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HKEX raises disciplinary action against Chinese lottery group

The Stock Exchange of Hong Kong (HKEX) has raised disciplinary action against China lottery business operator China Ecotourism Group to curb problematic lending transactions.

Exchange raises
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The Stock Exchange of Hong Kong (HKEX) has raised disciplinary action against China lottery business operator China Ecotourism Group, a concerted effort of Hong Kong regulators to curb problematic lending transactions and to improve listed issuers’ governance over material loans, including loans to support the development of lottery business.

With the assistance of the Securities and Futures Commission (SFC), The Exchange's investigation has uncovered evidence revealing that portions of loan proceeds were transferred to individuals and/or entities associated with executive directors Ms. Chan Tan Na Donna and Ms. Lau Ting. Additionally, part of the subscription funds intended for investment were redirected to the personal account of Ms. Chan’s husband. These transactions raised suspicions of undisclosed arrangements involving the directors and borrowers.

Despite purported intentions for the loans to support the development of the company’s lottery business in China and the Philippines, there is no evidence indicating that the funds were utilised for this purpose. Furthermore, all borrowers defaulted on their obligations.

Similarly, an investment meant for shares in a company owned by one Ms. Kang to advance blockchain technology in the lottery business did not materialize as planned. The subscription funds were not remitted to the intended recipient but instead to a third party at the instruction of Ms. Kang, who subsequently became unreachable.

The loans and investment lacked adequate due diligence, risk analysis, and credit assessment. As a result, they posed a significant risk to the company's assets and financial stability. Substantial impairment losses totaling HK$473.1 million were recognized for the financial years ended 2018 and 2019, indicating the severity of the situation.

Moreover, the board repeatedly assured the company's auditors between 2014 and 2017 that the loans were recoverable, despite evidence of defaults and lost contact with borrowers. Directors responsible for oversight, including members of the audit committee, failed to scrutinize these assurances adequately.

Overall, the directors' failure to ensure proper internal controls and risk management systems has jeopardised shareholders' interests. The company's lending practices have been subject to scrutiny, emphasising the importance of robust oversight and controls to protect shareholder value.

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