Exclusive: Shenzhen Stock Exchange Resorts to Intelligence Company as China Fights Capital Market Fraud

SHANGHAI, March 10 (Reuters) – The Shenzhen Stock Exchange has asked an intelligence firm for help to uncover fraud and veterinary lists, people familiar with the matter said, even as China uses high-tech weapons against crime and corruption to attract investors .

The exchange has been testing EC Guard’s technology for the past few weeks and staff have been trained, said the people, who declined to be identified as they were not authorized to speak to the media.

The Shenzhen Stock Exchange did not respond to Reuters’ request for comment. EC Guard declined an interview.

The initiative is in line with deliberations by the Shanghai Stock Exchange, whose president proposed in a parliamentary session this week to fight big data and artificial intelligence fraud.

Pressure to improve regulatory technology (RegTech) in China’s $57 trillion financial industry has increased as the government reforms capital markets and stamps out corruption.

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Last month, the anti-graft agency said it would stop the “revolving door” of former regulators joining banks and using regulatory ties, while securities regulators – which said they uncovered nearly 100 accounting frauds over the past year – had “zero tolerance.” promised corruption.

The regulator itself found itself embroiled in a high-profile corruption case in 2021 when a former official was found to have made illegal profits by investing in candidate listings.

China is also reforming initial public offering (IPO) rules to speed up listings. At the same time, exchanges are tightening screening procedures, a Shanghai-based banker said.

Underwriters must scrutinize company documents more closely, as well as examine executive cash flows and related transactions, to ensure applicants for listings can pass rigorous health checks from increasingly sophisticated regulators, the banker said.

CHINA’S PALANTIR

Established in 2002, EC Guard was modeled after US big data analytics firm Palantir Technologies Inc (PLTR.N), which showed August stock documents from business partner Xiamen Jihong Technology Co Ltd (002803.SZ). Its five main customers are security and law enforcement agencies, the filing showed.

The United States added EC Guard to its so-called corporate list of companies subject to US trade restrictions for reasons such as national security in 2019.

The Shenzhen Stock Exchange has not signed an agreement with EC Guard, but like other regulators and related regulators, it is looking for better tools to clean up the securities market, one of the people said.

The exchange has already invested heavily in RegTech. In 2021, Deloitte helped build a company profile model to detect accounting fraud.

EC Guard collects information from public sources, but has technology that can scour the deep web — sites invisible to traditional search engines — and the dark web — encrypted cyberspace ripe for illegal activity — one of the people said .

With this technology, EC Guard can identify relationships between users, which helps regulators identify potential illegal activity, and also track a company’s ultimate shareholders to ensure they are legitimate owners, the person said.

The Shanghai Stock Exchange, the country’s largest stock exchange, stepped up its anti-fraud efforts in December with a new generation of systems to monitor securities trading.

Cai Jianchun, the bourse’s president, said this week that government agencies should share data and that fighting accounting fraud requires cutting-edge technology.

The exchange has announced technology investments of about 1.6 billion yuan ($229.5 million) for 2021, nearly double the year-ago figure.

($1 = 6.9723 Chinese renminbi yuan)

Reporting by the Shanghai newsroom; Edited by Sumeet Chatterjee and Christopher Cushing

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