Hong Kong’s Securities and Futures Commission (SFC), the city’s primary markets regulator, has issued a stark warning to licensed securities brokers after a review uncovered widespread failures in client due diligence and account verification practices.
The SFC’s examination of 12 licensed securities brokers revealed that some firms had accepted questionable or forged documents when onboarding clients, and had fallen short in monitoring cross-border correspondent relationships (CBCRs) with overseas intermediaries. The regulator found that certain accounts opened through these flawed processes were subsequently linked to suspicious fund transfers, with no accompanying trading activity.
The circular sets out a series of expected controls, including a requirement for licensed corporations (LCs) to conduct internal reviews as soon as practicable to identify whether any questionable or forged documentation was accepted during account opening, and to close any accounts tied to such documentation. The SFC has also outlined that it will impose supervisory actions against non-compliant brokers — including requiring internal control and look-back reviews by external consultants, imposing licensing conditions that restrict business activities, and pursuing enforcement action where appropriate.
The regulator identified specific red flags that brokers must be vigilant about, including accounts that function solely as temporary depositories before funds are withdrawn with no trading activity, frequent changes to associated bank accounts, bank accounts or addresses shared between unrelated clients, and client profiles from overseas intermediaries that are inconsistent with those intermediaries’ typical jurisdictions or client bases.
The SFC’s circular also contains a dedicated set of additional measures relating to the opening and management of accounts belonging to Chinese mainland investors. The regulator noted that the majority of questionable or forged documents uncovered during the review were linked to accounts held by mainland investors.
The additional requirements include closure of zero-balance dormant investment accounts — which the SFC said could be exploited by illicit actors — as well as mandatory investor declarations for new account openings in this client segment, and account closures upon request from the regulator where documentation is found to be fraudulent or questionable.
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