Hong Kong SFC Enforcement Action: Guosen Securities

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SFC reprimands and fines Guosen Securities (HK) Brokerage Company, Limited $15.2 million for breaches of anti-money laundering regulatory requirements 
18 Feb 2019

The Securities and Futures Commission (SFC) has reprimanded Guosen Securities (HK) Brokerage Company, Limited (Guosen) and fined it $15.2 million for failures in complying with anti-money laundering (AML) and counter-terrorist financing (CFT) regulatory requirements when handling third party fund deposits (Note 1).

The SFC’s investigation revealed that between November 2014 and December 2015, Guosen had processed 10,000 third party deposits totalling approximately $5 billion for more than 3,500 clients. 

Specifically, the SFC found that:

  • over 100 Guosen’s clients received third party deposits that were incommensurate with their financial profiles;
  • some third party deposits were withdrawn by clients shortly after receiving the funds without being used for trading; and
  • certain third parties made numerous deposits to the accounts of Guosen’s clients and had no apparent relationships with these clients.

Despite the apparent AML/CFT red flags, Guosen failed to make enquiries about such third party deposits and did not submit suspicious transaction reports to the Joint Financial Intelligence Unit (JFIU) in a timely manner.

The SFC is concerned that Guosen only began to report the more than 2,200 third party deposits, which took place between November 2014 and December 2015, as being suspicious to JFIU in March 2016 after an SFC review.

The SFC also found that Guosen failed to:

  • put in place any system or controls to identify and monitor third party deposits into the bank sub-accounts for its clients;
  • verify the identities of third party depositors, ascertain their relationships with clients, and scrutinise the reasons for making third party deposits;
  • put in place an effective approval process for third party deposits;
  • effectively communicate and enforce its internal AML/CFT policies;
  • maintain proper documentation of its assessment of clients’ money laundering and terrorist financing (ML/TF) risk levels;
  • conduct ongoing monitoring of its business relationship with clients; and
  • put in place an effective compliance function.

It also emerged that certain staff members of Guosen had brought some of the above-mentioned internal control deficiencies to the attention of its former senior management and a former responsible officer as early as 2013 and made suggestion to address the deficiencies.  However, the senior management and the responsible officer did not take any steps to ensure that the AML/CFT internal controls on third party deposits were effective.

The SFC is of the view that Guosen’s conduct was in breach of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) and the Guideline on Anti-Money Laundering and Counter-Terrorist Financing (AML/CFT Guideline), which require licensed corporations to implement appropriate AML/CFT internal controls to mitigate the risk of ML/TF (Notes 2,3 & 4).

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

  • Guosen processed more than 2,200 suspicious third party deposits totalling over $2.3 billion in the course of a 14-month period;
  • the former senior management and a former responsible officer of Guosen, who have now been replaced, turned a blind eye to the ML/TF risks associated with third party deposits;
  • Guosen engaged an independent reviewer to conduct a review of its internal controls and took steps to remediate the deficiencies identified, including implementing new AML/CFT policies and third party deposit procedures;
  • Guosen cooperated with the SFC in resolving the SFC’s concerns and accepting the disciplinary action; and
  • Guosen has an otherwise clean disciplinary record.

End

Notes:

  1. Guosen is licensed under the Securities and Futures Ordinance to carry on business in Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities) and Type 5 (advising on futures contracts) regulated activities.
  2. Section 5(1)(c) of Schedule 2 to the AMLO and paragraphs 5.1(c) and 5.10 of the AML/CFT Guideline require licensed corporations to identify transactions that are complex, large or unusual or patterns of transactions that have no apparent economic or lawful purpose, make relevant enquiries to examine the background and purpose of the transactions, and report to JFIU where appropriate. The findings and outcomes of these examinations should be properly documented in writing and be available to assist the relevant authorities.
  3. Sections 5(1)(a) and (b) of Schedule 2 to the AMLO and paragraphs 5.1(a) and (b) of the AML/CFT Guideline require licensed corporations to continuously monitor its business relationship with a client by reviewing from time to time documents, data and information relating to the client to ensure that they are up-to-date and relevant and conducting appropriate scrutiny of transactions carried out for the client to ensure that they are consistent with the nature of business, risk profile and source of funds.
  4. Section 23 of Schedule 2 to the AMLO and paragraph 2.1 of the AML/CFT 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, including implementation of appropriate internal AML/CFT policies, procedures and controls to ensure compliance with relevant legal and regulatory requirements.
  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 certain licensed corporations’ AML/CFT systems.

Links:

HK SFC Notice

Statement of Disciplinary Action

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