Securities AML risk is more similar to banking than you may think
Securities providers’ anti-money laundering (AML) risk bears some close similarities to banks. To address these risks, securities providers with both a bank and broker-dealer must take a group-level approach to address all inherent risks across the institution. By creating a single view of their customer and adopting a contextual monitoring approach, providers can more precisely identify risk, bridge the gap between trade surveillance and AML, and drive efficiency gains and cost savings.
In October 2018, the Financial Action Task Force (FATF) released its Guidance for a Risk-Based Approach to AML risk mitigation for the securities sector. Following this in December 2018, the U.S. Financial Crimes Enforcement Network (FinCEN) and U.S. regulators released a joint statement encouraging innovative industry approaches to AML compliance.
These efforts, alongside a recent spate of enforcement actions, signal an increase in scrutiny against securities providers and suggest they face similar risks to banks. Securities providers will benefit from this regulatory support, as innovation will prove critical to ensuring their AML programs are effective and efficient.
Similarities in trade and securities AML risk
Recent enforcement actions against both large and small securities firms have illuminated key risks and typologies in the securities sector. Some of these are almost identical to longstanding high-risk money laundering typologies at banks.
Certain products and services — and therefore certain customer relationships, transactions and delivery channels — offered by securities providers differ from banks. Given the high volume and rapid pace of activity within the securities sector, it is particularly difficult for these companies to precisely identify and estimate their risks.
But, while specific products differ, certain inherent risks are the same. FATF’s guidance explicitly likens inherent risks associated with correspondent banking — one of the most troublesome risks for banks — to certain risks inherent to a securities provider. Both correspondent banking and securities products heavily involve institutional and intermediated relationships. But the similarities don’t end there. The mechanics of the “mirror trading” scheme almost exactly resemble the mechanics of a typical trade-based money laundering (TBML) scheme.
Generally, in a TBML scheme, money is laundered through the purchase and sales of licit goods executed via a gate-keeper, who provides access to a goods market. The animation below shows, in the specific case of the black-market peso exchange, how an illicit actor sends their illicit U.S. dollar (USD) proceeds through a peso broker to purchase and sell licit goods. The illicit actor eventually obtains pesos back from the broker, effectively laundering the illicit USD proceeds.
In the animation above, we see a visualization of the mechanics of a “mirror trading” scheme. Similar to the TBML example, an illicit actor uses a broker — in this case, a securities broker — to gain access to a market— in this case, the securities market — to buy and sell securities. This access offers an almost identical mechanism to quickly integrate large sums of illicit cash into licit assets (i.e. securities) and the ability to move that value quickly across jurisdictions.
How your firm can leverage innovative technology to manage securities AML risks
The FATF guidance stresses the need for securities providers to pursue a “group-level approach” to adequately mitigate money laundering and terrorist financing risks. However, there is no one-size-fits-all approach to controls. Institutions must holistically consider and estimate their risks across all different business units — bank and securities — primarily through a group-wide risk assessment and control framework designed for the specific business profile, customer base, geographic footprint and overall inherent risks.
Generating a single view of your customer is critical to a risk-based group-level approach. Quantexa’s contextual monitoring solution for markets AML enables firms to identify new and emerging risks, as well as more precisely model customer risk and money laundering typologies. By bridging the gap between trade surveillance and AML efforts, Quantexa enables firms to create a more complete picture of suspicious activity and file higher quality Suspicious Activity Reports (SARs). These improvements in your AML programs’ effectiveness will lead to efficiency gains and cost savings.