AML Monitoring in Capital Market: Detection Methods

Capital markets are internationally connected and largely liquid, making large amounts of capital flowing between jurisdictions in fractions of a second an appealing target for money launderers. Although financial institutions have been under pressure in recent years to develop more comprehensive anti-money laundering protections, wholesale market participants have not been subjected to the same pressure. Instead, significant policy changes in this area have focused on reducing the dangers of market manipulation and insider trading.

The primary goal of market manipulation and insider trading is to generate gains from trades that take unfair advantage of other market participants. Much of the time, this has a negative – and global – effect on consumer transparency and performance.

Market-based money laundering is similar to traditional money laundering. It entails the misuse of markets for financial benefit, and the trades involved might affect market transparency and performance, therefore fitting the broad concept of ‘market exploitation.’ Unlike financial exploitation and insider trading, market-based money laundering has the purpose of concealing the movement of funds rather than making a profit.

This is a problem for both regulators and businesses. Unless the origin of the funds being laundered across the markets, firms’ systems and monitoring tools are often not structured to recognize the typologies used for this type of market abuse; for example, methods such as detecting excessively high trading profits do not function where profit-generating is not the target.

Detection Methods

The application of securities experience to Anti-Money Laundering (AML)monitoring is also in its development. As a result, there are few well-known, tried-and-true vendor options open to businesses. The following are some ideas about how a company can get started researching this problem.


1)Blue Sheet Reviews

Blue Sheet reviews are a cost-effective and efficient way for companies to keep track of all types of securities. Portfolio pumping, cross transactions, prearranged dealing, and other securities typologies will all result from Blue Sheet reviews. Blue Sheets requests transactional information from regulators such as the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC), especially for securities that have recently experienced an increase in volatility. Regulators use advanced tracking solutions like the Securities Observation News Analysis and Regulation (SONAR) system to produce Blue Sheet applications. SONAR is used by FINRA’s Office of Fraud Detection and Market Intelligence to track irregular price or value fluctuations of stocks around U.S. markets and combine the data with news reports that SONAR collects regularly.

The FINRA system also creates warnings that detect cases that could indicate insider trading. Organizations can generate inquiry procedures and subject-matter knowledge using the Blue Sheets, especially though they don’t have the money for expensive technology applications.

2)In-House Monitoring 

Another choice for companies is to develop advanced in-house monitoring to deal with the money laundering problem in capital markets. Market records and securities guide data are required for model optimization due to the complexities of trading conditions and the usually high volumes. Market dominant behavior, for example, is impossible to spot without the ability to equate transaction volumes to regular market value.

Depending on the asset type, various assets must be handled accordingly, and some could also be out of scope. Because of the inherent nuances and dynamics, financial industry professionals must direct the application.


3)Vendor Selection

Money laundering is a field rich in opportunities because there is no leading vendor approach for AML securities monitoring. Vendors who can provide the required demand statistics, categorize market news events efficiently, and have subject-matter experience handling various forms of trade data and asset groups for AML tracking purposes have much potential. Those organizations who consider working with a vendor should check to see if the suggested approach has specific features and resources.


The Importance of Detecting the Potential Criminal

In the absence of market monitoring designed to detect transfers that could be used to affect a scheme, firms currently put the responsibility of controlling the risk of markets-based money laundering on consumer due diligence and risk management arrangements. Firms must recognize and analyze the risks posed by different items, consumers, geographic regions, and marketing networks for these agreements to be successful. Firms can devote more resources to mitigating risks in areas where they have assessed their exposure after evaluating their exposure.


Financial Conduct Authority’s Review 

Wholesale markets (capital markets) are a core focus for the FCA in its 2019/2020 Business Plan, where “cross-sector” work covers criminal activity.  The report discusses money laundering risks unique to financial instrument trading and examples of positive and insufficient regulatory activities. The FCA came to the following final result:

  • Companies are mainly in the early stages of worrying about money laundering issues and continue to learn more about their visibility.
  • Accurate consumer AML risk assessments and Customer Due Diligence (CDD) is critical to AML regulation due to the complexity of capital market transactions. Since transactions often require several companies in a transaction chain, each link in the chain must fulfill its CDD obligations.
  • Effective transaction management is complex in the capital marketing area, but it is necessary so that businesses do not rely on others to flag strange activities.
  • Rather than seeing enforcement as a back-office obligation, further responsibility is needed in the first line of defense.


What Can Be Done?

Firms must research the typologies involved in market-based money laundering and review recent cases to handle these risks, and then revise their market management tools to take these into account. They should keep a close eye on regulatory trends and be prepared for thematic assessments and advice in their home jurisdictions. Firms having trouble implementing current anti-market exploitation controls, especially those faced with the technical complexities of putting in place successful trade supervision, must address these issues now before a potential “second wave” of regulations and laws is enforced.


May, 2021, published on Sanctions Scanner


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