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Hong Kong has Goldman Sachs to thank for record fines in 2020 for misconduct as regulator tightens scrutiny of market practices

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Enoch Yiuenoch.yiu@scmp.com
·4 min read
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Hong Kong imposed record-high monetary penalties in its capital markets last year as authorities stepped up vigilance and enforcement to clamp down on market misconduct.

The Securities and Futures Commission slapped HK$2.8 billion (US$361 million) of fines on industry participants, 117 per cent more than in 2019, according to data compiled by law firm Freshfields Bruckhaus Deringer. The amount was also 32 per cent higher than the sum collected from 2015 to 2019.

The bulk of the sum, or HK$2.71 billion, was extracted from Goldman Sachs (Asia) when it reprimanded the US investment bank's unit for "serious lapses and deficiencies" that contributed to the misappropriation of funds at the Malaysian sovereign investment fund known as 1Malaysia Development Bhd.

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"Given the SFC's focus on 'high-impact cases', we can expect to see the SFC continue its pursuit of large fines," said Tim Mak, a partner of Freshfields, which began compiling the statistics in 2014. Mak said civil fines from disciplinary actions tend to be easier to obtain because of the lower threshold of proof than in criminal cases.

A Goldman Sachs sign is displayed inside the company's post on the floor of the New York Stock Exchange (NYSE) on April 18, 2017. Photo: Reuters alt=A Goldman Sachs sign is displayed inside the company's post on the floor of the New York Stock Exchange (NYSE) on April 18, 2017. Photo: Reuters

Goldman has paid more than US$5 billion in penalties in Hong Kong, Singapore, Malaysia, the UK and the US for its role in helping 1MDB raise US$6.5 billion in three bond offerings in 2012 and 2013. Much of the money was siphoned off by people associated with disgraced former premier Najib Razak and funnelled to pay for a Manhattan apartment, Monet art, a superyacht and even a Hollywood movie.

In 2019, the SFC imposed HK$814 million of fines on five investment banks - UBS, Morgan Stanley, Merrill Lynch, Standard Chartered Bank and China Merchants Securities (HK) - for shortcomings as sponsors for several initial public offerings (IPOs) over the past decade.

As Hong Kong is one of the world's leading IPO venues and the SFC has been focusing significant efforts on enhancing the market quality, the watchdog will continue to scrutinise the work of the listing sponsors, Mak said.

Hong Kong was the top IPO venue globally seven times in the past 12 years, while the stock exchange operator has planned to expand its listing reforms further to attract more candidates.

"Historically, Hong Kong regulatory fines have tended to be lower than those in other major markets like the UK and the US, but the SFC is catching up," Mak added.

The UK's Financial Conduct Authority meted out about £200 million (US$278.5 million) of fines last year, while the US' Securities and Exchange Commission handed out US$4.68 billion, according to data published on their websites.

"It is good to see the SFC issuing heavy fines on some big investment banks for those malpractices" to protect investors, said Tom Chan Pak-lam, chairman of the Institute of Securities Dealers, the brokerage industry body in Hong Kong. "They will act as a deterrent to market participants. It shows the SFC is very keen to improve the market quality."

Chan hopes to see the SFC handing out more compensation to investors who suffered as a result of malpractice in the market. The US Securities and Exchange Commission returned about US$600 million last year to investors as a result of enforcement actions.

In Hong Kong, the SFC fines go into the government's treasury, according to local law. The commission, however, can seek compensation for investors by seeking a court order, as it did in the case of Tianhe Chemicals Group last September.

In that event, the market watchdog initiated legal action against China's largest lubricant additives producer and its executive director Wei Xuan in the Market Misconduct Tribunal. It is seeking to recover HK$3.52 billion of proceeds from its 2014 IPO, saying the parties overstated revenue by US$1.04 billion from 2011 to 2013.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2021 South China Morning Post Publishers Ltd. All rights reserved.

Copyright (c) 2021. South China Morning Post Publishers Ltd. All rights reserved.