Global Securities Sector Exposed to Money Laundering and Terrorist Financing Risks

A recent report by the Financial Action Task Force (FATF) has highlighted the vulnerabilities in the global securities sector to money laundering and terrorist financing (ML/TF). The sector’s complexity, internationality, high level of interaction, high volumes, speed, and anonymity create opportunities for criminals to exploit.

Key Characteristics Contributing to ML/TF Risks

The FATF Report: Money Laundering and Terrorist Financing in the Securities Sector (October 2009) outlines the main ML/TF vulnerabilities in the securities sector. Key characteristics that contribute to these risks include:

Varying Roles of Securities Providers and Intermediaries: Investment fund managers, depository banks, and other intermediaries play different roles, creating opportunities for criminals to exploit.
Jurisdictional Differences: Divergent definitions of securities, products, and services across jurisdictions create challenges in identifying and mitigating ML/TF risks.
Types of Securities Products and Services: The types of securities products and services used by customers, investors, and payment methods can pose ML/TF risks.
Global Reach and Speed of Transactions: Transactions across multiple onshore/offshore jurisdictions and financial markets can facilitate ML/TF activities.
Anonymity: Ability to transact anonymously through intermediaries or online platforms creates opportunities for criminals to hide their tracks.
High Volumes of Transactions: High transaction volumes make it difficult to detect suspicious activity.

Importance of a Risk-Based Approach (RBA)

The report emphasizes the importance of a risk-based approach (RBA) for securities providers to assess and manage ML/TF risks. The RBA should consider factors such as:

Securities Product Involved in a Transaction: The type of security product used can influence ML/TF risks.
Custodial Relationships: The nature of custodial relationships can pose ML/TF risks.
Contractual Obligations: Contractual obligations and agreements can create ML/TF risks.
Customer Type, Source, and Use of Funds: The type of customer, source of funds, and intended use of funds can influence ML/TF risks.
Customer Business Sector and Geography: The business sector and geographic location of customers can impact ML/TF risks.

Investment Funds Vulnerable to ML/TF Risks

Investment funds, including undertakings for collective investment (UCIs) and pooled investment vehicles, are particularly vulnerable to ML/TF risks due to their complexity and the number of stakeholders involved.

Implementing an Effective Risk-Based Approach

The report provides guidance on how securities providers can implement an effective RBA, including:

Conducting Thorough Customer Due Diligence: Conducting thorough customer due diligence is crucial in identifying ML/TF risks.
Identifying and Mitigating ML/TF Risks: Identifying and mitigating ML/TF risks in various activities, such as capital market research, portfolio management, and order execution.
Developing Tailored AML/CFT Policies and Procedures: Developing tailored policies and procedures for anti-money laundering (AML) and combating the financing of terrorism (CFT).
Continuously Monitoring and Reporting Suspicious Activity: Continuously monitoring and reporting suspicious activity is essential in detecting ML/TF risks.

Prioritizing ML/TF Risk Management

The FATF report underscores the need for securities providers to prioritize ML/TF risk management to protect the integrity of the financial system and prevent illicit activities.