Using capital markets for money laundering via investment banking is one of the hot topics in financial work. Several cases, like Deutsche Bank's trouble with mirror trading or the connection of 1MDB bonds with Goldman Sachs, have been in the limelight. However, these cases are just the results of inadequate industrial efforts.
Money laundering occurs even through capital markets, although the participants are regulated with traded financial instruments and fall under the supervision of companies listed on stock exchanges. However, it has been observed that anti-money laundering (AML) risk management is a pressing issue taking place mostly in the capital markets at its relative infancy.
According to the data provided by the UK National Risk Assessment of Money Laundering and Terrorist Financing Report, the capital markets were exposed to high risk of money laundering in 2017 due to a relative lack of control. Hence, it is pivotal for AML procedures and processes to be implemented to control money laundering in any part of the world.
In this article, we will discuss concepts of capital markets and the role of anti money-laundering in capital markets with legal procedures adapted internationally to fight these problems.
What is anti-money laundering (AML)?
To put it into simple words, AML is a robust set of laws, regulations and procedures that are set to expose illicit funds disguised as legitimate income. Money laundering conceals the crimes with three legitimate states of placement, layering and integration stages uncovered by AML policies to set things straight.
Originally, AML used to be a response to the growth of financial industries to lift international capital control with the ease of conducting complex financial transactions. The concept of incorporating AML legislation in financial institutions dates back to the Bank Secrecy Act of 1970 to deal with the complex regulatory framework and work with utmost diligence. Since then, different institutions have been modifying AML regulations according to their needs to comply with their respective economy.
Compliance steps for AML regulations
AML abides by certain rules and regulations to prevent money laundering. Notably, money laundering has taken a huge dip in the market, compelling international financial institutions to formulate mandatory provisions to fight such problems. Here we have curated some compliant steps of AML regulations that are pivotal for any financial institution.
Know Your Customers (KYC)
It is integral for any financial institution to identify its clients. KYC is a method to comply with their identification and understand the nature of their financial activities. KYC also helps determine if the deposited funds are from a legitimate source and not made through different shell corporations.
Customer Due Diligence (CDD)
This is an integral method alongside KYC and complementary to one another. The regulations of CDD vary from country to country, depending on their economic situation. CDD ensures the information about a potential customer is accurate and authentic. CDD is also subjected to conduct due diligence on those suspecting clients who might be crossing the threshold of AML regulations.
Appointment of an AML Compliance Officer
Every financial institution is required to appoint an AML Compliance Officer to oversee any form of illicit activity taking place in the financial institution. This will substantially reduce the risk and identify any form of suspicious transactions.
Importance of anti-money laundering in capital markets
Money laundering is a serious threat even in capital markets. Notably, capital markets are highly prone to money laundering even though the potential investors are verified and complied with proper identification. However, since capital markets mostly deal with liquid assets, it becomes easier for criminal individuals to move money from one place to another.
Here we have listed the importance of anti-money laundering in capital markets:
- Blue Sheet Reviews: They would potentially help prevent money laundering in capital markets. This is a budget-friendly method for any organisation to detect typologies. By leveraging Blue Sheet Reviews, organisations can manage to develop robust investigation protocols and subject matter expertise in environments with limited budgets.
- In-house Build: A secure in-house monitoring system helps deal with the complexity of dealing patterns in capital markets. With the incorporation of in-house build, it becomes easier to unfold complex trading patterns in large volumes for model optimisation. Different asset classes like common stocks and fixed incomes are also unfolded with this in-house monitoring system with expertise in guiding the implementation.
- Vendor Selection: Even though there is no dominant vendor in AML securities and monitoring, this area is pivotal for understanding capital markets. It is brimming with opportunities as the vendors can thus supply essential market data and systematically categorise market news events. This will also help manage different trade data, making it potentially successful.
Money laundering is a serious issue that has been dominating financial institutions prevalently. It is integral that AML policies and regulations are implemented even in capital markets where the risk is potentially high. Financial institutions must thoroughly research the typologies involved in market-based money laundering and handle the risks based on recent cases.
If you are interested in making a career in capital markets, then do check out Imarticus Learning's Certified Investment Banking Operations Professional (CIBOP) course. This 180-hour investment banking certification will give you a thorough understanding of complex financial problems and those faced in capital markets for money laundering.