SFC announced that it reprimanded and fined China Industrial Securities International Brokerage Limited $3.5 million for internal control failures relating to monitoring of suspicious trading activities and recording of client order instructions. I am more interested in reviewing the following issues described in the SDA.
Failures to ensure all identified unusual transactions were properly examined and the relevant examination findings and outcomes were adequately documented
- Since June 2015, China Industrial has been using a third-party post-trade surveillance system to detect suspicious trading activities.
- China Industrial’s post-trade monitoring policy provided that Compliance Department would circulate daily reports on the alerts generated by the surveillance system to the ROs of the relevant departments that handled client accounts for review on a daily basis. Each department would receive and assess alerts that were relevant to the client accounts they handled and the ROs were required to make specific enquiries with the relevant AEs and/or clients for different types of alerts.
- However, the evidence shows that:
- prior to May 2018, the daily reports were not sent to 2 of the 4 Frontline Departments that handled client accounts;
- between 29 Mar and 7 Sep 2016, there were a total of 1,607 alerts. However, there is no review record for these alerts; and
- during the periods from 1 Aug 2017 to 31 Jul 2019 and from 1 Jun to 31 Oct 2020, there were a total of 18,008 alerts. However, there are review records for only around 5,000 alerts.
- According to China Industrial’s former ROs, the surveillance system generated many false alerts, which they would discuss, review and remark on the list of alerts. Nevertheless, China Industrial failed to properly maintain the ROs’ alert review records and/or to ensure that the ROs adequately record their examination remarks.
- Compliance Department would select 5 to 8 sample alerts per month for review and the review findings and follow-up actions were recorded in writing.
- However, the monthly check records show Compliance Department focused on examining the actual sample alerts (e.g. comparing the specific trade and client profile covered in each sample alert), and never reviewed the adequacy of the records kept and whether the steps taken by the ROs to examine the unusual transactions flagged by the alerts were compliant with the post-trade monitoring policy.
Many firms may have the misconception that putting in place a surveillance system which generate a lot of daily alerts is adequate. But now the regulatory is getting more concerned about the quality of monitoring. Unless RegTech facilitated by AI has become mature and reliable, human efforts in screening out false alerts and following up true alerts remain critical.
