class: center, middle, inverse, title-slide # BIS4630 Corporate Compliance & Fraud Analytics ## Week 8: Market Abuse, Insider Dealing & Market Fraud (Supplementary Materials) ### Hayson Tse, PhD (HK) ### 20.xii.2017 --- # Help * Pink means `I am a link; please click me.` * Click a slide and press `H` for help --- # Contact info * Personal email + [H.Tse](H.Tse@mdx.ac.uk) + [hayson.tse](hayson.tse@teacher.hkuspace.hku.hk) * Course twitter + [@bis4630](https://twitter.com/bis4630) --- # Copyright [This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International Licence.](http://creativecommons.org/licenses/by-nc-sa/4.0/legalcode)  --- # Objectives At the end of this presentation, you should be able to: * Explain the new corporate offences in Criminal Finances Act 2017 * Summarise the video recommended by MDX. * Explain “closed period” * Discuss issues with “inside information” and illustrate by Daimler and Massey. * Give good and bad practices. --- # Table of contents * Course administration * Criminal Finances Act 2017 * Videos * Closed period * Inside information * Compliance officer bulletin on MAR * FCA Guide * Recap * Summary --- name: admin class: inverse, center, middle # Course administration --- # Classroom Conduct * [HKU SPACE Handbook](http://bit.ly/2ds6czb) + Unauthorised reservation of seats is not permitted. + Eating or drinking is not allowed. + All mobile phones and pagers are to be turned off. + Smoking is prohibited at all HKU SPACE learning centres and the University campus. + No video / audio recording is allowed, except with the permission of the Programme Director / Manager, and is subject to any conditions stipulated when such permission is granted. + Personal belongings should not be left unattended. --- # MSc Electronic Security and Digital Forensics Degree > "This course will focus on IT law, professional and ethical issues, criminal law, theories of crime as well as looking at the legal system more generally. You’ll also focus on security regulations, contingency planning and risk management as well as intellectual property law, privacy and data protection law."¹ .footnote[ ¹ [Course homepage](http://bit.ly/2e18OVE) ] --- # Week 6 - 8: 6, 13 & 20.xii.2017 * Market Abuse, Insider Dealing & Market Fraud + Understanding of transparent and fair markets + Industry and professional guidance + Controlled functions + Regulatory monitoring + Insider dealing + Market manipulation + Misleading statements + Defences + FCA (Financial Conduct Authority) Listing, Prospectus and Disclosure Rules (principles) + Code of Market Conduct (FCA Handbook) --- # Important dates * 11 October 2017 - 6 December 2017, both dates inclusive + You are recommended to research for Coursework Section A to C. * 24 January 2018 + You are recommended to complete a first draft copy of Coursework Section A. * 31 January 2018 + You are recommended to complete a second draft of Coursework Section A and continue to review, edit and amend until you have a ‘camera-ready’ piece of soft copy before 7 March 2018. --- # Important dates * 7 February 2018 + You are recommended to complete a first draft of Coursework Section B. * 14 February 2018 + You are recommended to complete a second draft of Coursework Section B and continue to review, edit and amend until you have a ‘camera-ready’ piece of soft copy before 7 March 2018. * 21 February 2018 + You are recommended to complete a first draft of Coursework Section C. --- # Important dates * 28 February 2018 + You are recommended to complete a second draft of Coursework Section C and continue to review, edit and amend until you have a ‘camera-ready’ piece of soft copy before 7 March 2018. --- # Important dates * 7 March 2018 + Deadline for Summative Submission of Coursework Section A, B and C, each with its covering page via the supplied Turnitin link in the Middlesex University UniHub module page to Middlesex. + Any other means of submission, even to me or to HKUSPACE, means no submission. --- # Important dates * 14 March 2018 + Group presentation for Coursework Section C. --- name: cfa2017 class: inverse, center, middle # Criminal Finance Act 2017 --- # The Money Laundering Action Plan 2016 * [Action Plan for anti-money laundering and counter-terrorist finance April 2016](http://bit.ly/1YKsDgY) * Four policy priorities + To create a stronger partnership with the private sector + To strengthen law enforcement responses to AML and CTF threats + To reform the supervisory regime + To increase the UK’s international reach to tackle money laundering and terrorist financing --- # Criminal Finances Act 2017 * [Criminal Finances Act 2017](http://bit.ly/2pd3a44) * received Royal Assent on 27 April 2017 * give law enforcement agencies and partners new capabilities and powers to recover the proceeds of crime, and to tackle money laundering, corruption and terrorist financing. * two new corporate offences of failure to prevent facilitation of tax evasion. --- # Section 45 * Failure to prevent facilitation of UK tax evasion offences * The offence is committed by a relevant body where a person acting in the capacity of a person associated with it commits a tax evasion facilitation offence, that is, criminally facilitates another’s offence of tax evasion. * A defence where the relevant body has in force reasonable prevention procedures, that is, procedures designed to prevent persons associated with it from committing tax evasion facilitation offences. * The defence is also available where it is not reasonable to expect the relevant body to have such procedures. --- # Section 46 * Failure to prevent facilitation of foreign tax evasion offences * The offence can only be committed where the relevant body is incorporated under the law of the UK, the relevant body carries on part of its business from the UK, or where the associated person does the facilitating criminal act in the UK. * **Dual criminality**: A foreign tax evasion offence is defined as conduct that is criminal under the foreign law in question and would also be regarded by the UK courts as amounting to an offence of being knowingly concerned in, or taking steps with a view to, the fraudulent evasion of the tax. --- # Section 47 * Guidance about preventing the facilitation of tax evasion offences * Chancellor of the Exchequer to publish guidance about the procedures that relevant bodies might put in place * [Tackling tax evasion: Government guidance for the corporate offences of failure to prevent the criminal facilitation of tax evasion. 1 September 2017](http://bit.ly/2wMKpw6) --- # Government Guidance * The 6 guiding principles + Proportionality of risk-based prevention procedures + Top level commitment + Risk assessment + Due diligence + Communication (including training) + Monitoring and review --- name: mdx-video class: inverse, center, middle # Videos recommended by MDX --- # BLP video * Berwin Leighton Paisner * On-Demand Webinar: How to Prepare for Market Abuse Regulation (MAR) * [BLP website](http://bit.ly/28QuuAV) * [URL provided by MDX](http://bit.ly/2htTK3t) --- # BLP video content * Extension of the scope of the market abuse regime (00:35) * Meaning of inside information and market manipulation under the new regime + Inside information offences (13:07)) + Market soundings and wall crossings (15:21) + Inside Information regime (20:49) + Market manipulation (25:58) * New requirements on market soundings * New requirements to notify suspected market abuse + Surveillance (31:42) * New requirements on managers’ transactions (36:38) --- # Inside information offences * Use of inside information + Dealing + Cancelling / amending an order + Attempting to deal / recommending another person to engage in insider dealing * Unlawful disclosure of inside information --- # Market sounding > Market soundings are interactions between a seller of financial instruments and one or more potential investors, prior to the announcement of a transaction, in order to gauge the interest of potential investors in a possible transaction and its pricing, size and structuring. Market soundings could involve an initial or secondary offer of relevant securities, and are distinct from ordinary trading. They are a highly valuable tool to gauge the opinion of potential investors, enhance shareholder dialogue, ensure that deals run smoothly, and that the views of issuers, existing shareholders and potential new investors are aligned. . . . Conducting market soundings may require disclosure to potential investors of inside information.¹ .footnote[ ¹ Market Abuse Regulation No. 596/2014 Preamble paragraphs 32 - 33. ] --- # Market soundings regime * Written record of decision to disclose * Consent to receive inside information from intended recipient * Warning on prohibition to use inside information * Obligation to keep the information confidential by the recipient * Records of information given and insider lists * Cleansing inside information --- # Inside information regime * Insider dealing * Legitimate behaviours * Market soundings * Insider lists * Public disclosure of inside information * Criminal regime --- # Market manipulation * Benchmarks * Manipulation and attempted manipulation * Accepted market practices * Criminal offences --- name: mdx-video 2 class: inverse, center, middle # Closed period --- # Background * Article 19(11) of the Market Abuse Regulation * A company is required to published annual and interim reports. * The reports to be published may contained information that may affect stock value. * Directors know the information before publication. * During a period of 30 calendar days before the publication, PDMRs are not permitted to deal with company's shares unless with exceptions. --- # Duty to disclose * An issuer is required to announce to the public the information included in + an interim financial report + a year-end financial report * Such financial report constitutes unpublished price-sensitive information in relation to the issued securities. * In some countries, it is common practice for issuers to publish the key information about their financial results first, with the formal year-end report published at a later time. --- # PDMR transactions * Person discharging managerial responsibilities * MAR restricts dealings by PDMR during a closed period * What is closed period --- # Prohibited period * Article 19(11) prohibits dealing in the shares and debt instruments of the issuer (or linked financial instruments) by persons discharging managerial responsibilities (PDMR) during a “closed period”, except in certain specified circumstances. * The date when the announcement is made is the end date for the thirty-day closed period * What if it is an announcement of preliminary results prior to the issuance of the financial report? --- # FCA, ESMA views * On 26 May 2016, the FCA announced that, pending clarification from the European Commission and ESMA, the FCA will continue to take the view that, where an issuer announces preliminary results, the closed period will be the 30-day closed period immediately before the preliminary results are announced, provided that the announcement of preliminary results contains all of the inside information expected to be included in the annual report * On 28 July 2016, ESMA confirmed that the 30-day closed period ends on the date of the initial announcement, as long as that contains all the key information relating to the financial figures expected to be included in the year-end report. It also confirmed that there is no need for a further closed period before the publication of the final report. --- name: mdx-video 3 class: inverse, center, middle # Inside information --- # European Court of Justice (CJEU) * [Markus Geltl v Daimler AG](http://bit.ly/2iPyPd8) * Notion of precise information * Directive 2003/6/EC of the European Parliament and of the Council of 28 January 2003 on Insider Dealing and Market Manipulation (Market Abuse) + also known as Market Abuse Directive (MAD) * This case is directly about MAD (not MAR) * [MAR](http://bit.ly/244igM4) * [MAD](http://bit.ly/2hEo795) --- # Why read this case? * For you to comment on MAR about insider dealing * (in particular: inside information) * (specifically: what is precise information) * Definition of insider information in MAD is same as MAR * How future events become precise information? + How likely will the future event become true? + ‘more likely than not’ ? OR + ‘realistic prospect that they would occur’? --- # Inside information is: (Article 7(1) of MAR) * (same as Article 1(1) of MAD) * Information of a precise nature * Which has not been made public * Relating, directly or indirectly, to one or more issuers or to one or more financial instruments; AND * Which, if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments. --- # Deemed to be precise if information indicates (Article 7(2)) * A set of circumstances which exists or which may reasonably be expected to come into existence * Or an event which has occurred or which may reasonably be expected to occur * Where it is specific enough to enable a conclusion to be drawn as to the possible effect of that set of circumstances or event on the prices of the financial instruments or the related derivative financial instrument --- # What is “likely to have a significant effect on the prices of . . . ” * Article 7(4) > “For the purposes of paragraph 1, information which, if it were made public, would be likely to have a significant effect on the prices of financial instruments, derivative financial instruments, related spot commodity contracts, or auctioned products based on emission allowances shall mean information a reasonable investor would be likely to use as part of the basis of his or her investment decisions.” * “Likely to have a significant effect” is related to “a reasonable investor", how? (discussed in *Massey*) --- # Facts (from Daimler) * (1) Following general meeting on 6 April 2005, Mr Schrempp, Chairman of Daimler’s Board of Management, was thinking of tendering his resignation before the expiry of his mandate in 2008. * (2) On 17 May 2005, he discussed his intentions with the Chairman of the Supervisory Board, Mr Kopper. * (3) Between 1 June and 27 July 2005, other members of the Supervisory Board and the Board of Management were also informed of Mr Schrempp’s plans to resign. * (4) As from 10 July 2005, Daimler began preparing a press release, an external statement and a letter to Daimler’s employees. --- # Facts (from Daimler) * (5) On 13 July 2005, an invitation was issued convening a meeting of the Presidential Committee of Daimler’s Supervisory Board and the Supervisory Board on 27 and 28 July 2005, respectively * (6) Neither invitation mentioned a possible change of Chairman of the Board of Management. * (7) On 18 July 2005, Messrs Schrempp and Kopper agreed to propose Mr Schrempp’s early departure and Mr Zetsche’s appointment as his successor at the Supervisory Board’s meeting on 28 July 2005. * (8) At its meeting, which commenced at 17 hrs on 27 July 2005, the Presidential Committee decided that it would propose to the Supervisory Board, which was meeting the next day, that it approve said departure and said appointment. --- # Facts (from Daimler) * (9) At approximately 9.50 hrs on 28 July 2005, Daimler’s Supervisory Board decided that Mr Schrempp would step down at the end of the year and be replaced by Mr Zetsche. * (10) An announcement of that decision was sent to the management of the stock exchanges and of the Federal Office for the Supervision of Financial Services and was published in the disclosures database of the German ad hoc disclosure company. * (11) Following that announcement, Daimler’s share price, which had already risen that day following publication of the 2005 second quarter results that morning, rose sharply. --- # Facts (from Daimler) * (12) Mr Geltl and a number of other investors had sold Daimler shares before that announcement. --- # Questions * What is the information relevant to a CEO’s resignation which a reasonable investor could be likely to use as part of the basis of his investment decisions? * When information of intermediate steps become precise information? * When was Daimler to disclose the information? --- # The information relevant to a CEO’s resignation * The CEO’s intention to retire before the end of his term * The reasons for the retirement (which did not appear in the judgment) * The timing of the proposed retirement * The company’s acceptance of the decision to retire * The initiation of succession planning * The identification of one or more potential successors * The formal appointment of a successor .footnote[  [Financial Services Regulation and Corporation Crime Notes 10 August 2012](http://bit.ly/2is0m3E>) ] --- # When was Daimler to disclose the information? * The day the chairman was thinking about tendering his resignation? * The day the press release was prepared? * The day the supervisory board accepted the resignation? * Is precision certainty? * Is thinking about resignation precise? .footnote[ [The New European Market Abuse Framework: Some Significant Practical Issues](http://bit.ly/2hEbGdy) ] --- # CJEU decision: * Two questions: > (1) “Whether point 1 of Article 1 of Directive 2003/6 and Article 1(1) of Directive 2003/124 must be interpreted as meaning that, in the case of a protracted process intended to bring about a particular circumstance or to generate a particular event, not only may that future circumstance or future event be regarded as precise information within the meaning of those provisions, but also the intermediate steps of that process which already exist or have already occurred and which are connected with bringing about the future circumstance or event.” --- # CJEU decision: * Two questions: > (2) “whether Article 1(1) of Directive 2003/124 must be interpreted as meaning that the notion of ‘a set of circumstances which exists or may reasonably be expected to come into existence or an event which has occurred or may reasonably be expected to do so’ refers only to circumstances or events the occurrence of which may be considered to be preponderant or highly probable, or whether that notion implies that the magnitude of the effect of that set of circumstances or that event on the prices of the financial instruments concerned must be taken into consideration.” --- # CJEU decision: * Answer to first question > “In the case of a protracted process intended to bring about a particular circumstance or to generate a particular event, not only may that future circumstance or future event be regarded as precise information within the meaning of those provisions, but also the intermediate steps of that process which are connected with bringing about that future circumstance or event.” * Steps preceding a decision may in themselves be precise, and accordingly constitute inside information in their own right. --- # CJEU decision: * Answer to second question > “‘the notion of’ a set of circumstances which exists or may reasonably be expected to come into existence or an event which has occurred or may reasonably be expected to do so’ refers to future circumstances or events from which it appears, on the basis of an overall assessment of the factors existing at the relevant time, that there is a realistic prospect that they will come into existence or occur. However, that notion should not be interpreted as meaning that the magnitude of the effect of that set of circumstances or that event on the prices of the financial instruments concerned must be taken into consideration.” * . . . --- # CJEU decision: * Answer to second question > “In order to determine whether it is reasonable to think that a set of circumstances will come into existence or that an event will occur, an assessment must be made on a case-by-case basis of the factors existing at the relevant time.” > “‘may reasonably be expected’, cannot be interpreted as requiring that proof be made out of a high probability of the circumstances or events in question coming into existence or occurring.” > “precise information is not to be considered as including information concerning circumstances and events the occurrence of which is implausible.” --- # “likely to have a significant effect” is related to “a reasonable investor", how? * [David Massey v FSA [2011] UKUT 49](http://bit.ly/2iilvwU) --- # Massey (recall from previous slide) * What is “likely to have a significant effect on the prices of . . . ” + Article 7(4) > “For the purposes of paragraph 1, information which, if it were made public, would be likely to have a significant effect on the prices of financial instruments, derivative financial instruments, related spot commodity contracts, or auctioned products based on emission allowances shall mean information a reasonable investor would be likely to use as part of the basis of his or her investment decisions.” --- # Massey (recall from previous slide) * What is “likely to have a significant effect on the prices of . . . ” + Article 7(4) . . . + “likely to have a significant effect” is related to “a reasonable investor”, how? * Same as s118C(6) of FSMA > “(6) Information would be likely to have a significant effect on price if and only if it is information of a kind which a reasonable investor would be likely to use as part of the basis of his investment decisions.” --- # Massey * [David Massey v FSA [2011] UKUT 49](http://bit.ly/2iilvwU) * on FSMA, not MAD, not MAR * FSA succeeded in its argument + The reasonable investor limb of the definition of inside information should be given primacy over the significant effect of the definition * Whether or not there was a significant effect on price, the information can be regarded as inside information if it is of a kind that a reasonable investor would be likely to use as part of the basis of his investment decision. --- # Comments: * Not an easy task to determine when a piece of information constitutes inside information * The issuer has two options: + either he discloses early information deemed as precise but not certain and he may face market manipulation allegations, + or he discloses the information later and will breach the duty to inform the public as soon as possible pursuant to Article 17 of the MAR * Either way, the issuer may face sanctions due to the interpretation issues that arise from the notion of precise information. * [The New European Market Abuse Framework: Some Significant Practical Issues](http://bit.ly/2hEbGdy) --- name: mdx-video class: inverse, center, middle # Compliance Officer Bulletin on MAR --- # Compliance Officer Bulletin of April 2016 * The EU Market Abuse Regulation * Overview of the Market Abuse Regime * Changes to the current regime * Enforcement and sanctions under the regime * UK implementation * Compliance considerations --- # Background * Before MAR: MAD * MAD adopted in 2003 * Objectives and Aims + provide a common EU framework for prevention and detection of market abuse + ensure the EEA market is fair to all users + create consistent approach to regulate market conduct * apply to each financial instrument traded on each regulated market in EEA * October 2011, EC proposed to replace MAD with MAR * Transposition of MAR into national law by 3 July 2016 --- # 6 behaviours of Market Abuse: * Insider dealing * Improper disclosure of inside information * Manipulation of transactions * Manipulation of devices * Dissemination of information (false or misleading impression) * False or misleading behaviour and market distortion --- # Scope * Financial instruments, include multilateral trading facility and organised trading facility * Commodity contracts * Behaviour in relation to benchmarks * (MiFID II expands scope; MAR will apply MiFD II in 2018) --- # Inside information * Information of *precise* nature * Not made public * Relating directly or indirectly to one or more issuers or financial instruments * If made public would be likely to have a *significant* effect on the price of those financial instruments (or related to derivative financial instruments) * Information of precise nature may include *intermediate* steps in a protracted process * Information has a significant effect if it is information that a reasonable investor would be likely to use as part of the basis of an investment decision --- # Market abuse key issues * MAR continues to apply to insider dealing, unlawful disclosure of inside information and market manipulation (compare before MAR) * *Insider dealing expanded to include cancelling or amending an order where the order was placed before the person had the information* * No material change to unlawful disclosure of inside information (compare before MAR) * *Market manipulation expanded to include providing false or misleading information or inputs in relation to a benchmark* * Attempt to engage in market abuse is also covered --- # Market soundings * It is the interactions between issuer of financial instruments (or person acting on its behalf) and one or more investors (when?) before the announcement of a transaction to gauge interest in a transaction and the conditions relating to it (e.g. potential size and pricing) * It is proper function and is not market abuse IF subject to certain conditions --- # Market soundings conditions * Consider if market sounding will involve disclosure of inside information and record conclusion and reasons why * Obtain consent of recipient to receive inside information * Inform the recipient that he is prohibited from using the information to deal or amend or cancel an order * Inform the recipient that by agreeing to receive the information he is obliged to keep it confidential * Notify the recipient when the information ceases to be inside information * ESMA gives a market sounding template and guideline + [ESMA Final Report: Guidelines on the Market Abuse Regulation - market soundings and delay of disclosure of inside information](http://bit.ly/2j2sSJS) --- # Whistleblowing * MAR requires Member States to ensure competent authorities establish effective mechanisms to report *actual* or *potential* infringements of MAR including + specific procedures to receive of reports and to investigate + appropriate protection for whistleblowers + protection of personal data of whistleblower and the alleged infringer * MAR provides capacity for Member States to provide financial incentives in certain circumstances for whistleblowers who information results in administrative or criminal sanctions --- # FCA main goal: identify risks before they crystallise * Risks to: + ensuring relevant markets function well + ensuring market is not affected by market abuse --- # FCA supervisory framework * 10 supervisory principles (summarised as:) + focus on big issues and causes of problems + forward looking and pre-emptive approach + examining firm culture + individual accountability + rectifying poor behaviours and their root causes * 3 pillars model + proactive firm or group supervision + event-driven, reactive supervision + issues and products --- # Key FCA concerns * Inadequate procedures, systems and controls + e.g. handling inside information and relevant policies * Poor compliance oversight + adequate risk assessment + effective monitoring and surveillance + suspicious transaction and order reporting * Poor governance + senior management engagement and understanding * Bad culture and behaviours + led by senior management --- # FCA concern: adequate compliance framework * Formal market abuse risk assessment and compliance risk management framework * Designed to take account of specific risks facing the firm * Essential to ensure monitoring framework is relevant and covers all business areas and regulatory obligations * Forward-looking compliance plan detailing market abuse risk mitigation and required resources --- # FCA concern: monitoring and surveillance * Ensure trading monitoring system parameters covers all relevant business areas and activities * Volume of alerts and reports vs number of competent staff * Data is only useful if the staff analysing it understanding it and can prioritise efficiency * Log of suspicious activities * Ensure audit trail of surveillance and all alerts * Training and oversight * Back up manual monitoring system to carry out spot checks * How are breaches or potential issues escalated? to whom? * Reasonable suspicious and defensive reporting --- # STORs - Reporting * FCA and STORs + Notifiers required to report suspicious behaviours, activities, orders and transactions under Article 16 MAR + FCA expects firms and individuals to understand wider scope + FCA building system for reporting via Connect (computer system) + Level of surveillance on quotes expected from 3 July 2016 + FCA expects firms to demonstrate efforts to comply + Detailed and realistic plans ready --- # On-going training is crucial * Staff must know their obligations under MAR * Staff must understand market abuse behaviours and how they arise within the business * Is the training practical and job or task-specific? + compliance and senior management * How often is it reviewed? * Attendance and completion / understanding should be logged and recorded --- # MAR breaches likely to be treated similarly: * W H Ireland Limited (February 2016) + Fined £1,200,000 + Failed to organise and control effective systems and controls + [FCA Final Notice to W H Ireland](http://bit.ly/2hLI8KS) * Mark Samuel Taylor (May 2016) + Fined £36,285 + Made trade on the basis of inside information which he had obtained from an email circulated in error by his employer, Towry Limited + [FCA Final Notice to Mark Samuel Taylor](http://bit.ly/2j2rqqW) --- # Overview * The Market Abuse Regulation * On 3 July 2016, European Unions’ Market Abuse Regulation came into effect. * UK is not implementing the European Directive on Criminal Sanctions for Market Abuse * Therefore, there is no change to the UK criminal market abuse regime. --- # What is market abuse? * Three market abuse behaviours: + Insider dealing + Unlawful disclosure of information + Market manipulation * Certain exceptions --- # How to identify inside information? * Inside information is defined by Article 7 of MAR * Four parts: + information of a precise nature + which has not been made public + relating, directly or indirectly, to one or more issuers or to one or more financial instruments; and which, + if it were made public, would be likely to have a significant effect on the prices of those financial instruments or on the price of related derivative financial instruments --- # How to identify inside information? * Examples in MAR Recital 17 + the progress of contract negotiations; + provisionally agreed terms in negotiating a contract; + the possible placement of financial instruments; + conditions for marketing financial instruments; + provisional terms for placing financial instruments; and + whether an instrument should be included in or removed from a major index. * Article 7.4: information a reasonable investor would be likely to use as part of the basis for their investment decisions * Reasonable investor test is part of s118C FSMA in UK. So it is not new. --- # Public disclosure obligation for issuers * must inform the public as soon as possible about inside information which directly concerns them (Article 17.1) * inside information can be accessed quickly for complete, accurate and timely assessment by the public --- # Delay in disclosure of inside information to public (Article 17.4) * Disclosing immediately is likely to prejudice the issuer’s legitimate interests * The delay is not likely to mislead the public; and * The issuer is able to ensure the information remains confidential --- # ESMA * [ESMA Market Abuse and Accepted Market Practices website](http://bit.ly/2i4pyd7) * Publications: + Implementing Technical Standards (ITS) + Regulator Technical Standards (RTS) + Draft guidelines --- # Draft guidelines: situations where immediate disclosure harm issuers’ legitimate interest * On-going negotiation * Contracts or other decisions that require approval from another party or body * New inventions where immediate disclosure could jeopardise the issuer’s intellectual property rights --- # Draft guidelines: situations where delay will always mislead the public * Inside information is materially different to an earlier public announcement about the matter on which the inside information relates * Inside information relates to the issuer’s financial objectives being unlikely to be met and where such objectives were previously announced; * Inside information contrasts with market expectations based on signals given by the issuer previously --- # Delay disclosure must follow processes in ITS * Put processes in place * Inside information first exists + Record dates + Record times * Decision to delay + when the decision was taken --- # Delayed disclosure must notify FCA (Article 17.4) * Identify persons who make the notification * Identify those who are responsible for the decision to delay --- # Duty to prepare and maintain insider list * Article 18 sets out that the list must include + the identity of any person with access to inside information + details of why they are included on the list + the date and time they accessed inside information + the date the list was compiled + must be kept up to date + must be retained for at least five years after it is first compiled or updated + provided to the FCA as soon as possible on their request --- # Duty to take all reasonable steps to ensure * Any person on the list confirms to them in writing the legal and regulatory duties that person has + in respect of inside information + that it is aware of the sanctions applicable to insider dealing and unlawful disclosure of inside information * Person giving acknowledgement needs to know in practical and legal terms + what it means to be an insider + what the requirements are for insiders of that issuer * Duty to comply with requirement event the insider list is complied by third party --- # Prevention and detection of market abuse (Article 16) * (A company has a head office registered in USA. The company has a branch office situated in UK. The branch office in UK trades stocks at the German Stock Exchange in Germany.) * (para 1) Market operators and investment firms + shall establish and maintain + effective arrangements, systems and procedures + aimed at preventing and detecting + insider dealing, market manipulation and attempted insider dealing and market manipulation + in accordance with Articles 31 and 54 of Directive 2014/65/EU (recall MiFDII? (see Week 6)) + [MiFDII](http://bit.ly/2deTVgi) --- # Prevention and detection of market abuse (Article 16) * (para 1) A person of the market operators and investment firms + shall report orders and transactions, including any cancellation or modification thereof + that could constitute insider dealing, market manipulation or attempted insider dealing or market manipulation + to the competent authority of the trading venue (The Federal Financial Supervisory Authority) + without delay. + [List of Competent Authorities](http://bit.ly/2iQUUpi) --- # Prevention and detection of market abuse (Article 16) * (para 2) Any person professionally arranging or executing transactions + shall establish and maintain + effective arrangements, systems and procedures + to detect and report + suspicious orders and transactions --- # Prevention and detection of market abuse (Article 16) * (para 2) If any person professionally arranging or executing transactions + has a reasonable suspicion + that an order or transaction + could constitute insider dealing, market manipulation or attempted insider dealing or market manipulation + the person shall notify the competent authority (“as referred to in paragraph 3”, i.e. next item)(FCA, why?) + without delay. --- # Prevention and detection of market abuse (Article 16) * (para 3) Any person professionally arranging or executing transactions + shall be subject to the rules of notification + of the Member State (UK) in which they are registered or have their head office, or, in the case of a branch, the Member State (UK) where the branch is situated + The notification shall be addressed to the competent authority of that Member State (FCA) --- # Prevention and detection of market abuse (Article 16) * (para 4) The competent authorities (FCA) + receiving the notification of suspicious orders and transactions + shall transmit such information + immediately to + the competent authorities of the trading venues concerned (The Federal Financial Supervisory Authority)(i.e. like FCA in UK) --- # Prevention and detection of market abuse (Article 16) * (para 5) ESMA shall develop draft regulatory technical standards to determine + (a) appropriate arrangements, systems and procedures + for persons to comply with + the requirements established in paragraphs 1 and 2 + (b) the notification templates + to be used by persons + to comply with the requirements established in paragraphs 1 and 2. --- name: fca-guide class: inverse, center, middle # FCA Guide Financial Crime --- # FCA Guide * [Part 1: A firm’s guide to preventing financial crime, July 2016](http://bit.ly/2e1oXtV) * Does not form part of handbook * But guidance on handbook rules and principles * Following slides are examples only and exhaustive --- # Governance: good practice (Box 2.1) * A firm takes active steps to prevent criminals taking advantage of its services. --- # Governance: poor practice (Box 2.1) * There is little evidence of senior staff involvement and challenge in practice. * A firm concentrates on narrow compliance with minimum regulatory standards and has little engagement with the issues. * Financial crime issues are dealt with on a purely reactive basis. * There is no meaningful record or evidence of senior management considering financial crime risks. --- # Organisation structures: good practice (Box 2.2) * Financial crime risks are addressed in a coordinated manner across the business and information is shared readily. * Management responsible for financial crime are sufficiently senior as well as being credible, independent, and experienced. * A firm has considered how counter-fraud and anti-money laundering efforts can complement each other. * A firm has a strategy for self-improvement on financial crime. * The firm bolsters insufficient in-house knowledge or resource with external expertise, for example in relation to assessing financial crime risk or monitoring compliance with standards. --- # Organisation structure: bad practice (Box 2.2) * The firm makes no effort to understand or address gaps in its financial crime defences. * Financial crime officers are relatively junior and lack access to senior management. They are often overruled without documented justification. * Financial crime departments are under resourced and senior management are reluctant to address this. --- # Risk assessment: good practice (Box 2.3) * The firm’s risk assessment is comprehensive. * Risk assessment is a continuous process based on the best information available from internal and external sources. * The firm assesses where risks are greater and concentrates its resources accordingly. * The firm actively considers the impact of crime on customers. * he firm considers financial crime risk when designing new products and services. --- # Risk assessment: bad practice (Box 2.3) * Risk assessment is a one-off exercise. * Efforts to understand risk are piecemeal and lack coordination. * Risk assessments are incomplete. * The firm targets financial crimes that affect the bottom line (e.g. fraud against the firm) but neglects those where third parties. --- # Policies & procedures: good practice (Box 2.4) * There is clear documentation of a firm’s approach to complying with its legal and regulatory requirements in relation to financial crime. * Policies and procedures are regularly reviewed and updated. * Internal audit or another independent party monitors the effectiveness of policies, procedures, systems and controls. --- # Policies & procedures: bad practice (Box 2.4) * A firm has no written policies and procedures. * The firm does not tailor externally produced policies and procedures to suit its business. * The firm fails to review policies and procedures in light of events. * The firm fails to check whether policies and procedures are applied consistently and effectively. * A firm has not considered whether its policies and procedures are consistent with its obligations under legislation that forbids discrimination. --- # Staff training etc: good practice (Box 2.5) * Staff in higher-risk roles are subject to more thorough vetting. * Temporary staff in higher risk roles are subject to the same level of vetting as permanent members of staff in similar roles. * Where employment agencies are used, the firm periodically satisfies itself that the agency is adhering to the agreed vetting standard. * Tailored training is in place to ensure staff knowledge is adequate and up to date. * New staff in customer-facing positions receive financial crime training tailored to their role before being able to interact with customers. * . . . --- # Staff training etc: good practice (Box 2.5) * Training has a strong practical dimension (e.g. case studies) and some form of testing. * The firm satisfies itself that staff understand their responsibilities (e.g. computerised training contains a test). * Whistleblowing procedures are clear and accessible, and respect staff confidentiality. --- # Staff training etc: bad practice (Box 2.5) * Staff are not competent to carry out preventative functions effectively, exposing the firm to financial crime risk. * Staff vetting is a one-off exercise. * The firm fails to identify changes that could affect an individual’s integrity and suitability. * The firm limits enhanced vetting to senior management roles and fails to vet staff whose roles expose them to higher financial crime risk. * The firm fails to identify whether staff whose roles expose them to bribery and corruption risk have links to relevant political or administrative decision-makers. * . . . --- # Staff training etc: bad practice (Box 2.5) * Poor compliance records are not reflected in staff appraisals and remuneration. * Training dwells unduly on legislation and regulations rather than practical examples. * Training material is not kept up to date. * The firm fails to identify training needs. * There are no training logs or tracking of employees’ training history. * Training content lacks management sign-off. * Training does not cover whistleblowing and escalation procedures. --- # Governance: good practice (Box 3.1) * Reward structures take account of any failings related to AML compliance. * Decisions on accepting or maintaining high money-laundering risk relationships are reviewed and challenged independently of the business relationship and escalated to senior management or committees. * Documentation provided to senior management to inform decisions about entering or maintaining a business relationship provides an accurate picture of the risk to which the firm would be exposed if the business relationship were established or maintained. --- # Governance: bad practice (Box 3.1) * There is little evidence that AML is taken seriously by senior management. It is seen as a legal or regulatory necessity rather than a matter of true concern for the business. * Senior management attach greater importance to the risk that a customer might be involved in a public scandal, than to the risk that the customer might be corrupt or otherwise engaged in financial crime. * The board never considers MLRO reports. * A UK branch or subsidiary uses group policies which do not comply fully with UK AML legislation and regulatory requirements. --- # MLRO: good practice (Box 3.2) * The MLRO is independent, knowledgeable, robust and well-resourced, and poses effective challenge to the business where warranted. * The MLRO has a direct reporting line to executive management or the board. --- # MLRO: bad practice (Box 3.2) * The MLRO lacks credibility and authority, whether because of inexperience or lack of seniority. * The MLRO does not understand the policies they are supposed to oversee or the rationale behind them. * The MLRO of a firm which is a member of a group has not considered whether group policy adequately addresses UK AML obligations. * The MLRO is unable to retrieve information about the firm’s high-risk customers on request and without delay and plays no role in monitoring such relationships. --- # Risk assessment: good practice (Box 3.3) * There is evidence that the firm’s risk assessment informs the design of anti-money laundering controls. * The firm has identified good sources of information on money-laundering risks, such as FATF mutual evaluations and typology reports, NCA alerts, press reports, court judgements, reports by non-governmental organisations and commercial due diligence providers. * . . . --- # Risk assessment: good practice (Box 3.3) * Consideration of money-laundering risk associated with individual business relationships takes account of factors such as: (a) company structures; (b) political connections; (c) country risk; (d) the customer’s or beneficial owner’s reputation; (e) source of wealth; (f) source of funds; (g) expected account activity; (h) sector risk; and (i) involvement in public contracts. * The firm identifies where there is a risk that a relationship manager might become too close to customers to identify and take an objective view of the money-laundering risk. It manages that risk effectively. --- # Risk assessment: bad practice (Box 3.3) * An inappropriate risk classification system makes it almost impossible for a relationship to be classified as “high risk”. * Higher-risk countries are allocated low-risk scores to avoid enhanced due diligence measures. * Relationship managers are able to override customer risk scores without sufficient evidence to support their decision. * Risk assessments on money laundering are unduly influenced by the potential profitability of new or existing relationships. * The firm cannot evidence why customers are rated as high, medium or low risk. * A UK branch or subsidiary relies on group risk assessments without assessing their compliance with UK AML requirements. --- # CDD checks: good practice (Box 3.4) * A firm which uses, e.g. electronic verification checks or PEPs databases understands their capabilities and limitations. * The firm can cater for customers who lack common forms of ID (such as the socially excluded, those in care, etc). * The firm understands and documents the ownership and control structures (including the reasons for any complex or opaque corporate structures) of customers and their beneficial owners. * The firm obtains information about the purpose and nature of the business relationship sufficient to be satisfied that it understands the associated money laundering risk. * Staff who approve new or ongoing business relationships satisfy themselves that the firm has obtained adequate CDD information before doing so. --- # CDD checks: bad practice (Box 3.4) * Procedures are not risk-based: the firm applies the same CDD measures to products and customers of varying risk. * The firm has no method for tracking whether checks on customers are complete. * The firm allows language difficulties or customer objections to get in the way of proper questioning to obtain necessary CDD information. * Staff do less CDD because a customer is referred by senior executives or influential people. * . . . --- # CDD checks: bad practice (Box 3.4) * The firm has no procedures for dealing with situations requiring enhanced due diligence. This breaches the ML Regulations. * The firm fails to consider both: (a) any individuals who ultimately control more that 25% of shares or voting rights of; and any individuals who exercise control over the management over, a corporate customer when identifying and verifying the customer’s beneficial owners. This breaches the ML Regulations. --- # Situations of higher ML risk (Box 3.6) * Non-face-to-face CDD: this is where the customer has not been physically present for identification purposes, perhaps because business is conducted by telephone or on the internet. * Politically exposed persons (PEPs): a PEP is a person entrusted with a prominent public function in a foreign state, an EU institution or an international body; their immediate family members; and known close associates. A senior manager at an appropriate level of authority must approve the initiation of a business relationship with a PEP. This includes approving the continuance of a relationship with an existing customer who becomes a PEP after the relationship has begun. --- # Enhanced Due Diligence (EDD): good practice (Box 3.7) * The MLRO (and their team) have adequate oversight of all high-risk relationships. * The firm establishes the legitimacy of, and documents, the source of wealth and source of funds used in high-risk business relationships. * Where money laundering risk is very high, the firm obtains independent internal or external intelligence reports. * When assessing EDD, the firm complements staff knowledge of the customer or beneficial owner with more objective information. * . . . --- # Enhanced Due Diligence (EDD): good practice (Box 3.7) * The firm is able to provide evidence that relevant information staff have about customers or beneficial owners is documented and challenged during the CDD process. * A member of a group satisfies itself that it is appropriate to rely on due diligence performed by other entities in the same group. * The firm pro-actively follows up gaps in, and updates, CDD of higher-risk customers. * A correspondent bank seeks to identify PEPs associated with their respondents. * . . . --- # Enhanced Due Diligence (EDD): good practice (Box 3.7) * A correspondent bank takes a view on the strength of the AML regime in a respondent bank’s home country, drawing on discussions with the respondent, overseas regulators and other relevant bodies. * A correspondent bank gathers information about respondent banks’ procedures for sanctions screening, PEP identification and management, account monitoring and suspicious activity reporting. --- # EDD: bad practice (Box 3.7) * Senior management do not give approval for taking on high-risk customers. If the customer is a PEP or a non-EEA correspondent bank, this breaches the ML Regulations. * The firm fails to consider whether a customer’s political connections mean that they are high risk despite falling outside the ML Regulations’ definition of a PEP. * The firm does not distinguish between the customer’s source of funds and their source of wealth. * The firm relies entirely on a single source of information for its enhanced due diligence. * A firm relies on intra-group introductions where overseas standards are not UK equivalent or where due diligence data is inaccessible because of legal constraints. * . . . --- # EDD: bad practice (Box 3.7) * The firm considers the credit risk posed by the customer, but not the money laundering risk. * The firm disregards allegations of the customer’s or beneficial owner’s criminal activity from reputable sources repeated over a sustained period of time. * The firm ignores adverse allegations simply because customers hold a UK investment visa. * A firm grants waivers from establishing source of funds, source of wealth or other due diligence without good reason. * A correspondent bank conducts inadequate due diligence on parents and affiliates of respondents. * A correspondent bank relies exclusively on the Wolfsberg Group AML questionnaire. * see the [Wolfsberg Group AML Questionnaire](http://bit.ly/2hWfS4r) --- # Enhanced on-going monitoring: good practice (Box 3.8) * Key AML staff have a good understanding of, and easy access to, information about a bank’s highest-risk customers. --- # Enhanced on-going monitoing: bad practice (Box 3.8) * The firm treats annual reviews as a tick-box exercise and copies information from previous reviews without thought. * A firm in a group relies on others in the group to carry out monitoring without understanding what they did and what they found. * There is insufficient challenge to explanations from relationship managers and customers about unusual transactions. * The firm focuses too much on reputational or business issues when deciding whether to exit relationships with a high money-laundering risk. * The firm makes no enquiries when accounts are used for purposes inconsistent with expected activity (e.g. personal accounts being used for business). --- # Record keeping & reliance on others: good practice (Box 3.10) * Records of customer ID and transaction data can be retrieved quickly and without delay. * Where the firm routinely relies on checks done by a third party (for example, a fund provider relies on an IFA’s checks), it requests sample documents to test their reliability. --- # Record keeping & reliance on others: bad practice (Box 3.10) * The firm keeps customer records and related information in a way that restricts the firm’s access to these records or their timely sharing with authorities. * A firm cannot access CDD and related records for which it has relied on a third party. This breaches the ML Regulations. * Significant proportions of CDD records cannot be retrieved in good time. * The firm has not considered whether a third party consents to being relied upon. * There are gaps in customer records, which cannot be explained. --- # CTF: good practice (Box 3.11) * A firm identifies sources of information on terrorist financing risks: e.g. press reports, NCA alerts, Financial Action Task Force typologies, court judgements, etc. --- # CTF: bad practice (Box 3.11) * Financial crime training does not mention terrorist financing. * A firm doing cross-border business has not assessed terrorism-related risks in countries in which it has a presence or does business. * A firm has not considered if its approach to customer due diligence is able to capture information relevant to the risks of terrorist finance. --- name: summ class: inverse, center, middle # Recap --- # Recap * Prohibitions, preventions and detections of + insider dealing + unlawful disclosure of inside information + market manipulation * Market Abuse Regulation * ESMA guidelines and technical standards * FCA Handbook --- # ESMA guidelines & standards * 3 guidelines + Set out a non-exhaustive indicative list of information which is reasonably expected or required to be disclosed + Set out a non-exhaustive indicative list of legitimate interests of issuers, and of situations in which delay disclosure of inside information is likely to mislead the public. + Set out factors, steps and appropriate records a person must take into account when information is disclosed as part of the sounding regime --- # Offences  --- # Reporting requirements * Inside information + Definition of inside information + Inside information must be announced as soon as possible and may only be delayed if certain conditions are met + Notify FCA by "delayed disclosure of inside information notification form" + FCA Handbook: DTR 2 --- # Reporting requirements * PDMR transaction + Definition of persons discharging managerial responsibilities and persons closely associated with them + Transactions with the total amount exceeding EUR 5,000 in a calendar year + PDMR notification form no later than 3 business days after the transaction date + Insider list: a list of all persons that have access to inside information + FCA Handbook: DTR 3.1 --- # Reporting requirements * STORs + Suspicious transactions and orders reports + "reasonable grounds" to suspect a transaction or order might constitute market abuse, such as insider dealing or market manipulation + Effective training to identify potentially suspicious transactions and orders + Fill in and submit a STOR using "Connect" (on line) + FCA Handbook: SUP 15.10 * Whistleblowing + FCA Handbook: SYSC 18 --- name: summ class: inverse, center, middle # Summary --- # Reminder of learning outcomes * Explain the new corporate offences in Criminal Finances Act 2017 * Summarise the video recommended by MDX. * Explain “closed period” * Discuss issues with “inside information” and illustrate by Daimler and Massey. * Give good and bad practices.