In our earlier publication “COVID-19 heightened corruption risks – A Hong Kong guide”1, we forewarned that COVID-19 and the challenges it posed to enforcement authorities, organizations and their workforce would allow corruption to thrive. The 2020 annual report of the Independent Commission Against Corruption (the “ICAC”) released in July 2021 and the enforcement actions taken in Hong Kong in the period following our last publication bears this out. While corruption complaints (for both private and public sectors) were down, there were still 1,454 pursuable complaints, and in the second half of 2021, over 85 individuals, including some involved in the listed sector, were charged by the ICAC for corruption related offences2.
It is therefore not surprising that following the public consultation on the Review of Corporate Governance Code and Related Listing Rules (the “Consultation Paper”)3 which commenced on 16 April 2021, the Hong Kong Exchanges and Clearing Ltd (the “HKEX”) has mandated that all issuers establish anti-corruption and whistleblowing policies and procedures, or include relevant provisions in their code of conduct or other policies (together, the “New Requirements”)4. These New Requirements are being implemented through the introduction of new code provisions under the Corporate Governance Code (the “CG Code”) as set out in Appendix 14 to the Main Board Listing Rules and Appendix 15 to the GEM Listing Rules5 (collectively, the “Listing Rules”) that will come into effect on 1 January 2022.
In this publication, we consider the corruption complaints and enforcement actions in the second half of 2021, the New Requirements in the CG Code, and the new Corporate Governance Guide for Boards and Directors (the “CG Guide”) published on 10 December 20216 to assist issuers’ compliance with the New Requirements. As a guide to issuers and other organizations considering establishing and/or revising their policies and procedures, we set out additional steps that can be taken to ensure that the policies and procedures are fit for purpose and effectively implemented.
Corruption cases for the second half of 2021
We highlight below a number of the enforcement actions that have resulted in sanctions against the individuals concerned, which illustrate the diverse nature of the offending and the risks they pose to organizations:
There were also a number of enforcement actions involving the listed sector, some of which are still pending:
As can be seen from the above sample cases, many of the enforcement actions for corruption related offences involved both senior and junior personnel from large as well as small organizations in diverse industries, including construction, education, finance, retail / trading and transportation. Additionally, the personnel concerned worked in different functional areas, such as finance, human resources, marketing, operations, strategy and technology and equipment. They were also allegedly involved in a variety of misconduct, including misconduct in public office and/or failing to declare conflicts of interests, obtaining advantage by deception, accepting bribes and illegal rebates from clients / employees, conspiracy to steal, using false documents to mislead / pervert the course of public justice, as well as fraud / conspiracy to defraud. Of particular concern is the alleged involvement of “gatekeepers”, such as directors, senior management and professionals from underwriting and accounting firms involved in the listed sector, in the misconduct.
The New Requirements to establish anti-corruption and whistleblowing policies and procedures effective from 1 January 2022
The revised Listing Rules and CG Code with the New Requirements will come into effect on 1 January 2022, and will apply to corporate governance reports for the financial year commencing on or after 1 January 2022.
To assist compliance with the New Requirements, the HKEX published the CG Guide to provide guidance to issuers. The CG Guide should be read alongside the Listing Rules (including the CG Code), and is “intended to stimulate the board’s thinking on how they can carry out their role most effectively, including how the principles in the CG Code are applied and reported on.”21
As stated in the CG Guide, having anti-corruption and whistleblowing policies and procedures are core to establishing a healthy corporate culture and promoting high ethical standards. An effective whistleblowing system can help detect and deter misconduct or malpractice.
The key provisions in the CG Guide on establishing the anti-corruption and whistleblowing policies and procedures follow:
|Anti-corruption Policies & Procedures||Whistleblowing Policies & Procedures|
|Purpose of the policy||The policy should demonstrate the issuer’s support for anti-corruption law and regulations, and promote an anti-corruption culture within the issuer.||
The policy should enable employees and those who deal with the issuer, e.g. customers and suppliers, to voice concerns, in confidence and anonymity, with the audit committee (or a designated committee comprising a majority of independent non-executive directors) about possible improprieties in matters relating to the issuer.
|Scope of the policy||The policy should include:
(a) the types of breaches and conduct issues to which the policy applies;
(b) personnel to which the policy applies – this should cover employees at all levels, external parties doing business with the issuer and those acting in an agency / fiduciary capacity on behalf of the issuer (e.g. agents, consultants and contractors).
The policy should include:
|Matters that may be included in the policy||
The policy may include the following:Culture / integrity requirement:
(a) the issuer’s desired culture, with integrity, honesty, fairness, impartiality, and ethical business practices being stated as one of the core values of the issuer;
(b) integrity and conduct requirements expected of the issuer’s personnel, including compliance with POBO, amongst other relevant laws of other countries / regions as appropriate.
Conflicts of interest:
(a) a statement of policy requiring directors and employees to avoid conflicts of interest in carrying out the issuer’s business and to declare any conflicts of interest as appropriate;
(b) guidelines on handling of conflicts of interest.
Top-level commitment: an unequivocal statement of top-level commitment to adopt ethical and anti-corruption business practices, high standard of integrity and zero tolerance of corruption.
Customer due diligence measures: a requirement to include proper customer due diligence and record-keeping measures, policies or procedures taking into account factors including products and services offered, types of customers and geographical locations involved.Anti-corruption program:
(a) description of the issuer’s anti-corruption program, including the mechanism for the identification and assessment of corruption risks and the controls in place to mitigate the risks;
(b) appropriate policies and controls to manage risks and maintain records when offering or accepting gifts, entertainment or other advantages, and when engaging in charitable donations, political expenditure or recruitment;
(c) restrictions on the acceptance of advantages from persons having business dealings with the issuer where no undue favour is involved;
(d) proper training for management and employees likely to be exposed to bribery, corruption, money laundering, and terrorist financing.
Disclosures: a requirement to disclose the anti-corruption policy (or its summary) on the issuer’s website.
Breaches of policy:
Periodic review: a requirement to periodically review and ensure the effectiveness of the policies, including making changes when and where required.
The policy may include the following:
Statement of intent / pledge: a statement about the issuer’s commitment to high probity standards and ethical business practices, encouragement of reporting concerns and actual or suspected misconduct or malpractice by any staff and/or external parties in any matter related to the issuer.
Protection against retaliation: a statement pledging confidentiality, anonymity, timely handling of reports, assurance of fair treatment and protection from retaliation, and the relevant policy and measures.
Consequence of false reports: a policy against knowingly / irresponsibly making false allegations or malicious allegations and its consequences.
Disclosures: a requirement to disclose the policy (or its summary) on the issuer’s websites and the reporting channels.
Periodic review: a requirement to review the whistleblowing mechanism periodically to improve its effectiveness and employee confidence in the process and to encourage a “speak up” culture across the issuer.
Key takeaways / recommendations
The CG Guide is a good starting point for issuers and organizations who are seeking to establish anti-corruption and/or whistleblowing policies and procedures, or to modify their existing policies and procedures. To ensure that the policies and procedures are fit for purpose and effectively implemented, issuers and organizations should also consider taking the following steps:
To ensure well designed policies and procedures
1. ensure that the policies and procedures are designed around your organization’s risk profile – one size does not fit all;
2. ensure that the policies and procedures are clearly written, applicable, accessible and comprehensible to all employees;
3. ensure that there is periodic training of staff and mechanisms to measure the effectiveness of the policies and procedures;
4. ensure that the whistleblowing program provides a confidential and safe system for reporting suspected non-compliance, and is properly resourced;
5. ensure that there is a system for conducting proper risk based due diligence to identify and monitor dealings with all third parties and when assessing potential targets, including for corrupt activity;
To ensure effective implementation
6. ensure that the “tone from the top” / commitment to compliance is demonstrated across the whole organization; not just at senior management level;
7. ensure clear designation of properly qualified personnel with compliance responsibilities and allocation of sufficient resources to administer and support the anti-corruption and whistleblowing programs;
8. ensure that the anti-corruption and whistleblowing programs are properly enforced through clear and consistent disciplinary procedures and proper incentives for compliance;
To ensure the program works in practice
9. ensure periodic internal reviews are undertaken to evaluate compliance risks and effectiveness of the existing programs;
10. ensure timely, thorough and properly scoped investigations of suspected misconduct is undertaken by qualified personnel;
11. ensure that prompt analysis of root causes is conducted and remedial action is taken to address identified issues.
1 COVID-19 heightened corruption risks-A Hong Kong guide | LC Lawyers (eylaw.com.hk)
2 2020 Annual Report: www.icac.org.hk/icac/annual-report/2020/
3 Consultation Paper: Paper on ESG (hkex.com.hk)
4 Currently, it is a requirement under the ESG Guide to disclose anti-corruption and whistleblowing policies or information, implementation of relevant procedures and material incidents on a “comply or explain” basis.
5 CG Code: Main Board: appendix_14 (hkex.com.hk); GEM Board: Appendix 15 Corporate Governance Code and Corporate Governance Report | Rulebook (hkex.com.hk)
6 CG Guide: HKEX_GFBD_EN_211210_v5
7 ICAC, HKSAR - Press Releases - Ex-manager of street cleansing contractor jailed for $240,000 salary fraud
8 ICAC, HKSAR - Press Releases - Ex-director of garment trading company jailed for soliciting RMB150,000 bribe and stealing HK$150,000
9 ICAC, HKSAR - Press Releases - Duo guilty of fraud over $290,000 government green funding
10 ICAC, HKSAR - Press Releases - Ex-manager of groceries retailer gets three years’ jail for accepting bribes
11 ICAC, HKSAR - Press Releases - Ex-secondary school teacher jailed for breaching anti-bribery law and theft involving $5.3m over renovation projects
12 ICAC, HKSAR - Press Releases - Ex-manager of lighting product company charged by ICAC jailed for 56 months over $12m fraud
13 ICAC, HKSAR - Press Releases - Ex-manager of aircraft maintenance company charged by ICAC jailed for $1.5m order fraud
14 ICAC, HKSAR - Press Releases - SME director charged by ICAC jailed for $19m banking facilities fraud
15 ICAC, HKSAR - Press Releases - Duo charged by ICAC jailed for accepting illegal rebates from construction workers over Third Runway Project jobs
16 ICAC, HKSAR - Press Releases - ICAC statement; SFC and ICAC search a listed company and an underwriter | Securities & Futures Commission of Hong Kong
17 ICAC, HKSAR - Press Releases - ICAC statement; SFC and ICAC joint operation on listed company’s suspicious money lending activities | Securities & Futures Commission of Hong Kong
18 SFC-ICAC operation leads to conviction of Convoy Global’s former senior executives | Securities & Futures Commission of Hong Kong; ICAC, HKSAR - Press Releases - Four charged by ICAC sentenced for conspiracy to defraud over bonds placement of listed company
19 ICAC, HKSAR - Press Releases - Merchant further charged by ICAC with conspiracy to defraud over ‘backdoor listing’ of listed company and money laundering
20 ICAC, HKSAR - Press Releases - Three accountants among nine arrested by ICAC for alleged bribery over listing of Macao construction firm
21 CG Guide: HKEX_GFBD_EN_211210_v5