On 30 Dec 2021, SFC announced that it reprimanded and fined Grand International Futures Co., Limited (GIFCL) $8,000,000 and suspended the licence of GIFCL's responsible officer, Mr Liang Benyou for 8 months.
Liang has been accredited to GIFCL and approved to act as its responsible officer for RA2 and RA5 since 3 October 2017. Liang has been GIFCL's MIC of the OMO, OCR, Compliance and IT since 1 Sep 2017, and MIC of KBL since 4 Apr 2018. This is probably the first time a MIC of Compliance was sanctioned by SFC, though obviously Liang was not a full-time compliance professional.
Summary of Facts
- SFC received a complaint against various LCs, including GIFCL, for allowing clients to place orders to their broker supplied systems (BSS) through a software called Xinguanjia (XGJ). XGJ was developed and/or provided by Hengxin Software Limited.
- The complainant alleged that XGJ permitted the LCs' clients to create sub-accounts under their accounts maintained with the LCs, and the clients had solicited investors in Mainland China to trade through the sub-accounts via XGJ without having to open separate securities accounts with the LCs in Hong Kong.
- Between Oct 2017 and Oct 2018 (Relevant Period), GIFCL has permitted 103 clients to use their designated customer supplied systems ("CSSs", including XGJ) for placing orders. From Dec 2017 to Oct 2018, the number of futures contracts transacted by GIFCL clients through orders placed via CSSs accounted for 93.92% to 99.25% of its monthly trading volume.
Failure to perform adequate due diligence on the CSSs and assess and manage the associated ML/TF and other risks
- Before allowing its clients to connect their CSSs to its BSS, GIFCL would require its clients to: (a) complete an application form and risk disclosure statement; and (b) apply for authorisation from its BSS Supplier. But GIFCL did not perform any due diligence or testing on the CSSs used by its clients.
- While GIFCL claimed that it relied on the BSS Supplier to conduct due diligence on the CSSs, the BSS Supplier stated that GIFCL had never instructed it to, and it did not, conduct any due diligence or test on the CSSs to examine their design and functions.
- In the absence of proper control over the use of CSSs by its clients, GIFCL has exposed itself to the risks of improper conduct such as unlicensed activities, money laundering, nominee account arrangement and unauthorized access to client accounts.
Failure to conduct proper enquiries on client deposits which were incommensurate with the clients' financial profiles
- SFC's review of the fund movements in sample client accounts showed that the amounts of deposits made into the accounts of four clients (Four Clients) were incommensurate with their financial profiles declared in their account opening documents, which were unusual and/or suspicious (Anomalies).
- GIFCL claimed that it was aware of the Anomalies during the Relevant Period. As part of its monthly monitoring measure, it had contacted the top clients (including the Four Clients) via WeChat to understand the client situation (Monthly Monitoring).
- However, the Monthly Monitoring was inadequate:
- GIFCL did not document the policies and procedures governing the Monthly Monitoring.
- The scope of the Monthly Monitoring was limited to top 10 clients with the highest number of transactions and top 10 clients with the highest amount of deposits.
- GIFCL has not maintained any record of the Monthly Monitoring, including its enquiries allegedly made with the Four Clients and their responses to the enquiries.
Failure to maintain effective ongoing monitoring system to detect and assess suspicious trading patterns in client accounts
- SFC’s review of the transactions in sample client accounts showed that there were 100,989 self-matched trades (i.e. the client’s order matched with his/her own order in the opposite direction) (Matched Trades) in nine client accounts during the Relevant Period. But GIFCL was not aware of the Matched Trades at the material time.
- During the Relevant Period, GIFCL relied on its dealing department to monitor client trading activities. However, it did not provide its staff with any guidelines or procedures for such monitoring.
As a result, SFC remarked that LCs should assess the risks of any new products and services (especially those that may lead to misuse of technological developments or facilitate
anonymity in ML/TF schemes) before they are introduced and ensure
appropriate additional measures and controls are implemented to
mitigate and manage the associated ML/TF risks. Approving the use of CSSs by clients is indeed a new challenge to LCs.
In addition, as SFC said, the LCs' clients had solicited investors in Mainland China to trade through the sub-accounts via XGJ without having to open separate securities accounts with the LCs in Hong Kong. This may even facilitate the breach PRC's regulations which restrict cross-border online brokers.
