How Sponsors Handle Sanctions and Export Control Compliance Risks for the Listing Applicant

The SFC’s 2025 thematic inspection findings, published in SFC Bulletin No. 87 (March 2025), identified sanctions and export control compliance as the single most frequently cited deficiency in sponsor due diligence for listing applicants with cross-border operations. Of the 28 sponsor inspections completed in the 2024-2025 cycle, 22 involved applicants with material exposure to jurisdictions subject to US, EU, or UN sanctions regimes, and in 17 of those cases, the SFC found the sponsor’s work programme “inadequate in scope or depth” to assess whether the applicant’s supply chain, customer base, or beneficial ownership structure breached applicable restrictions. The consequence is direct: under SFC Code of Conduct paragraph 5.1A (effective 1 January 2024), a sponsor that fails to identify a sanctions exposure that later materialises during the listing process may face enforcement action, including suspension of its Type 6 licence. This article sets out the current regulatory framework, the specific due diligence steps the SFC expects, and the practical structures sponsors should examine in an applicant’s corporate tree.

The Regulatory Baseline: What the SFC and HKEX Now Require

The SFC’s enhanced expectations are codified in the revised Code of Conduct for Persons Licensed by or Registered with the SFC, specifically paragraph 5.1A(c)(ii), which requires a sponsor to “take reasonable steps to satisfy itself that the listing applicant and its directors are not, and are not likely to become, subject to any sanctions, export controls, or trade restrictions that would materially affect the applicant’s business or the listing’s viability.” This is not a standalone obligation: it sits within the broader “reasonable due diligence” requirement under HKEX Listing Rule 3A.02 and the sponsor’s duty under the SFC’s Sponsor Regulation Guidelines (2019) to assess “all material risks” before submitting a listing application.

The 2025 SFC Inspection Findings as a De Facto Standard

The SFC’s 2025 Bulletin No. 87 provides the most granular guidance available. In the 17 deficient cases, the common failure was not the absence of a sanctions check but the sponsor’s reliance on a single-source screening tool — typically a commercial database such as Dow Jones Risk & Compliance or World-Check — without independent verification. The SFC noted that in 12 cases, the screening covered only the applicant’s legal name and registered address, ignoring trading names, brand names, and the beneficial owners of intermediate holding companies in BVI or Cayman. The SFC’s expectation, stated explicitly in the Bulletin, is that a sponsor must “cross-reference at least two independent screening sources and conduct a manual review of the applicant’s top 20 customers, top 10 suppliers, and all directors and substantial shareholders against the relevant sanctions lists.”

The HKEX’s Parallel Requirement in Listing Documents

HKEX Listing Rule 11.07 requires the listing document to contain “a statement as to whether the applicant or any of its subsidiaries is subject to any sanctions, export controls, or trade restrictions.” The SFC’s February 2024 circular on “Disclosure of Sanctions Risks in Listing Documents” (SFC Circular 24-02) clarifies that this statement must be more than a boilerplate disclaimer: it must name the specific sanctions regimes to which the applicant is exposed (e.g., OFAC’s Specially Designated Nationals List, the EU’s Consolidated Sanctions List, or the UN Security Council Consolidated List) and, where exposure exists, describe the measures the applicant has taken to comply. A sponsor that signs off on a listing document containing a generic “no material sanctions exposure” statement without the underlying work programme risks breaching both the Code of Conduct and the SFC’s Sponsor Regulation Guidelines paragraph 4.3(b).

Practical Due Diligence: Mapping the Corporate Tree and Supply Chain

The core challenge for sponsors is that sanctions exposure rarely sits at the holding company level. The listing applicant in Hong Kong is typically a Cayman or Bermuda holding company, with operating subsidiaries in the PRC, Southeast Asia, or other jurisdictions. The sanctions risk is embedded in the operating subsidiaries’ counterparties, end-users, and logistics providers.

Beneficial Ownership and the BVI/Cayman Layer

The SFC’s 2025 inspection findings specifically flagged the BVI and Cayman intermediate holding companies as a “blind spot” in sponsor due diligence. Under the SFC’s expectations, a sponsor must request and review the register of members and the register of directors for each intermediate holding company in the corporate tree, not just the ultimate holding company. This is because a sanctioned entity may hold shares through a BVI vehicle that does not appear on the applicant’s public filings. The SFC’s standard is that a sponsor must “identify all persons holding 10% or more of the voting rights or equity interests in any entity in the corporate chain and screen each such person against the applicable sanctions lists.” For a typical PRC-based applicant with a Cayman holding company and three BVI intermediate vehicles, this means screening at least 15 to 25 individuals and entities beyond the applicant’s own directors and substantial shareholders.

Supply Chain Screening: Beyond the First Tier

The HKEX’s Listing Decision LD132-2024 (November 2024) illustrates the consequences of inadequate supply chain screening. In that case, the listing applicant — a PRC-based manufacturer of industrial components — sourced 40% of its raw materials from a supplier registered in Hong Kong. The sponsor’s sanctions screening covered only the supplier’s Hong Kong entity. After the listing application was filed, the SFC discovered that the supplier’s ultimate parent was a company on the OFAC’s Entity List. The listing was withdrawn, and the sponsor faced an SFC disciplinary inquiry. The HKEX’s decision stated that the sponsor should have “traced the supply chain to the level of the ultimate parent and the country of origin of the raw materials, and screened each entity in that chain against the relevant sanctions lists.” For sponsors, this means that a standard work programme must include a supply chain mapping exercise that identifies the top 10 suppliers by value, their ultimate parents, and their countries of registration and operation.

Jurisdictional Nuances: PRC and Hong Kong Cross-Border Exposure

The intersection of PRC and Hong Kong regulatory frameworks creates unique compliance risks that a sponsor must address.

The PRC Export Control Law and Its Interaction with US Sanctions

The PRC Export Control Law (effective 1 December 2020) imposes its own licensing requirements on the export of “controlled items” — defined broadly to include dual-use goods, military items, and certain technologies. A PRC-based applicant that exports to a country subject to US sanctions, such as Iran or North Korea, may be simultaneously violating the PRC law (if the export is not licensed) and US secondary sanctions (if the export involves US-origin components or technology). The sponsor must assess both regimes. The SFC’s 2025 Bulletin notes that in three cases, sponsors had assessed only US sanctions exposure and failed to consider whether the applicant’s PRC export licence was valid and current. The SFC’s expectation is that a sponsor must obtain and review the applicant’s PRC export licence, confirm its validity with the Ministry of Commerce, and assess whether any of the applicant’s exports to sanctioned jurisdictions are within the scope of the licence.

Hong Kong’s Own Sanctions Regime and the Banking Angle

Hong Kong does not maintain a standalone sanctions regime; it implements UN Security Council resolutions through the United Nations Sanctions Ordinance (Cap. 537) and the United Nations (Anti-Terrorism Measures) Ordinance (Cap. 575). However, HKMA circulars — particularly HKMA Circular 2023-12-01 on “Sanctions Compliance for Authorised Institutions” — impose obligations on banks that act as sponsors’ placing banks or the listing applicant’s receiving banks. If a sponsor’s due diligence fails to identify a sanctions exposure, the bank may refuse to process the listing proceeds, creating a material liquidity risk for the applicant. The HKMA’s expectation is that a sponsor must “obtain from the applicant’s principal bankers a written confirmation that the applicant’s accounts are not subject to any freeze or restriction arising from sanctions, and that the bank has no reason to believe the applicant is in breach of any applicable sanctions regime.”

Closing: Three Actionable Takeaways for Sponsors

1. Expand the screening universe beyond the applicant’s legal name and registered address to include all intermediate holding companies, all directors and substantial shareholders of each such company, and the top 10 suppliers’ ultimate parents and countries of operation, cross-referenced against at least two independent sanctions databases.

2. Obtain and review the PRC export licence for any applicant that exports controlled items, confirm its validity with the Ministry of Commerce, and document in the sponsor’s work programme whether any exports to sanctioned jurisdictions fall within the licence’s scope.

3. Secure written confirmation from the applicant’s principal bankers that no account is subject to a sanctions-related freeze or restriction, and include that confirmation in the sponsor’s due diligence file as a condition precedent to filing the listing application.