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Submitted by // J Wong, Partner
21 February 2020


Challenging a Search Warrant? Easier said than done.

A recent challenge1 to the seizure of various digital devices by the Securities and Futures Commission, or SFC, pursuant to two search warrants, failed in the Hong Kong courts.

Background

During the course of an investigation2
 , the SFC applied to the Magistrates Court for search warrants authorising the SFC to search for, seize and remove records and documents from numerous premises of the applicants.

During the searches, the SFC seized various digital devices, including mobile phones, tablets, notebook computers and desktop computers from the premises, and issued various notices under section 183 of the Securities and Futures Ordinance (Cap 571) ("SFO") to compel the applicants to provide the passwords to access the digital devices and their email accounts.

The applicants sought to challenge the SFC's actions on the grounds that:-

(1) the SFC's seizure of the digital devices in the course of execution of the search warrants and thereafter their retention were -

• ultra vires (that is, beyond the powers of) the SFO or the search warrants
• unlawful and/or
• unconstitutional;

(2) the SFC's issuance of section 183(1) notices to the applicants requiring them to provide passwords were -
ultra vires the SFO or the search warrants
• unlawful and/or
• unconstitutional; and

(3) the search warrants were unlawful and invalid for want of specificity.

Issue 1

On the first point, the applicants argued that the decisions to seize the digital devices were ultra vires, because the digital devices were not "records" or "documents" under section 183(1) as a matter of statutory construction3
 .

This argument was dismissed by the Court. The Court ruled that the words "records" and "documents" were given very wide meanings in the SFO, and are not confined to records or documents in paper or traditional form, but include4
:-

(a) any record of information "however compiled or stored";

(b) information "which is recorded otherwise than in a legible form but is capable of being reproduced in a legible form";

(c) any document, disc, tape, sound track or other device in which sounds or other data (not being visual images) are embodied "so as to be capable (with or without the aid of other equipment) of being reproduced"; and

(d) "any form of input or output into or from an information system", and any other document or similar material "whether produced mechanically, electronically, magnetically, optically, manually or by any other means".

The Court said that it would be "totally out of touch with reality" to exclude digital devices from the meaning of "records" or "documents", given the way information and data are created and stored nowadays.

The argument that the seizure disproportionately interfered with the right to privacy5
, and was thus unlawful or unconstitutional, also failed. The Court pointed out that the right to privacy is not absolute; in this case, there was a legitimate aim (the SFC investigation) to which the seizures and retention of the devices was rationally connected and no more than reasonably necessary. In addition, the SFC had proposed to use keyword searches to filter out personal or irrelevant information and therefore the applicants would not have suffered an unacceptably harsh burden.

Issue 2

Some of the applicants argued that the section 183 notices issued to them were ultra vires the provisions of the SFO, because they were required to produce vast amounts of materials which were irrelevant to the investigation
6. They further argued that to permit the use of section 183(1)(a) in this way would be disproportionate and a violation of the right to privacy. Finally, they also claimed that the SFC had no power under the relevant search warrants to access email accounts, mobile phones and tablets.

The Court rejected all of these arguments. The Court noted that storage of information and records nowadays is mostly in electronic form in email accounts and digital devices; inevitably there would be large amounts of personal7 materials and security protection by way of login IDs and passwords
8 . Seizing the entire device or having access to the entire email account is practically inevitable9 , and as the SFC had offered to do keyword searches to protect the privacy of the applicants, the Court did not agree that the section 183(1) notices were ultra vires, unlawful or unconstitutional.

Issue 3

The applicants also challenged the search warrants for lack of specificity, in that
10 :-

(1) they failed to specify or limit the scope of the search, seizure and removal;
(2) they failed to identify any particular offence; and
(3) parts of the warrants were vague and unspecific.

The Court's view is that what needs to be stated on a search warrant depends on the empowering statute. In the current case, the search warrants were issued pursuant to section 191 of the SFO, which requires the search warrants to specify various things, but there is no requirement that they must specify the specific offence committed
11 . In any event, the Court noted that the warrants did specify the general grounds, albeit a large number of possible offences were covered by those grounds. The applicants' arguments were rejected.

Key Takeaways

Do think carefully before deciding to challenge a search warrant or the SFC's use of its various investigation powers under the SFO; weigh up the pros and cons before proceeding.

In the meantime, recognise that the SFC's current practice to seize electronic materials and digital devices to assist in their investigations, will continue. Here are some general preparatory tips to minimise the adverse impact on your business and the privacy of individuals -

• Make sure you have a list of all devices used by your company so that you can keep track of these if they are seized.
• Ensure you have back-up records so you can continue to do business.
• Any document over which legal privilege can be asserted should be clearly titled or, ideally, kept in a separate folder or device so it is easy to identify. Claim legal privilege over those documents.
• Do filing regularly, so there is clear separation of personal or irrelevant materials from work matters. Ideally, each project should have its own file.
• Consider, and then have and enforce internal policies, regarding the use of personal devices for work purposes (and vice versa).
• Treat emails, digital messages, etc. with the same care as you would hard copy documents.

- Jill Wong & Kevin Leung
_______________________________________

[1] The applicants were Cheung Ka Ho Cyril, To Hang Ming, To Lung Sang, To Man Choy Jacky, Wan Wai Lun, HCAL 2132, 2133, 2134, 2136 & 2137/2018 [2020] HKCFI 270.
[2] The facts can be found at paragraphs 5 to 13 of the judgment.
[3] See judgment at paragraph 37. The applicants also argued that if the digital devices fall within the definitions of "records" and "documents", any provisions in the SFO authorising the SFC to require production of digital devices without a warrant would be unconstitutional. This point was dismissed by the Court in paragraph 49 for being irrelevant, because in all the searches, the SFC had valid search warrants.
[4] See judgment at paragraph 41.
[5] Under Article 30 of the Basic Law and/or Article 14 of the Bill of Rights.
[6] Thus falling outside the remit of any record or document which "is, or may be, relevant to the investigation" under section 183(1)(a) SFO.
[7] Albeit irrelevant.
[8] See judgment at paragraph 68.
[9] And generally in line with previous cases, see paragraphs 65 to 72 of the judgement.
[10] See judgment at paragraph 75.
[11] See judgment at paragraphs 78, 87 to 92


About Us

Howse Williams is an independent law firm which combines the in-depth experience of its lawyers with a forward thinking approach. 

Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; property and building management; banking; fraud; financial services/corporate regulatory and compliance.

As an independent law firm, we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.

 

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News //
Submitted by // J Wong, Partner
14 February 2020


BITCOINS: STOP AND FREEZE

A recent English high court case1 has found that cryptocurrencies are a form of property. This is a significant ruling with a useful analysis of this issue and provides some indication of how Hong Kong courts and regulators may approach the current debate of whether, and how, cryptocurrencies fall into various financial services laws.

The case

A hacker installed malware on a company's computer systems and subsequently sent a ransom note:

"Hello [company] your network was hacked and encrypted. No free decryption software is available on the web. Email us at […] to get the ransom amount. Keep our contact safe. Disclosure can lead to impossibility of decryption..."

The company notified its insurer. Given the importance to the company to obtain access to its computer systems, the insurer agreed to pay a ransom of US$950,000 in Bitcoins (about 109 Bitcoins) in return for the decryption tool.

After the ransom was paid, the insurer hired a specialist investigation company to track the Bitcoin ransom payment. The investigation revealed that whilst some of the Bitcoins had been transferred into fiat currency, a substantial portion, namely, 96 Bitcoins, had been transferred to a specified address linked to an exchange known as "Bitfinex". The insurer issued various court applications to further trace and recover the Bitcoin ransom payment.

Injunction application

One of the applications in front of the court was a proprietary injunction application over the 96 Bitcoins held in the account with Bitfinex. As injunctions can only be granted over property, the court had to determine whether or not the Bitcoins were property.

English law traditionally views property as being only of two kinds:

1. choses in possession; and
2. choses in action.

In the judgment, the court explained that this presents a difficultly in treating Bitcoins as a form of property; they are neither a chose in possession nor are they a chose in action. They are not choses in possession because they are virtual, they are not tangible, they cannot be possessed. They are not choses in action because they do not embody any right capable of being enforced by action.

However, the court found that English law does recognise forms of property other than choses in possession and choses in action, following a discussion of the UK Jurisdictional Task Force's "Legal Statements on Crypto-Assets and Smart Contracts"
2 . The court also concluded that Bitcoin met four criteria of property : it is definable, it can be identified by third parties, it is capable in its nature of assumption by third parties and it has some degree of permanence3 .

Takeaways

Although this case is not legally binding in Hong Kong, English judgments are nevertheless persuasive, and this case is promising for companies wanting to recover stolen crypto-assets.

The Hong Kong courts
4 have also recently granted a Mareva injunction freezing the assets of a cryptocurrency trader in a dispute concerning Bitcoins held on an insolvent trading platform. In the case, the court found the plaintiff had made a good arguable case that the Bitcoin should be preserved, although there were competing claims to ownership. The Hong Kong judgment does not discuss the nature of Bitcoins, as this was not relevant to the legal test for granting the Mareva injunction.

The English judgment may also have consequential implications on other Hong Kong legislation that refers to the definition of "property", for example, "property" is defined in the Securities and Futures Ordinance as: "property includes (a) money, goods, choses in action and land, whether in Hong Kong or elsewhere; and (b) obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, arising out of or incident to property as defined in paragraph (a)". This definition (which mirrors the definition of "property" in the Interpretation and General Clauses Ordinance) is inclusive, and so arguably, may include Bitcoins and other cryptocurrencies.

_______________________________________

[1] AA and (1) Persons Unknown Who Demanded Bitcoin On 10th And 11th October 2019 (2) Persons Unknown Who Own/Control Specified Bitcoin (3) iFINEX trading as BITFINEX (4) BFXWW INC trading as BITFINEX [2019] EWHC 3556 (Comm).
[2] The full legal statement can be found at the following link.
[3] As set out in Lord Wilberforce's classic definition of property in National Provincial Bank v Ainsworth [1965] 1 AC 1175]
[4] Nico Constantijn Antonius Samara v Stive Jean Paul Dan [2019] HKCFI 2718


About Us

Howse Williams is an independent law firm which combines the in-depth experience of its lawyers with a forward thinking approach. 

Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; property and building management; banking; fraud; financial services/corporate regulatory and compliance.

As an independent law firm, we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.

 

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Submitted by // P Yeung, Partner
12 February 2020

 

Hong Kong's Employment (Amendment) Bill 2019 Gazetted

On 27 December 2019, the Hong Kong SAR Government gazetted the Employment (Amendment) Bill 2019. The purpose of the Bill is to amend the maternity benefits for female employees who are employed under a continuous contract. The changes seek to bring Hong Kong in line with the International Labour Organisation standards, which provide for a minimum maternity leave period of 14 weeks.

The Bill proposes the following changes to the statutory maternity leave protections as provided for in the Employment Ordinance (Cap. 57):

  • Increase of statutory maternity leave from 10 weeks to 14 weeks. 
  • The additional four weeks' maternity leave pay will continue to be calculated at four-fifths of the employee's average daily wages, subject to a cap of HK$36,822 per employee (the cap is essentially equivalent to four-fifths of the wages of an employee with a monthly wage of HK$50,000 in four weeks). While the cap is stipulated in the Bill, the employer is not prohibited from paying a higher amount to the employee under the contract of employment. The current proposal is that the additional four weeks' statutory maternity leave pay will be reimbursed by the Government to employers by way of an administrative scheme. 
  • Shortening the period of pregnancy mentioned in the definition of "miscarriage" from 28 weeks to 24 weeks (which means that a female employee whose child is incapable of survival after being born at or after 24 weeks of pregnancy may be eligible for statutory maternity leave if other conditions are satisfied).
  • The acceptance of a certificate of attendance as proof for entitlement to sickness allowance for a day on which a female employee attends a medical examination in relation to her pregnancy (in contrast with the current position which requires a medical certificate). 
The Bill was introduced into the Legislative Council for First Reading on 8 January 2020, with the Secretary for Labour and Welfare commenting that the changes, if accepted, could take effect by the end of 2021.

Chief Executive announced plans to increase progressively the number of statutory holidays

On 14 January 2020, the Hong Kong SAR's Chief Executive announced plans to increase the number of statutory holidays per year from 12 days to 17 days, subject to discussions with the business sector. At present, employees in Hong Kong, in particular the white-collar workers enjoy 17 general holidays per year, while the blue-collar workers, are entitled to 12 statutory holidays per year.

According to a Press Release issued by the Hong Kong SAR Government, this initiative aims to address society's longstanding concern about unfair treatment, in which there are different numbers of holidays for different employees. The Government will ask the Labour Advisory Board to work out a proposal to increase progressively the number of statutory holidays so that it is eventually on par with the number of public holidays. It is estimated that more than one million employees in Hong Kong will benefit from the proposal.

Hong Kong's Sex Discrimination (Amendment) Bill 2020 Gazetted

On 31 January 2020, the Hong Kong SAR Government gazetted the Sex Discrimination (Amendment) Bill 2020. The purpose of the Bill is to provide breastfeeding women with protection from harassment by amending the Sex Discrimination Ordinance (Cap. 480) ("SDO") to make it unlawful for a person to harass a breastfeeding woman.
 
  • Expanding the definition of "harass" in the SDO to comprise both sexual harassment and harassment of breastfeeding women. 
  • Adding a new section to the SDO which sets out the meaning of harassment of a woman on the ground that the woman is breastfeeding.
  • Amending certain provisions in the SDO that only refer to sexual harassment so that such provisions apply in relation to both sexual harassment and harassment of breastfeeding women.
The Bill is expected to be introduced into the Legislative Council for First and Second Reading on 12 February 2020.

The EOC believes that the Bill will strengthen legal safeguards for the right to breastfeed, and help empower women to nourish their children without fear and intimidation.

 

About Us

Howse Williams is an independent law firm which combines the in-depth experience of its lawyers with a forward thinking approach.

Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; property and building management; banking; fraud; financial services/corporate regulatory and compliance.

As an independent law firm we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.

Disclaimer: The information contained in this article is intended to be a general guide only and is not intended to provide legal advice.  Please contact pr@howsewillilams.com if you have any questions about the article.

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News //
Submitted by // J Wong, Partner
10 February 2020


Virtual assets - the SFC's regulatory strategy for a dynamic industry

In November 2018, the SFC published a proposed framework for virtual asset trading platforms. A few months ago, the SFC followed this with the publication of a position paper on the regulation of virtual asset trading platforms. On the same day, the CEO of the SFC, Ashley Alder, gave a speech at FinTech week and the SFC also issued a warning on virtual asset futures contracts.

We have distilled the messages from the SFC as follows:

1. The SFC says it has no power to regulate businesses who deal in pure virtual assets, that is, assets that do not fall within the definitions of "securities" or "futures contracts" under the SFO.

2. However, the SFC will consider licensing a centralised online trading platform offering at least one security token and which has control over investors' assets.

3. The SFC will not accept licensing applications from platforms:

a. which only provide a direct peer-to-peer marketplace for transactions;
b. where investors typically retain control over their own assets; or
c. which trade virtual assets for clients, including order routing, but do not provide ATS themselves.

4. Licensees must comply with the Terms and Conditions for Virtual Asset Trading Platform, which is at Appendix 1 of the Position Paper.

5. These include, for example:

a. requirements relating to safe custody of assets, KYC/AML and market manipulation;
b. specific criteria relating to hot/cold wallets, hard forks, airdrops, etc.;
c. provision of services only to professional investors; and
d. requirements with respect to insurance.

6. The SFC is unlikely to grant a licence to carry on a business in virtual asset futures contracts. The SFC even goes so far as to note that "virtual asset futures contracts may also be construed as contracts for differences under the Gambling Ordinance… persons who breach the relevant provisions of the SFO or the Gambling Ordinance may be prosecuted and, if convicted, subject to criminal sanctions." This is a strong warning.

7. Licensed platforms will be placed into the SFC's Regulatory Sandbox.

Ashley Alder said in his speech that the SFC recognises that it must be open to the benefits of innovation, but its "bottom line" is that it needs to "stay vigilant about the risks of new technology."

This is clear from the recent statements from the SFC, which are robust, stringent and very comprehensive. It is likely that they only want committed and professional entities to apply and have set the bar for a licence (at least for trading platforms) quite high. Having said that, this could mean that platform operators looking to operate in Hong Kong could have a competitive advantage in being an SFC-licensed entity.

The regulatory regime continues to evolve, as the SFC continues to refine its approach, we expect more changes. As Ashley Alder said in his speech "…watch this space – there will be much more to come."


About Us

Howse Williams is an independent law firm which combines the in-depth experience of its lawyers with a forward thinking approach. 

Our key practice areas are corporate/commercial and corporate finance; commercial and maritime dispute resolution; clinical negligence and healthcare; insurance, personal injury and professional indemnity insurance; employment; family and matrimonial; property and building management; banking; fraud; financial services/corporate regulatory and compliance.

As an independent law firm, we are able to minimise legal and commercial conflicts of interest and act for clients in every industry sector. The partners have spent the majority of their careers in Hong Kong and have a detailed understanding of international business and business in Asia.

 

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