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Welcome to ComplianceAsia News

We aim to offer all of the latest developments we think are relevant to compliance professionals dealing with issues in financial regulation with a focus on the Asian region. Many of the articles are from the US and the UK because these are the principal locations that effect how firms operate in Asia outside of the regulator that is closest to your Asian operation.

Friday
Feb072014

WSJ report highlights significant concerns about the nature of global AML systems

Finally there is some reporting about the dirty little secret of global AML enforcement - it might not work.  The following was reported in the Wall Street Journal today and we recommend you read the full article:

The Morning Risk Report: The Potemkin Village of Anti-Money Laundering

Anti-money laundering efforts by the International Monetary Fund and the Financial Action Task Force have built a “Potemkin village” and a “paper reality” based on “a plausible folk theory” rather than data and evidence of what works, co-authors of a new, independent report said in interviews with Risk & Compliance Journal. The report had the cooperation of IMF and FATF officials and examined the third round of country assessments for anti-money laundering, conducted in the 2003-2012 period.   “We find that the current system is pervasive and highly intrusive but without any evidence as to tangible effect,” said Terence C. Halliday, co-director of the  Center on Law and Globalization, a partnership of the American Bar Foundation and the University of Illinois College of Law, and sponsor of the report.

Couched in the report’s bland bureaucratic language is the surprising observation that there is no  compelling reason even to expect the anti-money laundering regime should work. “The theoretical foundations of this are poorly articulated and don’t stand up to scrutiny,” said Peter Reuter, a professor of criminology at the University of Maryland and senior economist at the RAND Corp.  There is also considerable anecdotal evidence that the system doesn’t work. Corrupt countries with vast flows of illegal money score as well as clean countries under the criteria. Assessments did not raise warning flags about the flows of illegal money implicated in the financial crisis in Cyprus even though they had “apparently been an open secret for many years”, according to the report, which also noted prominent banks have been caught in “flagrant and enormous repeat violations” in countries where anti-money laundering regimes were thought effective.

Michael Levi, professor of criminology at the U.K.’s Cardiff University, acknowledged that the money laundering regime includes stiff penalties for violating rules, demands enormous amounts of technical detail from countries, and can lead to tough discussions about whether countries are following the rules. “But actually what was the point of all of this seemed to have gotten lost somewhere along the line,” he said.  No one even seems to know how much money is being laundered, for example, or whether the measures required by the many rules make a difference one way or another.

Monday
Oct282013

New FATF announcements regarding the progress various countries are making on AML CFT

On Friday the SFC sent around a circular to licensed firms with details of a number of additions to the AML sanctions regime and this included advice from the FATF that some countries were not doing enough to improve their AML CFT systems.

Asian countries named were Indonesia, Myanmar and Pakistan.  This is important as the SFC is recommending enhanced due diligence is considered for transactions involving these countries.  The SFC states:

LCs and AEs should therefore consider applying increased scrutiny to transactions associated with these jurisdictions, including enhanced due diligence and ongoing monitoring. 

This is what the FATF had to say about those three countries:

Indonesia

Indonesia has taken steps towards improving its AML/CFT regime. However, despite Indonesia’s high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies, Indonesia has not made sufficient progress in implementing its action plan within the agreed timelines, and certain key CFT deficiencies remain regarding the establishment and implementation of an adequate legal framework and procedures for identifying and freezing of terrorist assets. The FATF encourages Indonesia to address these remaining issues, in compliance with international standards.

Myanmar

Myanmar has taken steps towards improving its AML/CFT regime. However, despite Myanmar’s high-level political commitment to work with the FATF and APG to address its strategic AML/CFT deficiencies, Myanmar has not made sufficient progress in implementing its action plan, and certain strategic AML/CFT deficiencies remain. Myanmar should continue to work on implementing its action plan to address these deficiencies, including by: (1) adequately criminalising terrorist financing; (2) establishing and implementing adequate procedures to identify and freeze terrorist assets; (3) further strengthening the extradition framework in relation to terrorist financing; (4) ensuring a fully operational and effectively functioning Financial Intelligence Unit; (5) enhancing financial transparency; and (6) strengthening customer due diligence measures. The FATF encourages Myanmar to address the remaining deficiencies and continue the process of implementing its action plan.

Pakistan

Pakistan has taken substantial steps towards improving its AML/CFT regime, including by issuing a Statutory Regulatory Order that addresses the definition of terrorism and an Anti-Terrorism Amendment Ordinance to establish procedures for the identification and freezing of terrorist assets. The FATF commends Pakistan for the issuance of the Anti-Terrorism Amendment Ordinance, which came into force on 12 October 2013 and allows Pakistan to begin implementing its UNSCR 1373 obligations immediately. The FATF encourages Pakistan to begin implementing the ordinance expeditiously. However, the FATF has concerns regarding the temporary character of this ordinance, which will need to be converted into permanent legislation through the parliamentary process. The FATF therefore urges Pakistani authorities to take the necessary steps for swift ratification of the ordinance by its legislature. If Pakistan amends its Anti-Terrorism Act to incorporate the content of the ordinance before the February 2014 meetings, then the FATF will be able to authorise an on-site visit during its February 2014 meetings to confirm that the process of implementing the required reforms and actions is underway to address deficiencies previously identified by the FATF. 

Thursday
Oct242013

Mary Jo White sets out her views on the role of compliance

SEC Chair, Mary Jo White, recently spoke to an industry association in the United States and talked about the importance of the rule of compliance officers.  Here is the speech:

Remarks at National Society of Compliance Professionals National Membership Meeting

 

Chair Mary Jo White

Washington D.C.

Oct. 22, 2013

Good morning. It is a real pleasure to be here in welcome and familiar territory for me with an expert group of compliance professionals.

Your work is invaluable to the critical mission of protecting investors and ensuring the integrity of our markets.

You are on the front lines, working day in and day out in an effort to prevent people from cutting corners, stepping over the line, and violating the securities laws and regulations.

The simple fact is that when firms do not implement and enforce a comprehensive set of policies, procedures, and systems to govern and supervise their employees, it increases the likelihood that an investor somewhere will be harmed.

And when firms do not fully and fairly disclose conflicts, it increases the chance that an investor will be deprived of the opportunity to make fully-informed investment decisions.

This is precisely what we – and you – want to prevent. Your work is extremely important to us as well as to investors because you are positioned to prevent infractions from happening in the first place, rather than coming to our attention only after harm has been done.

But it is not just investors who benefit from the work you do to create a strong compliance program and a strong compliance culture. Your firms also benefit because your work protects the business and ensures that reputational risk is managed. As a result, the livelihoods of all those who work alongside of you are safeguarded.

And at the SEC, we rely on you.

We rely on you because as much as we strive to be everywhere we can be, our resources are limited and always stretched. Take, for example, the 450 incredibly dedicated professionals we have to examine investment advisers and investment companies.

They are tasked with inspecting nearly 11,000 registered advisers who advise approximately 9,700 mutual funds and ETFs and 30,000 private funds. That is a 24-to-1 ratio of examiners to registrants and a nearly 90-to-1 ratio of examiners to funds – far larger than that of almost every other financial regulatory agency.

Because we rely so heavily on you, one of the cornerstones of our examination program is to support your efforts to create a comprehensive compliance environment within your firms – one in which individuals at every level understand the importance of compliance and working with you to comply.

As an agency, we try to send a clear message about the importance of compliance to your boards and senior management. We work to proactively provide you with the information that helps you focus and target your resources in vulnerable areas that we believe may be overlooked. And we work to structure the most effective exams we can to supplement your efforts.

We have a great deal of respect for you and are far more interested in helping you succeed before an examination than we are in catching your firm in a violation in the course of an examination.

That is what is best for investors, and that is what matters most.

A Strong Line of Defense Against Non-Compliance

So at the SEC, we see you as a critical line of defense against violations of the securities laws and regulations, inadequate policies, procedures and systems, and inadvertent errors – all of which may harm investors or your firms. But you are not and should not be the only line of defense.

There are many others who need to play a key role in defending against non-compliance, and helping you. They include:

  • The managers of business units who, in striving to meet their targets, must also manage risks and stay in compliance with their firms’ own policies and the law.
  • The internal auditors who need to have the skills, stature and independence to effectively review the books, ensure that the numbers are bona fide and that there are no control deficiencies.
  • The CEO and senior executive team, who in addition to focusing on the bottom line must instill a culture in the biggest producer and the most junior employee that they are expected and encouraged to do the right and ethical thing, and escalate problems if they are not resolved.

And there is the board of directors, who must oversee all of it.

In short, an effective compliance and risk management program does not rest with you alone, it is an organization-wide effort and responsibility. And the culture of compliance and ethics must be set at the top.

That is why one of the pillars of our support for you is outreach to the men and women who staff the other lines of support and who should be significantly assisting you.

But you are uniquely important. You are dedicated compliance officers who provide advice and support to your entire organization. You are charged by your firms to be expert in the laws, rules, and regulations that apply to your company. You counsel business managers, senior executives, and the board about how to achieve their business objectives while staying in bounds. And you test your firms’ controls and identify weaknesses, which you escalate if necessary. It is, in short, you who set the bar, provide the expert guidance, and serve as the example for everyone.

So for us at the SEC, the question is not, “Who do we rely on most heavily to ensure compliance with the rules?” Because we know it is you.

Instead, the questions we ask are:

  • Do you have the necessary resources and access to training to enable you to advise your firms as they navigate competitive, highly complex, rapidly changing markets?
  • Do you have the tools to test for, detect and address compliance failures?
  • Do you have the necessary independence, access, authority and support to do your jobs effectively, and ensure that your firms adopt, implement and enhance effective compliance controls?
  • In short, are you empowered by your firms to do what you need to do?

We want the answer to each of these questions to be “yes.” We want to encourage companies to give you the recognition that you deserve, the resources that you need and the authority that your role demands, so you can succeed and, as a result, our markets are safe and can succeed.

Needless to say, we want to encourage you to engage and become involved when you see an issue that raises a concern. We do not want you to hesitate to become involved and provide advice when issues arise, and to engage in the remediation of issues.[1] That is your job. And we do not want you to be concerned that by engaging, you will somehow be arbitrarily construed to be a supervisor, and expose yourselves to potential supervisory liability.

As our recent staff guidance makes clear, compliance officers do not become supervisors solely because they provide advice concerning compliance issues to business line personnel.[2]

Supporting the Role of Compliance Officers

Engagement with Senior Executives and the Board

As we all know, the culture of compliance must be set and lived at the very top of every company. So our effort to empower you starts at the top as well.

We have launched an initiative to help us focus on and assess the “tone at the top.” It is an outreach effort in which senior examiners and other SEC officials engage with executives and boards at firms. We do this through in-person meetings with CEOs, senior business managers, heads of compliance and other control functions as well as the chairs of the audit and risk committees of the board.

During these meetings, one of the things we ask about and assess is the standing, authority, and resources of compliance personnel within the organization and its affiliates. We look to see whether your role is woven into the fabric of the firm.

And by engaging senior management and the members of the board in this dialogue, we seek to promote the role of compliance and ensure that the firms recognize and acknowledge the importance we place on your role.

We understand, and we know you understand, that compliance must be an enterprise-wide effort. And we are working hard to ensure that those with whom you work understand that as well.

Transparency

Another way we are empowering you is by being transparent about our priorities and exam observations. Recognizing that you – like we – do not have infinite resources, we now highlight practices, policies, and procedures that show or suggest a pattern of non-compliance throughout the industry.

This can help you focus on areas for additional scrutiny and provide encouragement to your management to support your efforts to take the appropriate remedial steps.

An example of this effort is our risk alerts.

We use risk alerts to pool and share our findings related to a common issue that we derive from a series of examinations. The risk alerts lay out the most frequently observed instances of non-compliance, whether as a result of intentional acts or misunderstandings about what the rules require. We recently published risk alerts on a wide range of areas, including on illegal options trading[3] and compliance with the custody rule.[4]

In the case of the custody rule, we highlighted failures by investment advisers to recognize when they are deemed, under the rule, to have custody of their clients’ assets and to arrange for surprise audits by independent accounting firms in those circumstances.

Similarly, we recently issued a risk alert[5] on Rule 105 of Regulation M – a rule that generally bans firms from improperly participating in public offerings soon after short selling those same stocks. It is a very important rule but, as our exams discovered, a rule often not observed. Its objective is to protect a stock offering from potential manipulation by short sellers who artificially depress market prices and guarantee themselves a profit while reducing the company’s offering proceeds and diluting shareholder value. It is obviously a rule that underlies the integrity of our markets.

Unfortunately, however, our examinations and enforcement investigations revealed that a surprisingly large number of investment advisers and broker-dealers have either ignored or overlooked the rule in designing and implementing their policies and procedures.

The risk alerts we issue are one way we try to help you and your firms identify common mistakes and deficiencies so that you can take prompt action to find and correct any such problems you may have.

In addition to our risk alerts, which are generally tailored to a specific issue or set of issues, we are also being more transparent about our priorities and observations on a broader scale.

Earlier this year, the examination program published its list of current priorities, which include broad areas of focus critical to all of our registrants.[6] These include fraud prevention and detection, corporate governance, and technology, as well as more specific initiatives unique to regulated financial institutions.[7]

Other current priorities of the examination program include a focus by our broker-dealer exam team on potential violations of the market access rule[8] and unsuitable sales of high-yield securities, and a focus by our investment adviser exam team on potential conflicts of interest of investment advisers in allocating trades among their client accounts.[9]

We have heard from many of you that you find our risk alerts useful and that you appreciate our published statements of exam priorities. This type of transparency certainly makes sense from our end and we intend to continue to publish our exam priorities each year and periodically share risk areas as we see them emerging. Such an approach allows us to best leverage our compliance efforts with yours.

Communication between us is important. And for the past few years, the exam program has sponsored compliance outreach conferences on a variety of topics. We use these opportunities to promote a better understanding of our examination priorities, common findings of deficiencies, and other issues essential to building an effective and up-to-date compliance programs.

We think this interaction is particularly valuable because it gives you the opportunity to ask questions, to explore the nuances of our examination goals in more detail, and to give us feedback on our efforts.

A More Sophisticated Examination Program

Our efforts to empower you are rooted in our overall objective that your compliance programs be state of the art. And in encouraging you and your firms to work toward that goal, we try to lead by example, constantly striving to improve and strengthen our exam program.

A better exam program means a more effective focus on real challenges firms face and on issues that matter most to investors. And when we sit down with you and your team or you and your board, we are able to focus – and, again, help you focus – on issues, as we see them, that present significant risk to investors and your firms’ reputations.

As you know, in the last several years, we have continued to hone and improve the implementation of a risk-based strategy across the entire examination program, focusing resources on entities and business practices that we believe pose the greatest risks to investors and markets.

We have become more adept at collecting and analyzing large data sets to help us do this.

The Risk Analysis Examination – our RAE initiative – is a prime example of the flexible and innovative way in which we are more efficiently and effectively conducting examinations to identify and address significant compliance issues. The RAE team uses quantitative analytics to examine clearing firms and large broker dealers by downloading all transactions cleared by the firm over the prior year or two and then subjecting that data to a broad range of queries designed to identify problematic behavior.

In one exam that was recently completed, the RAE team collected and analyzed over 400 million transactions. And the next exam is expected to analyze more than twice that many.

Armed with this data, the RAE team is – and has been – able to identify a wide range of problematic behavior including:

  • Unsuitable recommendations, misrepresentations and inadequate supervision.
  • Churning.
  • Inadequate supervision of “reverse churning,” a practice where a client who trades infrequently is placed in a fee-based account.

We intend for this new capability to empower you as well.

As regulators, we do not often have tools that enable us to analyze the metrics of a business that are not available to the people who run it. But through the efforts of the RAE team and others, we now can do that. Some of our new tools should allow us to detect and inform you about activities, trends, and issues of which you may be unaware.

Our ability to do that may also help you persuade your firms to devote the resources you need to create more sophisticated and effective monitoring programs.

Enforcement Actions

We also want to use our enforcement program to support your efforts.

Recently, the SEC filed its first-ever charge against an individual for misleading and obstructing a compliance officer of an investment adviser. That, as you may know, is a violation under Rule 38a-1(c) of the Investment Company Act.[10]

The action came about after our examiners discovered that an assistant portfolio manager had forged and altered brokerage statements, trade pre-approvals and other documents. He also attempted to conceal from his firm’s chief compliance officer his involvement in more than 600 unauthorized personal trades – many of which involved securities held or acquired by funds managed by the firm. In resolving the case, the portfolio manager agreed to pay $345,000 including a $100,000 penalty, and accept a five-year bar from the industry.

This was a very important case because it held the portfolio manager directly accountable, not only for his substantive violations, but also for obstructing the compliance officer’s work.

We want your firms to know, at every level, how important your work is to investors and to us. And we will be looking for more cases to bring to drive that message home.

Closely Coordinating With Enforcement

The close working relationship our examination team has with our enforcement staff is one aspect of our multi-faceted compliance effort.

One good example of our cross-agency collaboration is the Compliance Program Initiative.[11]

Through this joint effort, the Enforcement Division’s Asset Management Unit, the examination staff and others are teaming up to identify and recommend enforcement actions against registered advisers who have failed to adopt or implement an adequate compliance program after being notified repeatedly of deficiencies by our staff.

The Compliance Program Initiative underscores the critical function that effective compliance programs and personnel play in protecting the investing public from fraud. And it is a particularly timely effort now that hundreds of private fund advisers have recently registered with the Commission for the first time under the Dodd-Frank Act. The compliance program rules of the road need to be learned and followed from the outset.

The Commission to date has brought six settled actions as part of this initiative,[12] and more are in the pipeline. In one of these cases filed in 2012, we charged a registered investment adviser who had gone five years without addressing the compliance deficiencies that we identified in a 2005 exam. Those deficiencies included inadequately tailoring its compliance manual to its business as well as making inaccurate or inconsistent statements in its filings.

When we conducted a subsequent exam, our examiners not only found that the deficiencies identified earlier were not remedied, but also that the firm had failed to enforce its written code of ethics and neglected for several years to conduct the required annual review of its compliance program.[13]

This case involved charges against the firm and not the compliance officer. Although we occasionally bring enforcement actions against compliance personnel, compliance officers who perform their responsibilities diligently, in good faith, and in compliance with the law are our partners and need not fear enforcement action.

On another front, two years ago, our examination program created specialized working groups in several subject matter areas. Today, these areas include securities valuation, marketing and sales practices, fixed income and municipal securities, structured and complex products, equity market structure and trading practices, microcap fraud, transfer agents, private funds, and investment companies. The groups are made up of professionals from across the agency with specialized knowledge in these subject matter areas.

Through this effort, we are bringing to bear in our examinations expertise from across the Commission, which we believe makes our exams more focused on a broader range of problems occurring in the industry.

These working groups are bearing fruit.

In one action, our specialized unit for fixed income and municipal securities built a case that was triggered by press reports of financial misstatements by local municipal entities. We began a municipal surveillance initiative to examine whether those entities raised capital in the municipal markets during the time period of those misstatements. The team identified significant violations which ultimately resulted in several major cases, including a recently settled action.[14]

The path of investigation to charging and settlement was pretty straightforward. After reading a news story about financial irregularity involving a county’s public hospital system, the examination team focused on whether the senior managing underwriter and the county, as the issuer of an $83 million bond offering, knowingly concealed financial difficulties.

The examination led to an enforcement referral and settlement after finding that the hospital system operator was aware that its financial situation was deteriorating, resulting in a non-operating loss in a single year of $244 million. This was more than four times the figure disclosed in the official statement provided to investors.[15]

The close coordination between our enforcement and exam programs is nothing new. Some have suggested that it leads people to be more defensive in dealing with our examiners, fearing that any compliance failure will result in an enforcement action.

Openness with our examiners is, of course, required and it continues to be provided to us, as we would expect. But let me also assure you that we do not think that every deficiency warrants an enforcement response. Indeed in the vast majority of cases, we address instances of non-compliance through engagement with the registrant, deficiency letters, and other approaches short of an enforcement action.

So we fully expect that your firms will continue to work with our examiners to fix any deficiencies promptly – whether you detect them or whether we detect them through our exams – which is essential to strong compliance. And that is what we are seeing.

Conclusion

You have a very tough job in a complex industry where the stakes for all concerned are extremely high. We recognize that and have tremendous respect for the work you do. For our part, we will do everything we can to help empower you so you can do your jobs even more effectively.

It is a privilege to work with you as you serve your firms and fulfill our mutual mission to protect investors and our markets. We do that by working to ensure scrupulous compliance with laws, rules, and regulations, which give the markets a level playing field and make ours the strongest and most desirable capital markets in the world. You and the work of your people deserve much of the credit for that. Thank you for all you do and for inviting me here today.


[1] Recently, the Division of Trading and Markets published guidance related to liability that may arise under the Exchange Act in connection with the role and duties of chief compliance officers and other compliance and legal personnel at broker-dealers. The guidance notes that “[a]s a general matter, the staff does not single out compliance or legal personnel. Rather we encourage compliance officers and other compliance and legal personnel to take strong and vigorous action regarding indications of misconduct.”http://www.sec.gov/divisions/marketreg/faq-cco-supervision-093013.htm.

[2] The guidance further notes that “[c]ompliance and legal personnel play a critical role in efforts by broker-dealers to develop and implement an effective compliance system throughout their organizations, including by providing advice and counsel to business line personnel. Compliance and legal personnel do not become "supervisors" solely because they have provided advice or counsel concerning compliance or legal issues to business line personnel, or assisted in the remediation of an issue. If their responsibilities or authorities extend beyond compliance and legal functions such that they have the requisite degree of responsibility, ability or authority to affect the conduct of business line personnel, additional inquiry may be necessary to determine if they could be considered supervisors of the business line personnel.” http://www.sec.gov/divisions/marketreg/faq-cco-supervision-093013.htm.

[4] Custody Rule Sec. IAA Sec. 206 and Rule 206(4)-2http://www.sec.gov/about/offices/ocie/custody-risk-alert.pdf.

[7] The published priorities memorandum sets out specific initiatives in each of the major program areas of the SEC's examination program: (i) investment advisers and investment companies; (ii) broker-dealers; (iii) market oversight (i.e., exchanges and self-regulatory organizations); and (iv) clearance and settlement (i.e., transfer agents and clearing agencies).

[8] Exchange Act Rule 15c3-5.

Thursday
Aug012013

HK SFC gives guidance on the sale of securities during a placement

The HK SFC enforcement division has issued some guidance on selling practices during a placement that may conflict with some market practice.  The note is below and should be carefully considered:

Premature selling of placing shares may constitute illegal short selling

1 Aug 2013

Investors and intermediaries could face criminal prosecution for illegal short selling if they sell placing shares before completion of a placement, the Securities and Futures Commission (SFC) said today (Note 1).

The warning came after recent SFC investigations which revealed some misconceptions in the market on the selling of placing shares prior to completion of a placement.

Some placees, who sold placing shares for which they had subscribed, appear to have taken the mistaken view that the trade would not amount to illegal short selling even if they did not have the shares when they placed the sell order provided that they could settle the trade on the settlement day with the placing shares allotted to them.

In other cases, some placees took the erroneous view that they could sell the placing shares before completion of a placement by relying on oral or written confirmations from their placing agents about the quantity of shares they would be allotted as guarantees for receiving the same number of placing shares on the completion date to settle the trades.

In general, a placement before its completion is subject to various conditions which may or may not be fulfilled. In particular, a placement is usually subject to (i) the Listing Committee of The Stock Exchange of Hong Kong Limited (SEHK) granting the listing of, and permission to deal in, the placing shares; and (ii) the SEHK does not revoke such listing and permission.

As such, the SFC takes the view that placing shares will remain conditional until completion of a placement.

Under the Securities and Futures Ordinance (SFO), a person shall not sell securities at or through a recognized stock market unless at the time he sells them:

  • he has or, where he is selling as an agent, his principal has; or
  • he believes and has reasonable grounds to believe that he has or, where he is selling as an agent, that this principal has,

a presently exercisable and unconditional right to vest the securities in the purchaser of them.

It follows that anyone who sells these conditional placing shares before completion of a placement runs the risk of committing illegal short selling, contrary to the SFO, unless the person (or where the person is selling as an agent, his principal has) already held a sufficient number of shares to settle the trade.

SFC licensees or registered persons who illegally short sell may also be subject to the SFC’s disciplinary action.

The SFC’s Executive Director of Enforcement, Mr Mark Steward, said: “Investors and other market participants need to be aware of the consequences if they sell shares they do not yet hold or own. In some cases, this may constitute naked short selling which is against Hong Kong law.”

Under the SFO, illegal short selling is a criminal offence which carries a maximum penalty of $100,000 fine and two years of imprisonment upon conviction.

End

Note:

  1. Section 170 of the SFO sets out, among other things, various restrictions on short selling and the penalty for the offence of illegal short selling upon conviction.
Tuesday
Jul232013

ICAC takes action against brokers for breach of internal procedures

The ICAC in Hong Kong announced today the conviction of two brokers on bribery related offences.  The full announcement is below and shows how a failure to follow firm policies can result in jail:

Four jailed for $323,000 bribery over trading in securities 23 July 2013

Two former employees of a securities firm, who were then its licensed representatives, and two other persons, charged by the ICAC, were today (Tuesday) each jailed for one year at the Eastern Magistracy for accepting and offering over $323,000 in illegal commissions respectively in relation to trading in securities.

The defendants were Chan Chi-cheung, 34, Tang Wing-ho, 35, respectively dealer and marketing manager formerly employed by First China Securities Limited (FCSL), Ha Shing-ming, 34, and his younger brother Ha Shing-chi, 31, both stock investors.

Chan and Tang were also ordered to pay $208,000 and $115,751 in restitution to FCSL respectively.

In sentencing, Magistrate Miss Ho Wai-yang said the offences committed by the defendants were of a serious nature in view of the substantial amount of bribes involved.

Chan and Tang were earlier respectively found guilty of one count and three counts of agent accepting an advantage, contrary to Section 9(1)(a) of the Prevention of Bribery Ordinance (POBO).

Ha Shing-ming was earlier convicted of one count of offering an advantage to an agent, contrary to Section 9(2)(a) of the POBO, while Ha Shing-chi was found guilty of two similar offences.

The court heard that at all material times, Ha Shing-ming, Ha Shing-chi and their father Ha But-yee opened securities accounts with FCSL to conduct trading in securities, including stocks and derivative warrants.

Upon the arrangement of Ha But-yee, Chan and Tang were employed by FCSL as dealer and marketing manager respectively to execute trade orders for the Ha family.

On 17 occasions between September 2, 2009 and February 11, 2011, Chan received sums of money ranging from $1,000 to $42,000, totalling $208,000, from Ha But-yee and Ha Shing-ming.

Ha Shing-ming transferred the said sums of money into the bank account of Chan as Chan assisted him in trading of securities.

The court heard that between February 24, 2009 and November 9, 2010, Tang received sums of money totalling over $96,700 from Ha But-yee and Ha Shing-chi.

The sums of money were transferred into the bank account of Tang from the bank account of Good Investment Company, of which Ha Shing-chi was the sole proprietor.

Through his bank account, Tang also received another sum of $19,000 in cash from Ha But-yee on November 10, 2010.

All the above payments were illegal commissions accepted by Chan and Tang as rewards for them to assist the Ha family in the trading of stocks and derivative warrants.

The management of FCSL prohibited its employees from soliciting or accepting any advantages in relation to its business, the court was told.

FCSL and the Securities and Futures Commission had rendered full assistance to the ICAC during the investigation.

Wednesday
Jul172013

SFC commences civil action against Tiger Asia in the Market Misconduct Tribunal

For the first time the SFC in HK has directly commenced action against parties in the market misconduct tribunal.  Previously it was only the Financial Secretary who could do so.  The claims against Tiger Asia can be found here.

The Tiger Asia case has been ongoing for quite some time and this latest move was, in our view, something that should have happened a long time ago based on the prior claims of the events that occurred by the SFC.

If the issue proceeds to a hearing there will be some interesting factual details to analyse in terms of wall crossing.

 

Wednesday
Jun262013

HK SFC releases its annual report

Today the HK SFC released its annual report for the year ended 31 March 2013.  The full report can be found here.

Here are some extracted highlights:

The number of licensed corporations reached a record high of 1,905 during the year, while the total number of SFC licensees and registrants declined 2% to 38,746.

Hong Kong continues to attract hedge fund managers or advisers and credit rating agencies (CRAs). As at 31 March 2013, the number of licensed hedge fund managers or advisers increased 5% year-on-year to 371. We also granted licences to the first two Mainland-related CRAs in mid-2012, bringing the total number of licensed CRAs to seven.

In June 2012, we completed the processing of the licence applications that had arisen out of the transfer by six banks to licensed corporations within their respective groups of their initial public offering sponsor business. We granted licences under the SFO to approximately 840 individuals who were previously responsible for conducting sponsor work within those six banks.

Licensees1

  Corporations Representatives Responsible officers Total Change
  2012/13 2011/12 2012/13 2011/12 2012/13 2011/12 2012/13 2011/12
Stock exchange participants 463  453 11,602 11,618 1,601 1,568 13,666 13,639 0.2%
Futures exchange participants 115 117 940 952 149 150 1,204 1,219 -1.2%
Stock exchange and futures exchange participants 65 65 3,720 3,984 392 380 4,177 4,429 -5.7%
Non-participants 1,262 1,205 14,911 15,890 3,409 3,208 19,582 20,303 -3.6%
Total 1,905 1,840 31,173 32,444 5,551 5,306 38,629 39,590 -2.4%

This table represents a snapshot view as at each financial year-end. The figures exclude registered institutions. The total number of licensees and registrants is 38,746.

AND

In the past year, we conducted 271 risk-based inspections. Besides reviewing the protection of client assets, other focus areas during the year included dark pool operations, short-selling and client facilitation trading.

The new provisions under the Code of Conduct3 relating to sale of investment products have become fully operational since September 2011. We monitored licensed corporations on their compliance with the new Code of Conduct requirements through thematic on-site inspections.

Following our review of selected licensed corporations’ selling practices and regulatory compliance, we published theReport on the Thematic Inspection of Selling Practices of Licensed Corporations in October 2012 to highlight specific deficiencies and shortcomings, as well as best practices adopted by some firms. Intermediaries may use the report to strengthen their management supervision and compliance programmes.

To help us supervise selling practices, we conducted a survey to better understand the overall market structure and to identify the major types of non-exchange-traded investment products sold by licensed corporations. Findings of the survey were published in December 2012.

Findings of our fourth survey on Hong Kong’s hedge fund industry were published in March 2013. As at 30 September 2012, SFC-licensed hedge fund managers managed 676 hedge funds, up from 538 in 2010. The total hedge fund assets under management increased 37.8% to US$87.1 billion from US$63.2 billion in 2010.

AND on the enforcement side:

Actions against internal control failures

  • Société Générale (SG) was reprimanded for internal control failings in its wealth management activities regarding the non-disclosure of certain fees and charges in secondary-market transactions of over-the-counter products between April 2003 and January 2006. SG agreed to reimburse all affected customers the full value of the undisclosed fees with interest. Almost all eligible customers have accepted the offer, and SG has paid out reimbursements of over US$13.7 million. SG was also required to undergo an internal control review by an independent reviewer.  
  • Manulife Asset Management (Hong Kong) Ltd was reprimanded and fined $24 million for inadequate internal controls in the sale of Manulife Global Fund from 2007 to 2012. The deficiencies were related to the company’s systems and processes for understanding its customers’ background and investment objectives for the sale of the fund.
  • RBC Investment Management (Asia) Ltd (RBC) was reprimanded and fined $4 million for providing investment advice to clients on a number of non-SFC authorized funds between November 2006 and July 2008. RBC also agreed to make repurchase offers or pay compensation to relevant customers.
  • Merrill Lynch (Asia Pacific) Ltd was reprimanded and fined $3.5 million for failing to take adequate steps to properly handle complaints of 11 clients in 2008. These clients were victims of a fraud involving around $56.4 million invested in investment products perpetrated by Joyce Hsu Ming Mei, a former sales representative. The company also agreed to engage an independent law firm and auditor to conduct a review of all client accounts handled by Hsu.
  • We publicly reprimanded and fined CIC Investor Services $4 million for its failures between 2004 and 2010 to comply with regulatory requirements in treating clients as professional investors and to keep adequate records of its investment advice to clients.
  • President Securities (Hong Kong) Ltd was reprimanded and fined $2 million for failing to act in the best interests of its clients when accepting subscriptions for a number of Lehman Brothers related structured products by 21 Taiwanese clients in 2008.
  • Deutsche Securities Asia Ltd was reprimanded and fined $2.5 million for regulatory breaches and internal control failings relating to position limit failures.
  • IMC Asia Pacific Ltd was reprimanded and fined $1.5 million for regulatory breaches and internal control failures concerning a large number of short-selling input errors between May 2007 and July 2010 and its failure to report the errors to Hong Kong Exchanges and Clearing Ltd until mid-2010. 
Wednesday
Jun262013

US SEC publishes summary of financial crisis enforcement actions

Possibly in response to ongoing public concerns about SEC enforcement in the wake of the 2008/9 financial crisis the SEC in the United States recently published an interested summary with links of enforcement actions regarding financial firms.

The list can be found here.

 

Wednesday
Jun192013

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.
Tuesday
Jun182013

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.

Friday
Jun142013

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.
Wednesday
May292013

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.

Tuesday
May212013

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.
Thursday
May162013

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!!

 

Thursday
May162013

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.

Monday
May132013

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.

Monday
May132013

Tiger Asia judgement link

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

Friday
May032013

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.
Tuesday
Apr092013

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.

 

Monday
Apr082013

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.