PRECISE. PROVEN. PERFORMANCE. www.moorestephens.co.uk
Keeping ahead of financial crime 7 September 2016
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
PRECISE. PROVEN. PERFORMANCE.
Market Abuse Regulation Giovanni Giro
www.moorestephens.co.uk
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
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
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
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
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
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
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
‘Attempted’ behaviours
Under the EUMAR, it is an offence to even just ‘attempt’ market
manipulation, insider dealing or unlawful disclosure
For example:
• Sending emails 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
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
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
Key FCA requirements for all firms
• Monitoring of investment recommendations
• Whistleblowing
• PA dealing
• Transaction Reporting
• Telephone recording
• Training
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
PRECISE. PROVEN. PERFORMANCE.
The Fourth Money Laundering Directive
Darren Johal
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
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
Other MLD4 key updates for consideration
• Early Transposition – The Commission has proposed to bring
the MLD4 into national law by 1 January 2017.
• 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 non-
reloadable 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.
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
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
PRECISE. PROVEN. PERFORMANCE.
Insights of a Skilled Person Andrew Jacobs
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
1
2
3
4
5
6
7
8
9
10
11
The content of Financial Crime
Requirement Notices
0
1
2
3
4
5
6
7Areas 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.
Root causes
Lack of tailored policies
Third Party payments
Concerns
arising
which lead
to a S166
Notice
Inadequate Risk Assessment
Identification and application of EDD
Failing to identify / report SARs
Concerns about Sanctions / Adverse Media hits
Knowledge of competitor reporting
Suitability of oversight by Executive & Board
Competence of Second Line of Defence
Concerns about surveillance
Lack of documented procedures
Infrequent refresh of KYC
Client Take-on
May be a target of Money Laundering
In effective policies and procedures
Concerns about monitoring systems
and controls
Resources
May not be detecting Market Abuse
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
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
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
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
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
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
Other issues arising from S166 Financial
Crime Requirement Notices..
Suspicious Activity Reports
Disclosure Guidance and Transparency
Training & Competence Payment Screening
Bribery Act compliance Management of Conf l icts
Best Execution
Ongoing Screening
Remittances
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
MLR 2007
JMLSG Note
FCA Financial
Crime Guides
EU MAR
Market Watch
documents
Final Notices
Dear CEO Letters
CEO Letters
Code of market
Conduct
ESMA Guidelines
Our biggest revelations as a
Skilled Person
PRECISE. PROVEN. PERFORMANCE.
Conclusion Tim West
Helping to keep up-to-date
• Financial Insight – our quarterly newsletter
• E-alerts – subscribe via [email protected]
• Regular seminars
• Follow us on Twitter: @MSFinSec
• Visit our website: www.moorestephens.co.uk/sectors/financial-
services
PRECISE. PROVEN. PERFORMANCE. www.moorestephens.co.uk
Keeping ahead of financial crime 7 September 2016