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Capital markets money laundering risk gets the thematic review treatment

What happened?

The FCA has completed a thematic review looking at money laundering risks and vulnerabilities in the capital markets sector.

Given the relatively high levels of regulation and scrutiny – and the complexity of the products involved – capital markets might not seem like an obviously attractive environment for money laundering. But it can and does happen – as illustrated by seven typologies outlined in an annex to the FCA’s report (based on real examples).

The FCA visited 19 participants across investment banks, recognised investment exchanges, trade bodies, clearing and settlement houses, inter-dealer brokers, trading firms, and a custodian bank. Its main focus was on the secondary markets, but the report also includes a section on primary market services.

The FCA’s findings highlight some specific areas of concern around capital market participants’ awareness of money laundering risk – and a number of risks specific to the sector. Its general conclusion was that most participants were ‘in the early stages of their thinking’ on money laundering risk and needed to do more to fully understand their exposures.

Effective customer risk assessment and customer due diligence (CDD) were singled out as key to reducing opportunities for money laundering in the capital markets arena.

This task is complicated, the report concedes, by the fact that capital markets transactions often involve many firms in a long transaction chain. This makes it essential (as illustrated by the recent Upper Tribunal case involving Linear Investments Limited) to verify that each link in the chain meets its obligations – rather than simply relying on others to monitor transactions.

The FCA identified a wide range of approaches to anti-money laundering transaction monitoring, highlighting some of the risks and challenges this presents.

Many market participants focused primarily on detecting insider dealing, market manipulation and other forms of market abuse, failing to recognise the possibility that suspicious activity might be indicative of money laundering.

Another concern raised was that some capital markets participants were unclear about their obligations in terms of submitting Suspicious Activity Reports (SARs).

The FCA also raised concerns over insufficient accountability and ownership of money laundering risk at a senior level, with AML tending to be seen too much as a compliance or back-office responsibility.

The adequacy or otherwise of the various participants’ provision for training around money laundering also provoked comment. Some firms used a variety of training methods tailored to the specific risks they believed they were most exposed to, with insufficient focus on money laundering risk. Others relied on a ‘basic’ AML module within a broader training package.

The FCA’s report noted that various participants in the thematic review said they had used the regulator’s Final Notice for Deutsche Bank in 2017 as an aid to understanding money-laundering risks in capital markets sector, but that they would find it helpful to have other sector-specific examples of how money laundering can arise.

The seven typologies included in the report’s annex, respond by illustrating in practice how money can be laundered in a capital markets environment. Each of the anonymised (and partially fictionalised) case studies is accompanied by a short list of questions which could help market participants in framing their risk assessment, transaction monitoring and training provisions.

The FCA has specifically said it expects capital markets firms to consider their approach to identifying and assessing money laundering risk in light of this new report. Changes to the FCA’s supervisory approach are also under consideration in the light of the review’s findings.

How can Thistle help you?

Thistle helps firms implement proportionate and risk-based policies and procedures to comply with the Money Laundering Regulations 2017, the FCA Handbook and industry guidance.

Our Financial Crime team are highly knowledgeable in all areas of Anti-Money Laundering regulation and the implications these regulations have on firms in the Capital Markets sector.

Our assistance includes helping firms to conduct an AML risk assessment on its business operations, reviewing customer due diligence arrangements and offering guidance on firm’s AML governance. Visit our Financial Crime page to find out more about what we do.

Contact us today on info@thistleinititaitves.co.uk or call 0207 436 0630.