Hong Kong regulator cracks whip on brokers over money laundering laxness

HONG KONG (Reuters) - Hong Kong securities regulator is investigating licensed brokerages and expects to lodge cases against some for inadequate internal anti-money laundering (AML) controls, it said on Wednesday, amid heightened scrutiny over illicit money flow in the city.

The Securities and Futures Commission (SFC) directed brokerages to immediately tighten their internal controls to comply with anti-money laundering rules that came into force in 2012.

The SFC's onsite inspections and investigations revealed a number of shortcomings including failure to scrutinise cash and third-party deposits into customers accounts, it said.

Hong Kong authorities are under pressure from international bodies to clamp down on illegal money flows following a number of high profile cases that involved Hong Kong-based companies, including a corruption scandal that engulfed global soccer body FIFA last year.

The SFC is sharpening its focus on money laundering activities after Hong Kong figured prominently in the leaked 'Panama Papers', which contained details on thousands of shell firms.

The leaked documents from Panama law firm Mossack Fonseca, which contained information on 214,000 offshore companies, showed that Hong Kong was the most active centre in the world for the creation of shell firms, which have many legitimate purposes but can also be used to hide assets and avoid taxes.

"The banks have largely toed the line as far as transparency is concerned and as far as sharing of information around tax investigations is concerned," Jake Robson, Singapore-based partner at law firm Morrison & Foerster LLP, said.

"The next big target for the global law enforcing agencies are the broker dealers. It kind of makes sense they are cracking down visibly and I suspect that will happen across Asia," he added.

The SFC had seen a 91 percent spike in the number of instances where the city's financial firms are failing to comply with its anti-money laundering guidelines in 2015.

In May, Hong Kong launched a multi-pronged customs, shipping and financial sector crackdown against so-called fake trade invoicing that allows billions of dollars of capital to leave China illegally.

In July 2014 the SFC fined the Hong Kong securities subsidiary of China's Ping An HK$6 million for "serious" AML failures, later moving in 2015 to strike off the company's chief compliance officer, in the first major enforcement action by the SFC since the Antimoney Laundering Ordinance came into force in 2012.

(Reporting by Elzio Barreto and Denny Thomas; Additional reporting by Saeed Azhar and Michelle Price; Editing by Simon Cameron-Moore and Susan Thomas)