The Securities and Futures Commission (SFC) has publicly reprimanded BMI Securities Limited (BMI) and fined it HK$3,700,000. The SFC also suspended the licence of BMI’s responsible officer, Tang Wing Chi Maggie (Tang), for five and a half months. In addition, BMI undertook to provide the SFC with a report prepared by an independent reviewer within twelve months to confirm that all the identified concerns are satisfactorily rectified.

The disciplinary action arose in respect of BMI’s internal control deficiencies and regulatory breaches in relation to anti-money laundering and counter financing of terrorism (AML) between 1 May 2016 and 30 November 2017.

A number of BMI’s clients subscribed for placing shares of two listed companies in 2016. The clients subsequently transferred most or all of their placing shares to third parties using bought and sold notes (BS Notes) in off-exchange transactions for substantial amounts of consideration.

The circumstances of the transactions raised a number of red flags. However, BMI did not make appropriate enquiries to understand the reasons for the clients’ sale of shares to third parties by way of BS Notes, nor did BMI take any steps to ascertain the relationships between the clients and the third parties.

The SFC found that BMI failed to:

  • implement adequate internal controls to mitigate the risk of money laundering and terrorist financing associated with suspicious transactions conducted through BS Notes;
  • identify, and conduct proper enquiries into suspicious transactions and failed to consider reporting them to the Joint Financial Intelligence Unit where appropriate;
  • perform appropriate customer due diligence and keep customer information up-to-date and relevant; and
  • put in place adequate and effective procedures for the identification of politically exposed persons (PEPs) and the screening of terrorist and sanction designations.

The SFC in its press release drew attention to two red flags in particular:

  • the subscription amount for the placing shares was incommensurate with the clients’ financial profiles; and
  • the clients did not conduct any other transactions in their BMI accounts apart from acquiring and disposing of the placing shares.

The SFC’s action highlights the importance of understanding the financial position of clients, the relationships between them, and their reasons for undertaking transactions which raise suspicions.

Case analysis

In one case, BMI was engaged as a sub-placing agent in a share placement in or around December 2016. It placed 93,232,000 shares to Client A for around HK$699 million. Within three months Client A transferred all the shares allotted to it to Client B by way of BS Notes for around HK$856 million. Client A and Client B were companies incorporated in the British Virgin Islands (BVI). The SFC identified the following suspicious factors:

(a)

Client A changed its sole shareholder and beneficial owner thirteen days after it opened the account with BMI.

(b)

The account opening forms of Client A and Client B indicated that their net asset values were under HK$1 million at the time of account opening.

(c)

There were a number of similarities in the circumstances in which the accounts of Client A and Client B were opened:

(i)

Client A and Client B were both incorporated in the BVI on the same date.

(ii)

They opened a bank account in Macau on the same date.

(iii)

They opened the securities accounts with BMI on the same date.

(iv)

Their account opening forms were signed on the same date. The signing of the account opening forms and the related identity documents of the two accounts were witnessed and certified by the same certified public accountant in Mainland China on the same date.

(d)

Client A and Client B conducted no other transactions through their BMI accounts.

BMI did not make appropriate enquiries to ascertain the clients’ source of funds, the background and underlying reasons for conducting the transaction by BS Notes, or the relationship between the two clients.

In another case, Client C, a Beijing resident, opened an account with BMI and submitted an application to subscribe for shares in an IPO. Three days later, 109,830,000 shares were allotted to Client C for HK$188,907,600. Over the following seven months, Client C disposed of substantially all the shares by way of BS Notes to 19 third parties for HK$190,191,420. The SFC identified the following red flags:

(a)

Client C was a housewife with no previous investment experience, and her risk tolerance level was indicated as “low” in her account opening form

(b)

The use of BS Notes suggests that the transactions were pre-arranged off-exchange trading.

(c)

The relationships between Client C and the 19 third parties were unknown, and no explanations regarding the background and purpose of the transactions were sought or provided.

(d)

Client C did not conduct any other securities transactions in her BMI account.

Inadequate procedures for the identification of PEPs and screening of terrorist and sanction designations

BMI relied on its settlement clerks to perform internet searches for information about any PEPs or current terrorist and sanction designations. If the searches did not reveal any relevant information, the settlement clerks were not required to print out a copy of the search result for the responsible officers’ review. The SFC found that:

(a)

BMI did not provide any written guidelines on the determination of a PEP: the settlement clerks would exercise their own judgement in determining whether a prospective client was a PEP or high risk individual.

(b)

BMI’s management could not monitor and assess whether the settlement clerks had performed their searches properly, or at all, as search results were not documented if they did not reveal relevant information. BMI was therefore unable to demonstrate its compliance with the regulatory requirements for the identification of PEP and the screening of terrorist and sanction designations.

BMI did not screen its entire client base as soon as practicable after new terrorist and sanction designations were published as required by the regulatory requirements.

The SFC’s findings

The SFC found that the failures of BMI resulted in breaches of multiple AML requirements and other SFC requirements, including: various provisions of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance and the Guideline on Anti-Money Laundering and Counter-Terrorist Financing (April 2015); General Principle 3 (adequate resources and procedures) of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct); and Paragraph 5.1 (client information) of the Code of Conduct.

Tang’s failures

Tang was responsible for the overall management of BMI and its Money Laundering Reporting Officer.

The SFC found that BMI’s breaches were attributable to Tang’s failure to discharge her duties as a responsible officer and a member of BMI’s senior management. In particular, Tang failed to identify and conduct appropriate enquiries on the suspicious transactions and to ensure that BMI had established and implemented adequate and effective AML systems.