Corporate Liability in Hong Kong

By Susan Kendall , Cynthia Y.S. Tang and Bryan Ng (Baker McKenzie Hong Kong)

I.              Corporate liability deriving from criminal activity

1.             Nature of the liability and basis

In the area of corporate criminal liability, Hong Kong has largely followed the English common law. Under Hong Kong law, companies can be found liable in respect of most criminal offenses that are applicable to natural persons.

In order to convict a company of a criminal act, it is generally necessary to prove, beyond reasonable doubt, that the company:

  1. committed the act constituting the offense (actus reus)
  2. had a guilty state of mind or the required intention in committing the act (mens rea)As a company is an inert entity that has no mind of its own, it can only act and think through its officers and employees. To address the inherent difficulty of attributing criminal liability to a company, the law has developed the following two principles:

Some offenses carry “strict liability.” These offenses require no mens rea and can be prosecuted purely on the basis of the company having committed the offense.

As a company is an inert entity that has no mind of its own, it can only act and think through its officers and employees. To address the inherent difficulty of attributing criminal liability to a company, the law has developed the following two principles:

  1. The identification principle
  2. The principle of vicarious liability

Identification principle

The identification principle enables the courts to identify the directors and managers who represent the directing mind and will of the company and to attribute the criminal acts and mental states of those directors and managers to the company itself.[1]

This principle was applied by the Hong Kong Court of Appeal in R v. Lee Tsat-pin,[2] which held that:

“[I]n order to attach liability to a limited company for the act of an officer of that company the officer who committed the offense must be a person who was in control of the company so that his criminal act could be identified as that of the company.

The identification principle has its limitations and is generally ineffective for large companies where functions and responsibilities are widely spread through complex corporate structures.[3] This is because it is not possible to aggregate the acts or knowledge of different individuals within a company in order to impose criminal liability on the company, if the elements of the offense cannot all be established with respect to any single individual who is to be regarded as the company itself.[4]

Nevertheless, if the board of directors has the requisite mens rea and instructs an employee to carry out a criminal act, the mens rea of the board can be attributed to the company, and the company can be found to be criminally liable even if acting through an innocent agent.[5]

Vicarious liability

Vicarious liability is a well-established principle in civil law where the acts of an employee can be attributable to the company. However, in the context of criminal law, it is rare for a company to be held criminally liable for criminal acts committed by employees or agents who do not control the company. Statutory offenses that impose strict or absolute liability on the company as an employer are an exception to this rule, and in such cases, there is no need to prove the mens rea of the company.

2.             Types of crimes/administrative offenses for which corporate liability may arise

The general position in Hong Kong is that if a natural person is capable of being indicted for an offense, a company is also capable of being indicted for that same offense. This is because the Interpretation and General Clauses Ordinance (Cap. 1) defines the term “person” in any statute to include any public body and any body of persons, corporate or unincorporated.[6] The only exceptions to this are in relation to the following criminal offenses:

  • Criminal offenses that have imprisonment as the only sentence (eg, murder)
  • Criminal offenses that by their nature can only be committed by natural persons in their personal capacity and not acting as an agent for the company (eg, rape or bigamy)
  • Criminal offenses that are to apply, expressly or impliedly, only to corporations by legislation

Some examples of offenses for which a company may be criminally liable include the following:

  • Manslaughter
  • Fraud
  • Money laundering
  • Tax evasion
  • Failure to make required disclosures[7]
  • Acting in contravention of a disqualification order[8]
  • Misstatements in Hong Kong prospectus[9]
  • Criminal market misconduct offenses[10]
  • Consumer mis-selling[11]
  • False accounting[12]
  • Bribery and corruption[13]
  • Environmental offenses[14]
  • Product liability offenses
  • Contempt of court[15]

Due to the individualistic nature of some offenses, such as fraud, bribery and money laundering, the Commercial Crime Bureau and the Independent Commission Against Corruption focus on the prosecution of individuals instead of companies because the individuals are the actual parties at fault and are readily identifiable. That said, companies can still potentially be held criminally liable but are usually subject only to enforcement actions such as search and seizure of documents from the company’s premises for the purpose of the investigations.

Similarly, for criminal market misconduct offenses that are also individualistic in nature, such as insider dealing and price rigging, the Securities and Futures Commission also lays greater emphasis on prosecuting individuals rather than companies. In any investigation, the SFC frequently issues notices to compel a company to produce documents and to interview personnel. For regulatory offenses committed by companies, the SFC normally takes disciplinary actions against the investigated company.

3.             Identification of companies and entities to which liability may attach

Given the broad definition of “person” under the Interpretation and General Clauses Ordinance (Cap. 1) and as discussed above, any public body, body corporate or body incorporate can be held criminally liable of an offense if that same offense could be committed by a natural person.[16]

4.             Corporate liability for crimes committed abroad by representatives or subsidiaries of a company

Absent specific legislation to the contrary, the laws of Hong Kong generally have no extra jurisdictional effect. The exception is if the victim of a crime is within Hong Kong when the offense is committed even though the crime may be committed elsewhere. In such circumstances, even though the offense was committed on the high seas or in a place outside of Hong Kong, the Hong Kong courts would accept jurisdiction to hear and determine the case.[17] Examples of crimes with specific legislation that extend the jurisdiction of Hong Kong courts are as follows:

  • Offenses of dishonesty and blackmail[18]
  • Offenses connected with aircraft[19]
  • Acts of violence, threats or destruction of property on board any aircraft[20]
  • Homicide on the high seas or in any other place outside of Hong Kong if the victim dies in Hong Kong[21]
  • Unlawful disclosure of official secrets[22]
  • Drug offenses on Hong Kong ships[23]
  • Bribery[24]
  • Money laundering[25]

5.             Corporate liability in the case of transactions taking place after the commission of a crime (acquisitions, mergers, demergers, etc.)

In an acquisition of a target company or the merger of a target company into a corporate group, the target company may still be prosecuted for crimes committed before the acquisition or merger transaction.

As for amalgamation, one or more of the amalgamating companies become dissolved. Under the recently amended Hong Kong Companies Ordinance (Cap. 622),[26] amalgamation of either: (1) two companies that are subsidiaries of the same parent company; or (2) the parent and its subsidiary company can be done without consent of the court. Pursuant to the Companies Ordinance (Cap. 622), the amalgamated company succeeds all the property, rights and privileges, as well as all the liabilities and obligations, of each amalgamating company. In addition, any conviction, ruling, order or judgment in favor of or against an amalgamating company may be enforced by or against the amalgamated company.[27]

Other types of amalgamation still require court approval in Hong Kong. Given the complexity and the relatively restrictive approach that courts take toward such arrangements, such amalgamations are rare in Hong Kong.

II.            Applicable Sanctions

1.             Types of sanction to the company

Depending on the investigating agency and the offense, monetary penalties and forfeiture orders may be imposed on a convicted company. Unlike in some other jurisdictions, no formal scheme is in place in Hong Kong to ban convicted corporate entities from participating in public procurement processes.

However, it should be noted that a convicted company may face parallel regulatory, disciplinary or civil proceedings. For instance, disciplinary penalties include the suspension or revocation of a company’s securities and futures license or registration, which can be ordered by the SFC. Civil action can also be commenced against a company by a wronged party to recover the proceeds of crime or unlawfully obtained property. Class actions are not available in Hong Kong, although actions may be joined in specific circumstances.

2.             Interim measures, cease and desist orders, bans and confiscatory measures

A number of authorities in Hong Kong, such as the Hong Kong Police, the SFC, the Inland Revenue Division, the Immigration Department and the Hong Kong Customs and Excise Department, are empowered to enter and search a company’s premises with or without a warrant, depending on the suspected offense, for the purpose of investigating potential regulatory and criminal offenses. These authorities also have the power to seize documents and other materials, such as electronic devices, in relation to a criminal investigation. In addition, the SFC and the IRD have powers to issue a written notice to compel a person to produce documents or to answer questions relevant to an investigation. Failure to comply with such a production notice constitutes a criminal offense.

As an interim measure, some investigating authorities, such as the Joint Financial Intelligence Unit,[28] may request financial institutions in Hong Kong to freeze bank accounts suspected to have been used to pay the proceeds of the crime. In practice, financial institutions in Hong Kong will usually freeze an account as soon as they are notified by investigating authorities of any suspected criminal activities relating to such an account.

Natural persons or companies who know or suspect that funds remitted into a Hong Kong bank account are proceeds of a crime may notify the recipient bank of the suspected provenance of the funds. Notification may be made through a letter, which is sometimes referred to as an “OSCO letter.” This letter will trigger the bank’s obligations under the Organised and Serious Crimes Ordinance (Cap. 455)(OSCO), including the obligation to: (i) refrain from dealing with proceeds of crime; (ii) report the position to the JFIU; and (iii) refrain from “tipping off” or disclosing to the account holder that the account is under investigation.[29]

3.             Liability of directors or managers for not having adopted (intentionally or negligently) measures for the prevention of the crime

Failure to adopt measures to prevent crimes is not in itself a criminal offense. However, Section 101E of the Criminal Procedure Ordinance (Cap. 221) states that if a company commits an offense with the consent or connivance of a director or other officer concerned in the management of the company, the director or other officer may also be guilty of the same offense. A number of other items of legislation also impose criminal liability on directors or officers who consent to or connive in the commission by a company of specific corporate crimes.

III.           Measures and “models” of prevention and effects of the same on corporate liability and applicable sanctions

The mere implementation of criminal prevention mechanisms will not absolve the company of criminal liability. However, such mechanisms may minimize the risk of crimes being committed by the company and may therefore serve as a mitigating factor in criminal proceedings when it comes to the imposition of sentence. Proper criminal prevention models may also help reduce the risk of a company becoming vicariously liable for an employee who may have committed a crime in breach of corporate policies.

The Prevention of Bribery Ordinance (Cap. 201) does not specifically recognize compliance programs as a means of mitigating or eliminating corporate criminal liability for corruption, nor does it recognize the absence of a compliance program as a crime. Nevertheless, the ICAC recommends the adoption of an effective compliance program to minimize corruption and mitigate the risk of violations. Recommended mitigation measures include: (i) adopting a risk-based approach; (ii) undertaking proper due diligence of counterparties, agents and intermediaries; (iii) drafting and implementing effective anti-corruption policies and procedures; and (iv) effective embedding, monitoring and reviewing of compliance programs. The ICAC also provides free corruption prevention programs for companies in order to educate management staff regarding the relevant law.[30]

IV.          Judicial proceedings to determine corporate liability

1.             Court competent to decide the liability of and penalties applicable to the company

Criminal offenses are prosecuted in Hong Kong courts. Magistrates’ Courts, District Court, the Court of First Instance and the Court of Appeal of the High Court and the Court of Final Appeal all have jurisdiction to hear criminal offenses. Crimes are divided into summary offenses and indictable offenses. Summary offenses are minor offenses, while indictable offenses are more serious offenses. Summary offenses are generally dealt with in the Magistrates’ Courts in the absence of a jury, whereas criminal proceedings brought on indictment are generally heard by a judge in the district court of the Court of First Instance in the presence of a jury.

The Market Misconduct Tribunal has civil jurisdiction to hear market misconduct offenses committed under the Securities and Futures Ordinance (Cap. 571). If the SFC or Hong Kong Monetary Authority chooses to prosecute an offense under the SFO, the Hong Kong Courts have criminal jurisdiction over the prosecution of such offenses.[31]

2.             Possibility of applying interim measures

Prior to trial, the prosecution can apply for a range of interim orders against a defendant company to preserve evidence and restrict further wrongdoing. Such interim measures may include injunctions over property considered to be proceeds of crime. In cases where directors or officers of a defendant company are prosecuted alongside the company, a court may impose bail conditions on the individuals, such as requiring the posting of a bond, orders of restraint or the withholding of a passport or other travel document. Application for such orders can be made in support of criminal proceedings in Hong Kong or in aid of overseas proceedings.[32]

3.             Plea bargains and related effects on corporate liability

Hong Kong does not have a plea bargaining system. However, cooperation and early acceptance of guilt by a company is accepted by Hong Kong courts as a mitigating factor when it comes to the imposition of sentence. Defendants can receive a reduction of up to a third of the applicable sentence for an early guilty plea and can also be given further reduced sentences for cooperating with the prosecuting authorities in related or unrelated matters. If a defendant provides evidence for the prosecution of others in offenses in which they are not involved, they may be entitled to “supergrass” status entitling them to a reduction of 50% or more of the original sentence. The degree in the reduction of sentence is dependent on the usefulness of the defendant’s cooperation and is determined on a case-by-case basis.[33]

4.             Criminal sentencing against company

If the company is found guilty, the judge will pass sentence on the company based on the applicable sentencing guidelines under the statute and case law applicable to the offense being tried.[34]

5.             Permanence of corporate liability if the crime is extinguished

Hong Kong criminal law states different limitation periods depending on the type of offense. For summary offenses, for which there is no prescribed time limit, Section 26 of the Magistrates Ordinance (Cap. 227) sets out the general rule that prosecution should be brought within six months from the time the offense was allegedly committed.

For indictable offenses and offenses that can be tried either summarily or on indictment, which is known as “either-way offenses,” there is generally no time limit for the commencement of prosecution, except for offenses with specific statutory limitation periods.

V.           Corporate liability in multinational groups

Liability of parent companies in the case of offenses committed by directors, managers or representatives of the local company

Hong Kong law recognizes the concept of separate legal personalities. Accordingly, a foreign parent company will not automatically be liable for the criminal acts of its Hong Kong subsidiary or the directors or managers of the subsidiary. Similarly, a Hong Kong parent company will not be automatically liable for the criminal acts of its foreign subsidiary. Liability is subject to the general rules of attribution, which refers to whether or not the acts of the subsidiary can be attributed to the mind or direction of the parent.

Parent and subsidiary companies and their directors or managers can be criminally liable for any inchoate or secondary liability offenses if the various elements of the offense itself is proven, such as, for instance, if they conspired or incited another to commit an offense believing that it would be committed, or if they aided, abetted, counselled or procured another in committing an offense. The penalty for aiding, abetting, counselling or procuring is the same as that for the primary offense.

A common example of the interaction between group companies is when the proceeds of crime flow from one company to another. So, in cases where an overseas subsidiary is holding the proceeds of crime and distributes the proceeds to its Hong Kong parent company by way of a dividend or otherwise, the fact that the parent received and dealt with the proceeds of crime could make it liable for money laundering under the OSCO or the Drug Trafficking (Recovery of Proceeds) Ordinance (Cap. 405), regardless of whether or not the Hong Kong parent company was party to the underlying crime. Hong Kong authorities may seize criminal proceeds and commence prosecution of a Hong Kong parent under the OSCO and the DTRPO for dealing with criminal proceeds.

VI.          Significant case law concerning corporate liability

As discussed above, in cases where offenses are more individualistic in nature, such as fraud, bribery, money laundering, theft, drugs offenses and manslaughter, prosecution is commonly focused on the individual rather than the company. Therefore, criminal prosecutions of corporations for these offenses are rare. Most corporate prosecutions relate to statutory offenses bearing strict or absolute liability, such as offenses relating to food safety, product liability, environment, work safety, construction safety and customs. It is common for officers of the companies to be prosecuted alongside the corporations if the offenses amount to a serious breach.

The English House of Lords case of Tesco Supermarkets Ltd v. Nattrass,[35] which was adopted in Hong Kong in the R v. Lee Tsat-pin[36] as discussed above in para I(1), continues to be the leading case on the identification principle in Hong Kong.

The Privy Council case of Meridian Global Funds Management Asia Ltd v. Securities Commission[37] laid down the principles of attribution to assist in determining whose knowledge should count as the knowledge of the body corporate in cases where the application of the identification principle is not straightforward. The attribution principles in Meridian were adopted in Hong Kong by the Court of Appeal in Moulin Global Eyecare Trading Ltd (in liq) v. Commissioner of Inland Revenue,[38] and further by the Court of Final Appeal in Goldlion Properties Ltd & Ors V Regent National Enterprises Ltd.[39] The rules of attribution under Meridian and as adopted by Moulin[40] to be applicable to criminal offenses can be summarized as follows:

    1. The primary rules of attribution, as generally found in the articles, state that a decision of the board of directors or a majority vote of shareholders are to be treated as the decision of the company. In cases where there are no express rules in the articles, the primary rules, such as that of a unanimous decision of shareholders, may be implied.
    2. The general or agency rules of attribution state that a company can be vicariously liable for acts of its duly appointed agents, and knowledge may be imputed under the general principles of agency.
    3. In cases where the primary or general rules of attribution are inadequate to determine whether liability should be attributed to a corporation, the court will devise special rules to determine liability. For example, in cases where the wording of an offense suggests that the offense is applicable only to a natural person, the court may consider whether or not the offense was intended to apply to companies.

One notable example of corporate criminal liability in Hong Kong relates to a prosecution for contempt of court. In Secretary for Justice v. Oriental Press Group Ltd & Ors,[41] the defendant corporation (OPG) published a series of scandalous articles criticizing a panel of judges. The Obscene Articles Tribunal, which had heard two unrelated sets of proceedings brought against OPG, delivered judgment against them. OPG then alleged conspiracy and political persecution. OPG sent a paparazzi team to place one of the judges under three-day surveillance and then published articles about it. As a result, contempt of court proceedings were brought against OPG, its subsidiary, the chairman of the board, key members of its staff and the chief editor of the newspaper.

The court convicted OPG and the chief editor for contempt of court, noting that the law imposes clear liability upon newspaper proprietors for materials they publish. The court sentenced OPG to a fine of HKD 5 million and the chief editor to a term of four months’ imprisonment.

In the financial regulatory context, while not a landmark case, an example of where corporate criminal liability has been attached is the case of Securities and Futures Commission v. C.L. Management Services Limited & Ors.[42] In that case, C.L. Management and its sole owner and director were convicted of providing corporate finance advisory services without a license. The Eastern Magistracy fined the defendants a total of HKD 1.5 million. The director was also sentenced to a total of six months’ imprisonment and was suspended for 18 months.

 

 

[1] Tesco Supermarkets Ltd. V Nattrass [1972] AC 153 (HL).

[2] R v. Lee Tsat-pin CACC000315/1985 (Li VP).

[3] S. Lo and C. Qu, “Law of Companies in Hong Kong” (2015, 2nd ed.), paragraph 12.124.

[4] Attorney-General’s Reference (No. 2 of 1999) [2000] QB 796, 813; S. Lo and C. Qu, “Law of Companies in Hong Kong” (2015, 2nd ed.), paragraph 12.122.

[5] Deutsche Genossenschaftsbank v. Burnhope [1995] 1 WLR 1580; S. Lo and C. Qu, “Law of Companies in Hong Kong” (2015, 2nd ed.), paragraph 12.122.

[6] Section 3 Interpretation and General Clauses Ordinance (Cap. 1).

[7] Sections 659-660 Companies Ordinance (Cap. 622).

[8] Sections 168M-168N Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32).

[9] Section 40A Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32).

[10] Securities and Futures Ordinance (Cap. 571).

[11] Sections 7-9 Trade Descriptions Ordinance (Cap. 362).

[12] Section 19 Theft Ordinance (Cap. 210).

[13] Prevention of Bribery Ordinance (Cap. 201).

[14] Sections 26-28 Environmental Impact Assessment Ordinance (Cap. 499).

[15] Secretary for Justice v. Oriental Press Group Ltd & Ors, [1998] 2 HKC 627.

[16] Section 3 Interpretation and General Clauses Ordinance (Cap. 1).

[17] Section 19 Criminal Procedure Ordinance (Cap. 221).

[18] Sections 2-9 Criminal Jurisdiction Ordinance (Cap. 461).

[19] Section 11 Civil Aviation Ordinance (Cap. 448).

[20] Section 12A Aviation Security Ordinance (Cap. 494).

[21] Sections 8B-9 Offences Against the Person Ordinance (Cap. 212).

[22] Section 23 Official Secrets Ordinance (Cap. 521).

[23] Sections 38L, 38M and 38O Dangerous Drugs Ordinance (Cap. 134).

[24] Section 2(2)(c) Prevention of Bribery Ordinance (Cap. 201) provides that “a person accepts an advantage if he, or any other person acting on his behalf, directly or indirectly takes, receives or obtains, or agrees to take, receive or obtain any advantage, whether for himself or for any other person.” This extends the reach of various offenses, such as section 9 of the Corrupt Transactions with Agents, which are not extra-territorial in nature to cases where the actus reus of the offense arose from a pre-existing meeting of minds within the jurisdiction of Hong Kong.

[25] Part 4 of Schedule 2 Anti-money Laundering and Counter-terrorist Financing (Financial Institutions) Ordinance (Cap. 615).

[26] Sections 678-686 Companies Ordinance (Cap. 622).

[27] Section 685 Companies Ordinance (Cap. 622).

[28] The JFIU, which is based in the Hong Kong Police Headquarters, is jointly run by the Hong Kong Police and the HKCED. Its role is to: (i) receive, analyze and store reports of transactions that involve proceeds of crime; and (ii) disseminate such reports to the appropriate investigative unit: http://www.jfiu.gov.hk/en/aboutus.html.

[29] Sections 25 and 25A Organised and Serious Crimes Ordinance (Cap. 455).

[30] In particular, the ICAC has a Corruption Prevention Advisory Service that provides free advice on specific systems and procedures, such as procurement, store management, sales and accounting, staff administration, contract management and code of conduct for employees. (http://cpas.icac.hk/Info/Lib_Index?cate_id=3)

[31] Under Sections 388 and 388A of the SFO, the SFC and Hong Kong Monetary Authority may prosecute an offense or an offense of conspiracy to commit such an offense in its own name. The offense must be tried as a summary offense before a magistrate.

[32] C. Knight and A. Upham, “Criminal Litigation in Hong Kong” (2013, 3rd ed.), pages 113 to 115.

[33] Supra note 32, 346. Supergrass status may be accorded for a defendant’s cooperation with the police in related or unrelated matters or in the recovery of a stolen property. The principle is more commonly applied in the prosecution of individuals rather than corporations. Nevertheless, assistance provided by “corporate” defendants will contribute as a mitigating factor in determining the sentence. The seriousness of offenses, quality of information and risk to the defendant are all relevant in determining supergrass status.

[34] The maximum sentence for any statutory criminal offense is stipulated by the statute governing the offense (see section I(2) above). For common law crimes, the maximum sentence is stipulated under the statute governing the offense. If the offense is indictable and for which no penalty is otherwise provided under statute, the person shall be liable to imprisonment of seven years and a fine (Section 101I of the Criminal Procedure Ordinance (Cap. 221)). The offense of incitement and perversion of the course of justice are exceptions to the rule under Section 101I of the Criminal Procedure Ordinance (Cap. 221). A person will be liable under incitement to the maximum penalty of the offense they incite if no other penalty for such incitement has been otherwise stipulated under any other statute. For the perversion of the course of justice, a person will be liable to a sentence at the discretion of the court. For both statutory and common law offenses, the courts will consider case law applicable to the specific offense in deciding the appropriate starting point for the imposition of sentence in each individual case.

[35] Supra note 1.

[36] Supra note 2.

[37] [1995] 2 A.C. 500.

[38] [2012] 3 HKC 272.

[39] [2009] HKCU 924.

[40] Supra note 38.

[41] [1998] 2 HKC 527

[42] HCMA 288/2015