HK SFC fines firm HKD 2.6MM for AML failures

 

SFC reprimands and fines Zhongtai International Securities Limited $2.6 million for non-compliance with anti-money laundering regulatory requirements

14 Mar 2017

The Securities and Futures Commission (SFC) has reprimanded Zhongtai International Securities Limited, formerly known as Qilu International Securities Limited (Zhongtai), and fined it $2.6 million for failures in complying with anti-money laundering regulatory requirements when handling third party fund deposits (Note 1).

The SFC found that between January 2013 and December 2014 (Relevant Period), Zhongtai failed to:

  • monitor and/or conduct sufficient and timely enquiries and scrutiny on numerous deposits made by third parties to its clients’ sub-accounts at Industrial and Commercial Bank of China (Asia) Limited (ICBC Sub-Accounts); and
  • establish adequate and implement appropriate internal procedures and controls to detect and report suspicious third party fund deposits in a timely manner, and to ensure that there was clear delineation of duties among its senior management and staff in handling third party deposits.

Specifically, the SFC’s investigation found that:

  • Zhongtai processed more than 300 third party deposits which were made via the ICBC Sub-Accounts during the Relevant Period without adequate monitoring or scrutiny by its Compliance Department and senior management as required under its internal policies. These third party deposits were accepted and transferred to the clients’ accounts when the origins of the deposits and/or the identities of the third parties have not been clarified and verified;
  • the lack of adequate monitoring of deposits made via these ICBC Sub-Accounts demonstrates that there were deficiencies in Zhongtai’s internal controls at the material time. Zhongtai’s staff did not observe the requirement that a third party deposit should in principle be rejected and returned unless (i) the client provided a reasonable explanation for the deposit and (ii) the deposit was approved by its Compliance Department and at least one responsible officer; and  
  • there is evidence of relevant compliance staff and responsible officers showing a lack of mutual understanding of their respective roles and responsibilities in the handling of third party deposits.

The SFC further found that when Zhongtai took steps to re-assess certain third party deposits, it failed to maintain proper and accurate records of the assessments conducted by its senior management and compliance officers.

The SFC is of the view that Zhongtai’s conduct failed to comply with regulatory requirements under the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO), Guideline on Anti-Money Laundering and Counter-Terrorist Financing (AML Guideline), and the Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct) (Notes 2 to 4).

In deciding the disciplinary sanction, the SFC took into account that Zhongtai:

  • cooperated with the SFC in resolving the SFC’s concerns;
  • took remedial steps and enhanced its policies and procedures after discovering its failures in the handling of third party deposits via the ICBC Sub-Accounts;
  • agreed to engage an independent reviewer to conduct a review of its internal controls; and
  • has an otherwise clean disciplinary record.

End

Notes:

  1. Zhongtai is licensed under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities.
  2. Section 5(1) of Schedule 2 of the AMLO and paragraphs 5.1, 5.10 and 5.11 of the AML Guideline require licensed corporations to continuously monitor their business relationship with their clients, including conducting appropriate scrutiny of transactions carried out for their clients, identifying transactions that are complex, large or unusual or patterns of transactions that have no apparent economic or lawful purpose, making relevant enquiries to examine the background and purpose of the transactions, and reporting to the Joint Financial Intelligence Unit where appropriate. The findings and outcomes of these examinations should be properly documented in writing and be available to assist the relevant authorities.
  3. Section 23 of Schedule 2 to the AMLO and paragraph 2.1 of the AML Guideline require licensed corporations to take all reasonable measures to ensure that proper safeguards exist to mitigate the risks of money laundering and terrorist financing, and to prevent a contravention of any customer due diligence and record-keeping requirements under the AMLO. To ensure compliance with this requirement, licensed corporations should implement appropriate internal anti-money laundering and counter-terrorist financing policies, procedures and controls.
  4. General Principles 2 and 7 and paragraph 12.1 of the Code of Conduct require licensed corporations to (a) act with due skill, care and diligence, in the best interest of their clients and the integrity of the market, in conducting their business activities; and (b) comply with, and implement and maintain measures appropriate to ensuring compliance with, all regulatory requirements applicable to the conduct of their business activities.
  5. Licensed corporations are reminded to refer to the “Circular to Licensed Corporations and Associated Entities – Anti-Money Laundering / Counter Financing of Terrorism (AML/CFT) Compliance with AML/CFT Requirements” issued by the SFC on 26 January 2017 which sets out key areas of concern identified by the SFC in its review of some licensed corporations’ AML/CFT systems.

Links:

HK SFC Notice

Statement of Disciplinary Action

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