Hong Kong – Privilege Lost – Super Worth And The Crime/Fraud Exception.

15 August, 2015

 

What you need to know

 

In a recent decision, the Hong Kong Court of First Instance invoked the crime/fraud exception to defeat claims of legal professional privilege over communications between a client and several law firms.

 

In reaching its decision, the court held that there was a strong prima facie case that the purpose of the communications included guiding or facilitating the commission of criminal offences.

 

The case is not only relevant to situations where lawyers advise known and suspected criminals. Regulated businesses at risk of committing technical or strict liability breaches of criminal provisions and businesses with operations in countries where bribery risks are high are also at risk.

 

What you should do

 

Clients seeking and lawyers providing advice on issues that may have a criminal dimension should avoid the possibility that their communications might be perceived as guiding or facilitating criminal conduct or fraud.

If there is a risk that the crime/fraud exception could apply, prepare communications keeping in mind the wider audience that may see them. 

 

The Super Worth case

 

In Super Worth International Ltd -v- Commissioner of the Independent Commission Against Corruption,1 Hong Kong's Court of First Instance considered what is commonly called the "fraud exception" or "crime exception" to legal professional privilege.

 

This rule provides that there is no privilege in documents or communications which are themselves part of (or created in the furtherance of) the commission of a crime, or where the client has sought legal advice to guide or facilitate their commission of a crime. The exception applies to situations where the lawyer was aware of the criminal purpose and also where they were unaware or had been deceived by their client.

 

The background to the Super Worth case is that in 2012 the ICAC executed a search warrant at Super Worth's premises during which a number of documents were seized. Following the raid, criminal charges for fraud and money laundering were laid against several individuals, including May Wang.

 

The allegations in the criminal proceedings are complex. In summary, the ICAC alleges that (i) Wang and others falsely overstated the accounts of dairy farms in New Zealand that a Hong Kong-listed company, Natural Dairy, was seeking to purchase and (ii) the defendants failed to disclose a commission agreement that was in place for the purchase of the farms. It is alleged these misrepresentations were made in order to gain the approval of Natural Dairy's shareholders for the transaction and to avoid it being categorised as a connected transaction for the purposes of the Listing Rules.

 

Natural Dairy's shareholders approved the acquisition and funds were raised for its completion. There were a number of transactions involving the movement of funds through various companies associated with the defendants. After being declared bankrupt in New Zealand, it is also alleged that Wang arranged for puppet shareholders and directors to be appointed to certain companies in New Zealand so that she could retain effective control of them.

 

The documents seized from Super Worth's premises during the ICAC's raid were subject to privilege claims by Super Worth, May Wang and two other companies. The ICAC disputed that the documents were privileged, arguing that the formation of the companies, director appointments and movement of funds were all part of steps in the commission of the alleged offences. As the companies are not parties to the criminal proceedings, separate civil proceedings were commenced to determine the privilege claims.

 

In considering the competing positions, the court noted the strong protections provided to legal professional privilege under Hong Kong law, including Article 35 of the Basic Law. It held that the discretion to invoke the crime/fraud exception is not one that should be exercised lightly. A strong prima facie case that the offending occurred, and that the documents came into existence as a part of the offending, is required.

 

On the basis of the description of the prosecution case, the court held that a strong prima facie case of criminal activities and fraud had been established. In reaching this conclusion, the court considered that the formation of the various companies, the movement of funds and the various steps to complete the acquisition of the farms were all part of the steps necessary to release funds to May Wang and her co- defendants and to conceal their involvement in the transactions. The court considered this conclusion to be correct notwithstanding that many of the steps involved (to which the disputed documents related) were not themselves part of the criminal charges in Hong Kong. The crime/fraud exception was therefore invoked and the documents found not to be protected by legal professional privilege.

 

Analysis

 

While the court held on the material before it that a strong prima facie case of criminal offending existed, the judgment serves as a reminder that the protection afforded by legal professional privilege under Hong Kong law is not absolute. The court's decision is also consistent with the conventional approach under English law that any documents related to the furtherance of the offending (not just those directly relevant to it) fall within the crime/fraud exclusion.

 

The decision will be of interest to businesses that operate in highly regulated areas, such as financial services and banking. It will also be of relevance to businesses operating in jurisdictions where the potential for employees to be involved in bribery is greater.

 

Also of interest were two additional issues raised during the course of the case that the judge considered it was not appropriate for him to consider:

 

a)  One of the disputed documents was a letter containing tax advice prepared by an accounting firm. It was argued for the plaintiffs that Hong Kong should adopt the dissenting judgment in the Prudential tax case2 and extend legal advice privilege to accountants where they are advising on legal matters (as they often do when providing advice on tax issues). The majority of the UK Supreme Court in that case held that privilege should not be extended to accountants without legislative change.

b)  The second and related issue was whether the law of Hong Kong or the law of New Zealand should apply in determining whether the letter containing tax advice was privileged. It was not disputed that, under New Zealand law, a statutory right of non-disclosure does exist for tax advice documents that is equivalent to legal professional privilege.

 

The plaintiffs conceded that, even if privilege did apply to the tax advice – whether under Hong Kong law or the statutory non-disclosure right under New Zealand law – that the crime/fraud exception could still apply. The judge therefore stated that, in light of his conclusions that the documents fell within the exception, his consideration of these two issues would be academic and unnecessary for him to decide the case. While judicial consideration of these two fundamental issues would have assisted in clarifying the extent and scope of legal professional privilege under Hong Kong law, that will have to wait for another day. 

 

For further information, please contact:

 

Gareth Hughes, Partner, Ashurst

gareth.hughes@ashurst.com