Company Law - visence

AML/CFT/Company Law/Company Secretary/Financial Regulations/Hong Kong/License/Securities Regulations

[HK] SFC Firm’s Client Asset Management

2023年6月5日 by j.obara / 0 Comment

Does your firm have dormant accounts for such a long time that your firm does not even know whom you could contact for details? This will help yo uclean up dormant accounts.

Slightly outdated but on 19 December 2018, Securities and Futures Commission in its circular emphsized protection of client assets.

https://apps.sfc.hk/edistributionWeb/gateway/EN/circular/intermediaries/supervision/doc?refNo=18EC94

There should be policies for maker-checker controls, suspicious address checking and monitoring dormant accounts.

Client Assets and Obligtions
Securities and Futures Ordinance (Cap. 571) (SFO), Schedule 1, Part 1, Interpretation: “client assets” means Client Securities and Collateral or Client Money.

“A licensed person (LC) should ensure that clients assets are promptly and properly accounted for and adequately safeguarded” . [General Principle (GP) 8 and para 11.1 of Code of Conduct for LC]

Client Securities Rules – Summary
“Client Securities” means [S. 3, Client Securities Rules]
– Stock Listed on Recognized Exchange (e.g., HKEX), or
– Collective Investment Scheme (CIS)
which were received in HK in the course of regulated activities (e.g., Type 1)

Upon receipt of securities (or collateral), licensed coroporation(LC) safe-keeps in segregated account (CCASS client account) as soon as practicable [S. 5]

LC may deal with securities, if (amonst others):- [S. 6]
– An oral or written direction (instruction) from client to sell securities,
– Written direction by client to withdraw the security (from CCASS), and
– Standing authority (requires renewal after 12 months if not PI) [S. 4]

Client Money Rules – Summary
This Applies to client money received by LC in Hong Kong [S.3]
(If received outside of Hong Kong, not applicable) q

Upon receipt of client money (including cheque), within 1 business day, LC must
safe keep in a segregated client accounts (at HKMA licensed bank) [S. 4]

LC may pay client money out of segregated accounts, if (amongst others):- [S. 5]
To Client
– In accordance with Client’s Written Direction
– In accordance with Standing Authority (12 months rule, if not PI)
– LC may deduct fees or reimbursement amount [S. 4(3)(a)(i) & 5(1)(d)]
Unless with agreement, interest accrued from client money in savings account will be treated as client money [S. 6]

AML Concerns: Third Party Deposits and Payment [Chapter 11, SFC AML Guideline for LC]
– AML risk increases when customers use third parties to pay or receive investment proceeds
– Third-party deposits and payments should be accepted under exceptional and legitimate circumstances
– Adequate policies and procedures to monitor (e.g., deposits)
– Due Diligence on the source of deposits before settling transactions Delayed Due Diligence will increase difficulty to justify

How to Deal with Delisted Securities

Grounds to Halt or Suspend Trading or Delist Shares (HK stocks)

By HKSE or By Issuer (or by Financial Advisor/ Type 6):
[Mainboard Listing Rule 6.01]

– When HKSE’s listing committee believes that:
(1) Lack of Liquidity in the Market
(2) Issuer does not carry on a business as required (liquidation)
(3) Issuer or the business is no longer suitable for listing
(Instead of delisting) Usually, 18 months suspension by HKSE
=> Issuer is to comply with Remedial Proposal for resumptio
=> If not remedied, Delisted

By Issuer – Voluntary Withdrawal from listing is possible

Two usual types of Delisted Shares
(1)Active Delisted Securities
=> For strategies, some issuer go private (withdrawal) – Although delisted (System may show 0 value), still active!
=> But brokers are not helpful to safe-keep Active Delisted Shares, due to lack of liquidity for trading.
=> Need to seek client instruction [“Dormant Accounts” on SFC Circular Dec 2018]

To seek instruction to surrender (purchase by LC) or withdraw certificates (from CCASS) and send it to clients
Note 1:   Odd Lots cannot be withdrawn from CCASS
Note 2:   Share Register (TRICOR, etc.) may not provide service to re-register to client’s name
Note 3:    Consent Form to Surrender (based on recent case law) Liquidation Delisted Shares (Bankruptcy)

(a) Voluntary Liquidation (Company itself files bankruptcy) – Not many
(b) Compulsory Liquidation = Winding-up (3^rd Party sues for non-payment) – Very common during COVID/Recession

Compulsory Liquidation q Many Issuers are Bermuda or Cayman Companies (Variable Interest Entity Structure (VIE) with PRC Op Co)
=> They follow English Common-law (generally, liquidation law is the same)
=> HK Court and HK Companies Registry will recognize bankruptcy judgments rendered in other jurisdictions Effect of Compulsory Liquidation – Becomes Worthless Shares at some point, but when?
=> We should notify clients [“dormant accounts” on SFC Circular (Dec 2018)]

Procedures for Compulsory Liquidation Procedures (HK and Common-law Jurisdiction)

(1) Statutory Demand for unpaid debt amount for HK$10,000 or more by Lender
=> If no payment after 21 days of service of demand, Creditor can file a winding-up petition

(2) Court Hearing to verify Company’s insolvency or inability to repay
=> If verified, court will issue Winding-up order and Provisional Liquidator is appointed
=> At this stage, HKSE usually suspends trading of shares (but Liquidation is not final yet)

(3) Meetings with Creditors to appoint liquidator (accountant / lawyer), and Liquidation Begins
=> At this stage, almost impossible to revive the company – Virtually Value of Shares are Worthles
=> Not worth waiting until (5) below, and we should notify clients [“dormant accounts” on SFC Circular (Dec 2018)]

[Recommended Approach]    To Seek instruction to surrender (transfer to LC’s CCASS house account)
Note 1:   Odd Lots cannot be withdrawn from CCAS
Note 2:   Share Register (TRICOR, etc.) may not provide service to re-register to client’s name
Note 3:   Consent Form Template Shown in 2021 Case Re Wing Fat Securities Ltd (Next Page)

(4) Preparation of Final Accounts => Assets are Distributed to Creditors, if any left

(5) De-registration or Strike-off of Company Registration By Companies Registry => Officially Company is Closed

Consent Form to Surrender Abandoned Shares (based on Recent Case Law)

Death of Clients

Joint Account
Legally, joint tenancy with rights of survivorship (e.g., Husband and Wife are called “Joint Tenants”)
Upon death of 1 tenant, estate (asset) will automatically pass to surviving tenant
Upon death certificate being verified, account ownership transfers surviving owner (no probate)

Single Account (Probate)
Must wait until completion of probate which identifies:
– “Heir” means descendants entitled to estates (could be multiple account owners)
– Executor or Administrator of Estate who will handle estates
– In case of Deceased with a Will (testate)
– Generally the will be accepted by court to appoint “Executor” and distribute estates ØAt conclusion of probate, court will issue “Grant of Probate”
– In case of Deceased without a Will (intestate) Ø Court will examine and appoint Administrator to handle estates

At conclusion of probate, court will issue “Letter of Administration”
In case of estate not exceeding HK50,000 Home Affairs Department (no court’s involvement) will handle and issue “Confirmation Notice”

We should wait for “Grant of Probate”, “Letter of Administration” and “Confirmation Notice” to assign ownership of deceased’s client account
(Grant of Probate and Letter of Administration are collectively called “Grant of Representation”)

Ways to close dormant accounts
(1)We may consider changing policy to charge account maintenances fees for dormant accounts every mont
=> Some low value client money account will reach zero eventually => close accounts (Client Money)

(2)   If Annual Confirmation to retail clients was returned, we should make steps to close accounts
=> Re-sending confirmation several times, calling or news paper advertisement, etc.

If Delisted Shares or Odd Lot Shares in the Securities Account, we should enclose Consent Form
=> 1 year of client chasing to be considered best effort being made (Case Law)

(3) In case of no updates from client, we apply (Originating Summons) to surrender client assets to High Court
=> Strong Case Law supports that LC is considered a “trustee” of the client trust asset

Even though LC did not sign a trust instrument with Client – Client Agreement is considered a “trust” document

=> S. 56(1), Trust Ordinance (Cap. 29) – if there are no instructions from clients after reasonable endeavor, court may

provide the instruction in the absence of client instructions

=> S. 62, Trust Ordinance allows trustee to surrender the client assets to court. •Client Money can be paid into court (Cheque payable to High Court Registry) •Client Securities in the form of paper certificate form can be surrendered to court (We should try to withdraw first- High Court doesn’t have CCASS Account)

But Odd Lots and Delisted Shares may be surrendered to LC

AML/CFT/Company Law/Financial Regulations/Hong Kong/License/Securities Regulations/Taxation/Uncategorized

FATCA and CRS Latest Updates Since Inception During Obama Administration

2023年6月5日 by j.obara / 0 Comment

FATCA

Background

FATCA is a US fedral tax. As a backdrop, back in 2010, during President Obama Administration, US Democratic Party and President Obama introduced law to provide tax incentives for private enterprises.

The bill was captioned: “Hiring Incentives to Restore Employment Act of 2010” with several subsets. But it turned out that this bill created massive debt for US Government to incur payments to those eligible private enterprises who will benefit from the tax incentives.

To “sweeten” this bill, Obama administration introduced “Foreign Account Tax Compliance Act (FATCA)” as subset (Chapter 4), arguing FATCA may bring revenue to US government. Negotiation was successful, and bill including FATCA was passed in 2010. However, unbeknownst to elites in Washington DC at the time, FATCA unshered the financial industry into the new era of AML/KYC compliance outside of US. FATCA went through transition phases and had member nations to sign Intergovernmental Agreement (IGA) Model 1 or Model 2 prior to taking effect in 2014.

FATCA’s original emphasis was to prevent US tax evasions by US tax payers with accounts outside US. But did it really prevent such evasions? To date, as compliance professionals, we have not encountered a situation where Financial Institutions (or Foreign Financial Instutitions or FFI) had to withhold payment on behalf of clients.

To date, FATC seems to be applicable as originally intended. Here, let us look at FACTA rules in the nutshell as below:

FFI must:-

(1) At account opening or whenever situation materially changes, conduct KYC on customers to identify US account. (Back then in 2014, the AML/KYC procedures was not stringent, and this created a burden for FFIs. But in the current era of risk-based customer due diligence, this appears to be a simple due diligence process)

=> to identify US Account, FFI should obtain Self-Certification from clients and assess
From individual clients, use W-9 (US Person) and W8-BEN
From company clients, use W8-BEN-E (non-intermediary) or W8-BIMY (Intermediary)

(2) withhold 30% of transfer amount made from account whose holder is not cooperating with due diligene (recalcitrant account holder) or account is maintained by non-participating FFI.

(3) Report to IRS when needed:
A. Annual Report to IRS (Form 8966) on US Account as at the end of calendar year
B. Report to IRD when indicia of US status is not estalished.

(4) Have a complaince program with responsible officer (who does not need to be a licensed person) and conduct periodic audit every three years.

What is US Account?
It means an account held by
– individual who is a US Person (i.e. US citizenship or Permanent Resident)
– corporation whose controlling person (director or shareholder) is a US Person.

Indicia of US Status
If an Account has “indicia” of US Status:

(1) FFI needs to obtain additional documents to confirm the status (whether US Account or Non-US Account). If documentation is not obtained to establish non-US status, FFI may be required to IRS either as US Account or a Non-Consenting US Account.

Examples of Indicia of US Status (Red Flag Indicators):
1. US Passport Holder / Green card Holder
2. US place of Birth
3. Current US residence mailing
4. US telephone number
5. Standing instruction to transfer funds to US account
6. Power of attorney to a US Person
7. “In care” or / “hold mail” arrangement

In case FFI fails to comply with FATCA rules (i.e. FFI becomes “Non-participating FFI):
– Upon Non-participating FFI receives payment from US source, 30% withholding tax imposed
– Upon Clients of Non-participating FFI receives payment from US source, 30% withholding tax imposed.

CRS – Common Reporting Standard

It is an international treaty signed among member jurisdictions.

Legal basis is “Convention on mutual Administrative Assistance in Tax Matters” which was originally signed by OECD member jurisdictions in 1988; Amended in 2010. Currently 121 member jurisdictions are CRS Members.

In 2014, G-20 Nations declared that OECD jurisdictions to adopt CRS rules
This means, member jurisdictions pass national legislation(s):
       Example in HK
“The Inland Revenue (Amendment) Ordinance 2016”
                    => Commenced Operation in 2016 and implemented AEOI
        “The Inland Revenue (Amendment) Ordinance 2019”

Since 2014, member states enter individual treaty/agreeement, and such treaty/agreement sometimes carry different terms.

Overall, CRS has similarities to FATCA rules whilst actual operation may be different.

CRS Obligations
FI must: –

a. Conduct due diligence to identify financial accounts held by
(a) tax residents of reportable jurisdictions
(b) passive non-financial entities whose controlling persons are tax resident of reportable jurisdictions

Example – Hong Kong
Through certifications:    https://www.ird.gov.hk/eng/tax/aeoi/self_cert.htm
       => similar to W-9, W-8BEN, W-8BEN-E, etc.

b. FI reports to HK Inland Revenue Department Annually regarding financial accounts from the reportable jurisdictions
– [contract with FATCA Model 2 where report to IRS directly]
– Information uploaded to AEOI portal will be automatically exchanged with reportable jurisdictions
         => AEOI = Automatic Exchange of Information

What is Reportable Jurisdiction (US is excluded)
– https://www.oecd.org/tax/automatic-exchange/international-framework-for-the-crs/exchange-relationships/
– Also, agreement entered between HK and CRS jurisdiction and terms may be different

What is Tax Resident (HK standard)?
Individual – person’s physical presence or stay in a place for more than 183 days
Corporation – place or incorporation or where central management and control of the entity lies

In case you need technical advice on compliance with FATCA or CRS, please contact Visence Professional Services.

Company Law/Hong Kong

How to utilize Hong Kong for Investment into China (Dated 18 February 2022)

2022年2月19日 by j.obara / 0 Comment

These days, we often receive an inquiry from global business leaders: “what will happen to Greater China economy, when the China-US tension eases}. As geopolitics depend on various competing factors involving state actors, it is not possible to predict what will happen in the region in 2-to-3-year time. Having mentioned this, in this article, while shying away from political sentiments and views, purely based on facts on the ground, we strive to analyze the prospect of the Greater China economy. Thereafter, based on the aforementioned analysis, we will introduce how to utilize Hong Kong as the best venue to conduct business for foreign enterprises in Greater China, and how to manage risks.

The current situation in the Greater China and Hong Kong as follows:

Greater China is the second largest economy in the world (although data to calculate GDP should be verified due to vastness of geography), and despite the economic deterioration, the economy is growing.
Real estate bubble has burst, but the economy in the main cities have thrived and enough room for the central government to implement Common Prosperity in order to flat the disparity between the rich and poor (wealth distribution).
Particularly, following US silicon valley, in Shenzhen has developed as a hub for AI and IOT technologies which attract investment activities, and it is expected to grow. However, a lot of western countries may not have access to the Shenzhen market.
Fundamentally, China is based on the socialistic political system, although the measure of government depends on the elites in power. Such system is different from the Western Democratic system. Due to the differing political ideologies, there are diplomatic tension between the Western countries and Japan. In terms of relations with Taiwan, as of this stage, there are no specific policy which has been implemented.

Hong Kong

The so-called Democratic movement has commenced in 2014, and the democratic movement has become active in 2019. Given the democratic movement was said to be influenced by foreign forces, the National Security Law was enacted which policed criminal acts involving incitement. Adding the spread of COVID and Omicron, the democratic movement has been placated.
Based on the Joint Declaration entered with the United Kingdom under which “one country, two systems” is supposed to last until 2047, the political policies have been assessed. Many Hong Kong residents have moved to North America, United Kingdom, Europe, Japan or Taiwan just like the time back in 1997.
Western Countries like Google may move out of Hong Kong or reduce the operation in Hong Kong, but many of the international financial institutions continue to station in Hong Kong, which supports the investment activities involving foreign investors from around the world. In addition, as contrary to Google and other IT related companies’ policies, the investment into Hong Kong based data center is increasing.

This article does not take position on either way. Based on the neutral view, the analytical result is as follows:

Based on purely on the trend infused by the international relations and feeling or sentiment affected by global social media, turning back on the second largest economy could be a questionable business strategies.

Shenzhen being the hub for AI and IOT has been influenced by Silicon valley and Japanese technologies. However, to make the technologies on their own, the local custom and/or human resources have contributed the growth of such industry.

The National Security Law is managed in the socialist national system, but the incitement or treason can be found in the criminal law in other countries. Also, the judiciary and executive branches are categorically different. However, the fact that there are no blessings from the Western countries, careful explanation in order to have common understanding may be needed.

In early 1990’s, Hong Kong people and businesses have relocated to other countries ahead of 1997 HK Handover from the UK. The current “exodus” follows the similar pattern. In the case of 1997 exodus, after the SARS crisis in 2003, around 2005, a lot of Hong Kong people returned and many businesses and talents returned to Hong Kong, which fueled the growth of Hong Kong economy. If there are cycles for Hong Kong economy, statistically, 2019 could be the bust of the cycle, and economic growth may be expected in due course. Once the international political tension or perception eases, people will return to Hong Kong, as the international finance city.

There are people who believes such geopolitical risk a business chance. The prominent US investor and found of hedge fund Bridge Water Associates, Mr. Ray Dalio has recently injected additional capital into Alibaba group. Now may be the time to get closer to the Chinese business people who can return the investment in due course. https://www.bloomberg.com/news/articles/2022-01-25/dalio-says-u-s-divisions-pose-risk-for-2024-election-upheaval

However, for ordinary investors and business people, geopolitical risks cannot be controlled. As such, we need to have a plan B when making business decisions in relations to China. To risk manage, Hong Kong is the ideal place as the gateway to China. In addition, utilization of offshore entity such as BVI, Cayman, Seychelles and Singapore) could be beneficial in case the situation in Hong Kong abrupt and drastic changes. Such offshore entity can be registered as a foreign entity in Hong Kong, and bank account can be opened in Hong Kong. But at the same time, such company should have a secondary bank account outside of Hong Kong, and funds should be periodically pooled in such third country’s bank account.

We sincerely hope that the geopolitical tension eases soon. For use of Hong Kong or offshore entities, please consult Visence Professional Services.

Company Law/Company Secretary

Hong Kong Company Chop

2022年2月18日 by j.obara / 0 Comment

Here are the images of companies chops used in Hong Kong.

Whilst there are various ways to call them, 1 is called “Round Chop”, 2 is called “Square Chop”, and 3 is called “Common Seal”.

Legal Requirements

First, the Hong Kong Companies Ordinance does not require Round Chop and Square Chop, and a company can now choose to use the Common Seal after the 2014 Amendment to the Companies Ordinance. However, it is needed as a business practice in Hong Kong, so it is needed after all.

It is necessary for the board of directors to approve the seal as a company. Normally, approval is given by First Board Resolution when the corporation is established.

Use of Chops

Round Chop is mainly a seal which is stamped when there is a delivery. You may also be asked to seal your seal when submitting to a government agency. Some companies stamp invoices and receipts, but this is not a legal requirement.

Looking at the letters engraved on the Square Chop,

For and on behalf of Visence Professional Services Limited (corporate name)

—————————————————————————-

Authorized Signator(ies)　

The person who has the authority to sign the corporation signs on the dotted line (—–). Therefore, Square Chop is often used for contracts. However, as mentioned above, it is required by Hong Kong business practices, not legal requirements, so if the contractor asks you to seal the Square Chop, we will do so. Under the Hong Kong Companies Act, if you write “For and on behalf of (corporate name)” and sign it, the representative of the corporation will be signing and you will be able to conclude a contract as a corporation. So be careful.

The Common Seal is required to issue a special deed called Deed. The company name is engraved on the inside of the iron tool, and it is printed by tightening the gold / red sticker and paper. By issuing a Deed, it is possible to maintain not only the rights of the contracting parties but also the contingency (I will explain at another time).

Suppliers

When the corporation is established, I ask a printing shop to create a green box, but it is inside the green box. If you need it, you can buy it at Ma Wah Lane in Sheung Wan.

Banks and financial institutions

For security reasons, some corporations may register a company chop (Square Chop) and a signature to prevent deposits and withdrawals without two requirements. However, if you have not registered, Company Chop is not required for banking transactions. However, please note that even in financial transactions, a company chop is required for pension (MPF) related notification forms.

Company Law/Company Secretary

HK Companies Registry – Protection of Personal Information

2022年2月18日 by j.obara / 0 Comment

In the Circular issued by the Hong Kong Companies Registry on 16 August 2021, in order to strengthen the protection of personal information, in case the director or company secretary who is a natural person, he or she may choose not to disclose the Hong Kong ID (or passport) or residential address.

There will three phases to implement this new measures:

Phase 1　23 August 2021
Phase 2 24 October 2022
Phase 3　27 December 2023

After 23 August 2021 (i.e. Phase I), if you choose not to withhold disclosure of your Hong Kong ID, you will only need to include the first four letters of the Hong Kong ID or Passport. If you choose to withhold disclosure of your residential address, you may enter the registered address of the company it relates to director or company secretary.

However, as a condition for this new measure, the information must be strictly managed by the corporation, so it may be possible for police authorities to enter the subject of a money laundering investigation in the future. In addition, we cannot deny the possibility that an on-site inspection will be conducted on the corporation in order to confirm that it is being properly stored in the future.

When Phase 2 commences, it is possible to reserve the information itself instead of retaining the information. Instead, the legal entity will submit the information to the Companies Registry.

When Phase 3 starts, the owner of personal information can withhold disclosure by notifying the Companies Registry.

However, it is not clear how will financial institutions may verify their identities when information disclosure is withheld. Principals, agents, shareholders, trustees (bankrupt companies), investigative authorities, lawyers, certified accountants, and financial institutions can access the information by applying to the Companies Registry.

Notwithstanding the above, the names and addresses of shareholders will be stated in the annual report NAR1).

Company Law/Company Secretary

What is a Company Secretary?

2022年2月18日 by j.obara / 0 Comment

In common-law corporate settings, in addition to shareholders and directors, there is a position called Company Secretary. Although the Company Secretary is not directly involved in management decisions, it is a core position that oversees back office operations in company management.

The general duties of a company secretary are:

Convening, holding, and proceeding with the Board of Directors (Board of Directors) or the General Meeting of Shareholders (Council)
Preparation and management of minutes and approval documents
Contact work with external experts regarding the creation and submission of registries
Accounting book preparation Contact work with accounting auditors, preparation and submission of tax documents Contact work with tax accountant
Creating a company manual
Compliance support (including anti-maneron and identity verification work)
Management of various legal documents
Providing meeting arrangements and interpreting services to management as needed
Other operations required by management in company management ・

The advantage is that the company secretary can supervises the clerical work, shareholders and directors can focus on essential part of the company management. In fact, appointing a company secretary may be statutory requirement in some jurisdictions. Due to the complexity that it requires, Company Secretaries tend to be lawyers and accounting professionals.