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SFC reprimands and fines City International Futures (Hong Kong) Limited $100,000 for regulatory breaches

Issue date: 2023-03-09 16:35:00

The Securities and Futures Commission (SFC) has reprimanded and fined City International Futures (Hong Kong) Limited (CIFHKL), now known as VERCAP Financial Services Limited, $100,000 for failures in complying with anti-money laundering and counter-terrorist financing (AML/CFT) and other regulatory requirements between March 2016 and October 2018 (Note 1).

The SFC’s investigation found that CIFHKL did not conduct any due diligence on the customer supplied systems (CSSs) used by 16 clients for placing orders.  As a result, CIFHKL was not in a position to properly assess and manage the money laundering and terrorist financing (ML/TF) and other risks associated with the use of such CSSs by its clients (Notes 2 & 3).

In addition, the SFC identified that the amounts of deposits made into two client accounts were incommensurate with their declared financial profiles.  Although CIFHKL claimed that it conducted daily monitoring on client accounts’ fund movements and was aware of the substantial deposits in the two client accounts, it failed to demonstrate that it had conducted proper enquiries on the deposits and satisfactorily addressed the associated ML/TF risks.

The SFC further found that CIFHKL failed to put in place an effective ongoing monitoring system to detect suspicious trading patterns in client accounts as there were frequent, and large number of, trades in the two client accounts, and in many instances buy and sell orders for the same futures contracts were placed by the same client in the same second at the same price (Note 4).

The SFC is of the view that CIFHKL’s systems and controls were inadequate and ineffective, and failed to ensure compliance with the AML Guideline and the Code of Conduct (Notes 5 & 6).

In deciding the disciplinary sanctions against CIFHKL, the SFC took into account that:

• CIFHKL’s failures to diligently monitor its clients’ activities and put in place adequate and effective AML/CFT systems and controls are serious as they could undermine public confidence in, and damage the integrity of, the market;
• CIFHKL’s senior management has changed after the relevant period;
• CIFHKL’s financial position, its cessation of business and request to the SFC to revoke its licence (Note 7);
• a strong deterrent message needs to be sent to the market that such failures are not acceptable;
• CIFHKL cooperated with the SFC in resolving the SFC’s concerns; and
• CIFHKL’s otherwise clean disciplinary record.

End

Notes:

1. CIFHKL is licensed under the Securities and Futures Ordinance to carry on Type 2 (dealing in futures contracts) regulated activity.  It changed its name to Kings International Financial Services Limited in August 2018, Veritas International Financial Services Limited in March 2020, and VERCAP Financial Services Limited in January 2021.  It has ceased business since 31 March 2021.
2. CSSs are trading software developed and/or designated by the clients that enable them to conduct electronic trading through the internet, mobile phones and other electronic channels.
3. The CSSs were connected to CIFHKL’s broker supplied system (BSS) through application programming interface (a set of functions that allows applications to access data and interact with external software components or operating systems).  BSSs are trading facilities developed by exchange participants or vendors that enable the exchange participants to provide electronic trading services to investors through the internet, mobile phones and other electronic channels.
4. The Anti-Money Laundering and Counter-Terrorist Financing Ordinance and the Guideline on Anti-Money Laundering and Counter-Terrorist Financing (AML Guideline) specify the entry of matching buys and sells in particular securities and futures as an example of situations that might give rise to suspicion of money laundering, as it might create the illusion of trading and be an indication of market manipulation.
5. Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.
6. Please refer to the Statement of Disciplinary Action for the relevant regulatory requirements.
7. But for all these factors, the SFC would have imposed a significantly heavier fine against it.

News captured as of:2023-03-09 16:40:00

Source: SFC