Good luck James

In major Hong Kong related compliance news, James Shipton, formerly with Goldman Sachs and before that with ComplianceAsia, has been appointed an Executive Director of the HK SFC in charge of a new combined Licensing and Intermediaries Supervision Department.  The appointment is effective today.

The combining of the two departments is an interesting move and will present both challenges and opportunities for improving the regulatory environment in Hong Kong.  Broadly Hong Kong has a very good environment but we have been saying for quite some time that there remain opportuinities to enhance regulatory effectiveness by tweaking aspects of the rules relating to firms that only deal with other institutions.

In addition to his background in regulatory affairs with Goldmans and the formation of own firm, James has been very active in AIMA in Hong Kong and had a stint with Kleinwort Benson and the prime services side of Goldmans.

We wish James a very sucessful 3 year stint at the helm of the new combined department.  The full announcement from the SFC is reproduced below:

SFC welcomes appointment of Executive Director

The Securities and Futures Commission (SFC) welcomes the appointment by the Financial Secretary of Mr James Shipton as Executive Director of the new integrated Intermediaries Supervision and Licensing Division for a three-year term effective from 19 June 2013 (Note 1).

The integrated Division would enable the SFC to deal with an increasingly complex range of regulatory issues and to enhance the regulatory effectiveness of licensing and supervising intermediaries (Note 2).  

"I am pleased with the Financial Secretary’s decision to appoint Mr Shipton. I am certain that the SFC will benefit from his wealth of experience and professional knowledge. I look forward to working closely with him to advance the SFC’s regulatory objectives," the SFC’s Chief Executive Officer, Mr Ashley Alder, said.

End

Notes:

1. Mr Shipton was a full-time Visiting Fellow at Harvard Law School's Program for International Financial Systems for three months prior to joining the SFC. Previously, he was Goldman Sachs’ Asia Pacific Head of Government and Regulatory Affairs and a Managing Director in Goldman’s Asian Executive Office, before taking extended leave to take up his interim position at Harvard University. Mr Shipton has extensive finance, capital markets, operational and legal experience and has worked in Australia, Bangkok, Singapore, London as well as Hong Kong.
2. Last year, the Financial Secretary approved the SFC’s proposal to consolidate the Intermediaries Supervision Department and the Licensing Department to form an integrated Division and to recruit an Executive Director to head the new Division.

SFC bans rep for life

The SFC has banned a representative for life after her defalcation of client assets.  Theft of client assets remains the most serious of issues and the SFC has taken action accordingly.  Full details below:

SFC bans Michelle Ng Man Chow for life

The Securities and Futures Commission (SFC) has banned Ms Michelle Ng Man Chow from re-entering the industry for life (Note 1).

The disciplinary action follows an SFC investigation which found that, between August and October 2011, Ng deposited a number of cheques into her own trading account and the trading account of a client that she received from another client for settling securities transactions. Ng’s action left the latter client’s account with a negative balance and penalty interest was charged.

In order to conceal her misconduct, Ng lied to the client saying the interest charges were a mistake when asked for an explanation for the interest charged. In addition, Ng sold some securities in the client’s account without authorization to reduce her margin ratio and to prevent margin calls being made to her.

Ng has compensated the affected client after she lodged a complaint with Ng’s employer and the SFC.

The SFC also found that Ng conducted transactions in the former client’s trading account on a discretionary basis without any written authorization from the client.

In deciding the penalty, the SFC took into account that misappropriation of client’s assets is a serious and dishonest act and Ng’s attempt to conceal it aggravated its seriousness. The SFC concluded that Ng is not a fit and proper person to be licensed.

CS in HK fined for position limit breaches

The HK SFC has fined Credit Suisse in Hong Kong HK$1.6m for breaches of options position limits.  This is not the first time that an institution has been fined for this issue.  Buy side firms should ensure that they only use one PB for their trades in this area as the PB will monitor for you, but this only works if all the positions are in one place.  The full details of the SFC press release are below:

SFC reprimands and fines Credit Suisse Securities (Hong Kong) Limited $1.6 million for regulatory breaches

11 Jun 2013

The Securities and Futures Commission (SFC) has reprimanded and fined Credit Suisse Securities (Hong Kong) Limited (Credit Suisse) $1.6 million for regulatory breaches and internal control failings relating to position limit failures (Note 1).

Credit Suisse has also agreed to engage an independent reviewer, to be approved by the SFC, to review its systems and controls for ensuring compliance with the Securities and Futures (Contracts Limits and Reportable Positions) Rules (Rules).

The disciplinary action follows an SFC investigation into the holdings of Credit Suisse and Credit Suisse International of open positions in Industrial and Commercial Bank of China Limited stock options (ICBC Option) in breach of the prescribed position limit of 50,000 contracts on 27 October 2011, 14 December 2011 and 15 December 2011 (Notes 2, 3, 4 & 5).

The SFC also found that Credit Suisse failed to put in place effective internal controls to ensure that all open positions in stock options contracts in which extensions were granted were in compliance with the prescribed position limits.

In particular, the SFC found that at the material time, Credit Suisse had a system in place to ensure compliance with the Rules which generated regular reports including a warning report to signal when positions reached 75% of the available limit. However, excess position limits approved by the Stock Exchange of Hong Kong Limited and the expiry dates of the approved excess limits were not shown in the warning report and traders had to rely on their memories in monitoring compliance with the Rules. At the relevant time, three stock options classes had previously been the subject of applications for extensions.

The three position limit breaches with respect to the ICBC Option in October and December 2011 were caused by the traders’ mistaken belief that an approved excess limit which had expired in June 2011 remained available.

The warning report was introduced in April 2011. The traders raised issues about the limitations of the warning report with Credit Suisse but no steps to rectify them were taken until after the position limit breaches in December 2011.

In deciding the penalty, the SFC took into account Credit Suisse’s clear disciplinary record, the fact that it has now strengthened its internal controls for monitoring compliance with the prescribed position limits and its full co-operation with the SFC in the investigation.

End

Notes:

1. Credit Suisse is a licensed corporation under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities) and Type 4 (advising on securities) regulated activities.  
2. Rule 4(1) of the Rules provides that no person, except persons authorized by the SFC or the Hong Kong Exchanges and Clearing Limited, may hold or control futures contracts or stock options in excess of the prescribed limit.
3. Section 5(b) of the Rules provides that the limit on the number of contracts that may be held or controlled, in the case of stock options contracts, is specified in Schedule 2 of the Rules.
4. Schedule 2 of the Rules provides that the prescribed limit for stock options contracts on shares listed on the Stock Exchange of Hong Kong Limited is 50,000 open contracts per option class in any one market direction for all expiry months combined.
5. The positions in ICBC Option held by Credit Suisse and Credit Suisse International are under the same control and are therefore aggregated for the purpose of applying the prescribed position limit.
6. A copy of the Statement of Disciplinary Action in relation to the matter is available on the SFC website.

US AML authorities launch global action against Liberty money transfer system

In what could turn out to be the internet's equivalent of BCCI from the early 90's, the US Treasury, various arms of US law enforcement and several other jurisdictions launched co-ordinated action against the owners of Liberty Reserve SA.

The New York Times reports that it is alleged that some US$6 billion has been laundered on behalf of all sorts of criminal enterprises.

The US Treasury announcement is below:

Treasury Identifies Virtual Currency Provider Liberty Reserve as a Financial Institution of Primary Money Laundering Concern under USA Patriot Act Section 311

5/28/2013
Action Targets Liberty Reserve, a Web-Based Money Transfer System Employed by Criminals Worldwide to Launder the Proceeds of Illicit Activities 

WASHINGTON – The U.S. Department of the Treasury today named Liberty Reserve S.A. as a financial institution of primary money laundering concern under Section 311 of the USA PATRIOT Act (Section 311).   Liberty Reserve - a web-based money transfer system or “virtual currency” - is specifically designed and frequently used to facilitate money laundering in cyber space.  This is the first use of Section 311 authorities by Treasury against a virtual currency provider.

Liberty Reserve is widely used by criminals worldwide to store, transfer, and launder the proceeds of a variety of illicit activities.  Liberty Reserve’s virtual currency has become a preferred method of payment on websites dedicated to the promotion and facilitation of illicit web based activity, including identity fraud, credit card theft, online scams, and dissemination of computer malware.  It has sought to avoid regulatory scrutiny while tailoring its services to illicit actors. 

Treasury’s regulatory action today was taken in coordination with the unsealing of an indictment by the U.S. Attorney's Office for the Southern District of New York, which charged Liberty Reserve and seven of its principals – Arthur Budovsky, Vladimir Kats, Azzedine El Amine, Mark Marmilev, Maxim Chukharev, Ahmed Yassine Abdelghani, and Allan Esteban Hidalgo Jimenez – in Manhattan federal court for their alleged roles in running a $6 billion money laundering scheme and operating an unlicensed money transmitting business.

“Treasury is determined to protect the U.S. financial system from cyber criminals and other malicious actors in cyberspace, including overseas entities like Liberty Reserve that facilitate online crime and hope to evade regulatory scrutiny,” said Under Secretary for Terrorism and Financial Intelligence David S. Cohen.  “We are prepared to target and disrupt illicit financial activity wherever it occurs – domestically, at the far reaches of the globe or across the internet.” 

Treasury’s Financial Crimes Enforcement Network (FinCEN) has delivered to the Federal Register a regulatory finding explaining the basis of the actions as well as a notice of proposed rulemaking (“NPRM”) that, if adopted as a final rule, would prohibit covered U.S. financial institutions from opening or maintaining correspondent or payable-through accounts for foreign banks that are being used to process transactions involving Liberty Reserve.  The NPRM also proposes to require covered financial institutions to apply special due diligence to their correspondent accounts maintained on behalf of foreign banks to guard against any transactions involving Liberty Reserve.  If adopted, these measures would effectively cut off Liberty Reserve from the U.S. financial system.  After publication in the Federal Register, the public will have 60 days to comment on the proposed rule against Liberty Reserve. 

Liberty Reserve S.A.

Liberty Reserve is a web-based money transfer system or “virtual currency.”  It is currently registered in Costa Rica and has been operating since 2001.  Liberty Reserve uses a system of internal accounts and a network of third-party intermediaries or exchangers to move funds.  Operating under the domain name “www.libertyreserve.com,” Liberty Reserve maintains accounts for registered users, which are funded through exchangers.  Registered users typically send a bank or non-bank wire transfer to an exchanger, who then transfers the corresponding value of Liberty Reserve virtual currency from the exchanger’s account to the user’s account.  Once an account is established, transfers can be made from account-to-account instantly and anonymously.  Withdrawal of funds requires a user to instruct Liberty Reserve to send transfer value from the user’s account to the account of an exchanger, who then transfers the value as U.S. dollars or other currency as a bank or non-bank wire transfer to the user or to other recipient(s).  Exchangers operate as independent money service businesses globally, charging a commission on each transfer of funds into or out of the Liberty Reserve currency.

Liberty Reserve’s virtual currency appeals to illicit users because it provides the capability to conduct anonymous transactions around the world.  Liberty Reserve does not conduct verification of account registration for individuals using the system, asking only for a working e-mail address, and allow an individual to open unlimited number of accounts.  By paying an additional “privacy fee,” users can hide their internal unique account number when sending funds within the Liberty Reserve system.  Once an account is established, Liberty Reserve virtual currency can then be sent, instantly and anonymously, to any other account holder within the global system.

For example, a cyber-criminal online marketplace would accept payment in Liberty Reserve transfers for illicit activity that included spam services and key-logging programs used to steal personal information, such as account numbers and passwords, from innocent victims.  Also for anonymous sale were destructive malware programs designed to assault financial institutions, as well as lists of information from thousands of compromised personal accounts.  

To view a Fact Sheet on Section 311 of the USA PATRIOT Act, visit this link​. 

To view a chart related to this action, visit this link.

To view the complete Findings against Liberty Reserve, visit this link.

To view the Notice of Proposed Rulemakings, visit this link.

SFC proposes substantial changes to Professional Investor regime in Hong Kong

The SFC in Hong Kong has announced a 3 month consultation on major changes to the professional investor regime in Hong Kong.  The full announcement is below (our emphasis added).  We expect quite a vocal response to the consultation from some sectors.

SFC proposes to enhance professional investor regime, client agreement requirements

15 May 2013

The Securities and Futures Commission (SFC) has today begun a three-month consultation on proposals concerning the professional investor regime and the client agreement requirements in the Code of Conduct (Note 1).

The key proposals are as follows:

• requiring intermediaries to comply with all Code of Conduct requirements (including the Suitability Requirement (Note 2)) when dealing with all investors who are individuals, including their wholly owned investment vehicles and family trusts;
• streamlining the criteria under the Code of Conduct in assessing the knowledge and experience of corporate professional investors by removing specific tests (eg, the 40 transactions per annum requirement); and
• requiring (i) that the Suitability Requirement be incorporated in all client agreements as a contractual term, (ii) that client agreements should not contain provisions which are inconsistent with the Code of Conduct, and (iii) that client agreements should accurately set out in clear terms the actual services to be provided to the client.

We are not proposing any change to the laws concerning access to private placements of investments by those who fulfil existing wealth criteria.

"Our consultation aims to identify those investors who, we believe, require full protection under our Code of Conduct, and those who don't.  The Suitability Requirement is a cornerstone of investor protection which is why we believe that no individuals, regardless of wealth, should be classified as Professional Investors under the Code, depriving them of this vital safeguard," said the SFC's Chief Executive Officer, Mr Ashley Alder.

"The proposals also seek to align the contents of client agreements used by intermediaries with the services actually agreed to be provided to customers.  This is intended to keep intermediaries "honest", as is our proposal to embed the Suitability Requirement in the client agreement," he added.

The public is invited to submit their comments to the SFC on or before 14 August 2013.  Written comments may be sent on line via the SFC website (www.sfc.hk), by email to pi_client_agreement@sfc.hk, by post or by fax to 2284 4660.

End

Notes:

1. The Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission
2. The Suitability Requirement refers to the requirement to ensure the suitability of a recommendation or solicitation for a client is reasonable in all circumstances.

Happy birthday to us

Tonight in Singapore we are hosting our first of two anniversary parties.  ComplianceAsia is now 10.  Thanks to all of our clients, staff and partners who have supported us over the last decade.

10 years ago we set up the first regional compliance consultantcy in financial services.  A decade later we act for over 200 great clients every year.

Thanks to everyone involved (and there have been lots of you).

Special thanks to James Shipton who along with Philippa Allen, were the original two partners and the brains behind the concept.

Enjoy drinks at SCC.

HK party invites going out soon!!

More from the ICAC

Today the HK ICAC announced a jail sentence for two insurance agents convicted of falsifying commissions.  The full ICAC is below:

Ex-insurance agents jailed for accepting $563,000 bribes and deceiving commissions 16 May 2013

Two former insurance agents of an insurance company, charged by the ICAC, were today (Thursday) sent to jail at the Eastern Magistracy for accepting over $563,000 in bribes and using bogus insurance policies to deceive commissions totalling over $124,000 from the company. Wong Yin-ping, 46, a senior unit manager formerly employed by Dah Sing Insurance Services Limited (Dah Sing Insurance), received a jail term 16 months. Co-defendant Tang Wing-kwong, 53, a former insurance agent of Dah Sing Insurance, was sentenced to four months' imprisonment, and ordered to pay Dah Sing Insurance over $32,800 as restitution. In sentencing, Principal Magistrate Ms Bina Chainrai remarked that the defendants deserved immediate custodial sentences as the offences committed by them were serious in nature. Wong earlier admitted 10 charges - three of agent conspiring to accept advantages, contrary to Section 9(1)(a) of the Prevention of Bribery Ordinance (POBO) and Section 159A of the Crimes Ordinance; and seven of agents conspiring to use documents with intent to deceive their principal, contrary to Section 9(3) of the POBO and Section 159A of the Crimes Ordinance. Tang pleaded guilty to one count of agent using documents with intent to deceive his principal, contrary to Section 9(3) of the POBO. The court heard that at the material time, Wong was employed by Dah Sing Insurance as senior unit manager. She was the direct supervisor of Tang and three other insurance agents - Lau Kwok-kei, Monita Cheng Woon-ho and Cheng Chong (the trio). As a senior unit manager, Wong was required to reach the required production targets and/or maintain certain number of productive down-line agents. If Wong failed to do so, she might have her allowances and bonuses withheld and might even be demoted or terminated. The court heard that as the trio was unable to procure any insurance policy, Wong proposed she could source clients for them. Wong asked the trio to sign, as the handling agent, on a number of insurance policy application forms. But the trio had never met with the policy applicants or proposed insured. Between July 2008 and October 2009, Wong conspired with the trio to submit 41 bogus insurance policy application forms to Dah Sing Insurance. Upon Wong's request, the trio paid her a total of over $563,000 being the monthly allowances and commissions they received from the company. In January 2009, Tang also submitted two other bogus insurance policy applications to Dah Sing Insurance for the same purpose. Pursuant to the above bogus insurance policy applications, Dah Sing Insurance issued commissions of more than $92,000 and over $32,800 to Wong and Tang respectively, the court was told. The trio was also charged by the ICAC for their respective roles in the case. Lau Kwok-kei, 52, and Monita Cheng Woon-ho, 56, who earlier pleaded guilty to their respective charges, will be sentenced at the Kwun Tong Magistracy on May 20 and the Eastern Magistracy on August 2 respectively; while Cheng Chong, 25, was earlier convicted of his charges after trial, and will be sentenced at the Eastern Magistracy on August 6. Dah Sing Insurance rendered full assistance to the ICAC during its investigation.

HK ICAC secures conviction of ex securities firm staff member

Every now and then the HK Independent Commission Against Corruption secures a conviction against a licensed person for a breach which can be fashioned into a corruption case.  The latest announcement from the ICAC sets out one such case:

Ex-staff of securities firm ordered to serve three years in jail for accepting $1.1m bribes 10 May 2013

A former investment representative of a securities firm, charged by the ICAC, was today (Friday) ordered by the Court of Appeal (CA) to serve three years in jail for accepting over $1.1 million in bribes from a businessman after the Department of Justice (DoJ) sought a review of his sentence. Andy Pau Chin-hung, 37, formerly employed by KGI Hong Kong Limited (KGI Hong Kong), was earlier found guilty at the District Court of two counts of agent accepting an advantage, contrary to Section 9(1)(a) of the Prevention of Bribery Ordinance, and sentenced to perform 220 hours of community service and pay over $1.1 million as restitution to KGI Hong Kong. The DoJ subsequently made an application for a review of Pau's sentence. In allowing the DoJ's application, Mr Justice Peter Cheung Chak-yau of the CA remarked that meting out a non-custodial sentence to Pau convicted of bribery offences was wrong in principle. Meanwhile, the CA also dismissed Pau's application for leave to appeal against his conviction. The applications of the DoJ and Pau were today heard by Mr Justice Cheung of the CA, and Madam Justice Barnes and Mr Justice Derek Pang Wai-cheong, both judges of the Court of First Instance. The court heard that at the material times, Pau was employed by KGI Hong Kong as an investment representative working for KGI Asia Limited (KGI Asia). He was responsible for opening securities accounts and conducting stock trading for clients of KGI Asia. In early 2007, Pau came to know Derrick Luu Hung-viet, a businessman, through the introduction of Johnny Tang Ka-siu, with whom Pau had become acquainted when he worked in the insurance sector five or six years earlier. Tang told Pau that Luu wanted to sell his shares of Warderly International Holdings Limited (Warderly) through the securities accounts of other persons in KGI Hong Kong. Pau then helped his mother-in-law, a mainlander and a company associated with Luu open securities accounts with KGI Asia. The court heard that between April 3 and 4, 2007, Pau sold 30 million shares of Warderly for Luu through the securities accounts of the mainlander and the company. After receiving $13 million from the sale of the shares, Tang caused over $650,000 to be given to Pau. In mid April 2007, Pau used the securities account of his mother-in-law to sell another 20 million shares of Warderly on behalf of Luu for over $9.3 million. Out of the sales proceeds, five per cent or over $460,000 was given to Pau, the court was told. The prosecution was today represented by Deputy Director of Public Prosecutions William Tam and Senior Public Prosecutor Sheroy Tam, assisted by ICAC officer Ten Cheng.

Tiger Asia judgement link

The Court of Final Appeal Reasons for Judgement can be found here.

SFC bans trader for faking phone calls

The SFC has taken action against a trader in Hong Kong for faking calls.  Full details from the SFC website are below:

SFC bans Ma Tin Luk for three years

The Securities and Futures Commission (SFC) has banned Mr Ma Tin Luk from re-entering the industry for three years from 24 April 2013 to 23 April 2016 for fabricating telephone order recordings and providing false and misleading information to the SFC to conceal the lack of records on a short selling order he executed for a client in November 2009 (Note 1).

An SFC investigation found that:

• Ma had requested his wife to pretend to be his client and created two false telephone order recordings; and
• Ma informed the SFC that the telephone order recordings recorded the telephone conversations between him and his client, even though he knew that the conversations were in fact between himself and his wife.

In deciding the sanction, the SFC took into account all relevant circumstances, including:

• Ma’s misconduct was seriously dishonest;
• providing false and misleading information to the SFC could jeopardise the efficiency of its investigation and a deterrent message needs to be sent to the market that such conduct is not acceptable; and
• Ma has no previous disciplinary record.

End

Notes:

1. Ma was licensed as a representative under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contracts) and Type 4 (advising on securities) regulated activities and was accredited to Phillip Securities (Hong Kong) Limited and Phillip Commodities (HK) Limited between 26 March 2007 and 1 January 2011. He is currently not a licensed person.
2. A copy of the Statement of Disciplinary Action in relation to the matter is available on the SFC website.

SFC suspends another broker who did not disclose a personal share dealing account

The HK SFC has suspended a broker who had failed to disclose a personal share dealing account in the name of his wife and was involved in publishing stock tips that the SFC advises he traded in advance of those published remarks.

The link to the SFC notification is here.

This is the second recent suspension relating to this issue and a timely reminder to all licensed firms to ensure that their staff understand the rules regarding disclosure of accounts of connected persons.

SFC publishes new FAQ on disclosure of inside information by HK public companies

The SFC has published a new FAQ on the disclosure of inside information by HK public companies.  It also noted an increase in the number of disclosures made by those firms (up 43% on the same time period from last year) following roll out of the new rules regarding this topic on 1 January this year.

The full SFC notice is below:

New statutory regime for inside information drives increase in disclosures

The new statutory regime on disclosure of inside information, which aims to cultivate and encourage an enduring culture of disclosure by listed companies, has spurred a significant increase in corporate announcements on inside information, according to the Securities and Futures Commission (SFC). The total number of corporate announcements on inside information in the first three months of 2013 was up 43% compared to that of the corresponding period last year (Note 1).

The SFC has been working closely with Hong Kong Exchanges and Clearing Limited in monitoring the compliance of listed companies with the new statutory regime, including reviewing companies’ disclosures, raising pertinent issues with companies, and giving guidance where disclosure appears to be inadequate or anomalies are detected.

Most enquiries handled by the SFC’s consultation service have been general in nature and they are generally processed within the same day. The questions covered a broad range of issues such as the interpretation of inside information, the application of safe harbours and confidentiality requirements, the liability provisions and other general administrative matters (Note 2).

As part of the SFC’s continued effort to help listed companies better understand the provisions of the new statutory regime, Frequently-Asked-Question (FAQ) addressing particular issues will be published.

The FAQ issued today advises listed companies not to use the heading “Voluntary Announcement” to disclose information but to use a heading that accurately reflects the substance of the information concerned, and clarifies the statutory obligation of dually listed companies under the new regime in relation to “overseas regulatory announcements”.

"We believe the new statutory regime on disclosure of inside information has certainly raised awareness among listed companies of the importance of making disclosures to the investing public in a timely manner. We will nevertheless continue to maintain rigorous monitoring of listed companies’ compliance with the regime, with a view to promoting enhanced disclosure, fostering a positive change in corporate culture and facilitating more timely regulatory actions on cases involving non-compliance," the SFC’s Chief Executive Officer Mr Ashley Alder said.

End

Notes:

1. Under the new regime, which came into operation on 1 January 2013, listed corporations are required to disclose inside information to the public in a timely manner.
2. The SFC started providing consultation service to listed corporations from 1 December 2012 on application of provisions of the statutory disclosure regime.

Japan takes steps to reform insider dealing rules

Japan has had a number of insider trading issues to consider over the last two years including some serious cases involving the leakage of information from securities companies to their clients.  Recently it was reported in the Nikkei Shimbum daily that further reforms are to be implemented in this area.  Kakuko Takagi of our firm reports:

On 22 March 2013, it was reported that the FSA presented details of proposed amendments of insider trading rules to a Financial Affairs Meeting of the Liberal Democratic Party, the ruling party in Japan.  The FSA plans to submit the proposal to the ordinary parliament session in the middle of April 2013.  While currently only a person actually making an insider trade is penalized in Japan, a party who leaks insider information is going to be subject to the insider regulations under the proposed amendments.  Major amendments presented are:

 Where insider information was leaked by a securities company and it triggers a transaction:

- A fine to a securities company is calculated based on an amount of commission fees for 3 months from clients;

- Where a securities company also underwrites capital increases of a company whose information is leaked, 50% of the underwriting fee from that company is forfeited.  

Where insider information was leaked by a party other than a securities company:

-  50% of the unjustified profit of a person who received the information and made a transaction is forfeited;

It was stated that criminal penalties are imposed only for especially egregious cases such as a significant amount of transactions or repeated leakages of information and those penalties will be:

- No longer than 5 years’ imprisonment or not greater than JP 5 million yen’s fine is imposed to an individual who leaked insider information;  

-  Where a corporation has a supervisory responsibility to an individual who is found guilty of criminal conduct, not greater than JP 0.5 billion’s fine is imposed on the corporation.

ComplianceAsia actively tracks Japanese regulatory developments on behalf of our clients.

Anti Money Laundering rules finally getting the public scrutiny they deserved

Two articles in the SCMP over the weekend (one here) have finally highlighted to the Hong Kong public some of the downsides of this incredible raft of global legislation and regulatory burden.

Don't get me wrong, we hate drug traffickers, terrorists, kidnappers, people smugglers, despot rulers and arms traffickers.  These are problems that have massive social costs and some unusual laws seem like a good way of addressing them.

However laundering has always been subsidiary to these predicate crimes.  What we are now seeing in Hong Kong is public concern over how laundering itself has become a crime without reference to the underlying wrong it was designed to counter.

The case itself, for those not reading the local newspapers, involves an old woman who was smurfing and received a 10 year jail term.  What is missing from the case against her, at least so far, is any evidence that she was part of some criminal scheme.  The public prosecutor, Kevin Zervos, is also coincidentally a long time member of the anti money laundering establishment (if I can call it that) and is probably as well placed as anyone to be taking an educated position on this case.  His view is that the prosecution was warranted.  With respect, I differ.

Some years ago a very eloquent US prosecutor, John Moscow, put the case to an assembled group of bankers and compliance officers that it was their duty to assist the global fight against crime by participating in anti money laundering issues.  With respect to the crimes mentioned above, John was right.  Whatever our role in generating profits for our company, surely our social conscience overrides this when dealing with something as grievous as potential terrorism.  AML rules in fact gave bankers and compliance a way to legally assist law enforcement with these horrible social wrongs.

The problem is that now that these rules are in place, for example where failure to report a suspicion of crime is a crime in itself, and the rules have been drafted in such a way as to include a very wide range of crimes, prosecutors are resorting to a charge of money laundering as a quick way to win rather than using AML as a way of getting at the king pins or providing intelligence to knock out the terror cell.

AML globally needs a complete rethink.  Law enforcement needs intelligence and more resources.  The public do not need draconian legislation that can be turned on them in the most unjust of ways.  Bankers are not cops or spooks and there must be other ways to focus on the major crimes of our time and not see our civil liberties flushed down the toilet.

Well done Jake Vander Kamp and Philip Bowring for getting this issue into the spotlight, at least for a little while.

SFC kicked into touch on the eve of 7's weekend

In a widely anticipated case at the Eastern Magistrates court where the SFC sought to go after a local hedge fund manager for advertising his fund without SFC approval, the Eastern Magistrates court has dismissed the SFC's claims.  The SFC says they are considering an appeal.

From what we have seen of this case in the public disclosures this was never something the Commission should have gone after.

If the SFC is worried about the extent of hedge fund advertising it has a multitude of options for ensuring that what is done in, or from or into, Hong Kong is done in an acceptable manner.  Using the courts to try and set a precedent on issues such as what constitutes marketing and what constitutes the public in relation to asset management is a frightening way to do business.

Asset managers look for certainty in their regulatory dealings and operational structures and this case has been the cause of significant uncertainty.

Our message, don't appeal this one, work with the industry to agree standards of conduct with respect to advertising private funds to institutions and other professionals.  Clear industry standards will become the norm and then look to prosecute cases where firms ignore those standards and are truly targeting inappropriate classes of investors.  As for now, go and enjoy the rugby.

The full text of the SFC announcement is set out below:

Pacific Sun Advisors Limited and its director acquitted of issuing advertisements without SFC authorization

21 Mar 2013

The Eastern Magistracy has acquitted Pacific Sun Advisors Limited (Pacific Sun) and its director Mr Andrew Pieter Mantel for four counts of issuing advertisements to promote a collective investment scheme without the authorization of the Securities and Futures Commission (SFC) in contravention of section 103 of the Securities and Futures Ordinance (SFO) (Note 1).

The SFC alleged that between November and December 2011, the defendants issued an advertisement on the corporate website of Pacific Sun promoting a collective investment scheme called “Pacific Sun Greater China Equities Fund” (the Fund) without the authorization of the SFC.

It was also alleged that on or around 2 and 3 November 2011, the defendants issued an advertisement regarding the launch of the Fund to the public by email without the authorization of the SFC.

During three days of evidence, the defendants submitted that they intended to sell interests in the units of the Fund only to professional investors and so the advertisements did not require authorization by the SFC under a statutory exemption. The SFC, on the other hand, submitted that the exemption did not permit advertisements that had not been authorized by the SFC to be issued to the public and that in this case there was no evidence that the interests in the Fund had only been sold to professional investors (Note 2).

The Magistrate accepted the defendants’ argument and ruled also that the advertisements did not constitute invitations to the public to invest in the fund.

The SFC will consider an appeal of the decision.

End

Notes:

1. Pacific Sun is licensed by the SFC to carry on Type 4 (advising on securities) and Type 9 (asset management) regulated activities. Mantel, who is licensed by the SFC to carry on Type 4 (advising on securities) and Type 9 (asset management) regulated activities accredited to Pacific Sun, is a responsible officer of Pacific Sun.
2. Under section 103(3)(k) of the SFO, an advertisement does not need SFC authorization where the advertisement is in respect of securities, structured products or interests in a collective investment scheme that are or are intended to be disposed of only to professional investors.

MAS in Singapore initiates consultation process to implement FAIR recommendations in wealth management

On 5 March, the Singapore Monetary Authority announced a consultation paper to implement a series of wealth management related reforms.

Firms have until 4 June to make the submission.

The full consultation paper is here.

The FAIR panel announced that it sought change in relation to five topics or 'thrusts':

(a) Raising the competence of FA [Financial Advisory] representatives;

(b) Raising the quality of FA firms;

(c) Making financial advising a dedicated service;

(d) Lowering distribution costs; and

(e) Promoting a culture of fair dealing.

There are some very important issues raised in the consultation and major employers in this sector will want to review carefully the recommendations as they could be costly and we have some concerns over how these reforms will affect mid sized financial advisors and their ability to cost effectively compete with banks.

Former MS employee banned for 14 months for maintaining undisclosed personal accounts

The SFC in HK has announced that Calvin Ho Kei Him, a former Morgan Stanley Asia research analyst employee, has been banned from the industry for 14 months in connection with undisclosed personal share dealing on behalf of his wife and mother in law.

The case highlights the importance of abiding by internal policies and procedures regarding personal share dealing and in particular that relating to connected persons.

The Commission again published the statement of findings and within that it says that Mr Ho breached the Code of Conduct by:

a) failing to disclose his related securities accounts and the stock trading activities to his employer;

b) failing to avoid conflicts of interest between the stock trading activities in the related accounts and his employment as a research associate; and

c)making false and/or misleading declarations to his employer about his and his wife’s stock trading activities.

The full report and a link to the Statement of Disciplinary Action can be found on the SFC website.

The issue was reportedly uncovered during a routine review of his email account.

The SFC stated that "Candid disclosure is fundamental to the character of the licensed representative. . . "

Du Jun banned for life

Former Morgan Stanley MD, Du Jun, who was jailed for insider dealing and received the heaviest criminal sentence handed out in Hong Kong has been banned from reentering the industry for life. 

It is interesting to note that when he was originally sentenced reports in the media at the time stated that Judge Andrew Chan, was highly critical of Du's former employer, Morgan Stanley.  A part of Du's defence was that he had sought approval from the Morgan Stanley compliance department for the trades in question.

The prosecutor in the case was Ms Charlotte Draycott.  She is reported in the media as follows:

"Draycott said Du received approval only because the bank's compliance system was run in a "haphazard and ineffective manner".

The SFC has worked hard at taking strong action against Mr Du but as far as we are aware there has been no public comment about whether there were any issues that arose at Morgan Stanley.  It should be remembered that this employee, according to the judgement issued by the District Court, purchased on nine occasions a total of HK87m (some US11.15m) in shares in a company that Morgan Stanley was giving corporate finance advice to.  A portion of those purchases were, reportedly, financed by Morgan Stanley.  Given the comments of the trial judge that were reported at the time, this seems a curious footnote that remains outstanding.

We are not in any way condoning Mr Du's actions.  All the public materials suggest he deserved imprisonment.  Why has the Commission not addressed in a public way the concerns of the trial judge and the statements made by prosecuting counsel?

The full SFC release regarding Mr Du's recent ban is set out below:

SFC bans Du Jun for life

4 Mar 2013

The Securities and Futures Commission (SFC) has banned Mr Du Jun, former managing director of Morgan Stanley Asia Limited (Morgan Stanley), from re-entering the industry for life (Note 1).

The disciplinary action follows the completion of the criminal proceedings commenced by the SFC against Du for insider dealing in the shares of CITIC Resources Holdings Limited (Notes 2 & 3).

The SFC concluded that Du is not a fit and proper person to be licensed. In deciding the sanction, the SFC took into account all relevant considerations including:

• Du breached the trust and confidence placed in him by his clients and employer;
• Du’s criminal conviction and the direct relevance of the wrongdoings to his fitness and properness to be a licensed person; and
• insider dealing is a very serious misconduct which damages market integrity, a strong deterrent message must be sent to the market to deter other practitioners from committing
  similar conduct.

End

Notes:

1. Du Jun was licensed under the Securities and Futures Ordinance (SFO) to carry on Type 1 (dealing in securities) regulated activities and was accredited with Morgan Stanley from 12 February 2004 to 5 June 2007. Du currently holds no licence with the SFC.
2. Please see the Court of Appeal judgment for Appeal dated 20 September 2012 which is available on the judiciary website and the SFC’s press releases dated 20 September 2012 and 2 January 2013.
3. The SFC’s proceedings against Du Jun under section 213 of the SFO are ongoing.

Possible large fraud uncovered in Hong Kong

The SFC has alleged that employees of China Pacific Securities Limited have misappropriated client assets to the value of some HK$156m (US$20m).  They have obtained an injunction freezing assets to this value and are currently trying to trace the funds.

A timely reminder that fraud is always present in the HK market and it is really just a case of when it will be discovered.  According to the SFC release this one was discovered during an inspection.

We expect to hear quite a bit more about this case in the days ahead.  The SFC press release is below:

SFC obtains court order to freeze assets in misappropriation case

1 Mar 2013

The Securities and Futures Commission (SFC) has commenced legal proceedings in the High Court against five defendants in relation to allegations of misappropriation of clients’ assets by two former staff of China Pacific Securities Limited (China Pacific Securities) (Note 1). 

The SFC alleges that former account executive, Mo Shau Wah, and former settlement clerk, Hui Fong Ting, misappropriated client securities held at China Pacific Securities using false documents and records. 

The alleged misappropriation came to light during an on-site inspection by the SFC in November 2012.  At the time of the commencement of the proceedings, the market value of the discrepancy in client securities accounts was about $156 million.

The SFC earlier obtained an ex parte interim order against Mo prohibiting her from disposing of her assets worldwide in the amount of $156,471,705.  A similar interim order was also obtained against Hui in relation to her Hong Kong assets.

The SFC has also obtained an interim order against three nominees preventing them from disposal of any assets in suspected nominee accounts. 

The Honourable Mr Justice Poon at today’s hearing continued the interim injunctions after representatives of Mo, Hui, and one of the nominees raised no objection to the order remaining in force.

China Pacific Securities and its owners put in place arrangements to reduce and potentially avoid loss to clients. However, the SFC is seeking orders to recoup the losses caused to China Pacific Securities.

The use and possible whereabouts of proceeds of the alleged misappropriation largely remain unknown at this stage. The SFC is tracing the use of the funds and the identity of any assets owned by or on behalf of Mo and Hui.

The SFC is continuing its investigation and assisting the Commercial Crime Bureau in the case.

End

Note

1. China Pacific Securities Limited is a company incorporated in Hong Kong and licensed by the SFC to carry on a business in Type 1 regulated activity (dealing in securities) under the Securities and Futures Ordinance (SFO). The proceedings were commenced under section 213 of the SFO.

Major tax announcement regarding private equity funds managed from Hong Kong

Last night the HK Financial Secretary released the budget for the coming fiscal year and included within were a number of important taxation issues.  Much to the delight of the local private equity industry the Government has confirmed that it will be extending the exemption from profits tax for funds that transact in private companies to the existing exemption that applies to funds that trade listed securities.

This has a major impact in Hong Kong as the current SFO does define private companies incorporated outside of Hong Kong as securities and thus a private equity fund manager requires licensing under the SFO.  However the SFC has been refusing to allow a private equity fund manager to be licensed for asset management unless they could demonstrate that they exercised discretion.  This had the effect of forcing managers to adopt structures that involved taking a securities dealing license rather than the less burdensome and costly asset management license.  If the manager said that they exercised discretion, while they received their asset management approval, they may well have faced taxation of the fund under the pre-existing tax rulings.

A number of industry groups have been working hard to get this impasse between the IRD and the SFC sorted out.  Well done for getting government to put pragmatism first.

A focus on asset management issues and competitiveness by Treasury is warranted and welcomed.