Hong Kong's Securities and Futures Commission has reprimanded and fined Southwest Securities (HK) Brokerage Ltd for failing to comply with anti-money-laundering and anti-terrorist-financing rules back in 2016.
The regulator has found that the firm failed to:
- implement adequate and effective policies and procedures to mitigate the risk of money laundering and terrorist financing associated with third-party deposits; and
- establish proper internal systems and controls to monitor its clients' activities and detect and report suspicious transactions to the Financial Intelligence Unit (FIU) swiftly.
The SFC's investigation revealed that between January and December 2016, the firm failed to identify 89% of the third-party deposits totalling S$110.1 million for its clients due to the absence of systems and procedures to review the sourced of funds deposited into sub-accounts that the brokerage maintained with a bank.
In some cases where the firm identified third-party deposits, the clients' relationships with the third-party depositors (e.g. friendship) and the reason for these deposits (e.g. busy at work) provided by the clients failed to explain the rationale for the transfers satisfactorily. The firm did not critically evaluate these deposits and document the enquiries, as well as the reasons for approving them.
The brokerage's staff also did not have a clear and consistent understanding of their responsibilities in the monitoring and identification of suspicious transactions. Nor did the firm diligently supervise and provide enough guidance to its staff to enable them to form suspicions or to recognise signs of money laundering or terrorist financing.
Despite the presence of 'red flags' in some of the clients' activities, the firm did not identify the suspicious transactions and make appropriate enquiries. It was only after the SFC asked it to review all clients' deposits and trading activities for the year of 2016 that it spotted 31 suspicious transactions and reported them to the FIU.
The SFC has a long litany of rules that it believes the brokerage to have broken, which include the following.
- Section 23 of Schedule 2 to the Anti-Money-Laundering Ordinance (AMLO) and paragraph 2.1 of the AML Guideline, which require licensed corporations to take all reasonable measures to ensure that proper safeguards exist to mitigate the risks of ML/TF and to prevent a contravention of any customer due diligence and recordkeeping requirements under the AMLO.
- Paragraph 2.2 of the AML Guideline, which requires licensed corporations to establish and implement adequate and appropriate internal AML/CFT policies.
- General Principle 3 of the Code of Conduct for Persons Licensed by or Registered with the SFC, which requires firms to have and employ effectively the resources and procedures which are needed for the proper performance of their business activities.
- Section 5(1)(b) of Schedule 2 AMLO and paragraph 5.1(b) of the AML Guideline, which require licensed corporations to continuously monitor their business relationships with the clients by monitoring their activities to ensure that they are consistent with their knowledge of the clients and the clients’ business, risk profile and source of funds.
- Paragraph 5.9 of the AML Guideline, which requires licensed corporations to implement effective monitoring systems.
- Section 5(1)(c) of Schedule 2 AMLO and paragraphs 5.1(c), 5.10 and 5.11 of the AML Guideline, which require licensed corporations to identify transactions that are complex, large or unusual, make relevant enquiries to examine the background and purpose of the transactions, write down the enquiries made (and their results), and report the findings if appropriate.
- Paragraphs 7.11, 7.14 and 7.39 of the AML Guideline, which oblige firms to identify situations that might give rise to suspicions.