Newsletter – September 2016
- SFC notifies the industry of anti-money laundering concerns
- SFC reprimands and fines BNP Paribas Wealth Management HK$4 million
- SFC bans Chau Hang Yu and Steve Chow Chun Yin for life following their criminal convictions
- SFC commences MMT proceedings against former CEO of China AU and related parties for false trading
- SFC reprimands and fines HSBC HK$2.5 million for regulatory breaches
- SFC issues Restriction Notice to a broker to stop two clients from withdrawing shares and transferring money connected with suspected insider dealing
- SFC launches public consultation regarding proposal to enhance position limit regime
1. SFC notifies the industry of anti-money laundering concerns
On 21 September, the SFC announced that the Enforcement Division is investigating a number of cases of SFC licensed brokerages with suspected inadequate anti-money laundering (“AML”) internal controls and it expects to bring a number of enforcement proceedings as a result.
Background
On 21 September 2016, the SFC wanted to draw the attention of licensees that they are expected to enhance their AML internal controls immediately as they have had ample time to develop their internal controls since the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (“AMLO”) and the SFC Guideline on Anti-Money Laundering and Counter-Terrorist Financing (“Guideline”) came into force in 2012.
During the SFC’s onsite inspections of licensees and AML investigations, the SFC identified the following areas of concern:
- failure to scrutinise cash and third party deposits into customer accounts
- ineffective monitoring of transactions in customer accounts
- failure to take adequate measures to continuously monitor business relationships with customers which present a higher risk of money laundering
- inadequate enquiries made to assess potentially suspicious transactions to determine whether or not it is necessary to make a report to the Joint Financial Intelligence Unit, and lack of documentation of the assessment results
- failure to monitor and supervise the ongoing implementation of anti-money laundering and counter-terrorist financing policies and procedures
Comment
The AMLO and Guideline require SFC licensees to conduct due diligence on customers before the start of a business relationship and as it continues to ensure that licensees understand who their clients are and what business they do and to monitor for transactions that are inconsistent with their identity and business so as to be able to identify transactions that may be used to launder the proceeds of crime or finance terrorism.
Since licensees are vulnerable to being used to launder the proceeds of crime and to finance terrorism, the SFC relies on them to implement effective AML measures to prevent and detect these criminal activities and expects them to take their AML responsibilities seriously.
Readers are reminded that when corporations are found to contravene the AMLO, they are liable to a maximum term of imprisonment of 2 years and a fine of HK$ 1 million. Also, if corporations are found to contravene the AMLO with intention to defraud the relevant authorities, they are liable to a maximum term of 7 years imprisonment and a fine of HK$ 1 million upon conviction. They are advised to conduct regular review on their AML process.
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR95
2. SFC reprimands and fines BNP Paribas Wealth Management HK$4 million
On 31 August 2016, the SFC reprimanded and fined BNP Paribas Wealth Management (“BNPPWM”) HK$4 million for overcharging its clients between 1 January 2011 and 31 December 2013.
Background
In September 2013, BNPPWM reported to Hong Kong Monetary Authority (“HKMA”) and the SFC about monetary benefits it received from certain “back-to-back transactions” with its clients might have exceeded the levels set out in its documentation provided to the clients.
Later, the SFC’s investigation found that at the material time, BNPPWM received different levels of monetary benefits from client transactions in different product categories and clients were provided with documentation that indicated the levels of monetary benefits BNPPWM would charge for each product category. BNPPWM overcharged from around 2,300 client transactions and the total overcharged amount was around HK$9.5 million. The affected transactions covered different types of investment products, including equities, bonds, structured products, options, swaps and funds.
Comments
BNPPWM’s conduct was in breach of General Principle 2 and paragraph 2.2 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (“Code of Conduct”) for not acting in the best interests of its clients, and failed to exercise due skill, care and diligence to ensure the monetary benefits it received from client transactions were fair and reasonable, and in accordance with its representations to the clients.
In determining the sanction, the SFC considers that the level of fine would have been higher but for the followings:
- BNPPWM agreed to engage an independent reviewer to review and ensure all overcharged amounts are returned to the affected clients;
- BNPPWM has repaid all overcharged amounts received from current clients and is in the process of repaying former clients, which no longer retain an account with BNPPWM;
- BNPPWM self-reported the matter to the SFC and HKMA;
- BNPPWM proactively co-operated with the SFC in resolving the concerns; and
- BNPPWM has an otherwise clean disciplinary record.
Readers are reminded that license corporation shall clearly state the required charges, mark-ups and fees affecting a client and charge the clients according to the agreed charge. Proper internal control shall also be implemented to ensure that no discrepancy occurred.
For a copy of the Statement of Disciplinary Action, please refer to:
For a further detail, please refer to:
3. SFC bans Chau Hang Yu and Steve Chow Chun Yin for life following their criminal convictions
On 7 September 2016, the SFC banned Ms Chau Hang Yu and Mr Steve Chow Chun Yin, both former employees of The Hongkong and Shanghai Banking Corporation Limited (“HSBC”), from re-entering the industry for life following their criminal convictions.
Background
The District Court found that Chau and Chow, both of whom were responsible for selling and promoting investment products at HSBC and knew one another at the material times, made false claims in 2012 and 2014 that certain HSBC customers had agreed to subscribe for unit trust funds (“UTFs”). They received sales commission after HSBC processed the subscription orders in the belief that they had sold the UTFs to the customers when in fact it was not the case.
The District Court also found that Chau referred her customers to Chow so that he could obtain more sales commission after she had reached the cap for receiving sales commission. Chau later asked Chow for customer referral fees. He gave her HK$100,000.
The SFC considers Chau and Chow are not fit and proper persons to be licensed or registered to carry on regulated activities as a result of their convictions.
Comments
Chau (formerly known as Aixingero Chat Yung) and Chow were relevant individuals engaged by HSBC to carry on Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities under the Securities and Futures Ordinance. Both Chau and Chow are currently not registered with the Hong Kong Monetary Authority or licensed by the SFC.
On 23 February 2016, Chau was sentenced to 12 months of imprisonment after her conviction for two counts of fraud under the Theft Ordinance. Chow was sentenced to 18 months of imprisonment after his conviction for two counts of fraud under the Theft Ordinance and one count of offering an advantage to an agent under the Prevention of Bribery Ordinance.
According to General Principle 1 of the Code of Conduct, a licensed or registered person should act honestly, fairly and in the best interests of its clients and the integrity of the market.
Based on Paragraph 6.1.1 (b) of the SFC Fit and Proper Guidelines, the licensed person or registered person is not seen as fit and proper when that person has evidenced incompetence, negligence or mismanagement, which may be indicated by the person having been disciplined by a professional, trade or regulatory body; or dismissed or requested to resign from any position or office for negligence, incompetence or mismanagement.
In this case, Chau and Chow have made false representation on the subscription results of the UTFs to their former employer, HSBC. Such dishonest acts are served as evidence for both parties who violated General Principle 1 of the SFC Code of Conduct with impact on mistrust from the public towards the Fund Management industry. They are also not fit and proper as described in Paragraph 6.1.1 (b) of the SFC Fit and Proper guideline as a result of their convictions from the District Court.
Therefore, readers are reminded that a licensed person or relevant individual should perform his/her regulated activities with integrity and diligence. Otherwise, not only the wrongdoer’s license will be suspended, he/she may also be subject to certain criminal liabilities like this case.
Although HSBC was not subject to any liabilities in this case, this incident has also reminded HSBC and other licensed corporate or authorized financial institution to conduct adequate internal control and policy in order to ensure the staff is fit and proper in order to satisfy the above regulatory requirements and also Paragraph 4 of the SFC Code of Conduct. For instance, on-boarding and regular training should be conducted to licensed or registered staff relevant to the SFC requirements.
For a copy of the Reasons for Sentence in this Case (Case No: DCCC 130/2015), please refer to:
For further details, please refer to:
4. SFC commences MMT proceedings against former CEO of China AU and related parties for false trading
On 9 September 2016, the SFC announced that it has commenced proceedings in the Market Misconduct Tribunal (“MMT”) against Ms Samantha Keung Wai Fun, former CEO of China AU Group Holdings Limited (“China AU”), Ms Wu Hsiu Jung and Mr Chen Kuo-chen, for false trading in the shares of China AU.
Background
China AU, now known as Skynet Group Limited, has been listed on the Growth Enterprise Market of The Stock Exchange of Hong Kong Limited (“SEHK”) since 19 February 2002.
Between August 2009 and March 2010, China AU launched two fundraising exercises to finance the proposed acquisition of a property to set up a training institute for beauticians in the Mainland and for general working capital purposes.
In between the two fund raising exercises conducted by China AU, Wu and Chen traded substantial amounts of China AU shares, using 14 securities accounts in the names of themselves and others. Keung provided a majority of funding for Wu and Chen’s China AU trades.
The SFC alleges that Keung assisted or connived with Wu and/or Chen to create a false or misleading appearance of active trading or with respect to the market for, or the price for dealings in China AU shares which supported and/or benefited China AU’s fundraising.
Comments
Readers are reminded that false trading is a form of market misconduct and a contravention of section 274 of the SFO. Such breach may result in civil sanctions on people who are found to have engaged in false trading by the MMT.
For a copy of the SFC’s Notice to the MMT, please refer to:
http://www.mmt.gov.hk/eng/rulings/SkyNet_Group_Limited_09092016_e.pdf
For further details, please refer to:
5. SFC reprimands and fines HSBC HK$2.5 million for regulatory breaches
On 14 September 2016, the SFC reprimanded and fined HSBC HK$2.5 million for regulatory breaches and internal control failings related to position limit failures.
Background
The disciplinary action follows an SFC investigation into the holding by HSBC of open positions in Hang Seng China Enterprises Index (“HSCEI”) futures and options contracts in breach of the prescribed limit on 18 occasions from 26 May to 1 August 2014.
It was found that HSBC has no staff responsible for monitoring the positions of HSCEI related products entered into the house account. There was also no centralized intra-day monitoring of HSBC’s positions in Hong Kong Futures Exchange’s (“HKFE”) listed products. No position limit monitoring systems and controls were introduced in the daily operational processes either.
Specifically, the SFC found that:
- HSBC failed to identify its position limit breaches promptly;
- there was a lack of adequate knowledge within HSBC regarding HSBC’s position limits and its state of compliance with the relevant regulatory requirements; and
- HSBC lacked policies or procedures in place for position limit monitoring of HKFE’s futures and options contracts and failed to implement any position monitoring control over these contracts.
The SFC concludes that HSBC was in breach of the SFC’s Code of Conduct for failing to implement adequate internal controls to monitor its positions in HKFE’s futures and options contracts to ensure compliance with the prescribed position limit and breaching on multiple occasions on the prescribed position limit for HSCEI futures and options contracts.
Comments
In deciding the penalty, the SFC has taken into account that HSBC has since taken steps to improve its internal controls on monitoring of position limit and co-operated with the SFC in resolving the SFC’s concerns.
Readers are reminded that Section 4(1) of the Securities and Futures (Contracts Limits and Reportable Positions) Rules provides that no person, except persons authorized by the SFC or the Hong Kong Exchanges and Clearing Limited, may hold or control futures contracts or stock options contracts in excess of the prescribed limit. Each type of future contracts would have its own limit. For further details, please refer to https://www.hkex.com.hk/eng/market/dv_tradfinfo/lop.htm
Readers are also reminded that under General Principles 3 and 7 of the Code of Conduct, a registered institution is required to have and employ effectively the resources and procedures which are needed for the proper performance of its business activities and to comply with all regulatory requirements applicable to the conduct of its business activities respectively.
Under Paragraph 12.1 of the Code of Conduct, a registered institution is required to comply with and maintain appropriate measures to ensure compliance with all applicable regulatory law, rules, regulations and codes administered or issued by the SFC, exchanges, clearing houses and other regulatory authorities which apply to the registered institution.
For a copy of the Statement of Disciplinary Action, please refer to:
For further details, please refer to:
6. SFC issues Restriction Notice to a broker to stop two clients from withdrawing shares and transferring money connected with suspected insider dealing
On 20 September 2016, the SFC issued a Restriction Notice to BOCI Securities Limited (“BOCI”) prohibiting it from processing shares and/or money held in two client accounts that hold the proceeds of suspected insider dealing.
Background
BOCI is not subject to the SFC’s investigation into suspected insider dealing and the Restriction Notice does not affect BOCI’s operations or its other clients. BOCI has rendered full assistance to the SFC during the investigation.
The SFC considers that the issue of the Restriction Notice, which prevents dissipation of the suspected proceeds of insider dealing held in the two accounts, is desirable in the interest of the investing public or in the public interest.
Comment
The Restriction Notice is issued under sections 204 and 205 of the SFO. These two sections of the SFO allows the SFC to prohibit a licensed corporation from processing any instructions from clients or anyone authorized to operate the involved accounts with respect to the shares of a Hong Kong-listed company, including: (i) withdrawing the shares and/or transferring monies arising from the disposal or the cancellation of the shares; and/or (ii) disposing or dealing with the shares. Licensed corporation is also required to notify the SFC upon receipt of any of these instructions.
Readers are reminded that insider dealing is a very serious criminal offence. The maximum criminal sanctions were increased by the SFO to a maximum of 10 years’ imprisonment and fines of up to HK$10 million. In addition, the court may make disqualification, cold shoulder and disciplinary referral orders. Failure to comply with a disqualification or cold shoulder order is an offence liable to a maximum fine of HK$1 million and up to 2 years’ imprisonment.
For further details, please refer to:
7. SFC launches public consultation regarding proposal to enhance position limit regime
On 20 September 2016, the SFC launched a consultation proposing enhancements to the position limit regime to expand its scope and make it more responsive to financial market developments.
Background
The proposed policy changes to the position limit regime includes: –
- To raise the cap on the excess position limit that may be granted under the existing Client Facilitation Excess Position Limit from 50% to 300% and tighten one of the financial requirements for applicants
- To introduce an ETF Market Maker Excess Position Limit
- To introduce an Index Arbitrage Activity Excess Position Limit
- To introduce an Asset Manager Excess Position Limit, and asset managers who satisfy the following conditions are eligible for the excess position limit: –
- Be an intermediary licensed or registered for Type 9 regulated activity under the SFO and its total value of assets under management should be no less than HK$100 billion;
- Must demonstrate that it has a genuine business need to use HSI and HHI futures and options contracts to facilitate its asset management activity; and
- Has effective internal control procedures and risk management systems to manage the potential risks arising from the excess position.
- To increase the position limit for stock options contracts to 150,000
The proposal aims at ensuring a proper balance is struck between maintaining financial stability and facilitating market development. It is expected to make the position limit regime more responsive to changing developments in the financial market.
Comment
Under the existing position limit regime, an Exchange Participant or its affiliate may seek authorization from the SFC to hold or control Hang Seng Index and Hang Seng China Enterprises Index futures and options contracts in excess of the statutory limit for the purposes of hedging risks that arise in the course of providing services to clients. The current cap on the excess that may be authorized by the SFC is 50% of the statutory limit.
The initiative of the SFC to raise the cap from 50% to 300% is to encourage market participants to establish more of their derivative positions on the exchange markets. The SFC believes that this will not only result in greater market transparency but also enable the SFC to better assess the potential implications on market stability. The SFC also expressed that they will regularly review the position limits to ensure they remain appropriate and would not hinder market development.
Apart from raising the cap on excess position limit that may be granted under the existing Client Facilitation Excess Position Limit, the proposal has proposed a few more important changes. CompliancePlus is currently looking into the consultation paper and would publish a detailed response to the SFC in late October.
For a copy of the consultation paper, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/consultation/openFile?refNo=16CP3
For further details, please refer to:
http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=16PR93
The article is for general information purpose only and is not intended to constitute legal or other professional advice.
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