Internal Control Deficiencies in Handling Mainland Clients’ Accounts

Last week SFC reprimanded Christfund Securities Ltd (CSL), Christfund Futures Ltd (CFL) (collectively referred to as Christfund) and their respective responsible officers, and fined them a total of $2.5 million over internal control deficiencies in handling Mainland clients' accounts.

CSL and CFL were fined $1,200,000 and $700,000 respectively while responsible officers Ng Kam Shing and Chow Yuen Tung were fined $300,000 each in relation to Christfund’s internal control deficiencies in handling Mainland clients’ accounts.

An SFC investigation covering the period from August 2007 to July 2008 found that a Shenzhen-based company, Hang Fung Investment Consultants (Shenzhen) Co Ltd (HF Shenzhen) -- an affiliate of Christfund -- provided marketing services for Christfund on the Mainland.

HF Shenzhen made available account opening forms for Mainland investors to open accounts with Christfund. In handling the account opening process for these Mainland individuals, SFC found that:

• Christfund had not performed sufficient know-your-client procedures with respect to Mainland clients;
• Christfund took insufficient steps to establish the full identities and addresses of each of these Mainland individuals, thereby failing to establish the accuracy of such information;
• Christfund allowed 22 and 44 such Mainland clients of CSL and CFL respectively to use the office address of HF Shenzhen as their correspondence address. Also, 51 such Mainland clients of CSL were permitted to use the address of one of Christfund’s clients as their correspondence address;
• Christfund allowed about 1,000 clients at CSL to authorise one individual amongst them to operate their accounts on their behalf;
• Christfund had taken insufficient steps to check the operation of two accounts of clients emanating from HF Shenzhen for a prolonged period of time, thereby allowing these accounts to be used to transfer funds to facilitate settlement of transactions in the Mainland clients' accounts at Christfund, although each transfer is supported by written transfer authorisation by the respective clients; and
• in allowing these matters to occur, Christfund had taken insufficient steps to address the potential regulatory issues arising from inadequate records and the safe custody of client assets, including cash.

In deciding the sanction, SFC took into account that:

• Christfund was acting in good faith and there is no evidence of any dishonesty on its part or its senior management in its business activities;
• Christfund has co-operated with the SFC by readily accepting responsibility for the above breaches;
• Christfund has agreed to engage an independent audit firm to review the relevant aspects of its internal controls system and account opening procedures. The audit firm will also verify that remedial steps had been taken since the deficiencies were identified;
• Christfund has also agreed that CSL shall: (i) cease operating those Mainland individuals’ client accounts apart from taking those clients’ sell order instructions and returning their securities and remaining balances to those clients; and (ii) cease opening accounts for any Mainland individuals referred by or through HF Shenzhen or any other persons or corporations on the Mainland, unless such practice is in compliance with applicable Mainland laws; and
• CFL, Ng and Chow have not previously been disciplined by the SFC.

Jack's comment: Obviously Christfund's consent to cease the Mainland business is made under the pressure of the watchdog. However, even Christfund's internal controls were inadequate, why should an indefinite "show-stopper" be imposed?  Who is the judge to determine whether "such practice is in compliance with applicable Mainland laws"?