First published in the Business Daily on March 13, 2016.
The capital markets sector provides an array of opportunities for criminals to introduce “dirty money” into the financial system.
The anonymity, opportunities to pool funds through vehicles such as CIS and liquidity makes the sector vulnerable to money laundering and terrorism financing. Criminals can use agents to buy and sell securities, take comfort in high volumes traded daily and exit with ease. Trusts, nominees and fiduciary accounts are notable market access avenues used by criminals.
The Capital Markets Authority (CMA) last week published guidelines requiring capital market intermediaries to take a proactive anti-money laundering (AML) and counter-terrorist financing (CTF) role.
The directors of market intermediaries have the task of establishing AML and CTF policies and procedures, and ensuring compliance with existing legislation, including the Proceeds of Crime and Anti Money Laundering Act, 2009.
The guidelines summarise the process of money laundering into three stages which may occur simultaneously, concurrently or distinctly.
First, the laundered money or illegal profit is introduced into the financial system (placement). Secondly, transactions take place distancing the money from its source (layering). This may be through the purchase and sale of securities.
Thirdly, the money is taken back into the financial system appearing as normal business (integration). There is an impression of apparent legitimacy to the money. Market intermediaries will be required to have adequate Know Your Customer (KYC) requirements to establish the identity, economic background and the risk of money laundering posed by each client.
Particularly, accounts set up in jurisdictions with strict confidentiality requirements should be validated. Some of the indicators to money laundering that market intermediaries should note and investigate include unusual behaviour by the customer, suspiciously large transactions, high risk transfer and deposit of funds, unusual securities transactions and account activity and inexplicable inconsistencies.
The role of employees in facilitating money laundering and terrorism financing is highlighted, with the introduction of proceeds of insider trading into the market qualifying as money laundering.
Suspicious employee activity, such as giving too much attention to one client, should be investigated. The Central Bank of Kenya recently issued additional KYC requirements for customers depositing or withdrawing more than $10,000.00 (approximately Sh1 million) in cash.
Strengthened AML and CTF safeguards in the financial sector is expected to facilitate detection and prevention of criminal activity.