Hong Kong’s Securities and Futures Commission (SFC), the city’s financial markets regulator, has issued a formal circular to licensed securities brokers after a review uncovered widespread failures in client onboarding and account monitoring practices.
The SFC’s examination of 12 licensed securities brokers found material shortcomings in how firms verify client documentation at the point of account opening, as well as in the oversight of cross-border correspondent relationships (CBCR) with overseas intermediaries. In some cases, brokers were found to have accepted questionable or forged client documents without identifying warning signs during due diligence or subsequent monitoring.
The regulator has warned that some of the accounts opened under these inadequate processes were later linked to suspicious fund transfers that involved no trading activity, raising concerns about potential misuse for illicit purposes and exposing licensed corporations to elevated money laundering and terrorist financing risks.
Licensed corporations have been told to be alert to a range of red flags, including accounts used solely to hold funds that then go dormant once balances are withdrawn, frequent changes to linked bank accounts, bank accounts or addresses shared between apparently unrelated clients, and overseas intermediary client profiles that do not match either the intermediary’s jurisdiction or its expected client base.
The SFC has directed all licensed corporations to conduct internal reviews as soon as practicable to determine whether any questionable or forged documents were accepted during account opening, and to close any accounts where such documentation has been identified. The regulator has stated it has zero tolerance for the use of forged or questionable documents in client onboarding or ongoing client relationship management. Firms found to be non-compliant face supervisory action, which may include mandatory internal control and look-back reviews conducted by external consultants, the imposition of licensing conditions restricting business activities, and further enforcement action where appropriate.
Given that the majority of problematic documents identified during the review were linked to accounts held by Chinese Mainland investors, the SFC has introduced additional requirements specifically governing the opening and management of these accounts. These measures, set out in an appendix to the circular, include conducting reviews at the SFC’s request, closing investment accounts opened using questionable or forged documentation, and shutting zero-balance dormant accounts to reduce the risk of exploitation by illicit actors. New account openings for Chinese Mainland investors will also require investor declarations going forward.
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