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Integration and infiltration: Keeping Hong Kong corruption-free?

Keeping-Hong-Kong-corruption-freeJustin Bong-Kwan (LLM student, London School of Economics and Political Science) discusses Hong Kong’s increasing exposure to corruption resulting from the growing integration between the special administrative region and Mainland China’s markets and economies.

Speed Read

Although China is playing an increasingly significant role in consolidating Hong Kong’s status as a premier financial centre, there is evidence suggesting that increased market integration has also led to the infiltration of corrupt business practices from China into Hong Kong. The strict enforcement of the Prevention of Bribery Ordinance, Hong Kong’s cornerstone anti-corruption legislation, has given the city a reputation as one of the cleanest and most desirable places in the world to conduct business. However, the Ordinance’s lack of jurisdiction beyond the territory’s borders threatens to tarnish this image.

Commentary

According to the 2013 rankings of Transparency International’s Corruption Perceptions Index, Hong Kong’s public sector is perceived to be the world’s 15th cleanest, along with Belgium and Barbados, affirming its status as one of the most desirable places to conduct business. With Hong Kong’s increasing dependence on financial services for economic growth and its aspiration to become the world’s premiere financial centre rivalling London and New York, it is imperative that the territory maintains its economic attractiveness by staying corruption-free..

The concern is that the increasing integration between Hong Kong and Mainland China’s markets and economies may be jeopardising Hong Kong’s once squeaky-clean image. Since the transfer of sovereignty in 1997 under the ‘one country two systems’ principle and the conclusion of the Closer Economic Partnership Arrangement in 2003, China has become the city’s largest trading partner, accounting for over half of Hong Kong’s total trade volume.However, China is riddled with problems of inefficiency and corruption, and these continue to trouble Western financial institutions. In their efforts to gain market shares and revenue, many financial institutions have been lending extensively to Chinese borrowers through their Hong Kong subsidiaries or branches. The precariousness of this business and its potential downfall due to unlawful practices could easily tarnish Hong Kong’s reputation.

A more pressing issue is whether there is an infiltration of corrupt business practices, such as bribery and money laundering, from China. Unfortunately, there seems to be some evidence which suggests that such infiltration is occurring. For instance, the former head of investment banking in China of JP Morgan in Hong Kong was recently arrested under suspicion of contravening the Prevention of Bribery Ordinance (Cap 201) (‘POBO’) for hiring the children of senior Chinese officials and business leaders, allegedly in order to win lucrative financial deals from Chinese companies. In this and other instances, the Independent Commission Against Corruption (‘ICAC’) appears to have taken a strong stance in rigorously enforcing the POBO. This can be seen in the more recent prosecution of, among others,former SAR chief secretary Rafael Hui, who admitted to accepting a payment from a Chinese official to fund his indulgent lifestyle. This case has become the largest anti-graft probe in the history of Hong Kong involving the co-chairmen of top property developer Sun Hung Kai Properties.

Although the ICAC has gained a venerated reputation for enforcing the anti-corruptions laws with a high degree of success, this image has suffered an enormous setback with the revelation of, and later investigation into, the lavish spending of former ICAC chief Timothy Tong during his five-year tenure. Such spending included banquets and gifts to senior Chinese officials, and is particularly disconcerting in light of Tong’s subsequent appointment to the Chinese People's Political Consultative Conference, considered by many as his delayed payback. This raises the question of whether infiltration has not only affected the private sector, but also the public sector. If so, it raises a further and more important issue of whether Hong Kong’s legal and regulatory regime is equipped to handle this infiltration. As integration between Hong Kong and the Mainland continues to progress at a rapid pace, it is absolutely crucial for Hong Kong to have an effective legal framework in place as a safeguard, if the territory is to retain its largely corruption-free image.

The POBO is Hong Kong’s cornerstone anti-corruption legislation, aimed at preventing public officers from soliciting or accepting an advantage for the performance of official duties and preventing agents, such as employees of private companies, from doing the same when conducting their principal’s affairs. Under the POBO, the term ‘advantage’ is broadly defined to include “any gift, loan, fee, reward, commission, office, employment, contract, payment, service or favour”. It is conceded that many questionable practices may not be carried out with the intent of gaining an advantage and may just be a part of traditional business culture. Chinese officials may consider it no more than elementary politeness to treat their guests with utmost hospitality, and are simply not in tune with Western attitudes of how public money should be spent.However, the POBO does not provide for exceptions on the basis that it is customary in any profession or trade to accept an advantage.

Interestingly, ‘entertainment’ is excluded from the definition of advantage under the POBO. ‘Entertainment’ is defined as ‘the provision of food and drink for consumption on the occasion when it is provided, and of any other entertainment connected with, or provided at the same time as such provisions’. While the courts accept that entertainment expenses are ‘not unusual’ for improving business relationships (see, for example,Hau Tung Ying v HKSAR (2011) 14 HKCFAR 453 (CFA) [31]),there is still wide scope for bribery to occur, as business entertainment is very much the norm in Hong Kong and China. Indeed, the Hong Kong Civil Servants’ Guide suggests that ‘any lavish, unreasonably generous or frequent entertainment that may lead to embarrassment in performing official duties or bring the public service into disrepute’ should be declined, underscoring the government’s uneasy view of ‘entertainment’.

Yet, the broader issue is that the ICAC’s inability to investigate individuals and companies abroad and its strict enforcement in Hong Kong causes net exportation of corruption to China. Those in Hong Kong seeking to engage in bribery find it too risky to do so in Hong Kong, but can do so in China where law enforcement against corruption is relatively lax. This could potentially create a vicious cycle whereby corrupt practices creep into Hong Kong and then are exported back to China. Whilst a more robust enforcement beyond its borders may solve the problem, nothing in the POBO or ICAC Ordinance (Cap 204) gives the ICAC explicit power to conduct activities abroad. Even though the POBO outlaws bribery committed ‘in Hong Kong or elsewhere’, Bokhary PJ held in B v Commissioner of the ICAC [2010] 13 HKCFAR 1 (CFA) [21] that ‘[i]f any extra-territorial element was involved, it would be very limited since that legislation is directed against offers made here [in Hong Kong] and targets the offeror only.’ The case concerned the bribery of a Chinese official visiting Hong Kong, under POBO.

The reasoning of the Court of Final Appeal sets a precedent for an uncertain approach to future cases. In essence, the court highlighted the need to unequivocally proscribe cross-jurisdictional bribery and to prescribe the scope of the POBO’s extra-territorial application, while explicitly stating that extra-territoriality would only be applicable if it was so mandated by the Legislative Council. In this respect, Hong Kong lawmakers may wish to look to the UK’s Bribery Act 2010. Section 12(2)(c) extends jurisdiction of the Act to offences committed outside of the UK for ‘person[s] ha[ving] a close connection with the United Kingdom’. The provision includes categories of persons who may be prosecuted, such as British citizens, subjects and residents and citizens of British overseas territories. If Hong Kong were to adopt this position, it would have the effect of curbing the export of corruption by catching those who are associated with Hong Kong but have engaged in bribery abroad. This would be a welcome development if Hong Kong wishes to remain a premier business centre.

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The views expressed in this article represent those of the author and not Bright Line Law.

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