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HK SFC issues fine and reprimand for counter-money laundering failures

BIScom Subsection: 
Editorial Staff

Hong Kong's Securities and Futures Commission (SFC) has reprimanded Guosen Securities (HK) Brokerage Company, Limited (Guosen) and fined it HKE15.2 million for failures in complying with Counter-money laundering and anti-terrorist financing (CFT) regulatory requirements when handling third party fund deposits

A statement from the SFC (edited) says:

The SFC’s investigation revealed that between November 2014 and December 2015, Guosen had processed 10,000 third party deposits totalling approximately HKD5,000 million for more than 3,500 clients.

Specifically, the SFC found that:

- over 100 of 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- some third party deposits were withdrawn by clients shortly after receiving the funds without being used for trading; and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 warning signs, 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 money laundering and terrorist financing risk management policies;

- maintain proper documentation of its assessment of clients’ money laundering and terrorist financing 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 suggestions to address the deficiencies. However, the senior management and the responsible officer did not take any steps to ensure that the 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 internal controls to mitigate the risk of money laundering and terrorist financing.

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

- Guosen processed more than 2,200 suspicious third party deposits totalling over HKD2,300 million 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 risks associated with third party deposits;

- Guosen engaged an independent reviewer to conduct a review of its internal controls and took steps to remedy the deficiencies identified, including implementing new 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.

Further reading: The full decision is at https://www.sfc.hk/edistributi...