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

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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

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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

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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 fs@moorestephens.com

• 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