13 Jun 2019
Investment banks and other firms participating in UK capital markets must do more to understand their potential exposure to money laundering, according to the Financial Conduct Authority (FCA).
In a thematic review published Tuesday, the FCA found that most financial institutions involved in the trading of shares, derivatives, bonds and other instruments are “generally at the early stages of their thinking in relation to money-laundering risk” and are not uniformly apprised of the methods of financial crime that are unique to the sector.
“The nature of transactions in this sector means that effective customer risk assessment and customer due diligence (CDD) are key to reducing the opportunities for money laundering,” the FCA said in the review, which also outlined how criminals might exploit “free of payment” bond transfers, mirror trading, debt issuance, equity placement and over-collateralized account funding, among other activity.
The review noted that, between April 2017 and March 2018, capital markets firms filed only 324 suspicious activity reports (SARs) of the more than 460,000 reports submitted to the UK National Crime Agency.
The FCA attributed the “low level” of SARs to companies perceiving suspicious activity as indicative of market abuse rather than money laundering, insufficient understanding of how dirty money can enter the markets, a lack of guidance on criminal methodology and the belief that filing the reports wasn’t necessary because money laundering occurred elsewhere in the market or trading chain.
Following the authority’s £163 million monetary penalty against Deutsche Bank, internal reviews by firms in the sector resulted in an uptick of SARs citing the enforcement action’s mirror-trading typology, according to the FCA.
The 2017 enforcement action concluded that Deutsche Bank and its Moscow-based subsidiary executed more than 2,400 mirror trades between April 2012 and October 2014 that were used to mask the transfer of more than $6 billion from Russia to overseas bank accounts.
The NCA is currently considering the publication of a SAR glossary code for capital markets that can be used to “tag” activity potentially linked to money laundering, according to the review.
The FCA first announced its investigation of money laundering in the sector in August 2018.
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