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On 28 January 2022, the Securities and Futures Commission (“SFC”) has reprimanded and fined Citigroup Global Markets Asia Limited (“CGMAL”) HKD $348.25 million for providing mislabeled Indications of Interest (“IOIs“) to its clients and for executing IOIs without making proper prior disclosure from 2008 to 2018.
An IOI expresses a buyer’s non-binding interest in buying a security in the stock market. Broadly speaking, there are two types of IOIs. The first type of IOI is issued by a client of a licensed corporation. The execution of such IOI is known as an agency trade. A licensed corporation may only represent that an IOI is issued by its client if the IOI is backed by reasonable expectation of interest from a specific client. The second type of IOI is issued by the licensed corporation itself. The execution of such IOI is known as a facilitation trade. Conflict of interest may arise in facilitation trades, and the SFC requires licensed corporations to, amongst other things, disclose such conflict of interest to the client prior to executing the trade.
During the relevant period, CGMAL represented to its clients that the IOIs in question were backed by reasonable expectation of interest from a specific client. However, the SFC determined that CGMAL’s senior management knew or must have known that such representations were not true. When the CGMAL traders could not find clients willing to act as the buyers of the IOIs in question, the traders would execute the IOIs with CGMAL without making the required prior disclosure to the clients who are the sellers of the IOIs (“Improper Facilitated Trades”).
The SFC believes that CGMAL’s failure to correctly label the trades and failure to make proper disclosures prior to executing the Improper Facilitated Trades exposed “a culture within CGMAL which encouraged chasing revenue at the expense of basic standards of honesty and clients’ interests”. The SFC aimed to deter other licensed corporations from permitting similar failures to occur by handing CGMAL the heavy fine. The SFC has indicated that it will commence disciplinary proceedings against the senior managers responsible for permitting the failures to occur.
Licensed corporations are advised to review whether their compliance policies provide for effective monitoring in respect of its trading activities in view of the SFC disciplinary action against CGMAL.
On 30 December 2021, the Hong Kong Court of First Instance (CFI) handed down a judgment in Tam Sze Leung & Ors v Commissioner of Police HCAL 191/2021, in which it held that the longstanding practice of the Commissioner of Police to issue “Letters of No Consent” (LNC) was unconstitutional.
What is an LNC? To put it simply, under sections 25(1) and 25A(1) of the Organised and Serious Crimes Ordinance (Cap 455) (OSCO), once a bank knows or suspects that the money in a bank account is connected in some way to an indictable offence, it must not deal with the account and must file a Suspicious Transaction Report (STR) to the Joint Financial Intelligence Unit of the Hong Kong Police (JFIU). In response, the JFIU may either give its consent to the bank to deal with the said account, or issue an LNC to the bank stating that it does not have the requisite consent to do so. With the necessary consent, under section 25A(2), the bank may deal with the account in question and will not contravene the OSCO. Without the consent, the bank is at risk of money laundering.
Over the years, the LNC regime has slowly become a tool for the Police to “informally freeze bank accounts”– it is a quick and cost-effective administrative measure for which no court order is required.
Nonetheless, the decision in Tam Sze Leung seems to have put the regime to an end. In that case, the JFIU issued LNCs which ultimately resulted in the freezing of certain bank accounts for some 10 months. The CFI decided that the LNC regime as operated was not constitutional for the following reasons:-
The CFI noted that a similar challenge had been brought in 2015 in the case of Interush Limited v Commissioner of Police, HCAL167/2014 before the Court of First Instance and in CACV 230/2015 before the Court of Appeal, where the LNC regime in that case was nevertheless held constitutional. What makes Tam Sze Leung different from Interush is the change of the Police’s purpose in utilising the LNC regime – In Interush, the regime provided the banks with consent in appropriate cases to deal with the account and let them decide whether or not to do so in spite of having an LNC in place; On the contrary, the LNC regime as operated in Tam Sze Leung has become an informal freezing regime which mandates the bank to freeze the accounts in question.
It should not be lightly taken from the Tam Sze Leung case that the LNC regime in general is altogether rejected, because the Court only found that the LNC regime as operated in that case was unconstitutional. As the Court has postponed the granting of any relief, the question as to how the Police may operate the current regime constitutionally remains to be seen.
Meanwhile, banks are still under the obligation not to deal with accounts which they reasonably believe hold proceeds of an indictable offence, and file STRs with the JFIU in appropriate cases. Although they would be exposed to the risk of being sued by their customers affected by not having access to their accounts, it remains good practice to keep close communication with the authorities, and to seek proper legal advice so as to make the right decision in relation to dealing with the accounts in question. At all times it is also recommended to keep a good and complete record of all relevant documents and correspondence in the process.
On 20 January 2022, the Competition Commission (“Commission“) commenced an enforcement action in the Competition Tribunal (“Tribunal“) in connection with an agreement to fix the prices of tourist attractions and transportation tickets sold at a number of hotels, in breach of the prohibition against anti-competitive agreements under the Competition Ordinance (Cap. 619) (“First Conduct Rule“) . The participants of the cartel included two competing travel service providers that agreed to fix prices and nine hotel groups and a tour counter operator that facilitated the anti-competitive conduct by passing on pricing information between the travel service providers.
The Commission commenced its investigations into the travel services sector price-fixing cartel following a leniency application, which led to the Commission issuing infringement notices to six hotel groups and a tour counter operator in January 2021, all of whom have subsequently entered into commitments to comply with the infringement notice.
The latest enforcement action commenced in the Tribunal against the remaining participants of the cartel concludes the Commission’s investigations. The Commission is seeking a declaration that the respondents have contravened the First Conduct Rule, pecuniary penalties, costs, a director disqualification order and the adoption of a compliance programme. Of the six respondents named, three have elected to cooperate and as a result the Commission is seeking to dispose of proceedings against the cooperating respondents by consent.
The investigation into the travel services sector price-fixing cartel illustrates the Commission’s regulatory toolkit and the approach it will take to undertakings that cooperate during different stages of its investigations. For further information, the Commission’s guidelines and policy documents can be found here.
On 20 January 2022, the Securities and Futures Commission (SFC) reprimanded and fined Zhonghui International Futures Company Limited (ZIFC) HK$5 million for breaching know-your-client, anti-money laundering and counter-terrorist financing requirements (AML/CFT) between May 2017 and July 2018. ZIFC is licensed to carry on Type 2 (dealing in futures contracts) regulated activity.
The SFC found that ZIFC had permitted clients to use their designated customer supplied systems (CSSs) to place orders, yet failed to conduct adequate due diligence on the CSSs such that it could not properly assess the associated AML/CFT risks. Also, ZIFC did not implement two-factor authentication for clients to log in to their trading accounts via CSSs.
Furthermore, the SFC identified eight of ZIFC’s clients who authorised third parties to place orders for their accounts via CSSs, but ZIFC took no reasonable steps to establish those clients’ and their ultimate beneficial owners’ true and full identities and did not make proper enquiries. There was also a failure to establish an effective monitoring system that detects unusual money movements.
This enforcement action reflects that compliance with AML/CFT requirements is one of SFC’s areas of focus, in line with SFC’s consultation conclusions on its AML/CFT guidelines published in September 2021.
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On 29 December 2021, the Court of First Instance (“CFI“) handed down its decision in the case of 廣東順德展煒商貿有限公司v Sun Fung Timber Company Limited [2021] HKCFI 3823, setting aside an enforcement order granting leave to the Applicant 廣東順德展煒商貿有限公司 (“GD“) to enforce an arbitral award made by Zhanjiang Arbitration Commission against the Respondent Sun Fung Timber Company Limited (“Company“). The order was set aside on three grounds, namely (i) the arbitration agreement was invalid; (ii) the Company was not given proper notice of arbitration and was unable to present its case; and (iii) enforcement of the award would be contrary to public policy – a ground which rarely succeeds.
The Company was a business operation carrying on timber retail business owned equally by two families (represented by DL and ST). The relationship between the families went sour and in the course of winding down the Company, ST entered into a suspicious transaction with GD on behalf of the Company. The “unusual features” of the contract (“Contract“) were found by the Court to include the following:
On delivery, GD complained that cracks were detected in the marble and rejected the goods. Arbitration commenced one month after the dispute arose and an award was handed down 4 days after the commencement of the proceedings. During the proceedings, ST accepted liability on behalf of the Company and agreed to pay damages in the sum of RMB 59 million to GD (the “Award“). GD subsequently sought to wind up the Company on the basis of the Award and to enforce the Award in Hong Kong.
What appears surprising is that DL had no knowledge of the Contract, the arbitration or the Award at all until he was served by the Official Receiver as a contributory of the Company during the winding-up petition. What is more surprising is that the notice to arbitrate, the winding-up petition, and the order granting leave to enforce the Award were all served to the Company at the Company’s outdated registered office which has already been sold during the winding-down exercise.
Based on the above facts, the Court concluded that GD and ST carried out an orchestrated plan to make the Company indebted under the Award. This exercise would enable GD and ST to receive valuable assets and to avoid the need for ST to share the remaining assets of the Company with DL after the winding up. In ruling that ST “acting entirely in furtherance of his own personal interest”, the Court concluded ST had no authority to enter into the Contract (and consequently the arbitration agreement) on behalf of the Company. The Company was unable to present its case given its lack of proper notice. Notably, the Court also set aside the enforcement order on the ground of public policy, commenting that the arbitral process and the Award was “misused by ST with the assistance of GD” and it would be “shocking to the conscience of the Court” if enforcement of the Award is allowed.
Although the Hong Kong courts have all along adopted a pro-arbitration stance, this case demonstrates that Hong Kong courts are always ready to step in at the right moment to prevent Hong Kong from becoming a haven for impropriety, thereby maintaining Hong Kong’s integrity as a dispute resolution centre.
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