Page 576 - IOM Law Society Rules Book

Money laundering through the securities sector

The securities sector on a global scale is characterised by its diversity, the ease with
which trading can now take place (through electronic trading for example), and the
ability to perform transactions in markets with little regard to national borders. These
characteristics make securities markets attractive to the ordinary investor looking for a
good return on his or her money. These same characteristics, along with the sheer
volume of transactions in many markets, also make the securities sector a potentially
inviting mechanism for the laundering of funds from criminal sources.

The illegal funds laundered through the securities sector may be generated by illegal
activities both from outside and from within the sector. For illegal funds generated
outside the sector, securities transactions or the creation of legal entities are used as
the mechanism for concealing or obscuring the source of these funds. In the case of
illegal activities carried out within the securities market itself – for example,
embezzlement, insider trading, securities fraud, market manipulation, etc. – the
securities transactions or manipulations generate illegal funds that must then be
laundered. In both cases, the securities sector appear to offer the launderer the
potential for a double advantage in allowing him to launder illegal funds and to
acquire an additional profit from the related securities fraud.

TYPOLOGIES

Typology 1: Acceptance of cash and the entry of illegal funds into the securities
sector

In many securities markets, only certain permitted persons or firms, such as
stockbrokers, banks or certain independent financial advisors may perform
transactions. These market operators are generally restricted or prohibited outright
from accepting cash to carry out such transactions. Given that criminal funds in the
form of cash must therefore be introduced into the financial system before entering
the securities sector, the use of the securities sector for laundering was considered by
the experts to be primarily part of the layering and integration stages of money
laundering.

Despite this view that the securities sector is unsuitable for the placement stage of
laundering, a few cases have occurred in which a broker has accepted cash payments
in violation of industry practice or formal rules against the practice. While the
acceptance of cash likely represents the minority of laundering operations in most
markets, the reliance on commissions as a source of income for securities market
professionals can exert pressure to accept cash in violation of rules or procedures.

Typology 2: Layering of illegal funds

Another way to use the securities sector to launder illegal funds generated by non-
securities related criminal activities is to purchase securities with illegal funds that
have already been introduced into the financial system, that is, at the layering stage of
laundering.