Record fines but fewer cases: SFC enforcement in 2017
- Total fines increase by 632% compared to 2016
- Number of new investigations started during 2017 falls by 20%
- 36% more investigations are completed during 2017
Hong Kong’s Securities and Futures Commission (SFC) levied a record HK$497m (US$63.7m) in fines last year – a 632 per cent increase on the 2016 total, according to new analysis by international law firm Freshfields Bruckhaus Deringer (Freshfields). At the same time, the regulator initiated 20 per cent fewer investigations (414 in 2017 vs. 515 the year before), and completed 591 investigations (up 36 per cent from 436 in 2016), in line with its publicly-stated goal of reducing its enforcement caseload and focusing on high-impact cases.
While the dramatic increase in fines was largely the result of a single HK$400m fine levied against a private bank by the Securities and Futures Appeals Tribunal, the total amount of SFC fines would still have increased by over 40% year-on-year in 2017 – and still set a record – even if this single fine had not been levied.
“The SFC appears to be making good on its pledge to reduce its enforcement caseload and focus more on its most important cases – fewer investigations were started and more were completed in 2017 compared to 2016,” said Georgia Dawson, Freshfields’ Asia managing partner. “At the same time, our analysis suggests that the SFC is imposing heavier penalties in the cases it has closed. Based on the SFC’s stated objective, we believe both trends are likely to continue in the coming year.”
Corporate fraud and misfeasance continue to rank among the categories of case considered most important by the SFC, described by the regulator as the ‘top enforcement priority’ in a public statement earlier this week. Towards the end of 2017, the executive director of the SFC’s enforcement division revealed that, at the time, it was conducting 136 such investigations, of which 28 were particularly serious, with a number of cases involving gross overstatement of revenue and circular financing. One tool that the SFC has deployed with some success in the past year has been the pursuit of individuals, particularly directors and senior executives; the SFC is also focusing on “front-loaded” regulation, including imposing suspensions on listed stocks and raising enquiries of sponsors, underwriters and placing agents, which has led to a number of delayed listings on the Growth Enterprise Market.
Anti-money laundering (AML) compliance remains another key regulatory focus in Hong Kong, with the international Financial Action Task Force’s inspection due to take place later this year. In December 2016, the SFC stated that its AML specialists had been investigating a number of cases, and that tough penalties would be imposed for AML-related breaches. Subsequently, a number of licensees were disciplined by the SFC last year for AML-related failings. There have been a number of notable developments in this area, including a bill passed by the Legislative Council to update existing AML legislation and consequent revisions to the SFC’s Guideline on Anti-Money Laundering and Counter-Terrorist Financing. Both came into force today (1 March 2018).
At the same time, the SFC has strengthened cross-border co-operation with the China Securities Regulatory Commission (CSRC), signing a refreshed Memorandum of Understanding (MOU) for exchange of information and investigatory assistance in December 2017 that facilitates regulatory and enforcement co-operation in the Mainland and Hong Kong futures markets. It also won a victory in the first cross-border market manipulation case to come before the courts since the Shanghai-Hong Kong Stock Connect started operating, with the Hong Kong Court affirming the SFC’s entitlement to assist the CSRC. According to CSRC figures, the two regulators co-operated on over 130 cases in 2017.
“The SFC has been candid about the types of case that it considers represent the greatest threat to Hong Kong’s reputation as an international financial centre, and it is not surprising that corporate fraud and anti-money laundering compliance sit firmly in its crosshairs,” said Ms. Dawson. “By examining the individual liability of senior managers, and through its ever-stronger relationship with the CSRC, it is aiming to pursue its regulatory strategy with greater efficiency and effectiveness. I believe it will maintain this approach in 2018.”