The capital markets are also exposed to money laundering
by Ganado Advocates
16th August 2023
The capital markets are one of the most powerful instruments in promoting economic growth and wealth creation as they facilitate the movement of vast amounts of capital from different geographical regions with relative ease. Capital market participants range from trading venues which provide the infrastructure for the capital markets to operate, to investment firms offering brokerage, portfolio management and financial advisory services. In view of this, the capital markets are exposed to various risks arising from the array of services and products offered by market participants, which amongst others, relate to money laundering and other forms of financial crime.
There are various types of capital market transactions and typologies that in practice are deemed as predicate securities offences and linked with money laundering. Unlike other financial sectors, money laundering risks in the securities and investment area are more evident at the layering and integration phase, rather than the placement stage.
In October 2009 the Financial Action Task Force published a typology report entitled Money Laundering and Terrorist Financing in the Securities Sector, which provided thorough insight on how criminals and perpetrators may launder money and/or fund terrorist activities through securities firms, and how illicit funds can be generated following illegal activities conducted through investment firms.
Predominantly, capital markets-based money laundering usually involves transactions which are not in line with an investor’s business and risk profile, and anticipated investment activity. Typical examples of these transactions include frequent, short-term, investment activity involving large amounts of transactions in financial instruments, which is inconsistent with the normal practice of the client, requests for services which involve amounts which are outside of the norm taking into account the circumstances of the client and unexpected, sudden increases in the frequency or value of investment activity without reasonable explanations.
Illicit funds can be also laundered via irrational investing activity involving different investment positions which do not yield returns on investments, including movements of investment positions within various financial instruments that give rise to a loss or lower rate of return without any investment benefits or economic sense.
To ensure that all anti-money laundering regulatory obligations are met and that market participants are safeguarded from being misused by criminals for any illicit activities, it is of utmost importance for senior management to instil and promote a strong culture of compliance within their firms. These are some of our recommended best practices to foster a culture of compliance:
Over the years new and updated regulatory frameworks designed to combat money laundering and the financing of terrorism have been implemented and enforced, yet, market-based money laundering is still pervasive, not least due to the accessibility of the capital markets.
Although the Maltese capital markets are far less liquid than their foreign counterparts, there can be no guarantee that local markets aren’t used for money laundering purposes. It is therefore fundamental for local market participants to keep abreast of developments in this area in order to ensure that they are well-equipped to meet their ever-evolving regulatory obligations.
This article was written by Dr Beppe Degiorgio (Associate, Capital Markets) & Jonathan Camilleri (Regulatory Advisor, Capital Markets, AML & ISF).