Year of the Asian regulator

Global litigation boutique Kobre & Kim shares its top five predictions for the Asia legal market in 2015 based on the firm’s current client engagements.

William McGovern, a Hong Kong-based partner at the global litigation boutique Kobre & Kim, and John Han, a Hong Kong-based attorney at the firm, share their top five predictions for the Asia legal market in 2015 based on their current client engagements.

US prosecutors will use FATCA and related agreements to increase scrutiny of Asian banking practices

FATCA, which came into effect in July 2014, will require foreign financial institutions to automatically turnover information about their US clients or face a 30% withholding tax on all US sourced transactions. China has agreed in principal to the terms of an intergovernmental agreement with US tax authorities to exchange information about one another’s tax payers on a reciprocal basis.

In May 2014, the 65 members of the Organisation for Economic Co-operation and Development, including China and nearly all of the major world economies, committed to implementing a Common Reporting Standard for Automatic Exchange of Financial Information. This common standard, modelled after FATCA, will be implemented by early adopter states in 2017.

These agreements plus other tools already available will increase the US government’s visibility into banks in Asia and their US account holders. As a result, next year will almost certainly bring an increase in US tax investigations that involve Asia-based banks, private wealth managers, trust advisors and others who deal with US citizens.

Uptick in whistleblower information originating in Asia will drive an increase in internal investigations at MNC’s.

There is now a virtual wave of whistleblower information coming from Asia. In fact, whistleblowers from China and Hong Kong are among the most frequent reporters of information to the US Securities and Exchange Commission with an average of about 1 tip every 10 days during 2014. These whistleblower tips cover a wide variety of potential illegal conduct including bribery, financial fraud and insider trading. The trend is fuelled by reports of significant monetary rewards paid for accurate whistleblower information and widespread information exchange among employees via social media.  There have even been reports in China of businesses set up to identify disgruntled employees and source potential whistleblower tips.

The increase activity of whistleblowers and the resulting US government investigations creates an uneasy environment for MNCs operating in Asia. Employers are expected to provide hotlines and other means to collect whistleblower information and then investigate what is reported. Internal investigations, once reserved for the most serious allegations, are now a commonplace response to even seemingly minor allegations. Compliance officers and business managers recognise that they need to be proactive in these investigations to mitigate the force of any resulting in US government inquires.

Increasing Chinese outbound investment will lead to a surge in international disputes

The past year marked the first time Chinese outbound investment exceeded inbound investment.  Chinese enterprises completed a record 176 mergers and acquisitions (worth US$40.8 billion) overseas in the first nine months of 2014, up 31% from the previous year.

The profile of the typical outbound Chinese investor is continuing to evolve and globalise. The first wave of outbound investment was often driven by first tier state owned enterprises. We are now seeing more private enterprises focusing on US investment. Alibaba’s listing on the NYSE in September 2014, the largest IPO in history, is perhaps the most prominent example.

While this new group of outbound investors is commercially sophisticated and ambitious, they are often new to the global stage and so have less experience navigating international regulatory regimes and joint venture rules compared to the first tier SOE predecessors.

The further integration of the Chinese and US economies and, in particular, the physical presence of Chinese owned business in the US, has already started to lead to an increase in cross border disputes and litigation in US courts. And, importantly, this trend will give the US plaintiff a greater ability to survive jurisdictional challenges to the claims involving Chinese enterprise they seek to bring in US courts.

The Shanghai-Hong Kong Stock Connect scheme exposes investors to overlapping regulations from different regulatory bodies

The Shanghai-Hong Kong Stock Connect, launched in November 2014, was initially met with great euphoria but market stakeholders from both Hong Kong and the PRC are now realising they may be exposed to a dual set of regulations that they may be unfamiliar with.

Stock Connect is a pilot program aimed to establish mutual stock market access between mainland China and Hong Kong. The CSRC and the SFC recently entered into a Memorandum of Understanding in October 2014 to strengthen enforcement cooperation but the document leaves unanswered most questions about practical implementation. In particular, we believe the “Southbound” PRC-based entities will face issues when subjected to the unfamiliar Hong Kong legal system.

Rise in cross-border investigations in Asia

Historically, Asian regulators have followed cross-border investigations initiated by US and UK. In 2014, we have seen a shift to Asia increasingly taking the lead on cross-border investigations. It’s a trend we are likely to see increase in 2015.

2014 saw an increase in the number - and magnitude - of the PRC’s anti-corruption efforts against multinational corporations. In September 2014, PRC authorities fined British drug maker GlaxoSmithKline Rmb3 billion in connection with a corruption allegations. In a reversal of traditional roles, Britain’s Serious Fraud Office is now following the PRC-led investigation of GSK violations of Britain’s Bribery Act.

And finally, there’s a common theme

The thread linking many of these themes together is the shift by Asia based regulators to increasingly take more leadership in the region and internationally. Historically, Asian regulators have followed their US and UK counterparts; however, the lead taken in cross-border investigation will only increase in 2015.

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