Introduction: How to Use This Checklist

This checklist is designed to assist professionals in the financial services industry in conducting comprehensive due diligence. It covers a range of documents and information, from the most critical to important, suitable for various scenarios such as mergers and acquisitions, investments, or regulatory reviews. Users should adapt the checklist flexibly according to specific circumstances, ensuring comprehensive coverage of all relevant areas. Remember that due diligence is a dynamic process and may require adjustments and in-depth investigations based on initial findings. It is recommended to work closely with legal, financial, and industry experts to make the most of this checklist and ensure the comprehensiveness and accuracy of the investigation.

⭐⭐⭐⭐⭐ Most Critical Documents

1. Certificate of Incorporation
   • Explanation: Proves the company’s legal existence and basic details.
   • Example: Official certificate issued by the Companies Registry in Hong Kong.
2. Regulatory Licenses and Permits
   • Explanation: Essential for the firm’s legal operation in the financial services sector.
   • Examples:
     • SFC (Securities and Futures Commission) licenses
     • HKMA (Hong Kong Monetary Authority) authorizations
     • Any other relevant regulatory approvals
3. Recent Inspection Reports or Audit Findings
   • Explanation: Show the company’s current compliance status and any potential issues.
   • Examples:
     • SFC inspection reports
     • Internal audit reports
     • External regulatory audit findings
4. Audited Financial Statements (Last 3 Years)
   • Explanation: Provide a comprehensive view of the company’s financial health and performance trends.
   • Examples:
     • Balance sheets
     • Income statements
     • Cash flow statements
     • Auditor’s opinions and notes
5. Capital Adequacy Reports
   • Explanation: Demonstrate the firm’s compliance with regulatory capital requirements.
   • Examples:
     • Liquid capital computation (for licensed corporations)
     • Capital adequacy ratio calculations
     • Reports submitted to regulators on capital adequacy
6. Employee and Agent Registration with Regulatory Bodies
   • Explanation: Ensures all staff are properly licensed and registered as required by law.
   • Examples:
     • SFC licensing records for Responsible Officers and Licensed Representatives
     • HKMA registration for Relevant Individuals (for banking-related activities)
7. List of Responsible Officers and Licensed Representatives
   • Explanation: Identifies key personnel critical for maintaining regulatory licenses.
   • Example: Comprehensive list including:
     • Names
     • Positions
     • License types and numbers
     • Dates of appointment
8. AML Compliance Program and Guidelines
   • Explanation: Crucial for preventing money laundering and terrorist financing.
   • Examples:
     • AML policy document
     • Customer due diligence procedures
     • Suspicious transaction reporting guidelines
     • Risk assessment methodology
9. Know Your Customer (KYC) Policies and Procedures
   • Explanation: Essential for client onboarding and ongoing monitoring.
   • Examples:
     • Client identification and verification procedures
     • Risk rating methodology for clients
     • Ongoing monitoring processes
     • Enhanced due diligence procedures for high-risk clients

⭐⭐⭐⭐ Very Important Documents

10. Articles of Association
    • Explanation: Outlines the company’s internal rules and management structure.
    • Example: Full, current Articles of Association document.
11. Business Registration Certificate
    • Explanation: Confirms the company’s right to operate in Hong Kong.
    • Example: Current Business Registration Certificate issued by the Inland Revenue Department.
12. Register of Directors, Shareholders, and Secretaries
    • Explanation: Provides a clear picture of the company’s ownership and management.
    • Example: Up-to-date registers including all current and past office holders.
13. Corporate Structure Chart
    • Explanation: Illustrates the company’s organizational structure and relationships.
    • Example: Diagram showing all entities, subsidiaries, and ownership percentages.
14. Summary of Business Activities
    • Explanation: Outlines the core business and potential risks/opportunities.
    • Example: Detailed description of all services offered, target markets, and revenue streams.
15. Revenue Reports and Tax Filings
    • Explanation: Demonstrate financial performance and tax compliance.
    • Examples:
      • Profit and loss statements by business line
      • Tax returns and associated schedules
      • Any correspondence with tax authorities
16. List of Subsidiaries, Branches, and Associated Companies
    • Explanation: Identifies all related entities and potential liabilities.
    • Example: Comprehensive list with ownership percentages, jurisdictions, and brief descriptions of activities.
17. Shareholding Structure of Each Entity
    • Explanation: Clarifies ownership and control across the group.
    • Example: Detailed breakdown of shareholding for each entity, including any nominee arrangements.
18. Correspondence with Regulatory Authorities
    • Explanation: Reveals any ongoing regulatory issues or concerns.
    • Examples:
      • Letters from SFC or HKMA
      • Responses to regulatory inquiries
      • Applications for new licenses or exemptions
19. Compliance Certificates and Reports
    • Explanation: Demonstrate ongoing regulatory compliance.
    • Examples:
      • Annual compliance reports
      • Certificates of compliance with specific regulations
      • Internal compliance review reports
20. Details of Ongoing or Past Litigation
    • Explanation: Identifies legal risks and potential financial liabilities.
    • Examples:
      • List of all current and past (3-5 years) legal proceedings
      • Court documents for significant cases
      • Legal opinions on material litigation

⭐⭐⭐ Important Documents

21. Share Certificates Issued
    • Explanation: Provide evidence of ownership for all shares in the company.
    • Example: Copies of all share certificates issued to current shareholders.
22. Minutes of Board and Shareholder Meetings
    • Explanation: Offer insights into key decisions and corporate governance.
    • Examples:
      • Minutes of all board meetings for the past 3 years
      • Minutes of annual general meetings and any extraordinary general meetings
23. List of Jurisdictions Where the Company Operates
    • Explanation: Helps identify potential regulatory and tax obligations in different locations.
    • Example: Comprehensive list including:
      • Countries/regions of operation
      • Nature of activities in each jurisdiction
      • Relevant licenses or registrations held in each jurisdiction
24. Organizational Chart of the Company
    • Explanation: Illustrates the internal structure and reporting lines.
    • Example: Detailed chart showing:
      • Departments and divisions
      • Reporting structures
      • Key personnel positions
25. Transaction Agreements Related to Share Transfers, etc.
    • Explanation: Document changes in ownership structure.
    • Examples:
      • Share purchase agreements
      • Share transfer forms
      • Option agreements
26. Proof of Payment of Regulatory Fees
    • Explanation: Demonstrates compliance with ongoing regulatory obligations.
    • Examples:
      • Receipts for annual SFC licensing fees
      • Proof of payment for other regulatory charges
27. Correspondence with Legal Counsel Regarding Litigation
    • Explanation: Provides insights into legal strategies and risk assessment.
    • Examples:
      • Legal opinions on significant cases
      • Strategy memos from external counsel
      • Case assessment reports
28. Cash Flow Projections
    • Explanation: Indicate the company’s financial planning and expectations.
    • Example: Detailed cash flow forecasts for the next 12-24 months, including assumptions used.
29. Correspondence with Lenders and Compliance Reports
    • Explanation: Show the company’s relationship with its financiers and compliance with loan covenants.
    • Examples:
      • Loan compliance certificates
      • Correspondence regarding any covenant breaches or waivers
      • Periodic reports submitted to lenders
30. Employment Agreements for Key Personnel
    • Explanation: Outline terms for critical staff, including any non-compete clauses.
    • Examples:
      • Contracts for C-suite executives
      • Agreements for top revenue generators
      • Contracts for key Responsible Officers
31. Employment Contracts and Severance Agreements
    • Explanation: Show standard employment terms and potential liabilities.
    • Examples:
      • Template employment contracts
      • Any significant severance or golden parachute agreements
32. Compensation and Bonus Structures
    • Explanation: Detail how the company incentivizes its staff.
    • Examples:
      • Compensation policies
      • Bonus calculation methodologies
      • Long-term incentive plans
33. Records of Professional Development and Qualifications
    • Explanation: Demonstrate compliance with regulatory requirements for staff competency.
    • Examples:
      • Training logs for Continuous Professional Training (CPT)
      • Copies of relevant professional qualifications
      • Records of internal training programs
34. Organization Chart with Roles and Responsibilities
    • Explanation: Provides a detailed view of the company’s structure and key personnel.
    • Example: Comprehensive chart including:
      • Names and titles of all key staff
      • Brief description of roles and responsibilities
      • Reporting lines
35. Records of Training and Compliance Monitoring (Anti-corruption)
    • Explanation: Show the company’s efforts to prevent corruption and bribery.
    • Examples:
      • Anti-corruption training materials
      • Attendance logs for training sessions
      • Reports from compliance monitoring activities
36. Records of Internal Data Protection Assessments
    • Explanation: Demonstrate the company’s efforts to comply with data protection regulations.
    • Examples:
      • Data protection impact assessments
      • Internal audit reports on data protection practices
      • Action plans addressing any identified data protection issues
37. Standard Forms and Documents for Data Collection
    • Explanation: Show how the company collects and manages client data.
    • Examples:
      • Client onboarding forms
      • Data consent forms
      • Privacy notices
38. List of Key IT Systems and Software Licenses
    • Explanation: Outlines the company’s technological infrastructure and associated obligations.
    • Example: Comprehensive list including:
      • Names and purposes of key software systems
      • License terms and renewal dates
      • Any material IT service contracts

Instructions for Using This Checklist

1. Prioritize the collection and review of documents based on their star rating, starting with 5-star items and working down.
2. For each document, ensure you have the most recent version and, where applicable, historical data (typically 3-5 years).
3. If a document is not available or not applicable, note the reason why.
4. Pay special attention to any red flags or inconsistencies in the documents, particularly in high-priority items.
5. Cross-reference information between documents to ensure consistency and identify any discrepancies.
6. For complex documents, consider creating summaries or indexes to aid in navigation and understanding.
7. Maintain a log of questions or issues that arise during the document review process for follow-up.
8. Remember that the relative importance of documents may shift based on specific circumstances or findings during the due diligence process.
9. Consult with legal and financial experts as needed, especially for interpreting complex regulatory or financial documents.
10. Ensure all sensitive documents are handled securely and in compliance with confidentiality agreements.

This checklist provides a comprehensive framework for conducting due diligence on a financial services firm. However, it should be adapted as necessary to fit the specific circumstances of the target company and the nature of the proposed transaction.