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Countering Money Laundering In Capital Markets

Updated: Apr 2

In a recent Thematic Review, the FCA identifies shortcomings in the approach taken to anti-money laundering in capital markets [TR19/4] (link below)


This follows the guidance on a risk-based approach for the securities sector published by the FATF in October 2018 which is broader in scope (link below)


The focus of the FCA thematic review is on secondary not primary markets and on equities not fixed income.


‘Brokers can also be used to facilitate … money laundering, if they fail to question or investigate suspicious activity when confronted with it’

[FCA ‘ Dear CEO’ letter 18 April 2019]


The focus in capital markets in combating market abuse has led to a neglect in efforts to counter and report money laundering.


There is widespread confusion between the need to make Suspicious Transaction and Order Reports (STORs) and Suspicious Activity Reports (SARs) with many market participants incorrectly conflating both reports and misunderstanding their distinctive purpose.

A common view is that a STOR is functionally equivalent to a SAR which it is not.

  • ·A STOR is a civil obligation arising under the Market Abuse Regulation [596/2014] (and related delegated regulation) (link below) and is made to the FCA

  • A SAR is a ‘criminal’ obligation arising under Part 7 of the Proceeds of Crime Act 2002 and is made to the UK FIU (which sits in the NCA) (link below).

‘Wake up’ calls to capital markets arise from:


  • The Deutsche Bank ‘mirror’ and ‘one-sided’ trading scandal in 2012-15 (link below)

  • Linear Investments Limited failure to carry out effective transaction monitoring in 2013-15 (link below)


Deutsche Bank was fined GBP163,076,224 (after a 30% discount for early settlement) and Linear Investments was fined GBP409,300 (a similar 30% discount) (upheld on appeal to the Upper Tribunal).


The Deutsche Bank case was egregious involving 2,400 ‘mirror’ trades totalling over USD6bn and a further USD3.8bn of 3,800 ‘one-sided’ trades. The AML failings were catastrophic.


The FCA Final Notice of 30 January 2017 is salutary and used by many market participants to inform their AML policies and procedures (link below).


Although Linear Investment’s failings were smaller in scale and related to transaction monitoring the Upper Tribunal found ‘The negligence was of a serious kind and in relation to a serious matter. It was a key failing in [Linear’s] business model.’


The FCA did not allege ‘that suspicious transactions were not reported’. Linear was fined GBP409,300 (after the 30% discount) based on a starting point at Level 3 of 10% of gross revenue.


It follows that it is possible that activity detected through transaction monitoring could give rise to a STOR or a SAR or both depending on the circumstances.


Key findings are that

  • Management is focussed on the identification and reporting of insider dealing and market abuse

  • Management is complacent and ill-informed as to its responsibility to identify and report suspicions of money laundering

  • Capital markets transactions often involve multiple firms performing different roles

  • Each of those firms has a different perspective on any given transaction

  • There is a danger that a firm thinks that CDD is being done by another firm in the chain

  • Platforms: firms mistakenly think they have an ‘helicopter’ view

  • FCA concerns about the calibration of automated systems

  • Lack of awareness of money laundering in the 1LOD

  • Governance and the ‘eat what you kill’ culture

  • Poor monitoring and controls

  • Payment for order flow (PFOF)

  • Basic AML training models are inadequate and not ‘fit for purpose’

  • Smaller firms’ reliance on their broker

  • Dangers of asset movement free of payment

  • Lack of knowledge of common typologies


References


Thematic Review 19/4 [FCA]

https://www.fca.org.uk/publication/thematic-reviews/tr19-004.pdf


Dear CEO letter [FCA]

https://www.fca.org.uk/publication/correspondence/dear-ceo-letter-wholesale-market-broking-firms.pdf


Final Notice Deutsche Bank AG [FCA]

https://www.fca.org.uk/publication/final-notices/deutsche-bank-2017.pdf


Linear Investments Limited [Upper Tribunal]

https://assets.publishing.service.gov.uk/media/5cac6ef3e5274a42a5619fcf/Linear__Investements_Ltd_v_FCA.pdf


Market Abuse Regulation [(EU) 2014/596]

https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32014R0596


Proceeds of Crime Act 2002

https://www.legislation.gov.uk/ukpga/2002/29/contents


FATF Securities Sector : Guidance for a Risk Based Approach [October 2018]

http://www.fatf-gafi.org/publications/fatfrecommendations/documents/rba-securities-sector.html

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