Trading by organised crime groups (OCGs), alongside ways for firms to mitigate the risk of inadvertently facilitating it, is the focus of the FCA’s Market Watch 77.
The regulator suggests somewhat surprisingly, that trading by members of OCGs accounts for a significant proportion of the overall volume of suspicious trading observed in equity markets.
The release of the latest FCA guidance coincides with the arrests, in conjunction with the National Crime Agency (NCA), of three London based individuals “on suspicion of insider dealing, conspiracy to insider deal and money laundering linked to organised crime”.
Steve Smart, FCA joint executive director with responsibility for delivering enforcement and market oversight, said: “Insider dealing poses a significant threat to the integrity of financial markets both in the UK and overseas” declared.
Financial crime
The publication of MW77 also coincides with the publication by the FCA of an update on the progress made in connection with the reduction and prevention of financial crime alongside an update to its Financial Crime Guide, which contains additional detail on measures that the regulator expects firms to have in place in order to prevent insider dealing and market manipulation. At a recent Global Relay event, Jamie Bell, Head of Secondary, Market Oversight, also mentioned the FCA’s concerns relating to OCGs.
This market watch summarizes the characteristics of OCG activity in equity spread bets and CFDs including:
- trading patterns preceding M&A press speculation or actual M&A announcements;
- pro-active recruitment of inside information sources;
- use of intermediaries who broker inside information;
- use of umbrella accounts at overseas broking firms that lack UK-level safeguards;
- use of facilitators to open accounts with overseas firms;
- feeding M&A stories to financial media outlets in order to benefit from ensuing price movements;
- links with other types of serious crime.
The FCA is reminding firms of their obligations to “counter the risk of being used to further financial crime”.
It suggests that firms should look out for clients who:
- regularly generate STORs;
- frequently trade before announcements of M&A activity;
- open and close positions in response to media speculation about M&A without waiting for issuer responses;
- are part of a group trading in the same security for the first time;
- are connected to current or former clients about whom the firms has concerns.
It recommends that executing firms should consider the following measures:
- clearly sign-posting a zero-tolerance approach to market abuse;
- obtaining evidence of adequate surveillance and market abuse prevention measures at overseas broking firms;
- regarding all trades placed prior to media reporting of an M&A as suspicious and filing STORs where appropriate.
Although not voiced explicitly, the reiterated call for a bigger focus on clients’ trading activity and history might suggest future calls to action on KYC process enhancements, especially considering the FCA has put over 600 companies with a high MLROs churn rate on notice. The ability to identify and reconcile market activity with a client’s profile seems to be increasingly important.
Advisory firms should be on the lookout for OCG members approaching staff who possess inside information in order to obtain this from them.
Measures that advisory firms should consider in order to thwart the recruitment of their staff as information sources by OCGs include:
- advising staff of the risk of disclosing access to inside information on social media (junior staff are likely OCG recruitment targets);
- considering not surfacing the names of staff engaged in M&A advisory work on social media (or presumably firm websites) beyond the “principal senior contacts”.
According to Mark Francis, the FCA’s director of wholesale and unauthorised business investigations, the FCA has strengthened its focus on financial crimes systems and controls and has “made good progress to reduce and prevent financial crime”. The regulator is now looking for more collaboration across four areas:
- data and technology;
- collaboration;
- awareness;
- metrics.
The FCA is not the only regulator concerned about the growing exploitation of financial markets and firms operating within this ecosystem by OCGs. The recently published 2024 National Risk Assessment for money laundering, terrorist financing, and proliferation financing highlights the pervasive involvement of organized crime groups in activities such as fraud, money laundering, smuggling and terrorist financing.
The money-laundering risk assessment, for example, points out the vulnerability of financial services firms, such as investment advisers, for inadvertently facilitating organized crime operations.
Like the FCA it also draws attention to the potential limited reporting obligations as well as limited controls of corresponding overseas operations. This regulatory asymmetry is regularly leveraged by organised crime groups who see cross-border regulatory regime differences as arbitrage opportunities and use firms with “weaker or non-existent client due diligence practices” in order to gain access to the US financial system.
GRIP comment
Financial institutions may need to consider whether the expectations around market abuse involving organized crime should extend beyond adequate controls via rolling surveillance and also include the ability to complete a “deep dive” into communications with a client to rule out any attempts of collusive behaviour potentially leading to insider dealing.