HK regulator imposes $25.2m fine on Guotai Junan Securities

Hong Kong’s Securities and Futures Commission (SFC) today announces the imposition of a $25.2 million fine on Guotai Junan Securities (Hong Kong) Limited over internal control failures and regulatory breaches in connection with anti-money laundering, handling of third party fund transfers and placing activities, as well as detection of wash trades and late reporting.

The SFC investigation determined that, between March 2014 and March 2015, Guotai Junan failed to take reasonable measures to ensure that proper safeguards were put in place to mitigate the risks of money laundering and terrorist financing in processing 15,584 third party deposits or withdrawals for its clients, totalling approximately $37.5 billion.

Despite red flags suggesting some of the third party fund transfers were unusual or suspicious, Guotai Junan failed to adequately monitor the activities of its clients, conduct appropriate scrutiny of the fund transfers, identify transactions that were suspicious and report them to the Joint Financial Intelligence Unit in a timely manner.

Guotai Junan also did not ensure that its policies and procedures regarding anti-money laundering and counter-financing of terrorism (AML/CFT) were properly and effectively implemented with respect to third party fund transfers.

Furthermore, while acting as the placing agent for the global offering of a Hong Kong-listed company’s shares between December 2015 and January 2016, Guotai Junan failed to take reasonable steps to ascertain whether the clients’ subscription applications were consistent with its knowledge of their background and source of funds, and make appropriate enquiries when there were grounds for suspicion. The funds used by five clients to subscribe for $28.8 million worth of the listed company’s shares were deposited by the same third party into the respective client accounts in amounts far exceeding their self-declared net worth.

In the face of such red flags, Guotai Junan did not take reasonable steps to verify the ultimate beneficial owners of the clients’ accounts and their source of funds, nor make appropriate enquiries to ascertain whether the clients were independent of the listed company. In the end, three of the five placees, who were allotted 11% of the listed company’s shares of the total placing under the international tranche, turned out to be the listed company’s employees.

In addition, the SFC found that Guotai Junan failed to detect 590 potential wash trades in a timely manner between January 2014 and July 2016 due to a lack of adequate written trade monitoring procedures or guidelines and technical failures of its transaction pattern monitoring system. Despite becoming aware in July 2016 of 210 potential wash trades which could not be detected in a timely manner as a result of the system failure, Guotai Junan did not report these 210 trades to the SFC until seven months later in February 2017.

According to the SFC, Guotai Junan’s conduct represented non-compliance with regulatory requirements under the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance, the Guideline on Anti-Money Laundering and Counter-Terrorist Financing, the Internal Control Guidelines and the Code of Conduct.

In determining the disciplinary sanction, the SFC considered a variety of factors, such as that there were multiple AML/CFT related failures and Guotai Junan was handling a substantial number or amount of third party fund transfers, as well as Guotai Junan’s implementation of prompt remedial measures to rectify the deficiencies in its trade monitoring system and procedures once identified.

In resolving the SFC’s concerns, Guotai Junan undertook to provide the SFC with a report prepared by an independent reviewer within 12 months confirming that all the identified concerns were properly rectified.