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The thin red line

Date post: 14-Jul-2015
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The Thin Red Line Securities Vs. AML/CFT
Transcript

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.

Thanks

Naji Osman,CAMS

[email protected]


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