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The Thin Red Line Securities Vs. AML/CFT
The Thin Red Line
Securities Vs. AML/CFT
Why Securities Markets (Wholesale and Retail) are vulnerable to Money Laundering?
Securities transactions can be executed and settled quickly
The large value number of transactions
The international nature of the securities market
Co-mingling of “clean” and “dirty” money in securities
AML in Wholesale Securities Markets
• Private Equity:
Raising and accepting
Investing fundsRealization of Invested Funds
1. Investors in Funds 2. Investing and divesting
Funds paid to investee firm operates in high risk jurisdiction. Relevant Co-investors- Purchase on Exit Funds can be used as co-mingling tool Funds may be used in unregulated territories Funds to funds Type of business being invested in.
Leveraged buyout, LBO — Venture Capital — Growth Capital
• AML Risks:
• Corporate Finance:
Strategic financial
Manage and raise
Investments returns
Profits dividends
Merge or acquire
Issue of Securities – Financing and Structuring Changes of business ownership
• AML Risks:
Concealment- design securities to disguise the source of criminal funds.
Securitization - pooling existing financial assets- marketed to investors.
Advising of setting up (SPV), which will issue the asset-backed instrument.
As owner of the assets which wants to securities.
Counterparty to an SPV established by another firm for its own customer or
for itself.
• Wholesale Securities Market - Traded products:
Transfer of ownership
Change the nature of an assets
Cash payment to 3rd party
Diverse international customer base
Market mechanism
Securities MM instruments Derivatives Commodities
• AML Risks:
The wholesale markets comprise exchange and dealing arrangements
(trading) hedging instruments (traded products) this include but not limited
to:
AML in Retail Securities Markets
• Wealth Management:
Off-shore overseas companies
Across different jurisdictions
Non-standard investment solutions
Sophisticated products
High value transactions
Current account banking
• AML Risks:
Powerful clients – unwilling to provide adequate documents
Multiple and complex accounts- many accounts in more than on jurisdiction
Concealment –offshore trust helps to maintain an element of secrecy
Culture of confidentiality – clients seek assurance for confidentiality
Bank secrecy jurisdictions – certain countries have secrecy protection Laws
Credit- unsecured loans, where collateral is held in one jurisdiction and the
loan is made in another.
Banking and investment services for High Net worth clients (based abroad)
Market Manipulations (Abuse), Insider Trading and Money laundering
Market Manipulation and Insider trading are generic crimes and proceeds
frequently laundered through the same market!!!!
Market Manipulation: deliberate attempts to create an artificial, false
or misleading appearance to price of, or market for, a security to create an
opportunity for profit (spreading false or misleading information)
Insider Information: take advantage of non-public or confidential
information for personal profit.
Type of Market Manipulations:
Pools Churning
Painting the Tape (Runs)
Ramping Bear raid
Front-running Piggybacking
1. Money laundering – Stages, Typologies and Schemes
A) Securities
and AML
stages:Cash-using
securities
transactions
Give the investor the right to get full refund Investors can cancel contract within the designated period (Packaged investment fund)
1. Over & under-pricing
2. Issue of shares
Cooling-off
1. Break of chain2. Money transfer
justification
B) Methodologies and Schemes
1. Illiquid Securities – Fictitious Companies Shares:
Securities that do not have a real market or a true market is difficult to ascertain The offences schemes used to cover capital flight, tax evasion or transfer of the proceeds.
2. Securities - Over and under pricing –Integration stage:
Speculation trading with securities at off-market prices to legalize crime proceeds. Example: A criminal purchases
securities @cheap price and resell via intermediary in agreed price (inflated price) to money launderer; the profit for sale of shares appears to be obtained legally.
Cheap shares
1
payment
Dirty money
Overpriced
shares
2
3. Ownership – Break of Chain –Layering stage
Intention to break "Break a chain of ownership" documented transactions for money laundering.
Example: illegal fund owner issue a bill of exchange with blank endorsement against goods and service from company (A)"1". In course of transactions company (B)receives the bill"2" and presents it to the issuer for payment"3" and receives legal money.
Company B Company ADirty money
owner
Legalized funds
Bill 2
3 Blank
endorsement bill
1
Goods,
service
2. Predicate Offences:
Money laundering becomes an offence when money is derived from an underlying predicate offence.
Money laundering techniques may be utilized to commit financial fraud and they often coincide with transactions designed to commit fraud in security market.
One of basic money laundering techniques on securities, execution of transactions at off-market prices, can be used to transfer pricing to:
1. Redistribute tax burden between company branches in different countries
2. Enhance the financial reporting of company's branches.3. And or, Justify unexpected profit or loss4. Managers Fraud5. Enhancing balance sheet of a company6. Partners hiding profit from each others
3. Types of activities used for either money laundering or
represents predicate offences:
1. VAT Fraud:
The illegal fund raised from VAT used in securities, bear securities and used to legitimizing funds between exporter and importer, and it has two types:
a) Acquisition fraudb) Carousel fraud
2. TAX EvasionEntities purchase or sell securities in different tax periods or exploiting different tax rules between countries.
3. Capital FlightIndividuals and businesses transfer money and assets to another country due to high tax, economic instability, and low level of investment opportunity. Such money may have legitimate origin but they use securities of moving money to another country to contravention of fund movement restrictions.
For discussion ?????
It is difficult to distinguish where the predicate offence ends and money laundering begins!!!
“Parking” – Parking securities to conceal ownership
Arrangement made to conceal the true ownership of securities through a fictitious sale or transfer to an accommodator who agrees later to sell or transfer the securities to the true owner (or his Agent) at the agreed upon time at essentially the same terms
“Pump and dump” - Artificial inflation of a stock based on misleading information.
This typical sort of securities fraud generates proceeds and is therefore a predicate offense for money laundering in most jurisdictions
4. Examples: “Parking” and “Pump and dump”
“Parking”
Typically, one investor will buy and hold (“PARK”) securities in an account in its name at the request of another investor. In exchange, the investor making the request will agree to pay the holding (“PARKING”) investor a fee, to indemnify the holder against adverse market movement or (directly or indirectly) to repurchase the securities at a fixed price at a specific time. This removes the “parked” securities from circulation and places them in “friendly” or “controlled” hands
“Pump and dump”
Individual obtain large blocks of stocks at low price, and then promote securities to clients. Frauds begin. Misleading information is spread (future business success) price goes up; create appearance in market, when price reach peak the individual sell off the artificial inflated stocks.
Two events have occurred: (1) the money launderer, by selling his stock in the company, has layered the illicit funds he originally invested; and (2) as a perpetrator of a securities fraud, he has generated additional illicit proceeds that require laundering.
