EFG Bank Faces $1.39 Million Penalty After Hong Kong Regulators Flag Years of Due Diligence Failures

Key Takeaways

• Penalty Issued: EFG Bank AG fined $1.39 million (HK$10.85 million) after regulators uncovered years of due diligence and reporting lapses.
• Scope of Failures: Shortcomings stretched across 322 bonds, with internal reviews indicating the issues may have affected up to 351 products.
• Record-Keeping Issues: The bank was unable to produce due diligence records for 141 bonds, raising concerns about oversight during the period.
• Late Reporting: EFG flagged its concerns internally in July 2020 but didn’t alert the SFC right away, falling short of expected reporting standards.

Deep Dive

EFG Bank is facing a $1.39 million (HK$10.85 million) penalty after Hong Kong regulators found years of weaknesses in its product due diligence, record-keeping, and reporting practices. The reprimand and fine, announced jointly by the Securities and Futures Commission (SFC) and the Hong Kong Monetary Authority (HKMA), mark another example of how closely the two regulators now coordinate when internal control failures come to light.

The case traces back to both a self-report by EFG and a referral from the HKMA, which had investigated the bank’s handling of product due diligence across its securities and asset management activities between 2015 and 2020.

Investigators found that EFG did not consistently factor in the special features of a wide range of investment products. In total, shortcomings were identified across 322 bonds where assessments fell short, and internal policies were not updated quickly enough to keep pace with regulatory changes.

The lapses also affected customers directly. According to the SFC, EFG did not always provide sufficient information or warning statements when distributing certain complex products, an issue that raised concerns about whether clients understood the risks at the time of each transaction.

An internal impact assessment later expanded the scope even further, estimating that due diligence may have been inadequate for as many as 351 products during the five-year period.

Missing Records and Delayed Escalation

The failings were not limited to due diligence. EFG was unable to produce due diligence records for 141 bonds, and when it first suspected internal control issues in July 2020, it did not immediately alert the SFC, despite obligations under the Code of Conduct and internal control guidelines that require timely reporting.

In reaching the final penalty, the SFC said it considered the steps EFG has taken to strengthen its due diligence framework, as well as the bank’s cooperation with both regulators throughout the inquiry.

A key component of the bank’s remediation will be the roll-out of Enhanced Complaint Handling Procedures (ECHP), which require EFG to conduct an intensive review of complaints filed by customers who purchased any of the 351 potentially affected products. The aim is to ensure those complaints are handled “fairly and reasonably,” according to the regulators.

The GRC Report is your premier destination for the latest in governance, risk, and compliance news. As your reliable source for comprehensive coverage, we ensure you stay informed and ready to navigate the dynamic landscape of GRC. Beyond being a news source, the GRC Report represents a thriving community of professionals who, like you, are dedicated to GRC excellence. Explore our insightful articles and breaking news, and actively participate in the conversation to enhance your GRC journey.