Due Diligence Guidelines –
Anti-Corruption, Anti-Money Laundering and Sanctions
Code of Conduct Paragraphs
Key Stock Exchange Listing Decisions
1. Acquire a Thorough Understanding of the Listing Applicant and Assess the Legality and Compliance of its Business Operations
1.1.1 Based on reasonable due diligence, a sponsor should have a sound understanding of: (i) a listing applicant, including its history and background, business and performance, financial condition and prospects, operations and structure, procedures and systems; [and] (ii) the personal and business backgrounds of the directors, key senior managers and (where applicable) controlling shareholders of the listing applicant. [Paragraph 17.3(a) of the Code of Conduct]
1.1.2 Regarding the preparation of a listing document, a sponsor should: … achieve a thorough understanding of the listing applicant, including its business, history, background, structure and systems. [Paragraph 17.6(d)(ii) of the Code of Conduct]
1.1.3 Regarding the preparation of a listing document, a sponsor should perform, without limitation … [an] assess[ment] of the legality and compliance of the business operations and whether the listing applicant is subject to any material legal proceedings or disputes. [Paragraph 17.6(d)(vii) of the Code of Conduct]
1.2.1 At the time of reviewing a listing application, the Stock Exchange will need to be satisfied that both the listing applicant and its business are suitable for listing.1 Factors that the Stock Exchange highlighted in the past that it would take into consideration when assessing an applicant’s suitability for listing include, among others, serious incidents of regulatory non-compliance2 and incidents of misconduct in relation to directors of the listing applicant which might have implications for their suitability as directors.3 In addition, if a listing applicant has business relationships in countries subject to trade or economic sanctions imposed by certain overseas governments, the Stock Exchange may also request the sponsor to critically assess the listing applicant’s suitability for listing4 and the listing applicant to ensure certain measures have been undertaken to minimise sanctions risk.5 Therefore, it is important for the sponsor to assess the legality and compliance of the listing applicant’s business, including whether the listing applicant’s directors and controlling shareholders are involved in any legal proceedings, during the due diligence process.
1.2.2 In this regard, recent trends in regulatory developments and increasing criminal enforcement actions have both indicated that special attention may need to be paid by sponsors to the following areas in the conducting of due diligence:
(a) Anti-corruption and Anti-money laundering (“AML”)
(i) The main purposes of both anti-corruption and AML due diligence are:
(A) to establish whether the operations of the listing applicant and its affiliated companies are conducted in compliance with anti-corruption and AML laws and regulations in all jurisdictions in which the listing applicant conducts its business; and
(B) to establish whether the listing applicant or any of its directors, officers, employees, agents or affiliates are subject to any proceedings relating to a violation of anti-corruption or AML laws and regulations.
(ii) Anti-corruption due diligence is principally concerned with conducting reasonable diligence on the activities of the listing applicant, its directors, officers, employees, agents or affiliates to consider whether there are corruption issues and to identify potential corruption risks. The global trend of increasingly onerous standards in anti-corruption compliance has resulted in a greater focus on this area of due diligence.
(iii) Anti-corruption compliance frequently incorporates aspects of comparative, international and foreign law. Therefore, it is impossible to provide an exhaustive list of laws and regulations in this area.6 A list of key legislation which would generally be relevant to listing applicants in the context of a Stock Exchange listing include:
(A) the Prevention of Bribery Ordinance (Cap. 201), the primary anti-corruption legislation in Hong Kong;
(B) the PRC Criminal Law, in which anti-corruption provisions are prescribed (relevant for the majority of applicants for listing on the Stock Exchange with some connection with the PRC);
(C) legislation with an international character, such as Organisation for Economic Co-operation and Development (OECD) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions7 and United Nations Convention against Corruption;8 and
(D) legislation with extraterritorial jurisdiction, such as the US Foreign Corrupt Practice Act of 1977 (“FCPA”)9 and the UK Bribery Act 2010 (the “Bribery Act”)10.
Other relevant anti-corruption legislation will depend on the location of the place of incorporation, residence and operations of the listing applicant, its directors, key senior management and controlling/substantial shareholders.
(iv) AML due diligence is principally concerned with conducting reasonable diligence on the activities of the listing applicant, its directors, officers, employees, agents or affiliates to consider money laundering issues and to identify potential money laundering risks.
(v) Similar to anti-corruption legislation, the list of AML legislation which applies to the listing applicant will depend on the location of the place of incorporation, residence and operations of the listing applicant, its directors, key senior management and controlling/substantial shareholders. On the international front, the Financial Action Task Force (“FATF”)11 has developed a series of recommendations that are recognised as the international standard for combating money laundering and terrorism financing. Individual member jurisdictions implemented the FATF’s recommendations by way of their own AML regimes/legislations. A list of key regional/national regimes which would generally be relevant to listing applicants in the context of a Stock Exchange listing is set out as follows:
(A) In Hong Kong, the AML and counter-terrorist financing legislative framework includes the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap. 615), Drug Trafficking (Recovery of Proceeds) Ordinance (Cap. 405), Organized and Serious Crimes Ordinance (Cap. 455) and United Nations (Anti-Terrorism Measures) Ordinance (Cap. 575);
(B) In the PRC, the AML framework is centered on the PRC Anti-Money Laundering Law, coupled with various other rules and regulations which mainly focus on combatting money laundering and terrorist financing in financial institutions.12 Additionally, money laundering is criminalised under the PRC Criminal Law. The PRC AML framework will be relevant for the majority of applicants for listing on the Stock Exchange with some connection with the PRC;
(C) In the United Kingdom (“UK”), the FATF’s recommendations are implemented by way of the Money Laundering Regulations 2007, the Proceeds of Crime Act 2002 and the Terrorism Act 2000 (as amended);
(D) In the European Union (“EU”), the FATF’s recommendations are implemented by way of the Fourth Anti-Money Laundering Directive (2015/849/EC), which is in force and is being implemented into national law, and the Wire Transfer Regulation; and
(E) In the United States (“US”), principal AML legislations include the Bank Secrecy Act (BSA) and the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001 (the “Patriot Act”).13
(vi) For listing applicants engaged in a highly regulated industry (e.g. banking, insurance or gambling), the listing document should set out both the local statutory laws governing the industry and other internationally implemented industry specific rules and regulations (e.g. local banking, insurance and gambling laws and international anti-money laundering rules).14
(i) Sanctions are measures taken by states or international organisations, either unilaterally or multilaterally, with a view to bringing about a change in activity or policy of its target. Sanctions generally fall into one of two categories: sanctions directed against specific countries, and those directed against certain individuals or entities. They can take a variety of forms, including most commonly financial restrictions (e.g., freezing of assets) and trade sanctions (e.g., restrictions on exports and/or imports). Sanctions have in recent years been used as a foreign policy instrument, particularly by the US, the EU and the United Nations (“UN”).
(ii) Examples of sanctions regimes which are generally relevant include financial sanctions administered by the Office of Foreign Assets Control (“OFAC”)15 in the US, EU sanctions,16 UN sanctions,17 and asset freezes and other international financial sanctions administered by the Asset Freezing Unit of HM Treasury in the UK.18 In Hong Kong, UN sanctions are given legislative effect locally via regulations made under the United Nations Sanctions Ordinance (Cap. 537). Again, whether a particular country, individual or entity is or has been in the past subject to sanctions is relevant to the listing applicant will depend on the location of the place of incorporation, residence and operations of the listing applicant, its directors, key senior management and controlling/substantial shareholders.
(iii) From the perspective of the listing application process, sanction risk, in general, arises from listing applicants having business relationships in the sanctioned countries or with persons or entities subject to applicable sanctions. Given the broad scope of sanctions imposed on the sanctioned countries, there is concern that apart from the listing applicant and its directors and controlling shareholders, other parties who might be involved in an initial public offering of the listing applicant may be exposed to sanctions risk or be subject to actual or potential sanctions under the relevant sanctions laws and regulations, where they apply extraterritorially.19
(iv) The main purposes of due diligence in relation to sanctions are to establish:
(A) whether the listing applicant or any of its directors, officers, employees, agents or affiliates is subject to applicable sanctions;
(B) whether the listing applicant or any of its directors, officers, employees, agents or affiliates is conducting business with persons or entities subject to applicable sanctions or located in sanctioned countries;
(C) the materiality of any historic, current or planned operations in or business dealings with sanctioned countries or persons/entities;
(D) whether any such operation or business dealing has or is likely to have any material adverse consequence to the listing applicant, its directors, other officers, employees or affiliates, including any negative impact on the reputation of the listing applicant;
(E) if there is sanctions risk, whether any measures have been undertaken to minimise such risk, including terminating the relevant sanctionable activities or transferring the contracts in the sanctioned countries; and
(F) whether the use of proceeds from the offering will be used, directly or indirectly, to finance or facilitate any projects or businesses in countries subject to sanctions, or pay any damages in case the listing applicant is legally required to compensate the counterparty for terminating the contracts.
1.2.3 The sponsor should perform due diligence in the above mentioned areas. This is both necessary and challenging, as:
(a) corruption/money laundering/actions that are prohibited under sanctions are usually performed secretively and concealed carefully; and
(b) due diligence in these areas will tend to involve a wide range of laws and regulations which are cross-jurisdictional in nature and subject to constant changes. In addition, laws and regulations in relation to these topics are vastly different among different jurisdictions and regions. For instance, the UK Bribery Act applies to bribery of both public officials as well as of private citizens. Such scope is broader than the one prescribed by the FCPA in the US, which with respect to its anti-bribery provisions only applies to bribery of foreign public officials. Furthermore, the extraterritorial effect of laws and regulations in relation to these three areas can vary significantly, and an assessment has to be made of the historical or likely future material adverse consequences of any breach of laws and regulations with extraterritorial effect, including any negative impact on the reputation of the listing applicant.
1.2.4 Accordingly, the sponsor’s due diligence is not intended to and cannot possibly be guaranteed to find all non-compliance or misconduct. Its purpose should not be confused with the one of regulatory or judicial investigation.
2. In Exchange Listing Decision LD97-1 (issued in July 2010), the Stock Exchange mentioned that it considers that intentional, repeated breaches of laws and regulations by an issuer may affect its suitability for listing. In determining the impact of non-compliance on an issuer’s listing, the Exchange will take into account the following factors:
(a) the nature, the extent and the seriousness of the breaches, for example, whether the breaches involve dishonesty, or whether the breaches involved newly establishes laws and regulations which may be subject to different interpretations by legal professionals;
(b) the reasons for the breaches: whether the breaches were intentional or due to negligence or recklessness;
(c) the impact of the breaches on the issuer’s operations;
(d) the rectification measures adopted; and
(e) the precautionary measures put in place to avoid future breaches.
3. In Exchange Listing Decision LD48-2013 (issued in January 2013), for Company B, the PRC legal opinion revealed that Company B’s controlling shareholder and executive director was implicated in two bribery convictions which might have implications for his suitability as a director. These concerns were not brought to the Stock Exchange’s attention in the documents submitted together with the listing application form. There was also no submission from the sponsor on why it considered the individual as suitable to be a director under the Listing Rules. The listing application was subsequently returned by the Stock Exchange.
4. Also in Exchange Listing Decision LD48-2013, for Company D, the Stock Exchange requested the sponsors and Company D to critically assess the company’s suitability for listing as Company D was a mining company operating in a country subject to sanctions from the United Nations and the European Union. Company D subsequently submitted the listing application. In relation to sanctions, there was only a directors’ confirmation which was brief and did not state the basis of the directors’ view. There was also no view provided by the sponsors. The listing application was subsequently returned by the Stock Exchange.
5. In Exchange Listing Decision LD76-2013 (issued in December 2013), the Stock Exchange determined that given the listing applicant had undertaken measures to minimise sanctions risk, including terminating the relevant sanctionable activities or transferring the contracts in the sanctioned countries would not render it unsuitable for listing, and the issue could be addressed by disclosure.
6. For some countries, such as China, there may not be a single legislation designated for anti-corruption. In the case of China, the relevant provisions are prescribed by the PRC Criminal Law instead.
7. Organisation for Economic Co-operation and Development (OECD) Convention on Combating Bribery of Foreign Public Officials in International Business Transactions
8. United Nations Convention against Corruption
9. US Foreign Corrupt Practice Act of 1977
11. FATF is an independent inter-governmental body whose objectives are to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system. As at 8 March 2016, the FATF currently comprises 35 member jurisdictions and 2 regional organisations, representing most major financial centres in all parts of the world.
12. Relevant AML rules and regulations include Anti-Terrorism Law (1 Jan 2016), People’s Bank of China (“PBC”) [Order (2006) No.1] (14 Nov 2006) “Rules for Anti-Money Laundering by Financial Institutions”, PBC [Order (2006) No.2] (14 Nov 2006) “Administration Rules for the Reporting of Large-value and Suspicious Transactions”, PBC [Order (2007) No.1] (11 June 2007) “Administrative Rules for the Reporting of Suspected Terrorism Financing Transactions”, and PBC [Order (2007) No.2] (21 June 2007) “Management Rules on Record Keeping of Customer Identity Information and Transactions by Financial Institutions”.
13. The Patriot Act has far-reaching implications for non-US banks and financial institutions, which may become the target of AML measures imposed by the US and be required to provide more detailed and extensive records and information in relation to certain US and overseas accounts. What is also clear is that anyone who commits a money laundering offence part of which takes place in the US (which will include almost every US dollar transaction) is at risk of prosecution in the US, including forfeiture proceedings. Those doing business in the US (and particularly banks and other financial institutions) should therefore ensure that they are aware of the developments in the US AML regime and that they have taken any necessary steps to comply with the provisions under the Patriot Act.
14. In Exchange Guidance Letter GL86-16 “Listing Document Simplification Guide” (issued in February 2016), the Stock Exchange provides that for listing applicants engaged in a highly regulated industry (e.g. banking, insurance or gambling), the “Applicable Laws and Regulations” section of the listing documents should not only focus on local statutory laws governing the industry (e.g. banking laws, laws governing insurance companies, gambling laws), but also other internationally implemented industry specific rules and regulations (e.g. anti-money laundering). In relation to listing applicants that undertake gambling activities, the Exchange has also issued a Guidance Letter GL71-14 in January 2014 specifying that it would be a condition to listing that the issuer must use its best endeavours to ensure that the operation of the gambling activities, throughout its listing, (i) comply with the applicable laws in the areas where such activities operate (which potentially include the relevant international anti-money laundering standards); and/or (ii) not contravene the Gambling Ordinance (Cap. 148). The listing document must also highlight in the “Risk Factors” section the risk of revocation of listing should the operation of such gambling activities fail to fulfill the above conditions to listing in relation to legality.
15. OFAC, as an office of the US Department of the Treasury, administers and enforces economic and trade sanctions based on US foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction, and other threats to the national security, foreign policy or economic interests of the US. OFAC acts under Presidential national emergency powers, as well as authority granted by specific legislation, to impose controls on transactions and freeze assets subject to US jurisdiction as well as on US persons wherever they are located. US sanctions take into account United Nations and other international mandates, are multilateral in scope, and involve close cooperation with allied governments.
16. Sanctions can be imposed by the EU in a variety of ways. One way they may be applied is by means of EU legislation, usually in the form of an EU regulation. Another common method to impose sanctions is within the framework of the EU’s Common Foreign and Security Policy (“CFSP”). Under this method, member states agree on a “Common Position” to adopt sanctions, following which the EU Commission implements the sanctions.
17. The UN Security Council (“UNSC”) is empowered by Article 41 of the Charter of the United Nations (the “Charter”) to adopt binding resolutions regarding international sanctions in order to maintain or restore international peace and security. Under Article 25 of the Charter, UN member states are bound by UNSC resolutions. Member states are therefore obliged to pass domestic legislation, regulations, or decrees to implement UN sanctions.
18. HM Treasury is responsible for the implementation and administration of international financial sanctions in the UK, for domestic designation (principally under the Terrorism Asset-Freezing etc. Act 2010) and for licensing exemptions to financial sanctions.
19. Exchange Listing Decision LD76-2013 and Listing Committee Report 2013 
HKCFEF Limited and the contributing law firms, accountants and sponsors are not offering these due diligence guidelines as legal, financial or professional advice or services and they should not be relied upon as such. These due diligence guidelines should not be used as a sole basis for any decision, action or inaction and are not meant to serve as a substitute for the advice of qualified professionals. See here for the full terms and conditions.