The Hong Kong Securities and Futures Commission has reprimanded Zheng Da International Financial Holding Limited and fined the firm HKD 7 million over systemic anti-money laundering failures and a lack of due diligence on client subaccounts. Sidley Austin reported that the regulatory action also includes a seven-month suspension for Zhong Hao, a responsible officer and manager-in-charge at the firm.
Zheng Da Penalized HKD 7 Million for Subaccount Oversight Failures
The regulatory penalty stems from an investigation initiated after third-party complaints alleged that Zheng Da permitted clients to create client subaccounts (CSSs) and allowed subclients to trade directly through the firm’s platform. Investigators found that over a 20-month period spanning 2021 through 2023, Zheng Da permitted 160 clients to use their CSSs to place over 10 million futures trades using a third-party broker-supplied system (BSS). The firm asserted that employees conducted verbal inquiries regarding system functionality and submitted application documents to its BSS provider. However, the SFC determined that Zheng Da maintained no guidelines, procedures, or records for conducting due diligence on these third-party systems.
Zheng Da's service agreement with its BSS provider contained no obligation for the vendor to vet client systems. The provider confirmed to investigators that it performed no such due diligence. Investigators also uncovered extreme transaction anomalies among selected clients. One account holder with a declared annual income above HKD 1 million deposited approximately HKD 28 million through 439 transactions originating from 22 different bank accounts over six months. A second client, declaring an annual income below HKD 200,000, deposited over HKD 37 million across a 10-month period. These figures directly violated internal policies requiring staff to verify that deposits matched self-declared financial profiles.
SFC Suspends Responsible Officer Zhong Hao for Seven Months
Zhong Hao faced a seven-month suspension after the SFC concluded that Zheng Da’s regulatory breaches were directly attributable to his personal failures as a responsible officer and manager-in-charge. Sidley Austin reported that Zhong failed to ensure the maintenance of appropriate operational standards or properly manage regulatory risks. While Zheng Da claimed Zhong conducted random monthly telephone calls with high-volume and selected clients to review their financial standing, no contemporaneous records existed to substantiate the claim.
The investigation further revealed 176 instances where clients placed simultaneous buy and sell orders for the same futures contracts within the exact same second. Zheng Da’s transaction monitoring system failed to detect these occurrences in real-time. Although the firm utilized a self-matching prevention function for one U.S. futures exchange, it disabled a built-in BSS function designed to detect same-second trades on other exchanges because staff claimed it interfered with normal client trading. Because the trades went undetected, Zhong could not produce records of any inquiries regarding the activity.
Regulatory Breaches Involve Anti-Money Laundering and Code of Conduct Violations
The SFC concluded that Zheng Da breached several core provisions of the Code of Conduct, including failures to act with due skill, care, and diligence, and failures to maintain proper resources and verification procedures for client identities. The firm also violated the Anti-Money Laundering and Counter Terrorist Financing Ordinance (AMLO). These violations encompassed a failure to assess money laundering risks for new business practices, inadequate AMLO controls, a lack of ongoing client information reviews, and a failure to report suspicious transactions to the Joint Financial Intelligence Unit.
Investigators treated the ongoing publication of similar enforcement actions during the relevant period as an aggravating factor. Despite public warnings regarding identical market misconduct, Zheng Da took no steps to enhance its internal compliance controls or monitor client trading more effectively.
Frequently Asked Questions About the Zheng Da Enforcement Action
What specific licenses does Zheng Da hold with the Hong Kong SFC?
Zheng Da holds licenses to deal in and advise on futures contracts regulated by the Hong Kong Securities and Futures Commission.
How many trades were placed through client subaccounts during the investigation period?
Clients placed over 10 million futures trades using third-party broker-supplied systems across a 20-month period from 2021 through 2023.
What were the primary regulatory findings against Zheng Da?
The SFC found that Zheng Da failed to conduct due diligence on third-party client subaccount systems, neglected to investigate extreme transaction anomalies inconsistent with client financial profiles, and operated a deficient transaction monitoring system that missed same-second buy and sell orders.
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