A Guide to Anti-Money Laundering for Crypto Firms

FCA Threatens Enforcement Action in AML Broker Trading Case

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UK regulator the Financial Conduct Authority (FCA) has made public its threatened enforcement action against an interdealer broker that has failed to exercise due skill, care, and diligence in its anti-money laundering (AML) policies and procedures.

The firm’s “serious failings” relate to the financial crime risk arising from cum-ex trading by clients. Interdealer brokers (IDBs) facilitate transactions between broker-dealers, banks, and other financial institutions, rather than private individuals. As a result, they work with large blocks of securities where there is a low trading volume or when clients seek anonymity.

Cum-ex trading is a method used to engineer multiple refunds for withholding tax paid on a dividend. In April, a £1.5bn claim by Denmark against British hedge funder Sanjay Shah was dismissed by the High Court as an attempt by Danish authorities to recover lost tax revenue, which is inadmissible in an English court.

It is estimated that the total cost of cum-ex trading to European national tax authorities was in excess of €55bn between 2001 and 2012, with Germany and Denmark most heavily impacted.

A cross-border investigation by a number of European news media outlets resulted in the publication of the CumEx-files in 2018. Three years later, an international media collaboration led by Correctiv claims taxpayers worldwide were cheated out of €150bn through the scam.

New investigations have been opened in Germany, where several individuals have already been found guilty of tax evasion and 1,000 people are currently under investigation, including junior and senior banking staff, lawyers, and brokers.

The BBC reports that 134 of those under investigation are UK citizens. While London has been identified as a nexus for cum-ex trading strategies, the UK exchequer was not targeted because UK dividends are not subject to withholding tax. However, the report states that bankers did “recycle” German tax credits at UK taxpayers’ expense.

Implications for broker-dealers

The FCA case that has provoked a warning notice concerns dealings in 2015, when the interdealer broker breached Principles 2 and 3 relating to skill, care, and diligence, management, and control, of the FCA’s Principles for Businesses.

The interdealer broker’s clients were offshore companies incorporated in the British Virgin Islands and the Cayman Islands, and a large number of individual US 401k Pension Plans, the FCA said. The clients had no apparent access to funds to settle the transactions and were controlled by a small number of individuals, some of whom had worked for the introducing entities.

The scale and volume of the purported trades were “highly suggestive of financial crime” and left the firm exposed to the risk that it could be used to further financial crime, the FCA said.

The use of offshore companies in this case once again highlights the importance of comprehensive due diligence checks for compliance teams when assessing the location base of clients’ funds. It follows recent revelations in the Pandora Papers leaks, that several trillion dollars were hidden by billionaires, world leaders, and celebrities in 29,000 offshore companies around the world.

Firms should look at the behaviors identified in this case and ensure their risk-based approach is appropriately tailored to understand their clients’ customer bases.

Our Practical Guide for Broker-Dealers to Create and Enhance an AML Program, includes information on AML procedures and processes, politically exposed persons (PEPs), customer due diligence, information sharing, suspicious activity report (SAR) filing, the Travel Rule, cryptocurrency, and Ultimate Beneficial Ownership.

Originally published December 2, 2021, updated May 6, 2022

Disclaimer: This is for general information only. The information presented does not constitute legal advice. ComplyAdvantage accepts no responsibility for any information contained herein and disclaims and excludes any liability in respect of the contents or for action taken based on this information.

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