Money laundering in capital markets

Proper understanding of the customer is pivotal for an effective defence against money laundering

Some FIs hold the presumption that ongoing monitoring is only required for end investors and that if their customers are other regulated FIs there is little requirement to establish the expected trading activity of the relationship, or to conduct subsequent transaction monitoring. This presumption may result in partial, or in certain cases, full reliance placed on third party FIs to perform ongoing monitoring, a practice not permitted by AML regulations.

The emphasis of this in the report and the significance of the fine on ‘Linear Investments Limited’ serves to remind FIs that regardless of checks being undertaken by other firms, all FIs are responsible for undertaking their own checks using information available to them, and calibrated in accordance to its business nature.

Steps to manage the risks

• Review processes to ensure a sustainable risk-based approach is applied and that customer due diligence (CDD) conducted is in line with the nature of relationship, e.g. CDD requirements for a prime broker, broker, or custodian, will be specifically tailored for the type of customer, with focus areas designed to mitigate the risk factors associated with each
• Ensure that CDD requirements build a meaningful profile of the customer that allows detection of activity outside the identified expectations of the customer - CDD applied should include understanding the customer’s business model and expected trades
• Transaction monitoring performed should be based on the profile of the customers and business undertaken i.e. thresholds should be calibrated in accordance to the customer base and where alerts are generated the triggering activity is compared against the customer profile
  

Generally, there has been a low level of Suspicious Activity Reports raised

We have seen FIs with the mindset that their capital markets customers are sophisticated and deal in highly regulated products, so therefore present a lower ML risk.

Where FIs have recognized the ML risk, they frequently struggle with implementing controls and raising risk awareness in the first line of defence, due in part to the lack of readily available case studies and typologies for ML through capital markets.

For this reason, to help inform FIs where vulnerabilities may lie, the report identified seven main trade features that may act as a red flag to prompt further investigation. FIs will be expected to have incorporated these into their risk assessments and training - any subsequent failings for such will likely be viewed as being more serious.

Steps to manage the risks

• Raise the overall risk awareness of the FI by leveraging recent guidance papers issued by various regulators to include best practices and ML typologies into risk assessment and training
• Incorporate learning points from enforcement actions into senior management discussions
• Drive cultural change through an appropriate tone from the top, increasing first line of defence ownership and awareness of ML risks
• Appreciate the differences between market abuse risk and ML risk, with each having different requirements for compliance with the governing regulations. Understand that sufficient awareness of one does not equate to sufficient awareness of the other