Shenzhen bourse taps intelligence tech firm as China battles capital market fraud

SHANGHAI  – The Shenzhen Stock Exchange has sought help from an intelligence technology firm to detect fraud and vet listings, said people with knowledge of the matter, as China adopts high-tech weaponry against crime and corruption in its bid to attract investors.

The bourse has been testing EC Guard’s technology in recent weeks and staff have had training, said the people, declining to be identified as they were not authorised to speak with media.

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

The initiative is in line with thinking at Shanghai’s bourse whose president in a parliamentary session this week proposed combating fraud with big data and artificial intelligence.

Pressure to upgrade regulatory technology, or RegTech, in China’s $57 trillion financial industry has increased as the government reforms capital markets and weeds out corruption.

Last month, the anti-graft agency said it would stop the “revolving door” of former regulators joining banks and leveraging regulatory connections, while the securities regulator – which said it uncovered nearly 100 accounting scams last year – vowed “zero-tolerance” toward corruption.

The regulator itself was dragged into a high-profile corruption case in 2021 when a former official was found to have made illegal gains from investing in listing candidates.

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

Underwriters have to increase scrutiny to company documents as well as examine executive cash flows and related transactions to ensure listing applicants can pass rigid health checks from increasingly savvy authorities, the banker said.

China’s Palantir

EC Guard was established in 2002 and modeled after U.S. big data analytics firm Palantir Technologies Inc, showed August bourse filings by business partner Xiamen Jihong Technology Co Ltd. Its five main clients are security and law enforcement departments, the filing showed.

The United States in 2019 placed EC Guard on its so-called entity list of companies that are subject to U.S. trade restrictions for reasons such as national security.

The Shenzhen exchange has not signed any agreement with EC Guard but, like other regulators and regulator affiliates, is looking for better tools to cleanse the securities market, one of the people said.

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

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

Using that technology, EC Guard can identify relationships between users helping regulators identify potential illegal activity and also trace a company’s ultimate shareholders to ensure they are legitimate owners, the person said.

The Shanghai Stock Exchange, the country’s largest bourse, stepped up its fight against fraud in December with a new generation of systems that supervise securities trading.

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

The exchange has disclosed 2021 technology investment of about 1.6 billion yuan ($229.5 million), nearly double that of a year earlier.

($1 = 6.9723 Chinese yuan renminbi)