Hong Kong’s SFC imposes HK$15.2m fine on Guosen Securities (HK) Brokerage over AML violations


From November 2014 to December 2015, Guosen processed a significant number of third-party deposits with AML red flags without making any enquiries.

Hong Kong's Securities and Futures Commission (SFC) has taken action against Guosen Securities (HK) Brokerage Company, Limited over anti-money laundering laws violations.

The regulator has imposed a fine of HK$15.2 million on the brokerage and has reprimanded it publicly.

The disciplinary action concerns Guosen's internal control deficiencies and regulatory breaches in relation to anti-money laundering and counter financing of terrorism (AML/CFT) during the period from November 1, 2014 to December 31, 2015.

During the Relevant Period, Guosen accepted 221 third-party deposits (TPDs) via main accounts totalling HK$862.4 million, US$10.7 million and RMB 6.8 million. Although Guosen's operational manual required clients receiving third-party deposits to submit a standard form declaring that the source and purpose of the funds were irrelevant to terrorist and criminal activities, the company neither requested that clients provide nor made any enquiries about the reasons for the TPDs and the clients' relationships with the third party depositors. Guosen did not obtain copies of the identification documents of the third party depositors and had no procedures in place to verify their identities or to check if they were high-risk individuals or entities. There were no policies for the scrutiny and approval of TPDs. In reality, Guosen had no controls to mitigate the risks of ML/TF associated with TPDs.

Also, Guosen accepted over 9,000 TPDs in the aggregate amount of HK$4 billion made by telegraphic transfer (TT) and inter-bank transfer (RTGS), into the sub-accounts of more than 3,500 clients. Contrary to the provisions in its operational manual, Guosen did not require its clients to submit any Declaration in respect of these TPDs. Instead, Guosen's IT system automatically processed all deposits in the sub-accounts, regardless of the source and amount of the deposits. Although Guosen's then Head of Settlement kept records of these TPDs, nothing had been done to check whether they were consistent with the clients' respective financial profiles as there were no procedures to either scrutinise or approve these TPDs.

Furthermore, during the Relevant Period, Guosen processed a significant number of TPDs with AML red flags without making any enquiries. For instance, at least 102 clients received TPDs which were incommensurate with the net worth as declared in their respective account opening forms. The total number and value of TPDs involved were 780 and approximately HK$990 million respectively. The evidence shows that this prevalent situation about TPDs being incommensurate with clients' net worth was known to one account executive who helped some of her 300 clients deposit funds. However, no enquiries had been made to examine the background and purpose of those transactions. In short, Guosen did not take any steps to ascertain whether the TPDs were consistent with existing profiles of the relevant clients.

The SFC has also found that Guosen did not have any systems or procedures in place to continuously monitor activities in its clients' accounts. Nor did Guosen take any steps to check whether a client's activities were consistent with that client's financial profile. The lack of ongoing monitoring had contributed to Guosen's failure to recognise the large number of unusual and suspicious transactions during the Relevant Period.

The SFC has determined that Guosen is guilty of misconduct, and its internal control failures and regulatory breaches have called into question its fitness and properness to remain a licensed corporation.

In deciding the disciplinary sanction, the SFC has taken into account various factors, including:

there were more than 2,200 unusual or suspicious TPDs in the aggregate amount of over HK$2.3 billion during the Relevant Period which covers a period of 14 months;

the former senior management and a former RO of Guosen, who have now been replaced, turned a blind eye to the ML/TF risks associated with TPDs during the Relevant Period;

Guosen has engaged an independent reviewer to conduct a review of its internal controls and taken steps to remediate the deficiencies identified, including implementing new AML/CFT policies and TPD procedures;

Guosen cooperated with the SFC in resolving the SFC's concerns and accepting the disciplinary action; and

Guosen has no disciplinary history with the SFC.