Discovery of Legal Evidence Forbidden

So-called blocking statutes epitomize the clash of jurisdiction over records and documents in the modern, global economy.

Under a blocking statute a country forbids release of sensitive documents, evidence and information, such as state secrets.  Sometimes a country will define state secrets to include information about commercial corporations in the country.

US Law: “Disclose the Records”

But American courts and the American legal system tend to be rather acquisitive of documents and evidence.  American law often tilts toward requiring disclosure.

Thus American law – which demands release of the evidence through lawsuit or regulation – can clash with the law of countries where the evidence resides.  As explained in the blog article linked below, a French lawyer was fined for attempting to release documents from France in accordance with a discovery demand under a lawsuit in a US court.

China Law: “Don’t Give the Evidence to the Americans”

The latest example of a clash between countries involves demands by the US Securities and Exchange Commission for documents from accounting firms that audit Chinese companies traded on the public markets in the US.  SEC is demanding "audit work papers" from the accountants.

SEC maintains these documents are required to be disclosed to SEC under US securities law applicable to the publicly-held companies.  The disclosure protects investors.

But China has a blocking statute that forbids release of certain records about companies in China.  The accountant/auditor firms, based in China, say they are prevented by Chinese law from turning over the documents to the SEC.

Action by US Administrative Law Judge

The SEC complained to a US administrative law judge.  The judge has ruled that the accounting firms are failing to comply with US securities laws.  Therefore, as a penalty, the judge has for six months forbidden the firms from conducting audits on companies traded in the US markets.  “Judge suspends Chinese units of auditors,” Wall Street Journal, January 23, 2014.

This ruling poses a hardship for the Chinese companies.  They need to be audited in order to continue as publicly-traded companies in US markets.  Without audits they will be forced to withdraw their securities (stocks and bonds) from US markets.

Standoff Between Legal Jurisdictions

The outcome of a conflict like this largely depends on where the dispute is being heard.  If you are in an American court, it says turn over the documents.  But a Chinese court would say do not  turn over the documents.

#auditworkpapers  #globalization #conflictoflaw
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