Financial compliance in regulatory environments plays a significant role. It functions as a mechanism to ensure that operations in financial services adhere to a set of regulations.
These regulations aim to foster accountability, integrity, and transparency. Regulatory frameworks include both government-imposed regulations as well as internal regulations that come from within the companies themselves.
The role of AML regulations
Over time, financial crimes have changed. Technological advancements are one of the main reasons why organizations regulating the framework struggle to keep up with the criminals.
Among the most popular fraud methods are forgery and embezzlement. And then there’s also stock market manipulation.
AML (Anti-Money Laundering) regulations are critical in keeping things in check in the stock exchange market. Let’s take a closer look at how that’s done.
1. Market confidence
AML controls add to the overall feeling of confidence among investors. One might take a look at the top stocks and how they are doing in a market.
However, if the organization fails to ensure regulatory compliance, including AML, then the potential investor might look elsewhere after losing confidence.
Investors are known for being meticulous, and they pay attention to every little detail. High-risk markets are unlikely to attract new capital, and the same applies to low-risk markets.
2. Reputation and fines
Continuing from the point about market confidence, a small mishap could lead to significant reputation loss.
And what follows is not just lost confidence from potential investors. No, it’s also imperative to consider regulatory fines that come back to bite you back after failing to comply with existing regulations.
3. Regulatory oversight
Stock exchanges can be treated as intermediaries between regulators and market participants. In a way, a stock exchange becomes a hub of information thanks to all the trading data collected over time.
The detailed records come in handy when collaborating with financial regulators in regulatory oversight.
Regulators receive alerts of suspicious trading activities. In rarer cases, a stock exchange may take a proactive approach and report a potential breach within the trading ecosystem.
Don’t consider stock exchanges as just passive trading platforms. They can function as an active partner in helping regulators enforce financial crime laws.
4. Compliance enforcement
On the surface level, stock exchanges are not regulators or enforcers, and it’s a fair assessment. Having said that, when you look at it a bit deeper, they still are at the frontline of ensuring compliance.
Marketplaces that facilitate trading securities have to prevent sanctioned individuals or jurisdictions from participating.
It’s common to integrate various real-time monitoring solutions to keep tabs on the market. Once there is a suspicious activity, a system in place flags it and sends a signal to report the activity.
While stock exchanges are making the most out of available monitoring tools, there are still a fair few challenges to consider.
Due to all the geopolitical drama happening at the moment, changes are common in the sanctions list, which adds to an already complex compliance model.
Shell companies provide a problem as well, not to mention the data privacy and transparency landscape that covers not just national but also international laws.
5. Suspicious activity monitoring
Automated market surveillance systems deployed by stock exchanges monitor suspicious activities, such as:
- Rapid fire trades
- Spoofing
- Insider trading
- Layering or wash trading
Stock markets are complicated, and criminals come up with different schemes to manipulate the system.
It’s also worth noting that AML monitoring does not end with just outside traders. Stock exchanges also keep track of their own members, including brokers, dealers, and marketers.
Someone from within might be playing the system without anyone knowing about it. Failure to implement the necessary monitoring tools could lead to fines, audits, and even criminal liability.
6. Due diligence in listing and trading
For some, due diligence is a core pillar of AML compliance within capital markets. Companies that want to be listed on the exchange have to go through detailed screening and vetting to ensure no bad actors can get their hands on the markets.
If a company applies for an IPO listing or a direct listing, the stock exchange has to:
- Verify the source of funds
- Investigate potential connections to sanctioned jurisdictions
- Evaluate the background of advisors, auditors, and underwriters
Due diligence doesn’t stop after the listing is done. There is an ongoing process to monitor changes in ownership, shifts in business models, disclosure compliance, and other risk assessments.
As expected, companies that fail AML and other integrity checks risk suspension from the exchange, fines, public scrutiny, and so on.
Conclusion
All in all, AML encompasses different financial regulation measures—from transaction monitoring rules and customer risk assessment to payment screening and sanctions and PEP screening, both nationally and internationally.
In the context of capital market compliance, it’s pivotal to keep up with all the changes in the market exchange environment and should be treated as an asset rather than a blocking mechanism.
Featured Image by Freepik.
Share this post
Leave a comment
All comments are moderated. Spammy and bot submitted comments are deleted. Please submit the comments that are helpful to others, and we'll approve your comments. A comment that includes outbound link will only be approved if the content is relevant to the topic, and has some value to our readers.
Comments (0)
No comment