Keeping ahead of financial crime

Transcription

1 Keeping ahead of financial crime 7 September PRECISE. PROVEN. PERFORMANCE.

2 Agenda Introduction Tim West, Partner Market Abuse Regulation Giovanni Giro, Senior Manager The Fourth Money Laundering Directive Darren Johal, Manager Insights of a Skilled Person Andrew Jacobs, Director Conclusion Tim West, Partner

3 Market Abuse Regulation Giovanni Giro PRECISE. PROVEN. PERFORMANCE.

4 What is Market Abuse? Market abuse is a concept that encompasses unlawful behaviour to gain an unfair profit in the financial markets and consists of insider dealing, unlawful disclosure of inside information or market manipulation Occurs in relation to Financial Instruments whether traded on a regulated market or other the counter Market abuse prevents market transparency, which is a prerequisite for trading in integrated financial markets May amount to criminal offences and civil offences Recognised as unlawful in most jurisdictions

5 What s new? Market Abuse Regulation (EUMAR) EU Regulation reforming the Civil Market Abuse Regime Harmonised market abuse rules across all EEA countries Some elements depend on MiFID II (Jan 2018) In the UK Took effect in the UK on 3 July 2016 EUMAR is directly applicable Amendments to FSMA and MAR sourcebook Note: Criminal offences unchanged in CJA 1993 and FS Act 2012

6 Scope of application of EU MAR Territorial scope EUMAR applies exterritorialy to a market abuse offence relevant to financial instruments traded in the EEA even if committed outside the EEA or by a non-eea entity Three levels of responsibility Issuers and exchange / MTF / OTF operators disclosure / notification Regulated Firms trading on / off exchange MA prevention Individuals behaviour

7 New prohibitions in EUMAR Under EUMAR there are two primary offences: Art 14 Prohibition of Insider Dealing and of Unlawful Disclosure of inside information Attempting or succeeding to deal on the basis of inside information or passing inside information to other person, either directly or indirectly Art 15 Prohibition of Market Manipulation Attempting or succeeding in manipulating prices of instruments or supply or demand of instruments in financial markets FCA can take enforcement action against civil offence

8 Behaviours that amount to Market Abuse Insider dealing: dealing or trying to deal on the basis of inside information Unlawful disclosure: insider improperly discloses inside information Manipulating transactions: trading or placing orders that give a false or misleading impression of supply or demand and affect price

9 Behaviours that amount to Market Abuse Manipulating devices: trading, or placing orders through fictitious devices or any other form of deception or contrivance Dissemination: knowingly giving false or misleading impression about a Financial Instrument or an issuer Misleading behaviour and distortion: behaviour that gives a false or misleading impression of either supply or demand or otherwise distorts the market in a financial instrument

10 Broader effects of EUMAR Extended definition of financial instruments Affects emissions allowances and commodity derivatives More extensive requirements around systems and controls New rules on market abuse through electronic trading and high frequency trading platforms New market abuse offence for manipulation of benchmarks Offences extended to attempted behaviour Cooperation between financial and commodity regulators

11 Attempted behaviours Under the EUMAR, it is an offence to even just attempt market manipulation, insider dealing or unlawful disclosure For example: Sending s with highly sensitive Merger and Acquisition information to a friend may amount to improper disclosure even if the friend does not read or act on it Placing very specific orders to manipulate the price of instruments could amount to market manipulation even if the desired price change does not occur

12 Safe harbours Some legitimate behaviours in situations where activities do not amount to a Market Abuse offence due to legitimate exceptions Price stabilisation: price support activities carried out in accordance with the price stabilisation rules by buying the securities in the secondary market for a limited time after their issue Share buy-back: a purchase by a company of its own shares Accepted Market Practices: specific exceptions to potential Market Manipulation

13 Key FCA requirements for all firms Market Abuse prevention policies and controls Suspicious transaction and order reports (STORs) Managers transactions (PDMR Notifications) Buy-back programmes and stabilisation measures Accepted market practices Insiders lists and Chinese walls

14 Key FCA requirements for all firms Monitoring of investment recommendations Whistleblowing PA dealing Transaction Reporting Telephone recording Training

15 In summary Concept of Market Abuse remains similar but has broader scope EUMAR directly applicable from 3 July 2016 New definitions with reference to MiFID II Extended to OTC trades and attempted behaviour Criminal offences remain unchanged FCA expects accurate disclosures, notifications and reporting Firms must demonstrate that they have adopted effective measures to prevent Market Abuse

16 The Fourth Money Laundering Directive Darren Johal PRECISE. PROVEN. PERFORMANCE.

17 Overview of the Fourth Money Laundering Directive (MLD4) MLD4 is a EU Directive designed to bring a more risk-based approach to the prevention of money laundering and terrorist financing Have a more coherent approach to AML & CTF rules across the EEA whilst also removing any ambiguities in previous legislation Takes into account the recommendations of the Financial Action Task Force ( FATF ) from 2012 Designed to reduce compliance costs in relation to AML over the long term Came into effect in June 2015 Firms have until 26 June 2017 to be compliant

18 What are the core areas of the MLD4 The core areas of MLD4 remain somewhat in line with the Third Directive, but it introduces changes and updates to some key components: Risk Based Approach / EEA wide AML and CTF Risk Assessment Beneficial Ownership & Public Directories Sanctions and Politically Exposed Persons (PEPs) Simplified and Enhanced Due Diligence Policies and Procedures Penalties Payments / High Value Traders in goods

19 Other MLD4 key updates for consideration Early Transposition The Commission has proposed to bring the MLD4 into national law by 1 January Crypto Currency Currently virtual currencies are not monitored in any way by public authorities in the EEA. Virtual currency platforms and e-wallet providers will become subject to the obligations to implement preventative measures and report suspicious transactions under MLD4. Lower Thresholds for Pre-Paid Cards The Commission has proposed to lower the thresholds form 250 to 150 for nonreloadable pre-paid payment instruments to which CDD measures must be applied. The Commission also proposes to suppress the CDD exemption for online use of prepaid cards.

20 Other MLD4 key updates for consideration Enhanced Powers for the Financial Intelligence Units In order to assist Financial Intelligence Units ('FIUs') the Commission has proposed a number of additional measures to assist FIUs to collect and analyse information about suspicious transactions, money laundering and terrorist financing Tax Crimes will be included in the list of crimes relevant to money laundering Correspondent relationship the definition will be extended beyond traditional correspondent interaction to all relationships between two financial / credit institutions, regardless of their purpose

21 Financial Crime Reporting The FCA have confirmed the launch of an annual Financial Crime return known as REP-CRIM, to collect data and notifications through one reporting tool Firms will be required to submit a REP-CRIM only for areas of their business subject to Money Laundering Regulations (MLRs) Proportionality rule firms in scope with total revenue of less than 5m are exempt from reporting REP-CRIM to be submitted through GABRIEL Reporting obligations take effect from 31 December 2016, and affected firms have a submission period of 60 business days from year end

22 Insights of a Skilled Person Andrew Jacobs PRECISE. PROVEN. PERFORMANCE.

23 An overview of our Skilled Person s work Skilled Person s Lot Area Client number Client Assets Governance & Individual accountability Controls & Risk Management Conduct Financial Crime Regulatory Returns

24 The content of Financial Crime Requirement Notices 7 Areas of Financial Crime Based upon five Financial Crime Reviews where we have acted as the Skilled Person and 2 other Financial Crime related Requirement Notices seen.

25 Root causes May be a target of Money Laundering Third Party payments Failing to identify / report SARs Concerns arising which lead to a S166 Notice Client Take-on In effective policies and procedures Concerns about monitoring systems and controls Resources May not be detecting Market Abuse Identification and application of EDD Inadequate Risk Assessment Lack of tailored policies Lack of documented procedures Concerns about Sanctions / Adverse Media hits Infrequent refresh of KYC Suitability of oversight by Executive & Board Competence of Second Line of Defence Knowledge of competitor reporting Concerns about surveillance

26 1) Governance & Oversight This topic features in every Requirement Notice, whether implicitly or explicitly. The top three areas where the Regulator is likely to focus: How information permeates the governance structure Evidence of Board Member knowledge of issues within the Business How oversight is applied and evidenced

27 2) Key individuals The focus in this area has shifted over the last 18 months, with a widened onus on key individuals responsible for areas of Financial Crime detection and prevention: No longer homing in solely on Significant Influence Function holders (SIFs) The knowledge, experience, competence and involvement of individuals The level and appropriateness of resource committed to key functions

28 3) Risk Assessment Identification, quantification and assessment of risk are key areas where the Regulator will focus within firms. The prevalent trends in terms of review scopes are: Enterprise-wide Risk Assessment & Risk Appetite Client / Customer Risk assessment: Source of Funds Source of Wealth Changing / emerging risks..of increasing interest

29 4) Due Diligence Some of the themes around Due Diligence are longstanding, some are coming under heightened focus. The middle theme is one where we know thematic regulatory work is planned: Customer / Client Due Diligence Third Party Due Diligence Acquisition Due Diligence

30 5) Market Abuse issues Scrutiny in respect of Market Abuse risk is an areas where more Regulatory resources are being applied to monitor emerging and increasing risks. The areas of greatest interest from our experience are: Suspicious Transaction and Order Reporting Surveillance Activities of employees: Gifts, Entertainment and Hospitality guidelines Personal Account Dealing (PAD) Telephone Recording

31 6) Ongoing Monitoring A number of points continue to be recurring themes consistently arising in Requirement Notices when it comes to established relationships and Business As Usual (BAU) activity: Abdication v delegation Reliance on customer / client information => KYC Refresh Transaction Monitoring

32 Other issues arising from S166 Financial Crime Requirement Notices.. Payment Screening Remittances Ongoing Screening Training & Competence Best Execution Suspicious Activity Reports Bribery Act compliance Management of Conflicts Disclosure Guidance and Transparency

33 Our biggest revelations as a Skilled Person What we have learned.. Intelligence Focus on the Board & Senior Management Risk Assessment Due Diligence Reviews coming in two phases Acting upon Final Notices and Dear CEO letters The importance of not making purely cost driven decisions The Expanding universe and what s expected of Firms FCA Financial Crime Guides MLR 2007 JMLSG Note Dear CEO Letters EU MAR Final Notices ESMA Guidelines Market Watch documents Code of market Conduct CEO Letters

34 Conclusion Tim West PRECISE. PROVEN. PERFORMANCE.

35 Helping to keep up-to-date Financial Insight our quarterly newsletter E-alerts subscribe via Regular seminars Follow us on Visit our website:

36 Keeping ahead of financial crime 7 September PRECISE. PROVEN. PERFORMANCE.