SFC reprimands and fines Ample Capital LimitedHKD5.5 million and Suspends its Responsible Officer for IPO Sponsor Failures
The disciplinary action followed the SFC’s investigation which found that ACL failed to:
- conduct adequate due diligence on suspicious cash settlements received by COCCI and keep proper records of its due diligence work;
- ascertain the background and independence of a major wholesale distributor of COCCI (Distributor) and its associates, and to assess the reasonableness of COCCI’s sales to the Distributor; and
- critically assess the reliability of the shipping documents provided to it by COCCI.
The SFC has also suspended the licence of Mr Howard Tang Ho Wai for 17 months from 15 October 2021 to 14 March 2023 for failing to discharge his duties as a responsible officer and sponsor principal of ACL in charge of supervision of the execution of COCCI’s listing application, the regulator said in a press release.
Failure to conduct adequate due diligence on suspicious cash settlements
ACL’s due diligence identified that the Distributor had made cash settlements totalling RMB9.72 million to COCCI between March and June 2016 through various third parties, with one of the third party payers being an employee of COCCI’s major supplier.
Settlement of payments through third parties by a customer is a red flag as they might be used to disguise the original source of funds and facilitate a fraudulent scheme.
However, ACL failed to critically assess the reasons behind the third party cash settlement arrangement, nor did it conduct any independent due diligence to ascertain the truth and completeness of COCCI’s representations in this respect. ACL also failed to maintain any records to demonstrate the due diligence it conducted, including its alleged discussions with COCCI’s directors and reporting accountants regarding the third party cash settlement arrangement.
Failure to ascertain the background and independence of the Distributor and its associates
ACL was aware that the Distributor’s business activities were carried out by its sole shareholder (Ms A) and members of staff from her jewellery company.
There was also information suggesting a connection between Ms A’s jewellery company and COCCI. On the one hand, one of the co-owners of Ms A’s jewellery company was a company solely owned by an indirect shareholder (Mr X) of COCCI. On the other hand, one of the directors (Mr Y) of the jewellery company was also a director of COCCI’s major supplier, as well as a director and sole shareholder of a company which is a franchisee of COCCI and a management agent of certain self-operated retail outlets of COCCI.
ACL failed to undertake any additional due diligence to ascertain the involvement of Mr X and Mr Y in the Distributor’s business activities, and verify the independence of the Distributor or its sole shareholder, Ms A, from COCCI and its supplier.
Failure to assess the reasonableness of COCCI’s sales to the Distributor
Since COCCI’s revenue in 2015 rose significantly as a result of its sales to the Distributor and a substantial portion of COCCI’s products was allegedly ultimately sold to end customers in Saudi Arabia via the Distributor, it was imperative for ACL to conduct adequate due diligence to assess the reasonableness of such sales.
However, ACL had performed minimal due diligence regarding the sales of COCCI’s products in Saudi Arabia before submission of the listing application. While ACL had attended a telephone interview (conducted by COCCI’s reporting accountants) with a major Saudi Arabian customer of the Distributor, ACL did not seek to obtain any objective data to verify information provided by the customer, nor did it conduct any independent search on the customer’s background and scale of operations in Saudi Arabia.
It was only after ACL received comments made by the regulators after submission of the listing application that it performed further due diligence, such as interviewing the Saudi Arabian customer and visiting its retail stores in Saudi Arabia.
Failure to critically assess the reliability of the shipping documents provided by COCCI
ACL obtained from COCCI a total of 25 sets of shipping documents in relation to the shipment of COCCI’s products from the Distributor to the Saudi Arabian customer. However, it did not critically assess the reliability of the shipping documents before relying on them as part of its due diligence, and failed to identify red flags which cast doubt on the reliability of the shipping documents.
The SFC is of the view that ACL’s conduct fell below the standard expect of it as a sponsor and breached the requirements under Chapter 17 of the Code of Conduct. The SFC also considers that ACL’s failures are attributable to Tang’s failure to discharge his duties as a sponsor principal, a responsible officer and a member of the senior management of ACL.
In deciding the disciplinary sanction, the SFC took into account all relevant circumstances, including:
- substandard due diligence work of sponsors could assist the listing of companies that are, in fact, not suitable for listing;
- as COCCI’s listing application had lapsed, no harm has been caused to members of the investing public;
- the SFC has previously issued two compliance advice letters to ACL in respect of its conduct as a sponsor in two separate listing applications, which should have put it on heightened alert of the need to improve its due diligence work;
- ACL has no previous disciplinary record with the SFC;
- ACL’s financial situation; and
- ACL and Tang cooperated with the SFC in resolving the SFC’s concerns.