The Security and Exchange Commission, SEC, has been up and doing in its resolve to tame money Laundering in the Capital Markets. The Apex regulatory Authority in the Capital Markets does this through embarking on due diligence of companies. However, Money laundering has been a menace the Nigeria and its perpetrators employ many tactics in their operation.
Speaking at the 2023 SEC Academy, SEC Training for journalists, held recently in Lagos, Rahmatu Lami Sheikh-Lemu of CAMS who holds master’s Degree from the Institute of Criminology-Malaysia, Economic Crime Management 2014, who is also a member Association of Financial Crime Specialists 2012 and Certifies Anti-Money laundering Specialists to mention but a few, noted typologies typologies & Red Flags in Capital Markets. Adding that typologies provide a glimpse into the various methods criminals employ to launder money. It’s important to note that money laundering techniques continually evolve as criminals adapt to changing regulations and technologies in what form is the illicit money moved? Cash, asset, Jewelries, through what channels is the money moved? Preferred formal and informal channels, how is the money moved? ways and means.
Where is it moved to? Locations Who is involved in moving it? Criminals, couriers, third parties”, he asked.
Speaking further on money laundering, he said, Money laundering involves disguising the true origin, ownership, or destination of illicitly obtained funds. Criminals employ various methods to achieve this.
Placement: This is the initial stage of money laundering where cash proceeds from criminal activities are introduced into the financial system. Criminals may deposit cash into banks, exchange it for monetary instruments like money orders or traveler’s checks, or use it to purchase assets such as real estate or luxury goods.
Layering: In this stage, multiple complex transactions are conducted to obscure the audit trail and make it difficult to trace the illicit funds. Funds may be moved between different accounts, converted into different currencies, or used to purchase and sell various assets across multiple jurisdictions.
Integration: In the final stage, the laundered funds are re-introduced into the legitimate economy, appearing as legitimate assets. This can be done through investments in businesses, purchasing real estate, or investing in financial products such as stocks or bonds.
Money laundering risks in capital markets have been a focus not just to the regulators but international bodies/intuitions as the capital markets is an identified as posing a high money laundering risk.
Findings from a recent assessment revealed that Broker-Dealers and Fund/Portfolio Managers have a significant number of individual clients and are exposed to non-face–to-face transactions to a limited degree which can be seen as a form of red flag. Thus, also that most of the foreign investments in the Nigerian capital market come from countries with low ML/TF risk and as such lower jurisdictional risk.
However, the capital market sector is perhaps unique among industries in that it can be used both to launder illicit funds obtained elsewhere and to generate illicit funds within the industry itself through fraudulent activities.
“It is also noteworthy that in Nigeria, the SEC carries out risk-based AML/CFT examination for the sector which signifies good mitigation/controls lowering the level of risk. Thus, a diagnostic work by the Financial Conduct Authority (FCA) to better understand how capital markets are used for money laundering was published as a thematic review of Understanding the Money Laundering Risks in Capital Markets in 2019”, he stressed.
“This thematic review identified a lack of knowledge of AML risks by capital market operators. Additionally, other researchers attributed to a lack of understanding of the obligations of various Acts, Regulations, and jurisdictional laws which leads to under filing of Suspicious Activity Reports (SARs)”, he added.
He noted typologies such as Shell Companies, trade-based laundering and smurfing.
Shell companies: Criminals set up fake companies or use existing ones to create a frontage of legitimate business activity. These companies may have no actual operations or assets and are used to facilitate money laundering by providing an appearance of legitimate transactions and business income.
Trade-based laundering: Criminals manipulate trade transactions to move funds across borders and obscure the source of illicit funds. Techniques include over- or under-invoicing goods or services, falsely describing goods to misrepresent their value or nature, or using fraudulent shipping documents.
Smurfing: Also known as structuring, this involves breaking down large amounts of cash into smaller, less suspicious transactions to avoid detection. Criminals may deposit the cash into multiple bank accounts, make small withdrawals or transfers, or use multiple individuals (smurfs) to conduct transactions on their behalf.
Money Laundering methods according to him include virtual currencies, offshore accounts and Trade Haven, Casino Laundering and Crowdfunding platforms.
Virtual currencies: Criminals use digital currencies like Bitcoin use to launder money due to their pseudonymous nature. They convert illicit funds into cryptocurrencies and then convert them back into traditional currencies through various exchanges or mixing services to obfuscate the source of funds.
Offshore Accounts and Tax Havens: Criminals may use offshore bank accounts or entities in jurisdictions with strict secrecy laws and low tax rates. These accounts provide anonymity and make it difficult for authorities to trace and seize illicit funds
Casino Laundering: Criminals may use casinos to convert illicit funds into chips or tokens, gamble with them, and then cash out the winnings as seemingly legitimate funds. This process helps legitimize the proceeds of crime.
Crowdfunding Platforms: Criminals exploit crowdfunding platforms to legitimize their illicit funds by creating fake projects or campaigns to receive donations or investments from unsuspecting individuals.
The money Laundering expert listed the challenges and vulnerability to include lack of adequate Knowledge/training weak implementation and poor qualities of reports, facelessness, trans border, ease of access, speed, big volume and complexities.
Lack of Adequate Knowledge/Training: Despite the regulatory requirements requiring CMOs to conduct training, most operators still lack adequate understanding as to how money laundering could manifest itself in capital markets.
Money laundering problems in capital markets are often perceived as product, culture, and compliance requirements rather than a factor that can be detrimental to business which can jeopardize organizational image, operations, and reputation.
Weak Implementation and Poor Qualities of Reports: The implementation of preventive ML/FT requirements by reporting institutions is very weak. This dooms any initiative to detect financial flows linked to ML/TF.
Facelessness: They provide a certain degree of anonymity and money launderers having countless masks to choose from, not to mention the complex legal structures used to blur ownership. These include agency trading, nominee accounts etc. these are particularly dangerous because trading chains usually have multiple layers involving several participants, each having limited visibility and only seeing their direct customer instead of the whole picture, hence relying on due diligence to be performed by others.
Transborder: Capital markets have no geographical limit and witness hourly trading activities across jurisdictions in various markets and asset classes.
Ease of access: They are easily accessible, especially with the boom of internet-based trading accounts and electronic trading applications.
Speed: Time is of the essence in trading. Thus, orders are placed and routed rapidly, enabling a speedy movement and transfer of illicit funds and assets.
Big volumes: As of November 13th, 2023 the All-share index on the NGX floor is 70612.81. This is just to see the volumes of transactions taking place daily, which makes detecting layered transactions very challenging.
Complexity: Capital markets offer a wide variety of complex products that can be used by money launderers through sophisticated tactics and fictitious trading schemes.
Under Reporting of Capital Market STRS, he maintained that CMOs should understand the importance of detecting insider dealing or market manipulation, some firms failed to spot that such conduct may also be indicative of money laundering.
In the case of Nigeria, STRs are filled to NFIU directly, as it is now, there is a very low level of filing by the CMOs attributed to: lack of awareness of typologies of money laundering in capital markets; Inadequate capability to detect suspicious activity; mind frame of CMOs believing ML are not most likely to occur in the market and that STRs are quite insignificant; failing to think through whether market abuse also gives rise to a suspicion of money laundering; CMOs do not attach significance to the quality of reports to file as SAR and lack of attention to detail.
Legal and policy frameworks – Adequacy and comprehensiveness of the legal and policy environment.
The financial system, its strengths, and weaknesses – a source, destination, or transit for ML?
Geographical, regional, and international relativity – Who are you?
Supervisory and enforcement frameworks – mandated institutions, adequate and trained personnel; and high integrity. Compliance framework – preparedness of reporting entities, civil society – a push or a drag?
Main Indicators for Securities: he listed methods used to launder money through the securities industry include : High-value bank transfer deposits into asset management company, a possible Layering method; Fraudulent change of ownership of shares and fraudulent misrepresentation and connivance on transfer of securities of listed companies, Series of (repetitive) transactions; Misuse of familiarity with brokers; Irregular high-value investment through Asset Management; and Fraudulent change of share ownership High-value
Unjustifiable income, use of third-party natural or legal persons for transactions, Use of fictious or shell companies/dubious identities, complex legal structures with peculiar UBOs, high volume of transactions between companies with same ownership, one way traffic – receiver only and non-resident customers with high volume transactions