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Lacks of civil liability related to disclosure in China:
In China, violation of securities laws generally subject violators only to fines or imprisonment and not to civil liability. Laws in China against such misleading conduct are reflected under the below statutory provisions. The Chinese regulator is active in this field. In fact, from 1993 to October 2000, the CSRC filed 440 cases involving rule breaking and transgressions of the law in the securities and future markets. The CSRC meted out administrative penalties to 360 institutions and 408 individuals involved in 199 cases.[xxxi] The penalties included the confiscation of illegal income, fines, suspensions or cancellation of the qualifications for engaging in securities and future business, and a ban on market access.
However, such penalties which belong to the administrative penalties not civil liability cannot protect investor’s interest efficiently and effectively. The Securities Law does not provide statutory clear criminal and civil liability for breach of the existing disclosure obligation.
A new remedy needs to be implemented in Australia
Today ASIC is saying that the remedies that are available to him are not enough. The regulator considers that the remedies are not an incentive to the perpetrator of the offence of misleading conduct or statement. This is why ASIC wants the power to fine a company in the case of breach of such a duty. It is interesting to note that the Chinese regulator has this power and it has proved useful in many cases, the most important one being a big scandal in China.
Criminal liability:
In China, the basic principle of the liability is enacted in the provision of Company Law of PRC, which provides the company where false disclosure occurs in offering securities, should be ordered to halt, return all funds with interest, and will be fined. If the violation constitutes a criminal offence, criminal liability shall be investigated in accordance the law.[xxxii] The Criminal Law of PRC 1997, art 184 stipulates the penalty for making and passing fraud information. The reality is that this criminal liability is seldom used in the Chinese law related to disclosure for political reasons.
In Australia, the criminal liability is more developed. There is a primary liability and an accessorial liability[xxxiii]. In the primary liability, the criminal liability under the Corporations Law is applied on the person who authorizes or causes the issue of prospectus. But there is a problem with the terms used by the act. The term “authorize or cause the issue” involves considerate ambiguity and uncertainty of application and it is why this provision has been removed from other jurisdictions. We can say that in China this ambiguity does not exist.
The underwriter in Australia and China will face criminal charges. The case law in Australia imposes a requirement of knowledge of the elements of the illicit action. Willful blindness can be treated as equivalent to knowledge[xxxiv]. But there is one big dilemma with this provision. The problem is that the greater the level of inquiry of the underwriter, the more likely it will be for him to obtain the knowledge that is necessary for the prosecution to prove the accomplice liability. This will not encourage underwriter to do any inquiry.
In China, the situation is similar. Underwriter should verify the truthfulness, accuracy and completeness of the prospectus and other related publicity materials. If the documents are found to contain false and seriously misleading statements or major omission, they should not issue offer invitation or offers. If the offers have been issued, the selling activities must be stopped immediately and the same time remedial measures shall be taken.[xxxv]
IV. Challenge of China’s Securities Regulations After WTO Accession
In 2001, China eventually entered the World Trade Organisation (WTO) after years of twist and turns. Following entry into WTO, China has made significant commitments to the securities sector. The new Trade Agreement of WTO on Financial Services will actually integrate financial and investment markets of all member states, and will speed up the market access of the securities sector. China’s opening up of securities will abide by the principles of favored national treatment, transparency, market access, increased participation of developing countries, and progressive liberalization.[xxxvi] According to relevant agreements on China’s WTO accession, China will fully open up its financial and securities market after five years.
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