Please note that we provide links to external sites which were correct at the time of publication, but they may be updated. Cognitive GRC provides advisory services to regulated firms in Hong Kong on international requirements and works with various service partners to deliver these services. Firms should obtain specific advice relating to matters that we highlight here. This is neither legal, accounting or investment advice.
Introduction
The risks associated with bribery, corruption, and fraud continue to pose challenges, especially for Licensed Corporations (“LCs”) operating in Hong Kong and indeed on a cross-border basis. As expectations of stakeholders, indeed regulators increase, it is crucial for LCs to remain aware and be proactive in mitigating these risks. It is a fundamental mitigant of this risk to ensure appropriate controls such as proper procedure, training and ongoing third-party due diligence are in place.
Training and awareness programmes are particularly important, especially when you don't expect staff to become caught up in specific issues. We felt that the availability of proper training for staff in this topic was sub-optimal, and bit too tick the box type, so we have added to our catalogue. This update aims to provide an overview of the key risks, outline the relevant regulatory frameworks, and offer practical guidance for LCs to compare their processes or enhance their compliance measure in this regard. Recent enforcements (Source: ICAC), regulatory focus (Source: SFC) and government campaigns (Source: ICAC) all point to a renewed effort being required.
We are delighted to introduce our new online training product which is available through Inflection Point Intelligence Catalogue (IPI Catalogue) or which we can added to your own Learning Management System. Individuals, (following consent of your Compliance/HR team) may sign up via IPI, whereas licensed firms can request bulk discount rates.
In order to promote this course and to help with the provision of useful Continuing Professional Training we are providing the bulk 50% discount for individuals who need to close out their CPT. However, we do recommend that for firms that believe that they operate in higher risk environments, that they engage with their advisors to do more scenario based and bespoke training.
Please request the code by contacting info@cogntiivegrc.com subject "ABCFTCode" and we would be delighted to provide it to you access at the discounted rate.
Understanding the Regulatory Landscape in Hong Kong: SFC, POBO, and ICAC
LCs in Hong Kong operate under a regulatory framework designed to uphold market integrity and prevent misconduct. The three primary elements of this framework are the Securities and Futures Commission (SFC) Code of Conduct and the Prevention of Bribery Ordinance (POBO) and the Independent Commission Against Corruption (ICAC) which all play pivotal roles in enforcing these laws and guidelines.
The SFC Code of Conduct
The SFC Code of Conduct outlines the expected standards of behaviour for LCs and their licensed representatives. It emphasises the need for integrity, diligence, and fairness in conducting business. Specifically, Section 12 of the Code of Conduct requires LCs to maintain robust internal controls to prevent misconduct, including bribery and corruption. Failure to adhere to these standards can lead to severe penalties, including suspension or revocation of licenses, fines, and reputational damage.
The SFC has specifically highlighted guidance for private sector companies provided by ICAC.
POBO
The POBO is the cornerstone of Hong Kong’s anti-bribery framework. It criminalises both the offering and acceptance of bribes, covering a wide range of commercial and public sector activities. Under the POBO, it is illegal for any individual or corporation to offer, solicit, or accept any advantage as an inducement or reward for performing or abstaining from performing any act. LCs must ensure that they have comprehensive policies in place to prevent their employees from engaging in such practices, as breaches can result in criminal charges and substantial fines.
ICAC
The ICAC was established to combat corruption in Hong Kong and has been influential in upholding the city’s reputation for integrity. The ICAC collaborates closely with the SFC and POBO to investigate allegations of corruption involving LCs. Its proactive approach includes conducting audits, investigating whistleblower reports, and offering training programs to help organisations strengthen their internal controls.
Sample Code of Conduct for the Private Sector (Source: ICAC)
Latest News (Source: ICAC)
Key Risks for LCs
As per international regulatory frameworks, increasingly, a major part of the activity that was traditionally undertaken by intermediaries is now performed by parties on an outsourced basis. LCs face several risks related to bribery and corruption, particularly when engaging with third-party agents, intermediaries, and vendors. Working with external parties such as consultants, distributors, or contractors can expose LCs to potential bribery and corruption risks. It is crucial to conduct thorough due diligence on these partners to ensure that they adhere to the same ethical standards. This is primarily to ensure that LC’s are not found to be looking the other way, when an intermediary provides an improper payment that has been financed by the LC’s general service fees and delivers a benefit in whatever form it occurs.
Another area of concern is the offering of gifts and entertainment, which, while common in business, can be misconstrued as an attempt to influence decisions. Under the POBO, any advantage—including gifts, loans, or hospitality—could be considered a bribe if provided with the intent to influence a business decision. LCs should implement clear policies and training to ensure that employees understand the boundaries of acceptable behaviour.
Facilitation payments, even small payments made to expedite routine services, are another significant risk area as they can be considered illegal under the POBO. LCs should educate their staff about the risks associated with facilitation payments and establish procedures for reporting any requests for such payments.
The absence of robust internal controls can create opportunities for misconduct. LCs must implement comprehensive procedures for monitoring, detecting, and reporting potential incidents of bribery and corruption. This includes regular audits, whistleblower channels, and training programs tailored to the specific risks faced by the organisation.
Best Practices for LCs (Policy - Training - Onboarding - Monitoring)
To navigate the intricacies of the anti-bribery, corruption and fraud landscape in Hong Kong, LCs should focus on a few key practices.
Establishing a strong anti-bribery, corruption and fraud policy is crucial. This policy should clearly communicate the company’s commitment to ethical conduct and be shared with all employees, and contractors, and third-party agents if necessary. Allocators may be subject to certain specific standards (e.g. ERISA) which is why they are sometimes interested in seeing a more detailed description of an LC’s process as part of due diligence.
Regular training and awareness are also essential for maintaining a culture of compliance. Cognitive GRC’s new Anti-Bribery and Corruption online training program offers an opportunity for employees to stay informed about the latest regulatory requirements and real-world scenarios. This training can contribute 45 minutes towards Licensed Persons's SFC Continuing Professional Training (CPT) and is designed to provide practical insights into managing ABC risks for all team members. If you are doing business in places where facilitation payments are more commonplace such training should be supplemented with scenario-based training for staff who may find themselves in more tricky situations.
As part of Operational Resilience, conducting due diligence on third-party partners is equally important to ensure they share the same commitment to compliance. This includes a thorough review of their background, track record, and the adequacy of their internal controls. Encouraging a speak-up culture is another vital practice, and LCs should provide secure and anonymous channels for reporting suspicious activities, ensuring that reports are handled confidentially and investigated thoroughly.
Monitoring and reviewing the effectiveness of internal controls and the compliance program on a regular basis can help identify potential gaps and areas for improvement. This ensures that the organisation remains resilient against evolving risks and can adapt to changing regulatory landscapes. Depending on the level of risk you might supplement the above controls with additional due diligence and communication monitoring to ensure appropriate care is taking place.
Conclusion
The risks of bribery, corruption, and fraud are ever-present in Hong Kong’s dynamic financial sector, making it imperative for LCs to remain vigilant. By understanding the regulatory requirements set forth by the SFC, adhering to the POBO, and leveraging resources such as those provided by the ICAC, organisations can better protect themselves against these risks. Implementing robust compliance frameworks and investing in quality training programs, like those offered by Cognitive GRC, can help your organisation foster a culture of integrity and compliance.
For more information on how Cognitive GRC’s training programs can support your compliance efforts, contact us today.
Stay Informed. Stay Compliant. Charles French, Compliance Consultant.
Disclaimer: The resources provided here are for the use and consideration by persons responsible for Anti-Money Laundering and Counter Terrorist Financing or Compliance at regulated firms and appointed in that capacity or Individuals Licenced by Licensed Corporations. This document does not represent legal advice. The purpose of the document is to highlight information that may be relevant to the respective roles. Managers in Charge and Money Laundering Reporting Officers remain fully responsible for keeping themselves up to date with the required knowledge to maintain competent in their roles and Individuals should discuss any training proposed with their HR/Compliance Teams.
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