ComplianceOne Newsletter - September 2023
The topics discussed in this monthly newsletter are as follows:
1. The JPEX Fraudulence
2. SFC amended the Codes on Takeovers and Mergers and Share Buybacks with effective from 29
September 2023
3. HKEX FINI to launch on 22 November 2023 with pricing of IPO shortened to T+2
4. SFC commenced a cybersecurity review of selected licensed corporations focusing on cybersecurity
management
5. SFC fined Chee Tak Securities Limited $2 million and sanctioned its responsible officer for internal control
deficiencies and a host of regulatory breaches
6. SFC revoked Axial Capital Management Limited’s licence for repeated failures to comply with the Securities
and Futures (Financial Resources) Rules
7. LO Wai Ming, a former RO of Taiping Securities (HK) Co Limited, was banned by SFC for unauthorized
trading of client accounts
8. SFC obtained interim injunction against former director of SMI Culture & Travel Group Holdings Limited
(formerly 2366.HK)
MARKET NEWS
On 13 September 2023, the SFC released an astonishing warning statement of its awareness of a virtual asset trading platform (VATP) known as “JPEX” which has been actively promoting its products and services to the Hong Kong public through social media influencers and key opinion leaders (KOLs) as well as over-the-counter virtual asset money changers.
The SFC made it clear in the statement that no entity in the JPEX group was licensed by the SFC or had applied to the SFC for a licence to operate a VATP in Hong Kong; and a number of suspicious features about the practices of JPEX had been observed:
a) The declaration made by JPEX that it was “a licensed and recognised platform to facilitate the trading of digital asset and virtual currency” was not true.
b) JPEX offered very high returns for some of its products.
c) The SFC had received complaints from retail investors who were unable to withdraw virtual assets from their accounts maintained with JPEX.
d) Some of the products offered by JPEX appeared to be involving virtual asset “deposits”, “savings” or “earnings” which are not allowed under the SFC’s regulatory regime for VATPs.
e) JPEX publicised on its website and local advertorials that it had entered into a business cooperation with and received investment from a Hong Kong listed company which in fact had been terminated already.
f) KOLs and OTC Shops had made false or misleading statements on social media to suggest that JPEX had applied for a VATP licence in Hong Kong.
SIGNIFICANCE:
The warning statement aroused the scepticism of many investors, and rendered a large tide of withdrawal requests; strange enough was the subsequent arrangement and feedback of JPEX to restrict the withdrawal amount to a maximum of USDT1000 per request with withdrawal fee of up to USDT999.
Such unscrupulous responses to investors triggered a large number of reported cases of fraudulence to the HK Police and it unveiled the undertow that it was merely the “the tip of the iceberg”. More than 1,000 cases were reported at the first around, and with the amount of stake up to HKD1.5 billion!
The SFC was rather proactive to respond this time when confronted with criticism from the public that NOT sufficient information was published to enhance the public awareness of the incidence of JPEX despite its high-profile, large-scale social media advertisement which swept over the entire city and conveyed a misleading image that it was a legitimate virtual assets trading platform.
It should be noted that the legislations for governing the virtual asset regime and the AML Guidelines were only effected in June 2023 with the “Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (For Licensed Corporations and SFC-licensed Virtual Asset Service Providers)” and “Guidelines for Virtual Asset Trading Platform Operators”, and only after which that the SFC is vested with the authority to regulate the virtual asset regime and to enforce the guidelines for protection of the general public.
In light of recent public concerns about unregulated virtual asset trading platforms (VATPs), the SFC put forward a series of measures to reinforce information dissemination and investor education. Some remedial measure had been launched to provide the public with more information from its announcement on 25 September 2023 as a response to the vehement vogue for more transparent status of the licensing status of some ongoing VATPs which included:
a) a “List of licensed VATPs”;
b) a “List of closing-down VATPs” setting out the names of VATPs required by law to close down within a specified period;
c) a “List of deemed licensed VATPs” consisting of the names of VATPs which are deemed to be licensed as of 1 June 2024;
d) in light of public demand, a list of VATP applicants.
The SFC also took an active role to collaborate with the Police and set up a dedicated channel to share information on suspicious activities of and breaches by VATPs as well as investigate the JPEX incident to bring the wrong-doers to justice. And there were also a couple of press conferences from the SFC and the Police to demonstrate to the public that the JPEX fraudulence ranked top priority on the list with their dedicated mission of the ultimate goal to protect the investors, especially in Hong Kong as an international financial centre, and the recent high-profile roadshow of the HIKSAR government to establish Hong Kong as a pioneer in licensing the virtual asset landscape over the rest of the world.
A few days later on 29 September 2023, the SFC made another announcement with a series of “Lists of virtual asset trading platforms” to accommodate the vehement vogue for more information of VATP from the public. Besides, a dedicated list of suspicious VATPs was also published to help investors more easily identify suspicious VATPs doing business in Hong Kong and enhance awareness.
At this stage, there are more than 2,000 reported cases from investors, and the amount of stake surged up to nearly HKD1.5 billion. It is just the beginning of the story with more than 20 suspects arrested for further investigation by the Police.
Ironically, it may be a good opportunity for the HKSAR Government to demonstrate to the world its competence and tactics in settling and sorting out this JPEX scam which is analogous to the incidence of the FTX in the US.
2. SFC amended the Codes on Takeovers and Mergers and Share Buybacks with effect from 29 September 2023
On 21 September 2023, the SFC released the consultation conclusions on its proposed amendments to the Codes on Takeovers and Mergers and Share Buy-backs (the “Codes”) which would then be gazetted on 29 September 2023 and took effect immediately. All the proposals were adopted with minor modifications only.
SIGNIFICANCE:
It should be noted that the amendments mainly codify existing practices of the Takeovers Executive and clarify the Codes where necessary, including revising the definitions of important terms, streaming the process to enhance efficiency etc. Further be noted that consequential amendments will be made to a number of Practice Notes to the Codes and will be available on the SFC website when the revised Codes take effect. Market practitioners are encouraged to read and get themselves acquainted with the amendments.
3. HKEX FINI to launch on 22 November 2023 with pricing of IPO shortened to T+2
On 27 September 2023, the HKEX was pleased to confirm the launch date for FINI, Hong Kong’s new digitalised IPO settlement platform, on 22 November 2023. FINI is a major new initiative that will significantly shorten the time between the pricing of an IPO and the trading of shares from five business days (T+5) to two business days (T+2).
FINI is a cloud-based platform, which will enable different stakeholders such as IPO sponsors, underwriters, legal advisers, banks, clearing participants, share registrars and regulators to collaborate and perform their respective roles in an IPO, digitally. A new public offer pre-funding model is also being introduced in FINI, helping to reduce the scale of locked-up funds in over-subscribed IPOs.
SIGNIFICANCE:
The launch of FINI is a milestone development in the evolution of the city’s capital markets; it will modernise and digitalise Hong Kong’s IPO settlement process, driving efficiency and supporting the long-term development of Hong Kong as a capital raising centre.
A circular was released on 15 September 2023 saying that the SFC would commence a cybersecurity review of selected licensed corporations (LCs) with a focus on assessing their cybersecurity management and compliance as well as the resilience of their information systems against cybersecurity threats.
Cybersecurity has long been a major focus of the SFC’s supervision of LCs which offer internet trading to their clients, and are required to comply with the requirements set out in the Guidelines for Reducing and Mitigating Hacking Risks Associated with Internet Trading (Cybersecurity Guidelines), the cybersecurity frequently asked questions (FAQs) and the expected standards set out in the “Report on the 2019-20 thematic cybersecurity review of internet brokers”.
The cybersecurity incidents reported to the SFC by some LCs in recent years and the SFC’s inspection findings show a number of security loopholes and deficiencies, including the use of end-of-life software as well as inadequate controls over remote access and phishing attacks which hackers may easily exploit to infiltrate LCs’ information systems.
SIGNIFICANCE:
It is a common scenario and arrangement for many LCs to employ third-party technology vendors to supply and support business application systems, posing additional risks in hosting their systems and data in the cloud environment where the responsible officer (“RO”) or the senior management team may not be so conversant in cybersecurity risks.
In the light of this and to better assess the industry’s preparedness for and resilience to cyber risks, the SFC would commence a cybersecurity review in September 2023. A snapshot of the key takeaways are as follows:
a) the SFC would conduct a survey of selected LCs of different sizes and business types, including securities and futures brokers, leveraged foreign exchange traders, global financial institutions and firms which provide online product distribution platforms;
b) the SFC would meet with selected LCs to better understand their cybersecurity governance and controls; and
c) the SFC would perform on-site inspections of some of the selected LCs for a deep dive review of their information technology and related management controls and an assessment of their compliance with the Cybersecurity Guidelines and other expected standards.
Cybersecurity risk management has become a serious issue deserving imminent attention from senior management of many LCs especially with the upcoming reported cases of phishing attacks which pose unprecedented and irrevocable risk of data leakage.
ENFORCEMENT NEWS
On 18 September 2023, the SFC had fined Chee Tak Securities Limited (CTSL) $2 million for internal control deficiencies and a host of regulatory breaches; and also suspended the license of its responsible officer Kevin Chiu Koon Yu (CHIU) for 10 months.
The disciplinary actions followed the SFC’s investigation which found that, between 1 July 2018 and 5 March 2020, CTSL failed to:
(i) have in place an order recording policy and observe the order recording requirements;
(ii) implement effective internal controls to monitor cross trades between staff members and clients and to ensure fair treatment of clients;
(iii) establish and maintain an adequate and effective monitoring system to detect and assess suspicious transactions in client accounts;
(iv) set up systems and controls to identify and assess third-party deposits into client accounts;
(v) require or obtain written third-party authorisation for the operation of client accounts; and
(vi) institute internal controls to monitor employee dealings.
SIGNIFICANCE:
The failures of CTSL constituted breaches of the Code of Conduct, the Internal Control Guidelines and the Circular to licensed corporations and associated entities – Third-party deposits and payments; and the SFC had considered that CTSL’s failures were attributable to the failures of CHIU in discharging his duties as its responsible officer and a member of its senior management which called into question his fitness and properness.
CHIU had been accredited to CTSL since Nov 2004 for nineteen years, and was still not competent to discharge his duties as a RO properly, it unveils the hidden picture that some ROs may not have properly updated themselves with the prevailing guidelines, or are not aware of them during their tenures in the capacity for years.
On 11 September 2023, the SFC had revoked the licence of Axial Capital Management Limited (Axial) for repeated failures to comply with the Securities and Futures (Financial Resources) Rules (FRR), the SFO and the Code of Conduct. Meanwhile, the responsible officer, Mr Eugene CHUNG, whose license would also be suspended for five years to September 2028.
The investigation of the SFC found that Axial failed to maintain its required liquid capital of $100,000 for a consecutive period of 19 months starting from 28 March 2019, and Axial only notified the SFC 18 months later! In addition, Axial also failed to submit the semi-annual FRR returns and the audited financial statements from 2019 to 2022, despite repeated reminders from the SFC to do so.
SIGNIFICANCE:
The SFC's view that Axial’s failures were attributable to the failure of CHUNG in discharging his duty as the firm’s senior management and RO is something "a fact beyond controversy"; the crucial point in this case here is its prolonged period of time and repeated patterns of omissions which a competent licensed person is NOT supposed to overlook!
On 18 September 2023, the SFC had prohibited Mr LO Wai Ming (LO), a former responsible officer of Taiping Securities (HK) Co Limited (TSCL), from re-entering the industry for seven months from 16 September 2023 to 15 April 2024.
The disciplinary action followed an SFC investigation which found that between 2 January 2018 and 28 September 2018, LO had, unbeknownst to TSCL, logged into two clients’ internet trading accounts and placed orders for them. As a result, trades in the clients’ accounts were effectively disguised as if they have been placed by the clients themselves.
SIGNIFICANCE:
It was obvious that LO intended to circumvent TSCL’s internal policies by concealing the fact that he was trading on behalf of the two clients, and avoided the conflict of interest to be monitored under the regular routines. Such dishonest deeds and intention to play around with the loopholes should definitely be reprimanded in the eyes of the SFC.
On 25 September 2023, the SFC had obtained an interim injunction order at the Court of First Instance (CFI) against Ms Leung Anita Fung Yee Maria (LEUNG), former chief executive officer and executive director of SMI Culture & Travel Group Holdings Limited (SMI Culture & Travel Group), to preserve assets for satisfying a compensation order that the court might impose at the conclusion of legal proceedings brought by the SFC.
The application for an interim injunction order to prohibit LEUNG from disposing assets in Hong Kong and elsewhere mainly for reason of indication that there was a real risk of dissipation of assets by LEUNG. The SFC alleged that at the material times between 2010 and 2012, LEUNG, Wong Yu Hong (WONG) and/or Tsiang Hoi Fong implemented a fraudulent scheme under the guise of numerous non-genuine sale and purchase agreements in relation to TV licence rights with a total consideration of HKD327.75 million, while the unjust profits gained by LEUNG or Wong was in the range of HKD35.2 million to HKD74.27 million, being the sums transferred to LEUNG and/or companies owned by LEUNG or WONG.
A further step of legal action, the SFC was also seeking disqualification orders, and a compensation order for losses suffered by SMI Culture & Travel Group or alternatively an order to account for any profits gained by the respondents as a result of the alleged fraudulent scheme.
For more details, please click on the title of the topic above.
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