13 March 2017

SFC imposes personal liability for AML/CTF failures: 5 lessons for senior managers

This article was written by Urszula McCormack

The SFC has now banned the former responsible officer of Guangdong Securities Limited (“GSL”) from re-entering the industry for nine months.  This is just over a week since the SFC fined GSL for AML/CTF control failures relating to third party payments, as we reported in our 7 March 2017 alert.

This article provides a quick synopsis of the key facts and five key takeaways for senior managers.

Why was the RO banned?

The SFC’s invoked its disciplinary powers and banned Mr Huang Qiang for the following key reasons:

  • Broad scope of responsibility - Mr Huang was the managing director and a responsible officer of GSL during the “relevant period” in which the third party payment control failings occurred. In those capacities, he was responsible for the oversight of GSL’s operations, including risk and compliance monitoring. This spanned a very large number of licences, covering Type 1, 4, 6 and 9 regulated activities.
  • Consent, connivance, neglect – GSL’s third party payment control failures occurred under Mr Huang’s “consent or connivance and were attributable to neglect on his part”. For example, the SFC found that Mr Huang had not followed internal protocols in approving third party payments that involved significant sums of money and insufficient supporting information.
  • Insufficient compliance – Specifically, Mr Huang had failed to ensure that appropriate standards of conduct were maintained and proper procedures adhered to by the company, and to diligently supervise staff.

Grounds for action

As for the GSL case, the SFC did not invoke the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) (“AMLO”), even though there are criminal breach provisions for individuals there.

Rather, it drew upon two key principles of the Code of Conduct for Persons Licensed by or Registered with the SFC (“Code”), namely:

General Principle 9 Responsibility of senior management

The senior management of a licensed or registered person should bear primary responsibility for ensuring the maintenance of appropriate standards of conduct and adherence to proper procedures by the firm.  In determining where responsibility lies, and the degree of responsibility of a particular individual, regard shall be had to that individual’s apparent or actual authority in relation to the particular business operations, and the factors referred to in paragraph 1.3 [of the Code].
Paragraph 4.2 Staff supervision

A licensed or registered person should ensure that it has adequate resources to supervise diligently and does supervise diligently persons employed or appointed by it to conduct business on its behalf.

We expect that there were a few reasons why the SFC took this approach, including the time period involved (some of which pre-dated the AMLO) and the fact that this is now a well-worn “fit and proper” enforcement track.

In reaching its decision, the SFC also took into account Mr Huang’s otherwise clean disciplinary record.

Sound familiar?

This case bears many of the hallmarks of the SFC’s February 2015 decision banning the former chief executive officer of Ping An of China Securities (Hong Kong) Company Limited, for 12 months. That case involved AML/CTF control failures and the SFC also drew upon GP 9 and paragraph 4.2 (amongst others) in reaching its decision.

What are the key lessons?

There are five very clear lessons from this case:

1. The SFC is willing to take action against individuals. This is second disciplinary case on AML/CTF matters in two years, and both involved follow-up action against individuals. Numerous other SFC cases involving different types of regulatory breaches have also involved individual liability.

2. Actual money laundering is not required. Neither the SFC not a Court needs to demonstrate that actual money laundering has occurred. The mere fact that controls were not implemented or followed is sufficient to impose fines, reprimands and other penalties.

3. Senior managers will be held accountable to a broad compliance mandate. The SFC equates a broad scope of responsibility with a broad scope of accountability.

This means that if you are a responsible officer:

  • consider if you really can and should be a responsible officer for so many regulated activities;
  • delineate roles and responsibilities precisely in writing as between senior managers;
  • understand your own roles and responsibilities;
  • understand your exposure – the best senior managers we know proactively ask questions and seek advice if they need it; and
  • hire the right people and find the right resources to mitigate that exposure.

4. It’s not just about the numbers. The time period for an industry ban almost doesn't matter. Such disciplinary action is, of itself, severely damaging for career prospects.

5. This is just the tip of the iceberg. We know the SFC and other regulators are actively investigating AML/CTF control failures. There will be pressure to invoke the AMLO, particularly ahead of the upcoming mutual evaluation of Hong Kong’s regime by the Financial Action Task Force.

In addition, the SFC’s new senior manager accountability regime kicks in on 18 April 2017, meaning more people are likely to come under the SFC’s radar when compliance failures occur.

This case also demonstrates the need to handle regulatory enquiries carefully, as well as staff interviews. The SFC will look for responsibility and it is essential to frame the responses appropriately. It is tempting to point the finger without knowing the full story.


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