HK$6 million fine for late reporting to SFC

On 3 October 2011 the SFC announced that it had reprimanded Citigroup Global Markets Asia Limited (“Citigroup“) and fined it HK$6 million.

The rationale for the reprimand and the fine was Citigroup’s failure to immediately report the misconduct of a former licenced representative employed by Citigroup who was involved in what appears to be a ponzi scheme similar to that of Bernard Madoff.

Citigroup’s failure to report was compounded by the fact that although it initially reported to the SFC that the representative had been dismissed for gross misconduct, and informed the SFC that an internal investigation was in progress, in fact in so doing, Citigroup misled the SFC because at that time it had already obtained a preliminary report which revealed important information in relation to the representative’s apparent fraudulent scheme.

Citigroup delayed the provision of this report to the SFC until a follow up investigation by its external auditor was complete. By the time the report was provided to the SFC, the representative had left Hong Kong and he has not returned.

The delay therefore in reporting to the SFC meant that the SFC and other law enforcement agencies had no opportunity to interview the representative or secure his whereabouts pending the completion of an investigation.

SFC’s director of enforcement, Mark Steward said:

“Citi Asia not only failed to detect a Ponzi Scheme operating under its nose, despite having the opportunity to do so, but then failed to report the Scheme to the SFC in a timely way, thus making the investigation of this case more difficult given Mr. X’s decision to leave Hong Kong after he had been dismissed by Citi Asia”

“Intermediaries know they have a duty to report misconduct to the SFC immediately upon discovery, not when they have plumbed the bottom of it. Delay in reporting simply helps the wrongdoer. This public reprimand should make it clear that the SFC condemns such delay in the strongest terms.”

This was an expensive lesson for Citigroup, and one which should be readily avoidable.