Capital Markets: No Longer Complacent on AML Regulations?

Actimize AML Product Team, Anti-Money Laundering

The Financial Conduct Authority (FCA) recently published its first thematic review on AML in the capital markets industry. The Money Laundering Regulations first came into force in the UK in 1994, and applied to capital markets firms from the outset, and yet 25 years later the FCA states in this review, “We found that participants were generally at the early stages of their thinking in relation to money-laundering risk.” Obviously, there are cases where capital markets firms take AML seriously and have proper controls in place, but it is clear from the FCA thematic review that this is far from the case in many firms, possibly even the majority.

An Industry in Denial

The capital markets sector is often unjustifiably complacent when it comes to money laundering risk. Because it is not normally a gatekeeper (usually funds are transferred to capital markets firms from accounts at other institutions) and hardly ever handles cash, it is prone to regard money laundering control as someone else’s problem. This flies in the face of repeated comment to the contrary from the FCA and other regulators and, as the FCA points out in this thematic review, the Upper Tribunal case in April 2019 between the FCA and Linear Investments strongly underlines this yet again. All financial institutions are responsible for monitoring whatever activity that they observe and reliance on others plays no part in discharging this responsibility.

The lack of attention to AML matters in the industry seems also to be borne out by the paucity of SARs raised, with the NCA reporting just five SARS from firms identified by NCA as capital markets firms out of 22,619 between April 2017 and March 20181. Even when one adds SARS from other NCA category firms from the same industry, the figures hardly look better with markets and exchange firms adding 21, stockbrokers adding 303, exchanges 6, and asset managers completing the picture with 345 – a grand total of 680, barely 3 percent of all SARS from the entire investment industry.

Many argue that these numbers reflect the risk that money laundering poses to investment firms. However, this is clearly not the case. As the FCA points out in its thematic review, the 2017 UK National Risk Assessment concluded that capital markets present a high risk of money laundering, citing risks of “large sums being laundered” as well as “relative lack of controls” and states that the money laundering risks of this sector are emerging significantly. The Joint Money Laundering Steering Group guidance also points out a large number of specific money laundering risks unique to this section of the financial services industry. The FCA itself has placed capital markets activity in the top money laundering risk category. Finally, the FATF paper “Risk Based Approach Guidance for the Securities Sector” sets out a whole raft of factors that make the capital markets sector one of the most vulnerable to money laundering.

It is difficult to see, therefore, how an opinion that SARs from capital markets firms are low because of low risk.

The UK is Not an Island

This is not just a matter of concern for the UK. Many other regulators have expressed similar concerns in thematic reviews of AML control in the capital markets industry in the jurisdictions which they regulate. See, for example, the scathing report published in 2018 by the Dutch AFM which follows a report by the same regulator, which was equally unpleasant reading for the industry two years earlier. Similar reports are received during the regular meetings that NICE Actimize holds with regulators, with many placing lack of adequate securities red flag coverage, together with general poor AML practices amongst its capital markets firms.

Red Flags to a Bull or Bear

One observance from the FCA thematic review is that firms were unaware of the red flags giving rise to suspicion of money laundering in the capital markets industry, relying on only the mirror trading example from the FCA disciplinary case against Deutsche Bank. This again is odd, given the extensive lists of red flags published by FATF2 and MONEYVAL in 2009 as well as similar lists published by overseas regulators such as FINRA in the U.S., and even the FCA itself.

One of the themes of the FCA thematic report is the similarity of several market abuse and money laundering Red Flags. Wash Trading, for example, can be used in the cause of market abuse to tick prices up or down and to give an illusory view of market volume and open interest. It can also be used in a money laundering context to layer criminal funds. Similarly, Parking can be used to hide loss making positions, or again as layering. There are many other examples of such Red Flags, which are common to both regimes, and these are explored in the publications referenced above.

Barking Up Only One Tree

Perhaps the most interesting among the number of good points made by the FCA thematic review, is the relationship between STORs (Suspicious Transaction and Order Reports) required under the Market Abuse Regime and SARs (Suspicious Activity Reports) required on suspicion (or in situations where suspicion should occur) of money laundering. The FCA suggests that firms who discover market abuse (and make a STOR) do not stop to think that the exact same activity may very well be an indication of money laundering. Whereas on the face of it market abuse appears to be the predicate offence only, one should always bear in mind that mere possession of funds derived from criminal activity is itself money laundering.

Regulators Have Limited Patience

One of the factors now examined by FATF in the course of mutual evaluation reviews is the extent to which jurisdictions adequately enforce AML regulations. It cannot be a coincidence that many jurisdictions have begun to publish fines and other disciplinary cases for AML regulation breaches in recent months, while others have increased such activity.

As far as the FCA is concerned, there have been two notable fines in the capital markets area in recent years, the first being the Deutsche Bank case referred to above, and the second the case against Standard Chartered in April 2019, both of which had fines exceeding £1 million (USD1.3 million at current exchange rates).

In a speech in April 2019, Mark Steward, Director of Enforcement and Market Oversight at the FCA stated:

“We are now conducting ‘dual track’ AML investigations, i.e. investigations into suspected breaches of the Money-Laundering Regulations that might give rise to either criminal or civil proceedings.”


“I suspect criminal prosecutions, as opposed to civil or regulatory action, will be exceptional. However, we need to enliven the jurisdiction if we want to ensure it is not a white elephant and that is what we intend to do where we find strong evidence of egregiously poor systems and controls and what looks like actual money-laundering.”

What Must I Do to Be Saved?

One of the recommendations in the FCA thematic review was a combination of system-based and manual monitoring focusing on the appropriate Red Flags. It is this focus that is sadly lacking in capital markets firms, who only too often attempt to use general banking detection scenarios to find cases of money laundering in their industry. This is doomed to failure, as the FCA thematic review makes clear. No monitoring system is of any use to the industry unless it covers the Red Flags relevant to the industry with functionality that is pre-existent and has stood the test of time in use in production by other market participants.

Second, the thematic review makes it clear that there must be a joined-up approach between market abuse surveillance and AML surveillance, with cross fertilisation between the two. Any system worth using in a capital markets firm must incorporate this, as it must incorporate cross fertilisation between CDD, suspicious activity monitoring and sanctions screening.

Third, FCA recommends the use of voice recording monitoring as part of the fight against money laundering.

Fourth, efficient and comprehensive network analysis must be supported.

We also recommend a thorough review of the FATF and Moneyval Papers referred to above.


For far too long, the capital markets industry has been inadequately complying with AML. Regulators have had enough of this and will take strong action if the matter is not addressed. The tools, experience and knowledge to do this exist in the market, leaving capital markets firms with no excuse not to comply.

1. Source: National Crime Agency Suspicious Activities Reports (SARS) Annual Report 2018

2. Section 329, Proceeds of Crime Act 2002



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