Risk Management in Capital Markets and Pension Funds, September 25, 2014
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RISK MANAGEMENT: LEGAL ASPECTS OF CAPITAL MARKETS AND PENSIONS LAWS IN KENYA BENJAMIN MUSAU MANAGING PARTNER Lecturer, University of Nairobi, School of Law [email protected] 1
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Transcript of Risk Management in Capital Markets and Pension Funds, September 25, 2014
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RISK MANAGEMENT: LEGAL ASPECTS OF CAPITAL MARKETS AND PENSIONS LAWS IN KENYA
BENJAMIN MUSAUMANAGING PARTNER
Lecturer, University of Nairobi, School of Law
Edmond K. Wesonga
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INTRODUCTION
This session will provide an overview of risks relating to:
1. money laundering, 2. terrorism and 3. bribery risks in capital markets and
pension schemes
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INTRODUCTION Capital market development is an important
component of financial sector development and supplements the role of the banking system in economic development. Specifically, capital markets assists in price discovery, liquidity provision, reduction in transactions costs, and risk transfer.
Pension funds should provide proper risk management to ensure that the retirement income of their members is safeguarded. To do this, pension funds should have appropriate risk management policies that safeguard the replacement rate, investment safety and time-based risks such as inflation.
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CONT’D Both the Capital Markets and Pension
schemes face risks relating to: 1. Money Laundering2. Terrorism Financing3. BriberyThese risks have been addressed by the: • Enactment of the Proceeds of Crime and Anti
Money Laundering Act• Issuance of Anti Money laundering guidelines
by Capital Markets Authority
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DEFINITION OF TERMS
Money Laundering Generally, money laundering is the process of hiding or disguising the origin, receipt, existence, movement, destination, use and acquisition of capital or movable or immovable property, as a result of an illegal activity, to make them appear legitimate.
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There are three stages involved in money laundering, namely which are placement, layering and integration. There has been attempts to simplify these stages to include1. Collection of money: This entails Physical
reception of the money in cash, coming from illicit activities.
2. Placement: Introduction in financial or non-financial institutions of cash coming from criminal activities.
3. Mix with funds of legal money origin: Making of successive financial transactions with illegal money by mixing it with legal money, to eliminate or to hinder monitoring of its track.
4. Investment: Conversion of illicit money in various kinds of assets: movable and immovable properties, securities and other financial assets or businesses facade, through the transfer of the laundered funds to legal organizations without apparent links with the organized crime.
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TERRORISM FINANCING Terrorism financing is the crime committed by any way, directly or indirectly, illegally and by choice, it provides and collects funds with the purpose of being used, or knowing that they will be used, wholly or partly to cause death or serious injuries to civilians, or any other person who is not participating actively hostilities in a war situation, when the purpose of such act is to intimidate a population or compel a good government or an international organization to perform or abstain from doing any act
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THE RISKS IN CAPITAL MARKETS The capital markets is now commonly referred to as
the securities industry. The securities industry is one of the core industries
through which persons and entities can access the financial system. This access provides opportunities for criminals to misuse the financial system to engage in money laundering (ML) and terrorist financing (TF).
The securities sector can be used both to launder illicit funds obtained elsewhere, and to generate illicit funds within the industry itself through fraudulent activities.
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As reported by Asia/Pacific Group (APG) member countries, the following were the most common suspicious indicators and methods related to money laundering and predicate offences involving the securities industry include: 1. Changing share ownership in order to
transfer wealth across borders; 2. Redeeming a long-term investment within a
short period; 3. Opening multiple accounts or nominee
accounts; 4. Using brokerage accounts as long term
depository accounts for funds; 5. Effecting transactions involving nominees or
third parties; 6. Engaging in market manipulation, e.g. “pump
& dump” schemes.
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The Risks involved in Capital Markets are related to the following among others:1.Low Priced securities2.Brokers 3.Depository institutions4.Financial institutions5.Trust, nominee and omnibus accounts6.Charitable and other non-profit organizations7.Shell companies8.Hedge funds
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LOW PRICED SECURITIES RISKS
Low priced securities, also known as penny stocks, refer to low-value equity interests in companies that are publicly traded or are about to become so
vulnerabilities posed by these securities are first these types of securities are often used to generate illicit assets through market manipulation, insider trading, and fraud. Second, these securities can be acquired by investing illicit assets into a company that is about to become public. Once the company goes public, the money launderer can sell his or her stake, thereby giving funds the appearance of having been derived from a legitimate securities transaction.
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BROKER RISKS A broker-dealer might assume that, because another
financial institution has opened an account for a customer, the customer does not raise ML/TF issues. If illicit assets are successfully placed at a depository institution, the broker-dealer may assume that, because the funds are from an institution which is subject to Anti Money Laundering and Combating the Financing of Terrorism (AML/CFT) Rules, the customer does not pose a ML/TF risk and therefore will accept cheques or wire transfers from that institution to fund a securities account.
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DEPOSITORY INSTITUTIONS RISKS
Where illicit assets are successfully placed at a depository institution, a securities intermediary whether affiliated or not, may unjustifiably rely on the depository institution’s investigation and assume that the customer poses no ML/TF risk.
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USE OR CREATION OF A FINANCIAL INSTITUTION FOR ML/TF PURPOSES
Criminal elements can either create or gain direct control of a financial entity or seek to exert influence over the management or staff in furtherance of their aims. In so doing, they may seek to beneficial owners of a significant controlling interest or hold a management function.
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CHARITABLE AND OTHER NON-PROFIT ORGANISATIONS RISK
Such organisations may be used as a front for transferring funds to suspect beneficiaries located in high-risk areas/jurisdictions or conflict zones deemed to harbour or support terrorists.
Shell Companies These are non-publicly traded corporation or limited liability companies that might have no physical presence and generate little or no independent economic value and whose ownership is unclear. They may be used to introduce illicit funds into a financial system and/or generate illicit funds through manipulative or fraudulent securities activities.
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UNREGULATED INVESTMENT FUNDS AND POOLS (I.E. HEDGE FUNDS)
These are vehicles established to hold and manage investment assets. Because of the way they are structured, they may not be subject to regulatory oversight.
They pose ML/TF vulnerability because the broker may not know the identity of the underlying hedge fund investors.
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TERRORISM FINANCING RISKS IN CAPITAL MARKETS
There is relatively little evidence of the securities industry being used to finance terrorism. However, this lack of evidence specific to the securities industry does not rule out the potential for terrorist financing in this sector
Bribery in Capital MarketsBribery in aids money laundering and terrorism financing in securities exchange. This may take the form of giving financial advances to individuals to gain access to non-public material information on the securities of a company. In securities, the person advancing financial benefit will make the receiver not to collect adequate information required thus concealing their identities.
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ML/TF AND BRIBERY RISKS IN PENSION SCHEMES Pension schemes have been at some point abused and criminals use
them to launder money, finance terrorism and bribe officers. The following are indicators of money laundering in pension schemes.
1. Large cash sums deposited in Pension schemes by members of the scheme.
2. Deposit of securities or other assets whose possession is not justified by the contractor’s or policyholder’s income-earning capacity and/or type of business payment into a capitalisation scheme.
3. Transfer of assets from an unrelated third party into a capitalisation scheme.
4. Insistence on depositing securities or other assets into a capitalisation scheme that would not normally be allowed by the scheme rules.
5. Unrelated third party paying contributions cash on behalf of a member of a pension scheme.
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LEGAL MEASURES TAKEN TO COMBAT MONEY LAUNDERING AND TERRORISM FINANCING IN KENYA
Kenya is no longer subject to Financial Action Task Force (FATF’s) monitoring process under its on-going global AML/CFT compliance process according to FATF’s report on 27th June 2014 .
FATF is a global body that is universally recognized as the international standard setter for anti- money laundering and combating the financing of terrorism policies and standards.
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Kenya has taken significant steps towards improving its anti-money-laundering and combating the financing of terrorism (AML/CFT) regime. • Kenya has enacted Proceeds of Crime and Anti-Money Laundering
(Amendment) Act, 2009 (POCAMLA) • The CBK has issued a revised AML Guidelines• The Capital Markets Authority has drafted AML Guidelines for the
securities industryKenya has continued to work on implementing its action plan to address deficiencies by: 1. adequately criminalizing terrorist financing;2. ensuring a fully operational and effectively functioning Financial
Intelligence Unit;3. establishing and implementing an adequate legal framework for
the identification and freezing of terrorist assets;4. implementing effective, proportionate and dissuasive sanctions
in order to deal with natural or legal persons that do not comply with the national AML/CFT requirements;
5. implementing an adequate and effective AML/CFT supervisory program for all financial sectors; and
6. further improving and broadening customer due diligence measures.
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POCAMLA establishes 1.Anti-Money Laundering Advisory Board
(AMLAB), 2.the Financial Reporting Centre (FRC), 3.the Asset Recovery Agency and 4.the Criminal Assets Recovery Fund.It also criminalizes money laundering and provides for a comprehensive framework of criminal and civil seizure and forfeiture of illicit proceeds.FRC is an independent body whose principal objective is to assist in the identification of the proceeds of crime and combating money laundering. AMLAB advises the Director FRC on the performance of his functions and the exercise of his powers under the Act.
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CONCLUSION Money laundering and terrorism financing are closely related
and the two vices pose a serious threat to the integrity and stability of the international as well as our country’s financial and security systems
Although there is no adequate evidence to suggest that the securities industry lends itself to terrorist financing, it remains a serious risk.
The use of the securities industry to launder money constitutes an actual threat. The industry itself can be uniquely used to generate illicit proceeds from proceeds which might have had a legitimate origin.
Kenya’s Anti-Money Laundering regime is largely contained in The Proceeds of Crime and Anti-Money Laundering Act, 2009 (POCAMLA) which came into effect on 28th June 2010.
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BIBLIOGRAPHY AND REFERENCES http://www.ffiec.gov/bsa_aml_infobase/pages_manual/OLM_013.htm. Retrieved September 25, 2014. http://www.irs.gov/businesses/small/article/0,,id=154557,00.html. Retrieved September 25, 2014. http://en.wikipedia.org/wiki/National_Security_Letter. Retrieved September 25, 2014. http://www.bankersonline.com/security/guru2008/gurus_sec101308b.html. Retrieved September 25,
2014. Money Laundering, A Banker14/security/guru2008/gurus_se http://www.newsfromafrica.org/newsfromafrica/articles/art_11997.html. Retrieved September 25, 2014. http://www.estandardsforum.org/kenya/standards/anti-money-laundering-combating-terrorist-financing-sta
ndard Retrieved September 25, 2014.
The Global Anti-Money Laundering Regime and Developing Countries: Damned if they Do, Damned if they Don G? (appearing in http://webcourses.lexisnexis.com/webapps/portal/frameset.jsp?tab_tab_group_id=_2_1&url=%2Fwebapps%2Fblackboard%2Fexecute%2Flauncher%3Ftype%3DCourse%26id%3D_17256_1%26url%3D. Retrieved September 25, 2014.
Benjamin Musau, The analysis of the Kenya Anti-Money Laundering Legislation. Internet Business Law Services (Journal) available at (http://www.ibls.com/TaxLawCurrent.aspx#1029). Retrieved September 25, 2014.
Benjamin Musau. The analysis on the extent to which Kenya has implemented the FATF Recommendations on Anti Money Laundering, Counter Terrorism Financing and Anti Corruption Measures. Internet Business Law Services (Journal) available at http://www.ibls.com/TaxLawCurrent.aspx). Retrieved September 25, 2014.
http://www.imolin.org/pdf/imolin/FATF_New_Standards.pdf. Retrieved September 25, 2014. Shamini Jayanathan, (unpublished) Article on the Analysis of the Kenya Prevention of Terrorism Act, 2012. The Proceeds of Crime and Anti Money Laundering Act, 2009. www.kenyalaw.org. Retrieved September
25, 2014. The Prevention of Organised Crimes Act, 2010. www.kenyalaw.org. Retrieved September 25, 2014. The Prevention of Terrorism Act, 2012. www.kenyalaw.org. Retrieved September 25, 2014. International Monetary Fund Report 2013. FATF – GAFI, Money Laundering and Terrorist Financing in Securities Sector, October 2009.
