Dawn raids in Hong Kong
Mark Jephcott, Partner, Head of Competition Asia, and Grace Aylward, Associate, Herbert Smith Freehills LLP, offer a practical guide to preparing for an unannounced inspection by the Hong Kong Competition Commission.
It is anticipated that the Hong Kong Competition Ordinance (the Ordinance) will finally come into force in the second half of 2015, having been approved by the Legislative Council nearly three years ago in June 2012. To date, public focus has centered on the substantive provisions of the Ordinance. The procedural aspects of the Ordinance, and in particular, the powers of investigation of the Competition Commission, have received far less attention. However, with the enforcement of competition law in Hong Kong just around the corner, now is the time for businesses to consider whether they have adequate procedures in place to deal with potential dawn raids.
This guide highlights some simple and practical processes (based on experiences of competition dawn raids in other countries) that can be put in place to ensure that if your business is raided, you know what to expect, what to do and what not to do.
What is a dawn raid?
A competition dawn raid is a surprise inspection at a company’s premises (or in certain circumstances at the homes of officers/employees) by the Hong Kong Competition Commission (the Commission). Authorities in other jurisdictions typically start their raids first thing in the morning, and we would anticipate that the practice in Hong Kong will be similar. As the Commission will not have the power to conduct raids until the Ordinance comes into force, the guidance below is based on best practice in other jurisdictions, particularly in Europe, on responding to a competition dawn raid.
What would trigger a dawn raid?
The Commission may apply to court to obtain a warrant to conduct a dawn raid when it has reasonable cause to suspect a contravention of the competition rules. The Commission would likely apply for such a warrant in circumstances where it believes that the suspected breach of the conduct rules is being carried out in secret, or there is a risk that documents or other evidence relevant to the Commission’s investigation would be destroyed or interfered with if the Commission did not carry out the raid.
The focus of a dawn raid is typically on accessing, searching and copying documents including electronic documents such as emails, instant messages and phone recordings. The inspectors may also ask questions of individuals at the premises.
Why do I need to be ready for a dawn raid?
Obstructing any aspect of an inspection including deleting, destroying or tampering with documents, can lead to penalties for both the company and individual officers/ employees, including significant fines of up to HK$1 million and imprisonment for two years.
Employees can often panic in dawn raid situations. In a worst case scenario, there is a risk that they may rush into actions (such as deleting emails), which they might think is necessary to protect themselves and their employers.
Notable examples of the consequences of a failure to co-operate with a dawn raid include heavy fines imposed in Europe for failure to co-operate such as: a € 38 million fine imposed on UK energy giant E.ON for breaking a seal in 2008; a €2.5 million fine imposed on two Czech companies in 2012 for failing to block access to email accounts and diverting incoming emails during a raid; and a 30% increase in Sony’s fine for anticompetitive practices due to an employee’s refusal to answer questions and documents having been shredded during the raid.
Preparation for a dawn raid is therefore advisable both in terms of increasing the prospects that a company will be able to protect its legal rights in a raid, while also ensuring compliance with its legal obligations. This includes having procedures and training in place for key staff such as receptionists, security and the IT team (whose assistance during a raid is essential).
What can we do to prepare?
The best way for a business to prepare is to have a set of dawn raid procedures in place to ensure an efficient and appropriate response in a raid scenario. Some businesses may already have similar processes in place in the event of a raid by other authorities (for example the Securities and Futures Commission), which can be adapted to the competition law scenario. If not, the tips below can be used to form the basis of an internal dawn raids guide.
The Commission arrives at 9am
A group of inspectors arrive at reception. They state that they are from the Hong Kong Competition Commission and that they have a warrant authorising them to enter and search the premises. They may ask to see a particular individual (by name or job title). The inspectors may have other people with them, such as forensic IT experts.
Reception should have a simple one-page document explaining what steps to take in this scenario. This should specify a number of individuals who have agreed to act as key contacts in the event of a raid (for example, a member of the company’s legal team, the company secretary or other individuals nominated to lead the dawn raid response).
1. Reception should call the key contacts:
- informing them that inspectors from the Commission have arrived
- informing them whether the inspectors have asked to see any individual(s)
- asking them to attend reception immediately, and
- if the key contacts are unavailable, leave messages, then call the company’s external lawyers.
2. Reception (or a key contact if already present) should ask the inspectors to provide their identity papers and the warrant:
- take two copies of the identity papers and the warrant
- note down the inspectors’ names and where the inspectors are from, and
- write down the time they arrived.
3. The inspectors should be asked to wait until the company’s lawyers arrive:
- if they refuse to wait, do not prevent them from entering the premises (they are unlikely to wait if an in-house lawyer is present)
- make sure someone accompanies the inspectors at all times, and
- if the inspectors agree to wait, show them to a meeting room and make sure someone stays with them at all times.
4. If the inspectors ask to speak to the company’s IT team, call the relevant contacts in IT.
The company’s key contacts arrive
1. Once reception has informed the key contacts of the raid, a senior team member should immediately go to reception and collect the inspectors. (S)he should:
- check the inspectors’ identity papers and the warrant
- ask whether the inspectors would like to speak to any particular individuals, and
- note down the time (s)he arrived.
2. At the same time, another team member should contact the company’s external lawyers immediately to explain what is happening, sending a copy of the warrant.
3. Contact the IT team immediately and instruct them to be on stand-by.
4. Ask the inspectors to wait a short time until the external lawyers arrive. If they refuse to wait:
- do not prevent them from starting the raid (but ask to delay the substantive questioning of any individuals until external lawyers arrive)
- make sure the inspectors are accompanied at all times, and
the inspectors may insist on protective measures being put in place as a condition for waiting until the external lawyers arrive, for example blocking access to email accounts and/or locking offices.
During the raid
1. Arrange a large meeting room for the inspectors for the duration of the raid, away from staff.
2. Hold a meeting with the inspectors and try to get as much information as possible about the background to, and scope of, the investigation.
- If requested, provide information on company structure and organisation, methods of communication, and the company’s IT systems.
- Agree processes and a procedure for the raid (for example, what is the procedure for resolving a dispute on legal privilege).
- Seek as much information from the inspectors as possible about the reasons for the investigation.
- Emphasise the company’s commitment to co-operation (but do not volunteer information or documents not requested).
3. Each inspector should be accompanied by a company representative or the company’s lawyers at all times.
4. Detailed records should be taken of: any documents taken, copied or reviewed; any questions asked; searches applied electronically; disputes; and the timings of requests, responses and other events during the raid.
5. A record and duplicate copies of all documents copied and/or seized should be made for the company. For electronic documents, the inspectors may provide this on CD/DVD.
What can the Commission take?
The Commission can take any document, computer or other thing that the inspector has reasonable grounds for believing will, on examination, provide evidence of a competition law infringement.
A document is defined to mean any information recorded in any form. This definition is sufficiently broad to include all hard copy and electronic documents (such as diaries, emails, e-documents, instant messages, phone recordings, voicemails, SMSs, electronic calendars and so on).
The concept of another ‘thing’ that may provide evidence of a competition law infringement would include mobile phones and tablets. The Commission may seek to seize personal as well as company devices if they believe that these may contain evidence of the infringement.
The Commission is as likely to be focused on electronic searches as reviewing hard copy documents. The inspectors may want to access the company’s IT network to search and take copies of large volume of electronic documents. The company’s IT team will therefore need to be involved from the outset.
The IT team should:
- having first checked with the inspectors, halt any routine data management processes that result in data being deleted or overwritten
- accompany the inspectors and their IT specialists at all times
- assist the inspectors to carry out their tasks and answer any technical questions
- take notes of exactly what processes the inspectors carry out
- ensure that the company has a duplicate copy of all electronic documents copied or taken by the inspectors, and
- at the end of the raid, liaise with the inspectors and their IT specialists to ensure that all the inspectors’ forensic IT tools that contain copies of company data are cleansed.
The end of a raid
If the raid takes more than one day:
- if the inspectors seal rooms or cabinets, make sure the seals are not broken or tampered with in any way
- if the inspectors impose restrictions to preserve electronic documents (for example preventing access to email accounts), make sure these are complied with
- everyone relevant must be made aware of such measures, including cleaners and maintenance staff coming to the premises out-of-hours, or IT personnel not involved in the raid, who will not necessarily be aware of the day’s events
- if questions have been left outstanding, try to agree that the inspectors will express exactly what they want in writing, and
- make sure the inspectors have provided an inventory of all documents seized or copied (which may be in electronic form).
What happens next?
The end of the dawn raid may just be the start of a long investigation. The company should now begin its own process of evaluating whether an infringement of the competition laws has occurred, and if it has, what the best method of responding might be.
Mark Jephcott, Partner, Head of Competition Asia, and Grace Aylward, Associate, Herbert Smith Freehills LLP.
The contents of this article are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this article.