Third Party Deposits Inadequately Scrutinized

As announced on 14 Mar 2017, SFC reprimanded Zhongtai International Securities Limited, and fined it $2.6 million for failures in complying with AML regulatory requirements when handling third party fund deposits.

Between Jan 2013 and Dec 2014 (Relevant Period), Zhongtai failed to:

• monitor and/or conduct sufficient and timely enquiries and scrutiny on numerous deposits made by third parties to its clients' sub-accounts at Industrial and Commercial Bank of China (Asia) Limited (ICBC Sub-Accounts); and
• establish adequate and implement appropriate internal procedures and controls to detect and report suspicious third party fund deposits in a timely manner, and to ensure that there was clear delineation of duties among its senior management and staff in handling third party deposits.

Specifically, the SFC’s investigation found that:

• Zhongtai processed more than 300 third party deposits which were made via the ICBC Sub-Accounts during the Relevant Period without adequate monitoring or scrutiny by its Compliance Department and senior management as required under its internal policies. These third party deposits were accepted and transferred to the clients' accounts when the origins of the deposits and/or the identities of the third parties have not been clarified and verified;
• the lack of adequate monitoring of deposits made via these ICBC Sub-Accounts demonstrates that there were deficiencies in Zhongtai’s internal controls at the material time. Zhongtai's staff did not observe the requirement that a third party deposit should in principle be rejected and returned unless (i) the client provided a reasonable explanation for the deposit and (ii) the deposit was approved by its Compliance Department and at least one responsible officer; and
• there is evidence of relevant compliance staff and responsible officers showing a lack of mutual understanding of their respective roles and responsibilities in the handling of third party deposits.

When Zhongtai took steps to re-assess certain third party deposits, it failed to maintain proper and accurate records of the assessments conducted by its senior management and compliance officers.

In recent years, SFC has tightened the standards of AML measures, esp. those against third party deposits and payments. I am expecting to witness more sanctions on securities firms (esp. those with PRC background...you know what I mean).