even the servers in the cases which involve listed companies or investment banks.

Since the SFC has no power to arrest, the person under investigation is not required to answer bail periodically. The Enforcement Division’s operations would involve spending months to plow through the seized items and construct their allegations. If any seized items give rise to suspicion of committing any offences under SFO, the SFC would issue investigation notice to the person assisting in the investigation and/or the person under investigation to compel them to produce further records and documents, to demand written explanations to their written enquiries and to attend interview(s) with the SFC. Attending the SFC interview would normally be in the later stage of the whole SFC investigation by which time the SFC would have constructed their allegations with sufficient materials.

 The ICAC investigation 

ICAC’s investigation powers mainly derive from the Prevention of Bribery Ordinance (“POBO”). The operational procedures involved in an ICAC investigation do not vary much from a police investigation.

The ICAC’s operations would normally start with an office/house raid, during which the ICAC has the power to arrest the suspect. The ICAC would then take a cautioned interview with the suspect who has the right to remain silent to the questions posed by the ICAC under caution.

The ICAC has the power to detain the suspect for up to 48 hours, after which ,if the ICAC require more time to investigate, the suspect would normally be released on bail and required to answer bail regularly (unless charged straightaway).

If the ICAC see any flight risk, they can demand the suspect to surrender their travel documents, which is empowered by the POBO whilst the Police has no such power.

The Synergetic Advantages 

It is apparent from the above that the investigatory powers possessed by the SFC and the ICAC are complementary to each other, giving them a tremendous synergetic advantages in their joint operations.

In any joint operation, since the SFC has no power to arrest, the SFC could defer this task to the ICAC so that the person under investigation who does not reside in Hong Kong can be restricted from leaving Hong Kong and be compelled to report bail on a regular basis.

On the other hand, when the ICAC need some information to proceed with their investigation whilst the suspect remains silent under caution, the SFC assists the ICAC in a joint operation by compelling the said suspect (who also happens to be the person under SFC investigation) to produce records/documents, to answer enquires, and to attend an SFC interview in which he/she has to answer the questions.

Although the statement given under the SFC interview cannot be used as direct evidence against the interviewee in a later criminal proceedings, provided that the said interviewee exercises his/her right against self-incrimination under section 187 of the SFO, the records/documents obtained under the SFC investigation notice can be shared with the ICAC to build their case in a joint operation. The answers made during the SFC interview could also become useful information to lead the ICAC investigation. Nevertheless, as a word of caution, in the past when a “steering committee” was formed between the SFC and the CCB in a previous criminal investigation, this fact led to some criticism by the courts and an application by the defence for a permanent stay of proceedings. The extent of the SFC/ICAC cooperation is therefore a matter to keep under review.

The Ramification

As illustrated from the past joint operations above, it shows the resolution of the SFC and the ICAC to fight financial crime and they are jointly targeting all the players in the financial market, including the directors and senior management of the listed companies and other regulated entities under the SFO. It is notable that the first two pilot operations all led to prosecution and criminal trials.

We can envisage that the joint operations between the SFC and other agencies would become the trend. On 27 August 2021, the SFC also cooperated with the CCB. During the said joint operation, the Police arrested two former senior executives for offences of conspiracy to defraud, theft and money laundering. They are alleged to have conspired to with other persons to conduct fictitious transactions and/or misappropriate funds from the listed company. [4]Although the SFC and the CCB renewed their MoU back in September 2017, which is earlier than the MoU between the SFC and the ICAC, we can see that the SFC may lead the next wave of the housecleaning within the financial market with other investigatory agencies, which will hit much harder.

In light of the above developments, the compliance and/or regulatory risks are evident to  regulated persons and entities, and the criminal risks are tangibly present.

It has therefore become paramount for the General Counsel of the regulated entities to engage specialized advisors to assess their risk management systems against the potential risks of criminal prosecution. This should include mechanisms to identify the risks which may attract potential criminal investigations during the day-to-day operations; training programmes to cultivate awareness within the corporation from top down in preventing as well as handling criminal investigations; and contingency plans in the event of a “dawn raid”.





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