The Securities and Futures Commission (SFC) has reprimanded Guoyuan Securities Brokerage (Hong Kong) Limited (Guoyuan) and fined it $4.5 million for its failure to conduct proper enquiries and scrutiny to mitigate the risks of money laundering and terrorist financing when processing third party fund transfers for clients between September 2010 and July 2012 (Note 1).
Specifically, the SFC’s investigation found that:
- Guoyuan failed to conduct proper enquiries and sufficient scrutiny when processing a large number of frequent and unusual fund transfers between Guoyuan’s clients and third parties which were unverified and unrelated to the clients. Two clients’ accounts alone recorded an aggregate of fund transfers to and from third parties totalling $665.3 million. These third party fund transfers, which were purportedly repayment to or receipt from “friends” or “business partners”, were routinely processed and accepted by Guoyuan’s senior management without making further enquiries.
- Suspicious patterns suggesting the two clients’ accounts were used as depository accounts or conduits for transfers were evident in some instances where monies from third parties were deposited in the clients’ accounts and equivalent or roughly similar amounts were withdrawn shortly thereafter, and then transferred to numerous other third parties without any securities trading in the clients’ accounts at the material time. Furthermore, the activities in some Guoyuan’s clients’ accounts who received third party funds from the two clients were inconsistent with the clients’ declared net worth or annual income.
- Despite such red flags, Guoyuan failed to identify them as suspicious transactions and/or follow up on them, and/or failed to adequately record enquiries which were allegedly made on these transactions.
- Guoyuan also failed to properly implement and communicate policies and procedures regarding anti-money laundering and counter-terrorist financing to relevant staff members.
The SFC is of the view that Guoyuan’s conduct was in breach of the Prevention of Money Laundering and Terrorist Financing Guidance Note, the Guideline on Anti-Money Laundering and Counter-Terrorist Financing, and the Code of Conduct which require licensed corporations to:
- conduct ongoing due diligence and scrutiny on clients’ transactions and pay special attention to all complex, unusual large transactions and all unusual patterns of transactions which have no apparent economic or lawful purpose. The findings and outcomes of these examinations should be properly documented in writing; and
- take all reasonable measures to ensure that proper safeguards exist to mitigate the risks of money laundering and terrorist financing, including implementation of appropriate policies and procedures and ensuring their effectiveness and compliance with all relevant legal and regulatory requirements (Notes 2 to 6).
In deciding the disciplinary sanction, the SFC took into account:
- the duration of Guoyuan’s failures was more than a year;
- Guoyuan cooperated with the SFC in resolving the SFC’s concerns;
- Guoyuan has implemented new policies and procedures in relation to anti-money laundering and counter-terrorist financing, taken steps to remedy its internal control deficiencies and the former senior management team has left;
- Guoyuan agreed to engage an independent reviewer to conduct a review of its internal controls; and
- Guoyuan has an otherwise clean disciplinary record.
- Guoyuan is licensed under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities.
- The “Prevention of Money Laundering and Terrorist Financing Guidance Note” (AMLGN) was published by the SFC in September 2009 and remained effective until 31 March 2012. From 1 April 2012, the AMLGN was superseded by the “Guideline on Anti-Money Laundering and Counter-Terrorist Financing” (AML/CFT Guideline) and the “Prevention of Money Laundering and Terrorist Financing Guideline issued by the Securities and Futures Commission for Associated Entities”.
- Paragraph 6.1.2(d) of the AMLGN and paragraph 5.1(b) of the AML/CFT Guideline require licensed corporations to conduct ongoing due diligence and scrutiny, i.e. perform ongoing scrutiny of the transactions and account throughout the course of the business relationship to ensure that the transactions being conducted are consistent with the licensed corporation’s knowledge of the customer, its business and risk profile, taking into account, where necessary, the customer’s source of funds.
- Paragraph 6.2.8 of the AMLGN and paragraphs 5.1(c) and 5.10 of the AML/CFT Guideline require licensed corporations to pay special attention to all complex, unusual large transactions and all unusual patterns of transactions which have no apparent economic or lawful purpose. The background and purpose, including where appropriate the circumstances, of the transactions should be examined. The findings and outcomes of these examinations should be properly documented in writing and be available to assist the relevant authorities.
- Paragraph 4.2.2 of the AMLGN 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 policies and procedures for the prevention of money laundering and terrorist financing and ensuring their effectiveness and compliance with all relevant legal and regulatory requirements.
- General Principles 3 and 7 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission require licensed corporations to have and employ effectively the resources and procedures which are needed for the proper performance of their business activities, and to comply with all regulatory requirements applicable to the conduct of their business activities.
- 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.