The Securities and Futures Commission (“SFC”) has reprimanded and fined Citigroup Global Markets Asia Limited (“Citi”) $57 million after resolving concerns with Citi over its discharge of duties as a sponsor in relation to the listing application of Real Gold Mining Limited (“Real Gold”).
An SFC investigation revealed that Citi had failed to (i) conduct adequate and reasonable due diligence on Real Gold’s customers and (ii) properly supervise its staff when carrying out the sponsor work on Real Gold’s listing application.
Real Gold, established in Mainland China, owned three gold mines in Chifeng Municipality, Inner Mongolia, and specialised in the mining of gold and the processing of ore into concentrates containing gold and other minerals for subsequent sale, according to the company’s 2009 prospectus (“Prospectus”).
The Prospectus disclosed that Real Gold’s sales increased by more than twenty-fold between the year ended 31 December 2007 and the 10 months ended 31 October 2008 (being respectively the last full year and the last 10 months of the track record period).
The SFC found that information provided to Citi during its due diligence inquiries showed that apart from one customer, the customers of Real Gold for the two periods were completely different.
The Prospectus also disclosed that Real Gold had entered into a memorandum of long-term cooperation (“MLC”) with each of three customers who contributed to an aggregate of 35.2% of Real Gold’s sales in the 10 months ended 31 October 2008. Pursuant to the MLCs, the customers were obliged to purchase whatever amount of gold or zinc concentrates Real Gold decided, in its absolute discretion, to sell them.
While Citi did conduct some customer-related due diligence on Real Gold, the SFC considers it inadequate and substandard, for instance, Citi conducted all customer interviews by telephone on telephone numbers provided by Real Gold, without independently verifying the identities and contact details of the representatives of the customers. The SFC considers that Citi’s approach towards customer due diligence was not justified by the relevant regulatory requirements and the SFC’s view is supported by the opinion of an independent market expert. The SFC’s investigation also found that the due diligence work conducted on Real Gold’s customers was handled by junior and inexperienced staff members of Citi with little supervision.
In addition, the SFC’s investigation also found that the sponsor principals did not supervise the transaction team in the manner expected of them under the Additional Fit and Proper Guidelines for Corporations and Authorized Financial Institutions applying or continuing to act as Sponsors and Compliance Advisers.
In view of the deficiencies in Citi’s due diligence work identified above, notwithstanding Citi’s view that its approach to due diligence was the result of a reasoned weighting of production-related concerns over customer-related concerns, it appeared that Citi was in breach of its undertaking and declaration to SEHK.
For details of the SFC’s investigation on Citi, please click here.
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