Hong Kong Regulators Create Team to Focus on Shell Companiesby
Corporate fraud a priority after significant damage to market
SFC also probing anti-money laundering breaches at brokerages
Hong Kong’s Securities and Futures Commission has established a team to investigate the creation and use of so-called shell companies, amid a focus on malfeasance and fraud by companies listed in the city.
The team will probe suspected shells on the Growth Enterprise Market, the regulator wrote in a biannual report published Thursday. Firms listed on GEM, Hong Kong’s exchange for smaller companies, sometimes change hands soon after a public offering and are seen as targets for what’s known as backdoor listings, a way for a Chinese enterprise that does not want to go through the initial public offering process to get on the stock market.
“We are seeking to prevent the creation and use of listed shells and have been conducting inquiries into possible shell companies,” the SFC said in its report. “Where we can prove that such activities are taking place, we will take appropriate action to address the problem.”
Shell companies are one of several issues on Hong Kong’s public market that have caused concern among regulators, lawmakers and investors. Targeting shells will be part of a broader clampdown of behavior in the city that Tom Atkinson, head of enforcement at SFC, previously said has wiped HK$200 billion ($25.6 billion) in value from Hong Kong’s public companies.
Wrongdoing by public companies has caused significant damage to the integrity and reputation of the city’s markets, the SFC report said.
“By prioritizing resources on cases which pose the greatest risk to Hong Kong’s financial markets, the SFC’s approach echoes that already adopted by U.S. and European regulators, who are all seeking to achieve the maximum results from their relatively limited resources,” said Veronique Marquis, head of the financial services disputes and investigations team in Asia at the law firm Eversheds LLP.
The initiatives come as Hong Kong has been stepping up efforts to improve scrutiny of its markets, and as mainland investors start to trade the city’s small-caps shares through the stock-trading link with Shenzhen that opened on Monday.
Under Atkinson, the regulator’s enforcement division has been focused on clearing a case backlog by bundling cases together to effect speedier settlements, Bloomberg News reported in October. The agency is also investigating anti-money laundering internal controls at brokerages and will impose “tough controls” if it finds breaches, Thursday’s report said,.
The SFC has nearly doubled enforcement staff since 2010, from 115 to a projected 202 next year, and has seen a recent doubling in the number of requests for investor identifications sent to brokers. It is readying proposals that would allow it to identify investors behind trades in real time and is consulting the market about regulation that would make senior managers directly accountable for misconduct that occurs on their watch.