Recent AML disciplinary actions

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Authored by: Lavita Pong

In December 2021, the SFC issued information relating to three disciplinary actions which involve AML breaches.

Failures involving non-face-to-face approach and third party deposits

On 15 December 2021, the SFC reprimanded and fined Mason Securities Limited (MSL) (formerly known as GuocoCapital Limited (GCL) and fined it HK$3.6 million (link) for failures to:

• meet the requirements of the SFC’s AML Guideline for certifying the identity documents of six clients; and
• put in place policies and procedures to identify third party deposits prior to June 2017 and in particular failure to identify 15 cheques issued by third parties into the accounts of five clients.

Non-face-to-face approach

During December 2014 to January 2015, a former licensed representative of GCL acted as a certifier and signed on the copy identity documents of six clients without in fact ever meeting these six clients. The certified copies were not dated, did not have the representative’s position or capacity, and did not confirm that he had seen the originals.

According to the SFC’s AML Guideline at the time (and the same is found in the current Guideline – see reference to the current version in brackets):

• The certifier is required to have seen the original identity document (7.1 of Appendix C).
• The certifier should sign and date the copy document (printing his name clearly in capitals underneath) and clearly indicate his position or capacity on it. The certifier should state that it is a true copy of the original (7.3 of Appendix C).

Third party deposits

From May to July of 2016, MSL did not realise that it had 15 third party cheques until the SFC asked for copies of these cheques. This had occurred due to GCG and MSL having a lack of policies and procedures related to third-party deposits prior to June 2017.

Although MSL explained that the five clients had difficulty in remitting funds from the Mainland to Hong Kong in order to settle their margin loans, there was no evidence to suggest that MSL made enquiries as to whether the funds used to settle such loans originated from the five clients respectively.

According to the SFC’s AML Guideline at the time (and the same/similar requirement is found in the current AML Guideline – see reference to the current version in brackets):

• GCL and MSL breached its obligation to mitigate money laundering (ML) and terrorist financing (TF) risk (3.1).
• MSL failed to identify third-party deposits as part of the ongoing monitoring obligations and in particular transaction monitoring (5.1).

The SFC’s AML Guideline was revised with effect from 30 September 2021. The current Guideline sets out the requirements for third-party deposits in Chapter 11. The required due diligence measures, including making proper enquiries, are at 11.5 of the Guideline.

Failures to make proper enquires on third-party deposits and implement effective transaction monitoring

On 30 December 2021, the SFC reprimanded and fined Grand International Futures Co., Limited (Firm) HK$8 million for AML and other regulatory breaches. The SFC also suspended the Firm’s responsible officer, Mr. Liang (RO) for eight months (link).

This action also:

• reflects how misuse of technological developments can facilitate anonymity in ML / TF schemes;
• involves the highest fine in terms of disciplinary actions involving AML breaches during the calendar year of 2021 (although it also involves other regulatory breaches); and
• indicates a strong deterrent message from the SFC to the market that such failures are unacceptable.

Facts

The SFC received a complaint against various licensed corporations (LCs) including the Firm, for permitting their clients to place orders with their broker supplied systems (BSSs) through a software called Xinguanjia (XGJ). XGJ was developed and/or provided by Hengxin Software Limited.

It was alleged that XGJ allowed the LCs’ clients to set up sub-accounts under their account maintained with the LCs, and that the clients had solicited investors from Mainland China to trade through the sub-accounts via XGJ without opening separate accounts with the LCs in Hong Kong.

Between October 2017 and October 2018 (Period), the Firm permitted over 100 clients to use their designated customer supplied systems (CSSs) to place orders and these amounted to over 99% of the trading volume of the Firm.

The Firm did not conduct any due diligence or testing on the CSSs and claimed that it relied on the supplier of BSSs to conduct due diligence on the CSSs. The supplier then claimed that the Firm had never instructed them to conduct the relevant due diligence.

AML breaches

During the Period, the Firm failed to:

• perform adequate due diligence on the CSSs, and assess and manage the associated ML / TF and other risks;
• conduct proper enquiries when deposits by clients did not match their declared profiles; and
• implement effective transaction monitoring, in particular, where there were over 100,000 matched trades. (Matched trades are trades where the client’s order is matched with his / her own order in the opposite direction.)

SFC’s findings

Apart from breaches of the Code of Conduct, this action involves AML breaches of the following key ongoing monitoring obligations of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) and related provisions in the SFC’s AML Guideline. The key provisions of Schedule 2 of the AMLO are summarised below:

• establish and implement adequate AML policies and procedures to ensure compliance with the AMLO and mitigate ML / TF risks (section 23);
• keep customer information up-to-date and relevant (section 5(1)(a));
• monitor transactions and ensure these are consistent with the client’s profile (section 5(1)(b)); and
• identify transactions which are complex, large or unusual, or transaction patterns which have no apparent economic or lawful purpose; investigate and document findings and report them to the Joint Financial Intelligence Unit where there is any suspicion of ML / TF.

The RO’s failures

The SFC also found that the Firm’s failures were attributable to the RO’s failures to discharge his duties as a responsible officer and a member of senior management to ensure appropriate standards of conducts and properly manage the risks associated with the Firm, pursuant to the Code of Conduct.

Supervisory failures including suspicious transaction monitoring

On 30 December 2021, the SFC issued information in relation to an action against a former responsible officer and executive director of Zhonghui International Futures Company Limited (Futures Broker) who was banned for seven months (link).

His supervisory failures related to the use of CSSs by the Futures Broker’s clients for placing orders. In this case, the CSSs allow clients to conduct electronic trading through the internet, mobile phones and other electronic channels.

His failures also related to:

• approval of client requests for setting up third-party operated accounts; and
• monitoring of suspicious transactions in client accounts.