On September 8, 2011, the US Securities and Exchange Commission (SEC) filed a subpoena enforcement action against Shanghai-based Deloitte Touche Tohmatsu CPA Ltd. (Deloitte Shanghai) in the US District Court for the District of Columbia. The enforcement action was the result of Deloitte Shanghai’s failure to produce documents related to the SEC’s investigation into potential fraudulent conduct by Longtop Financial Technologies, Limited, one of Deloitte Shanghai’s longtime clients.  

Deloitte Shanghai advised the SEC that it could not produce documents responsive to the subpoena because removing these documents from China, without authorization from the appropriate government authorities, could be deemed illegal and lead to extremely harsh consequences, including prison time. 

Specifically, Deloitte Shanghai was concerned that producing documents to the SEC would violate the People’s Republic of China (PRC) Law on the Protection of State Secrets, the PRC Certified Public Accountants Law, the PRC Archives Law and the PRC General Principles of Civil Law and Criminal Law. Collectively, these laws place stringent controls on the disclosure and production of documents to foreign countries. 

Under the PRC Law on the Protection of State Secrets, a “state secret” is broadly defined and includes matters concerning state affairs, national defense, diplomatic activities, national and social development, science and technology, state security and any other matters classified by the State Secrets Bureau as state secrets.¹Chinese law also strictly controls the disclosure of “Archives”—historical records of public entities and individuals the preservation of which is “of value” to the state and to society.²Such records can relate to political, military, economic, scientific, technological, cultural, religious and other activities.³Under the Archives Law, every public organization, enterprise, institution and citizen has a duty to protect  Archives.⁴In addition, under the PRC Certified Public Accountants Law, a CPA has a duty to maintain the confidentiality of all business information he or she acquires in the performance of his or her service.⁵

On September 8, 2011, the SEC filed an ex parte Application for Order to Show Cause, contending that Chinese law did not justify Deloitte Shanghai’s failure to comply with the subpoena.⁶The district court granted the SEC’s Application and ordered Deloitte Shanghai to show cause as to why it should not be held in contempt for failure to respond to the subpoena.⁷The district court, however, made no findings with regard to whether the various Chinese laws would prohibit Deloitte Shanghai from producing documents.⁸Deloitte Shanghai filed a Motion to Clarify the Order to Show Cause, which was denied by the court on February 1, 2012.⁹  Currently, a hearing on whether Deloitte Shanghai will be required to comply with the subpoena is set for May 4, 2012.¹⁰

Other courts have held that the simple assertion of foreign law as a justification for noncompliance does not suffice. See, e.g., Societe Internationale Pour Participations Industrielles et Commerciales, S.A. v. Rogers, 357 US 197, 204–05 (1958) (foreign secrecy laws did not preclude US court from ordering a foreign party to disclose information in judicial proceeding); Société Nationale Industrielle Aérospatiale v. US District Court for the Southern District of Iowa, 482 US 522, 544 n.29 (1987) (blocking statutes do not “deprive an American court of the power to order a party subject to its jurisdiction to produce evidence even though the act of production may violate [those] statute[s]”); Richmark Corp. v. Timber Falling Consultants, 959 F.2d 1468, 1477 (9th Cir. 1992) (contempt sanctions against corporation that refused to produce discovery because of Chinese law prohibitions upheld where neither the corporation nor the People’s Republic of China had “identified any way in which disclosure of the information requested . . . [would] significantly affect the PRC’s interests in confidentiality”). 

In determining whether to compel compliance with a subpoena or other discovery request, the courts in these cases consider the factors enumerated in the Restatement on Foreign Relations Law, including but not limited to: (1) the importance of the documents or other information requested; (2) the specificity of the requests; (3) where the information originated; (4) the availability of alternative means of procuring the information; and (5) “the extent to which noncompliance with the request would undermine important interests of the United States, or compliance with the request would undermine important interests of the state where the information is located.”¹¹The most important factor appears to be the balance of national interests.¹²Courts will, however, also consider the good faith of the party objecting to discovery.¹³

While the Deloitte Shanghai case deals with an accounting firm located in China, US-based firms may also have to contend with these issues in situations where the client for which the audit or other accounting services are being performed is located in China or where the firms have branch offices located in China. In such instances, there are several questions that must be considered, including who created the documents, where the documents are located, who has possession and control of the documents, and whether the documents contain information that could be deemed state secrets, Archives, trade secrets or financial or other sensitive information subject to Chinese law.  

There is still much uncertainty in this area of law with respect to how US courts will analyze the relevant factors in determining whether disclosure is warranted. A question also remains as to how federal agencies such as the SEC will work with countries such as the PRC to address these concerns. In addition, companies faced with a subpoena or other document request that is directed toward records located in a foreign jurisdiction may find themselves in the proverbial catch-22—deciding whether to produce the requested documents and information, while facing potential civil and criminal penalties under Chinese or other foreign law, or to withhold the requested documents and information, while facing possible contempt liability and other civil sanctions levied by US courts. Nonetheless, for companies with branch offices or clients abroad, it is important, to protect their interests and those of their clients, to recognize when foreign law might need to be taken into consideration.

¹PRC Law on the Protection of State Secrets, Art. 8.

²Archives Law of the People’s Republic of China, Art. 2.

³Id.

⁴Id., Art. 3.  Under the Archives Law, unauthorized disclosure of Archives may result in criminal liability. Id., Arts. 24, 25.

⁵PRC Law on Certified Public Accountants, Art. 19. Also, the Regulations on Strengthening the Protection of Secrets and Archive Management relating to Issuance and Listing of Securities Overseas, promulgated on October 20, 2009, provide that audit work papers must be stored in China and strictly prohibit their production to people or entities outside of China without express approval from the necessary Chinese authorities.

⁶See SEC v. Deloitte Touche Tohmatsu CPA, Ltd., 1:11-mc-00512-GK-DAR, Document No. 1.

⁷Id., Document No. 10.

⁸Id.

⁹Id., Document No. 14.

¹⁰Id., Document No. 22.

¹¹Restatement (Third) of Foreign Relations Law § 442(1)(c).

¹²See Richmark Corp. v. Timber Falling Consultants, 952 F.2d 1468, 1476 (9th Cir. 1992) (The balance of the national interests is “the most important factor.  We must assess the interests of each nation in requiring or prohibiting disclosure, and determine whether disclosure would ‘affect important substantive policies or interests’ of either the United States or the PRC”) (citing Restatement (Third) of Foreign Relations Law § 442, comment c).

¹³Gucci America, Inc. v. Weixing Li, No. 10 Civ. 4974 (RJS), 2011 WL 6156936, at *5 (S.D.N.Y.  Aug. 23, 2011); see also Tiffany LLC v. Andrew, 276 F.R.D. 143, 160 (S.D.N.Y. 2011) (“There is no evidence in the record that the Banks are acting in bad faith . . . . [Indeed,] [t]he fact that the Banks chose to object to the subpoenas .  .  . does not indicate bad faith”).