The Hong Kong Securities and Futures Commission (SFC) has issued its largest fine ever for violations of anti-money laundering (AML) and counter-terrorist financing (CFT) regulatory requirements. Last month, the SFC announced that it has fined Guosen Securities (HK) Brokerage Company, Limited (Guosen) HK$15.2 million for its internal control deficiencies and breaches of AML/CFT regulations1.
This is more than double the fine for similar breaches in the past. The SFC's record breaking fine against Guosen appears to be due to an egregious breakdown in its systems and controls to identify and monitor AML/CFT risks, as well as senior management's outright disregard to AML/CFT concerns.
Where Guosen went wrong
Guosen was found by the SFC to have, during the 14-month period between 1 November 2014 and 31 December 2015, failed to implement appropriate internal controls in relation to the handling of third party deposits (TPDs). These failures led to over 2,200 unusual or suspicious TPDs amounting to over HK$2.3 billion.
In particular, the SFC found that:
As such, the SFC is of the opinion that Guosen has been guilty of misconduct under the SFO and its fitness and properness to remain a licensed corporation has been called into question.
Turning a blind eye to third party deposits risk – what are the consequences?
The record breaking fine is likely due to the large number of transactions and monetary value involved. The message is clear: the SFC will not tolerate weak internal systems and controls and blatant oversight of management's responsibilities to address vulnerabilities of the same.
In the past year or so, Hong Kong has witnessed a downward trend in the number of investigations initiated3, which is attributable to the SFC's shift to focus on larger and higher profile investigations and enforcement actions4. Nonetheless, this should not be seen as a sign of relaxation on its part. The SFC has recognised that money laundering continues to be a persistent risk globally, and has strengthened its enforcement actions against firms with internal control failures related to know-your-client or anti-money laundering requirements5. Financial crime is especially a concern in a market fraught with TPDs.
In light of this, senior management should not just pay lip service to their duties to prevent and address money laundering/counter financing risks and should note the following: