High Court set to decide on state secrets law's reach
Donna Wacker, a partner of Clifford Chance, looks at the issue of mainland secrecy laws and their effect on Hong Kong companies
Regulators and accountants in Hong Kong are facing a challenge of how to handle China's state secrecy laws. The Hong Kong Court of First Instance earlier this month ordered Ernst & Young to explain the basis on which it relies upon "state secrets" as the reason for refusing to hand over accounting records to the Securities and Futures Commission (SFC). The records relate to mainland company Standard Water's listing application in Hong Kong in 2009. Ernst and Young has an obligation under the Securities and Futures Ordinance (SFO) to provide the records unless it can demonstrate a reasonable excuse for not doing so.
This will be a landmark court decision in Hong Kong as it is the first time that the court has been asked to rule on whether a potential breach of China's state secrets law provides a party with a reasonable excuse for potentially breaching Hong Kong law. When did China introduce the secrecy law?
The Maintenance of State Secrets Law, which was promulgated in 1988 and amended in 2010, establishes a regime of identifying and protecting Chinese state secrets.
What are state secrets?
What is a "state secret" is very broadly defined to include any information relating to state security and interests whose disclosure may harm state security or interests in politics, the economy, national defence and foreign affairs, and includes matters such as social development, science and technology.
What would happen if someone breached it?
Depending upon the type of state secret and the seriousness of the breach (ie: whether the disclosure caused loss to the mainland) an offender may be subject to a wide range of criminal penalties, from a fine to imprisonment or even the death penalty.
What agency decides whether something is a state secret?
As a starting point, state secrets are classified into three categories: "top secret", "highly secret" and "normal secret". Different categories of state secrets are subject to different protection periods and measures, they can be determined by government agencies at different levels and may give rise to different criminal penalties for their disclosure.
"Top secret" can be determined by national or provincial government authorities or agencies authorised by them.
"Highly secret" and "normal secret" can be determined by national, provincial or large municipal government authorities or agencies authorised by them
It should be noted that the "authorities" referred to above include not only the state secret bureau and its branches but also other government authorities.
Can listed companies or accounting firms use state secrecy as an excuse not to make a disclosure?
This is the very question currently before the High Court in the action commenced by the SFC against Ernst & Young. The court will need to determine whether Ernst & Young's reliance on the state secrets law to not disclose the information requested by the SFC provides Ernst & Young with a "reasonable excuse" for what is otherwise a breach of Ernst & Young's obligations under the SFO.
Do overseas markets have similar state secrecy laws?
Yes, other countries have state secrecy laws (see the list below as examples) which are generally aimed at protecting national security. While some other jurisdictions, such as the US, have faced public criticism for applying their state secrecy laws too broadly, none of their relevant laws appear to be as broad as China's state secrecy law, which includes a non-specific "other matters" category and where the classification of a matter as a state secret does not appear to be open to challenge by a private party.
- United States: State Secrets Protection Act (not yet passed)
- South Africa: Protection of State Information Bill (2011)
- India: Official Secrets Act (1923)
- New Zealand: Official Secrets Acts (1951)
- United Kingdom: Official Secrets Act (1989)
- Canada: Security of Information Act (2001)
- Ireland: Official Secrets Act (1963)
- Singapore: Official Secrets Act (revised in 1985)
- Australia: Procedure for Protection of State Secrets and Classified Information of Foreign States (2007)