Stock Markets across the world provide an opportunity to earn money and grow wealth. This provides a lucrative opportunity for the launderers to make quick money. There are different crimes, whose proceeds are invested in the stock markets. Security is a financial instrument or financial asset that can be traded. Let us understand some important concepts in Stock Market Laundering.
One of the most important aspects of stock market laundering is security. Security could be in the form of equity shares, debentures, or even cryptocurrencies.
Securities can be traded in:
- Primary markets: Where companies sell their stocks to the public.
- Secondary markets: Investors trade securities between them.
The securities sector can be attractive to money launderers because of the following characteristics:
- The complexity of investment products – There are different financial securities like Debentures, Debt Instruments, Preference Shares, etc
- The internationality of transactions – These days it has become easy for investors to buy securities from other countries as the technology brokers have evolved.
- Speed – These days you find the bots that trade on your behalf. There are different algorithms that help you to trade in a programmatic manner. This is another interesting fact for the launderers to use the stock markets as the conduit for routing their dirty money.
- High volumes – Stock markets provide liquidity. Unlike real estate, which was considered the paradise of launderers the stock markets offer the flexibility to withdraw money anytime.
- Easy conversion to cash and vice versa is possible with the local players. Even though globally there is a significant push for digital transactions, local hawala dealers and other players are still active and help to convert the proceeds of crime to be introduced in stock markets.
- The securities sector is also vulnerable to insider trading, market manipulation, and securities fraud – maybe more than vulnerable to money laundering.
The securities sector is mostly abused in the layering and integration stages of money laundering. This is because investment firms usually do not accept cash.
Red Flags of Stock Market Frauds
Some red flags that may indicate stock market laundering activity are:
- Investors’ strategies that do not appear designed to provide a return on the investment. Generally, any investor would invest money in the stock markets to earn profits and not to make losses.
- Transactions in a sequential manner to avoid transaction monitoring
- Transactions involving high-risk jurisdictions
- Mirror trading with no apparent business purposes.
- Trading in the same security between various accounts controlled by the same people
- Customer is reluctant to provide information in relation to their identity or transactions.
- Purchase of securities or transactions that do not match the customer’s investment profile.
- Two or more unrelated accounts at an investment firm trade illiquid or low-priced security suddenly and simultaneously.
- Transactions indicating that the customer is acting on behalf of third parties with no apparent business or lawful purpose.
…and many more which cannot be covered in a single post!
The FATF in the year 2018 issued Guidance for a risk-based approach to stock market laundering which describes:
- The various types of securities providers
- The characteristics of securities transactions that can create opportunities for criminals and
- Measures that can be put in place to address such vulnerabilities (see link in comments)
There are unlimited methods to launder illegally derived funds and the securities sector could not be missed by criminals.
Investment firms must establish appropriate AML measures to prevent the misuse of their products and services for money laundering or other types of financial crime.