Isle of Man Financial Services Authority Sector Specific AML/CFT Guidance Notes for Investment Business

Isle of Man Financial Services Authority
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Investment Business
Sector Specific AML/CFT Guidance Notes
August 2021
Whilst this publication has been prepared by the Financial Services Authority, it is not a legal document and should not be relied upon in respect of points of law. Reference for that purpose should be made to the appropriate statutory provisions. Contact:
AML/CFT Division
Financial Services Authority
PO Box 58
Finch Hill House
Bucks Road
Douglas
Isle of Man
IM99 1DT
Tel: 01624 646000
Email: aml@iomfsa.im
Website: www.iomfsa.im

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Contents
Contents..................................................................................................................................................2
Version history ........................................................................................................................................3

1. Foreword.........................................................................................................................................4
2. Introduction ....................................................................................................................................4
   2.1 National Risk Assessment .......................................................................................................4
   2.1.1 Stockbroking / Asset Management.................................................................................5
   2.1.2 Financial Advisory Firms (“FAs”) .....................................................................................5
3. Risk Guidance..................................................................................................................................5
   3.1 General Higher Risk Indicators................................................................................................6
   3.2 Red Flags.................................................................................................................................7
   3.3 Risk factors specific to the sector ...........................................................................................8
   3.3.1 Technology risk ...............................................................................................................8
   3.3.2 Discretionary and Advisory Asset Management.............................................................9
   3.3.3 Financial Advisers..........................................................................................................10
   3.3.4 Stockbroking .................................................................................................................10
   3.3.5 Custodians.....................................................................................................................11
4. Customer due diligence ................................................................................................................12
   4.1 Use of Intermediaries............................................................................................................13
   4.2 Inactive customer relationships............................................................................................13
5. Simplified customer due diligence measures...............................................................................14
   5.1 Where the customer is a collective investment scheme......................................................14
   5.2 Exemption in relation to certain insurance products...........................................................15
6. Case Studies..................................................................................................................................15
   6.1 Laundering by acquisition of a publicly traded shell company.............................................15
   6.2 Securities transfers ...............................................................................................................16
   6.3 Structuring of cash deposits..................................................................................................17
   6.4 Rapid purchase and sale of shares........................................................................................18
   6.5. Employee of a securities intermediary assisting a PEP to launder money ...........................19

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Version history
Version 2 (March 2020) Updates made to links in relation to the updated NRA Version 3 (August 2021) Updates to reflect changes to the main structure of the AML/CFT Handbook Updates to footnotes to include links in the main body for consistency purposes 4 – further clarification inserted to cover inactive customer relationships in respect of financial advisers
5.2 – update to refer to the Insurance
Intermediaries (General Business)
Regulations 2020

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1. Foreword
   For the purposes of this sector specific guidance, the term “Investment Business” refers to a business conducting activity that would require a licence under Class 2 of the Regulated Activities Order 2011 (as amended in 2019).
2. Introduction
   The purpose of this document is to provide some guidance specifically for the investment business sectorin relation to anti-money laundering and countering the financing of terrorism (“AML/CFT”). This document should be read in conjunction both with the Anti-Money Laundering and Countering the Financing of Terrorism Code 2019 (“the Code”) and the main body of the AML/CFT Handbook (“the Handbook”). Though the guidance in the Handbook is neither legislation nor constitutes legal advice, it is persuasive in respect of contraventions of AML/CFT legislation dealt with criminally, by way of civil penalty or in respect of the Authority’s considerations of a relevant person’s regulatory / registered status and the fit and proper status of its owners and key staff where appropriate. This document covers unique money laundering and financing of terrorism (“ML/FT”) risks that may be faced by the sector and provides further guidance in respect of approaches to customer due diligence where it may vary across between sectors. This document is based on the following documents:
    FATF Money Laundering and Terrorist Financing in the Securities Sector and  FATF Risk-based Approach Guidance for the Securities Sector. The Authority recommends that relevant persons familiarise themselves with these documents and other typology reports1 concerning the investment business sector. Also, some case studies are included to provide context to the risks of the sector.
   2.1 National Risk Assessment
   The Island’s National Risk Assessment (“NRA”) was published in 2015 and was updated in
3. The investment business sector must ensure their business risk assessment (and
   customer risk assessments where necessary) take into account any relevant findings of the NRA.

1 Also, see the FCA document: Understanding the Money Laundering Risks in the Capital Markets

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2.1.1 Stockbroking / Asset Management
In relation to the main vulnerabilities of the sector, there can be some fairly complex structures and characteristics such as increased liquidity which can result in potential risk of ML. The NRA sets out the main risks and vulnerabilities in detail. Overall, after applying consideration of the control and other preventative measures in place, the sector is assessed as having a medium level of vulnerability for ML and a medium level of vulnerability for FT.
2.1.2 Financial Advisory Firms (“FAs”)
Considering FAs, the main vulnerability is that an FA could be involved in the chain of arranging for proceeds of crime to be moved/settled into a legitimate product. The level of risk for both ML and FT is considered to be low based on the role and nature of their business, the predominantly local resident client base level of activity, and the requirements in place to understand clients and their financial circumstances.
3. Risk Guidance
The investment business industry is a broad sector and the ML/FT risks will vary for each business based on a wide range of factors such as the type of products they supply, their customers and delivery channels. There are a number of different business types in this sector, therefore this document covers some of the general risk factors common to the sector as a whole and then focusses on particular individual business types where necessary. The Code mandates that a number of risk assessments are completed –  a business risk assessment (paragraph 5);  a customer risk assessment (paragraph 6); and  a technology risk assessment (paragraph 7). In order to complete these risk assessments and keep them up-to-date vigilance should govern all aspects of an entity’s dealings with its customers, including:
 account opening;
 providing advice to a customer;
 customer instructions;
 transactions into and out of customer accounts;  ongoing monitoring of the business relationship;  technology / security issues if there is an online element to the business relationship; and;

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 any outsourced / delegated services.
3.1 General Higher Risk Indicators
As with the basic elements of a risk assessment, discussed in chapter 2 of the Handbook, the following activities may increase the risk of the relationship. Just because an activity / scenario is listed below it does not automatically make the relationship high risk, the customer’s rationale / nature / purpose of the business relationship etc. should be considered in all cases. If a business is unable to obtain a satisfactory explanation from a customer in the event of the following situations, features, or activities, or any other features which cause it concerns, it should be determined whether this is suspicious or unusual activity. As stated in paragraph 13 of the Code:
13 Ongoing monitoring
(2) Where a relevant person identifies any unusual activity in the course of a business relationship or occasional transaction the relevant person must – (a) perform appropriate scrutiny of the activity; (b) conduct EDD in accordance with paragraph 15; and (c) consider whether to make an internal disclosure. (3) Where a relevant person identifies any suspicious activity in the course of a business relationship or occasional transaction the relevant person must – (a) conduct EDD in accordance with paragraph 15 of the Code, unless the relevant person believes conducting EDD will tip off the customer; and (b) make an internal disclosure. Please refer to chapter 5 of the Handbook for further detail of the Island’s suspicious activity reporting regime. This list of higher risk indicators is by no means exhaustive, and relevant persons should be vigilant for any transactions where suspicion may be aroused and take appropriate measures. Also please see the list of red flags included at 3.2 of this document.  Where a customer is reluctant to provide normal information or provides only minimal information.  Where a customer’s documentation cannot be readily verified.  The customer is reluctant to provide the business with complete information about the nature and purpose of the relationship including anticipated account activity.  The customer is located in a higher risk jurisdiction.  Transactions involving numerous jurisdictions.  The customer is reluctant to meet personnel from the firm in person and / or uses a “front person”.  The customer engages in frequent transactions with money service businesses.

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 The customer has no discernible reason for using the businesses’ services, or the businesses’ location.  The customer has a history of changing financial advisers / businesses and using a number of businesses in different jurisdictions.  The customer’s address is associated with multiple accounts that do not appear to be related.  The customer is known to be experiencing extreme financial difficulties.  The customer is reluctant to invest in more appropriate securities when those securities would require a more enhanced CDD procedure.  The amount, or nature of, the investment does not seem in line with the customer’s usual pattern of activity.  The customer with a significant history with the securities business abruptly liquidates its assets to remove wealth from that jurisdiction or makes investments with very short holding periods.  The customer enquires about how to quickly liquidate accounts without explaining their reasons fully.  The customer opens an account / product without any regards to loss, commissions or other costs associated with that account / product.  The customer acts through intermediaries such as money managers or advisers in order not to have their identity registered.  The customer exhibits unusual concern with the businesses’ compliance with Government reporting requirements and/or AML/CFT policies and procedures.  The customer funds deposits, withdraws or purchases financial / monetary instruments below a threshold amount to avoid certain reporting / record keeping requirements.  Wire transfers / payments are sent to, or originate from higher risk jurisdictions without apparent business reason.  The securities account is used for payments with little or no securities activities.  The customer’s transaction pattern suddenly changes in a manner that is inconsistent with the customer’s normal activities or inconsistent with the customer’s profile.
3.2 Red Flags
In addition to the above higher risk indicators, there are some factors that are likely to be “red flags” in relation to that particular relationship or occasional transaction and would therefore usually be suspicious activity. If a relevant person identifies suspicious activity appropriate steps as explained in section 3 of this document, and the Code, must be taken. This list of red flags is by no means exhaustive and is as follows:
 where it is identified a customer provides false or misleading information;  where it is identified a customer provides suspicious identification documents;  the customer does not provide the business with relevant / accurate information about the nature and intended or ongoing purpose of the relationship, including anticipated account activity;  the customer is secretive / evasive when asked to provide more information;

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 when requested, the customer refuses to identify a legitimate source of funds or source of wealth;  the customer refuses to provide details on beneficial owners of an account or provides information which is false, misleading or substantially incorrect;  the customer enquires about how quickly they can end a business relationship where it is not expected;  where the business relationship is ended unexpectedly by the customer and the customer accepts unusually high fees to terminate the relationship without question;  the customer appears to be acting on behalf of someone else and does not provide satisfactory information regarding whom they are acting for;  the customer is known to have criminal / civil / regulatory proceedings against them for crime, corruption, misuse of public funds or is known to associate with such persons; and  the customer is interested in paying higher charges to keep their identity secret.
3.3 Risk factors specific to the sector
The following section of the guidance covers some of the risk factors specifically related to the provision of discretionary and advisory asset management, financial advice, stockbroking and custodians. When considering these activities there could be both retail and non-retail customers. Further guidance surrounding the risk assessments is outlined in chapter 2 of the Handbook.
3.3.1 Technology risk
Considering the technology risk assessment specifically, this must estimate the risk of ML/FT posed by technology used by the business, such as the use of online delivery channels. This assessment must be kept up to date. Investment business services are increasingly being delivered and / or supported by innovative technological solutions which reduce the administrative burden and the need for human intervention. These developments can change the ML / FT risks posed by an activity in particular due to the speed with which securities transactions can be executed and settled. In relation to transaction monitoring systems, relevant persons should be aware of any limitations of solely using an automated system. Where transactions are complex involving multiple products and counterparties an automated system may not provide enough coverage to mitigate risks. Examples of innovative areas include Trading Platforms, Crowdfunding and Robo Advice. By their nature online solutions are non-face-to-face and as such attract and increase ML / FT risk factors. Also, over recent years a number of automated KYC / CDD solutions have come on to the market. Such packages offer a wide variety of services, for example:
 client information upload;

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 verification of customer identity;
 verification of address;
 bank account details; and
 sanctions checking.
These services can be run daily, or in some cases offer real time verification. These electronic data verification packages have become widely used given the cost and time efficiencies they provide, further information on electronic methods of verification is provided in section 3.5 of the supplemental information document. Also, when placing reliance on third parties for any aspect of KYC/CDD you should consider section 4.5 of the Handbook.
3.3.2 Discretionary and Advisory Asset Management
Investment management includes both discretionary and advisory management of assets and investments. It therefore includes the business undertaken by asset managers, investment advisers and investment managers in managing customer assets. Discretionary managers are given the power to decide upon stock selection and to undertake transactions within the portfolio according to an investment mandate from the customer. Advisory relationships differ in that the manager does not have the authority from the customer to deal in investments on the customer’s behalf. In some cases the customer will execute their own transactions using the manager’s advice. There is little distinction between the ML / FT risks associated with discretionary and advisory asset management activities. In both cases the business could handle client money and therefore the service could be susceptible to the risk of ML at all three of the stages of the traditional ML model, placement, layering and integration. Discretionary / advisory managers must ensure they obtain the full range of customer information / verification required by the Code regardless of whether there is discretionary power given. It should be ensured that this customer information / activity is appropriately monitored on an ongoing basis as per the Code requirements. Specific risk factors to consider (in addition to the generic factors listed in section 3 of this document) in relation to the discretionary / advisory asset management sector may include:
 the type of customer i.e. is it an individual, fund, company or trust;  whether there is any PEP involvement;  whether the customer is undertaking activity inconsistent with the advice being provided;  whether there is transfer of funds without involvement from a custodian;  whether there are frequent and unexplained additions to the investment portfolio; and / or;

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 whether there are frequent and unexplained requests for assets to be realised and the funds paid away.
3.3.3 Financial Advisers
Financial advisers give customers advice on their investment needs and provide assistance in selecting appropriate products. A financial adviser is typically licenced to give advice to the customer and also to arrange deals on the customer’s behalf. Generally financial advisers do not have the regulatory permissions to hold client money so there is unlikely to be involvement in the placement stage of ML. Financial advisers could however be involved in the layering and integration stages. The vast majority of financial advice is conducted on a face to face basis which is a mitigating factor for some of the ML / FT risks faced by the business. A financial adviser must carefully consider any non-face to face business and conduct appropriate CDD based on the location of the customer, or where they are conducting business activity. Financial advisers must ensure they obtain the full range of customer information / verification required by the Code both where full advice is given and also where execution only activity is taking place. It should be ensured customer information / activity is appropriately monitored on an ongoing basis as per the Code requirements. Financial advisers may act as eligible Introducers to other regulated businesses and therefore any relevant ML / FT risks concerned with this activity should be mitigated appropriately. Specific risk factors to consider (in addition to the generic factors listed in section 3 of this document) in relation to the financial advice sector may include:
 the type of customer i.e. is it an individual, company or trust;  whether there is any PEP involvement;  situations where the customer is reluctant to meet the financial adviser face to face if they are a local resident;  whether the customer has been introduced and if so what is known about the introducer;  whether the customer has had a number of different financial advisers, possibly in a number of jurisdictions; and / or:
 whether the customer is undertaking activity inconsistent with the advice being provided.
3.3.4 Stockbroking
Stockbroker firms hold investment business permissions which allow them to undertake a wide range of services. They can be market makers, acting as principal, or as agent when

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Last updated August 2021 buying and selling stocks and other securities for customers. Stockbrokers are normally members of at least one stock exchange. Stockbroking is usually provided on an “execution only” basis, however can be on an advised or discretionary managed basis. Stockbrokers may also offer advisory and / or discretionary portfolio management and custodian services. “Execution Only” arrangements refer to where the business is not required to assess the suitability of any transaction for the customer. It purely carries out transactions on the instructions of the customer. A business undertaking execution only business is still required to fully comply with the Code therefore they must ensure they obtain the full range of customer information / verification required by the Code. Stockbrokers must ensure this customer information / activity is appropriately monitored on an ongoing basis. As stockbrokers hold client money it is a sector that could be used at all three stages of the traditional three stages of money laundering model, placement, layering or integration. Where customer instructions are taken on a non-face to face basis this could increase the risk of the service being used for ML / FT. This should be carefully considered and appropriate CDD obtained based on the location of the customer. Also, as per paragraph 9 of the Code and section 4 of this document the number of intermediaries that may be involved should be considered. Specific risk factors to consider (in addition to the generic factors listed in section 3 of this document) in relation to the stockbrokers sector may include:
 the type of customer i.e. is it an individual, company or trust;  whether there is any PEP involvement;  consideration whether execution only business is being undertaken and no advice is being provided, if so it may be difficult to fully understand the customer’s background and therefore it could be difficult to identify suspicious activity;  whether the customer is reluctant to meet the stockbroker face to face if they are a local resident;  whether the customer has had, or has, a number of different stockbrokers, possibly in a number of jurisdictions therefore making it difficult to build up a picture of their background;  whether there are sudden and unexplained additions to, or transfers from, the customer’s investment portfolio;  whether the customer appears indifferent to the profit or loss generated by trading activities; and  whether the customer transfers, and asks the investment business to dispose of, assets which were not acquired through that business, since transfers of assets off market may provide a vehicle for the ML.
3.3.5 Custodians
Custodians are financial institutions that hold customers' securities and other investments for safekeeping so as to minimise the risk of their theft or loss. A custodian can hold securities

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Last updated August 2021 and other assets in electronic or physical form. Custodians would typically hold client money therefore it is a sector that could be used at all three stages of the traditional three stages of money laundering model, placement, layering or integration. The vast majority of customer instructions would tend to be received on a non-face to face basis which could increase the risk of the service being used for ML / FT. This should be carefully considered and appropriate CDD obtained based on the location of the customer. Also, as per section 4 of this document the number of intermediaries that may be involved should be considered. Specific risk factors to consider (in addition to the generic factors listed in section 3 of this document) in relation to the custodian sector may include:
 the type of customer i.e. is it an individual, company or trust;  whether there is any PEP involvement;  whether the customer is reluctant to meet the custodian face to face if they are a local resident; and;  situations where the custodian is utilised by other investment businesses in respect of their customers, in these cases it should be ensured that both the custodian and the investment business concerned have complied with the necessary Code requirements.
4. Customer due diligence
Part 4 of the Code requires relevant persons to undertake customer due diligence and
ongoing monitoring in relation to all business relationships. Chapter 3 of the Handbook, provides guidance on how to identify and verify the identity of the customer in relation to both a natural and legal person. Also, guidance on the timing of identification and verification of identity is provided. CDD procedures are undertaken in relation to a customer prior to, or during the formation of a business relationship. The customer would usually be the person seeking to form the business relationship (although, as per paragraph 12(2)(b) of the Code, it must be determined if the customer is acting on behalf of someone else). For details of particular concessions which may be relevant please see section 5 of this document and chapter 4 of the Handbook. Also, see section 3.8 of the Handbook for further details on source of funds and source of wealth. In all cases where the requirements of Part 4 of the Code cannot be met (Paragraphs 8(5), 9(9), 10(5), 12(11), 14(6), 15(8) and 19(11)) the procedures and controls must be provide that – (a) the business relationship must proceed no further;

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(b) the relevant person must consider terminating2 the business relationship; and (c) the relevant person must consider making an internal disclosure.
4.1 Use of Intermediaries
Within this sector an intermediary (or a number of intermediaries) may be involved in the customer relationship. Where this is the case, it does introduce a further risk in that there can be numerous parties involved in a transaction, and it is likely these firms would have not met, or have contact with, the underlying customer. Where appropriate, relevant persons must comply with the provisions of paragraph 9 of the Code. Please see section 3.4.3 of the Handbook for further guidance in this area. Where an intermediary is used, a relevant person should analyse any specific risks arising from a further party being involved in the relationship. Involvement of an intermediary may vary depending on the particular products and services provided and which party is meeting the customer. It is imperative to understand the number of layers involved in the relationship and ensure enough information is held to comply with the Code and to identify any suspicious activity in relation to a relationship.
4.2 Inactive customer relationships
Due to the nature of activities provided by financial advisers in some instances these entities may retain information regarding customers on their records which relate to investments or products that were sold to the individuals several years ago. These customers may tend to be considered as part of the firm’s overall book of business, and thus be subject to the firm’s ongoing monitoring and review program (such as periodic review of their customer risk assessments) as required by the Code. It is noted that following the initial investment firms may lose contact with such individuals, and despite making efforts to re-engage, have no on-going relationship with the underlying customer. As such, meaningful and up to date reviews of the customer’s risk may not be achievable. The only ongoing activity within these relationships may be payment of trail, or indemnity commission, by the investment manager or Life Company (as appropriate) to the financial adviser. These payments may be payable over the life of a policy or an investment, which could run into decades. They will remain payable to the introducing financial adviser until maturity/redemption or potentially the switch of an adviser, but do not rely on any further action from the firm (or the customer). In these circumstances, depending on the number of years without any direct customer activity, the financial adviser may conclude there is no longer an ongoing “business relationship” as defined by the Code. Any such determination must be documented and appropriately justified.

2
In relation to a New business relationship (paragraph 8) the business relationship must be terminated.

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The writing of any new business for customers in this scenario is considered to be a trigger event and the usual requirements of the Code would apply (such as customer risk assessments, customer due diligence etc.) before undertaking any new business.
5. Simplified customer due diligence measures
The following sets out further detail regarding concessions that may be applicable to the sector.
5.1 Where the customer is a collective investment scheme
Where a relevant person enters a relationship with a customer it must undertake appropriate CDD in line with the requirements of the Code. In particular, an area that must be focussed on is paragraph 12(2)(b) of the Code which requires a relevant person to determine if the customer is acting on behalf of another person and identify, and take reasonable measures to verify the identity of that person. However, if certain conditions are met, paragraph 21(2) of the Code provides a concession to the aforementioned Code requirement at paragraph 12(2)(b). 21 Miscellaneous (2) Where – (a) a customer is – (i) a collective investment scheme (except for a scheme within the meaning of Schedule 3 (exempt schemes) to the Collective Investment Schemes Act 2008), or (ii) an equivalent arrangement in a jurisdiction in List C; and (b) the manager or administrator of such a scheme or equivalent arrangement is - (i) a regulated person; or (ii) a person who acts in the course of external regulated business, the relevant person need not comply with paragraph 12(2)(b). Further details on this concession are included in the Handbook at section 4.7.1.2.

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5.2 Exemption in relation to certain insurance products
Some financial advisers are able to avail themselves of a partial exemption under Regulation 6 of the Insurance Intermediaries (General Business) Regulations 2020. These particular financial advisers may also be eligible to make use of certain CDD concessions contained in paragraph 20 of the Code if particular insurance products are sold. It should be noted that although these concessions dis-apply CDD (part 4 of the Code) in certain circumstances, other parts of the Code, including the obligation to undertake a customer risk assessment (part 3 of the Code) continue to apply in all instances. It is at the relevant person’s discretion whether the insurance CDD concessions (paragraph
20) are utilised, however, for customers that are provided other investment business services
the CDD requirements contained in part 4 of the Code continue to apply, therefore the concession would not be applicable. If relevant person is considering using any of these CDD concessions we would suggest contacting the Authority to discuss further.
6. Case Studies
The case studies below are real life examples of risks that have crystallised causing losses and / or sanctions (civil and criminal) against the funds /investment business sector. These examples are based on the FATF report: Money Laundering and Terrorist financing in the Securities Sector October 2009. For further typologies please see the Annex to the FCA document: Understanding the Money Laundering Risks in the Capital Markets
6.1 Laundering by acquisition of a publicly traded shell company
The Financial Intelligence Unit (“FIU”) received a suspicious transaction report (“STR”) from a bank regarding D, a man in his twenties with a student account. The STR stated that D bought a controlling interest in public shell company X and then proceeded to open a bank account in the name of that company. A few days later, the account received a deposit of approximately US2.5 million. In addition to company X, D was also the sole owner of a private company, Y. D used company Y to purchase a controlling interest in company X through the Over the Counter market. Part of the US$2.5 million that was credited to company X was derived from a company Y account. Company Y received large deposits from several private accounts managed by criminal entities involved in drug trafficking. In one case the funds were transferred from the person known to be involved in criminal activity through a money service business account to the account of company X to further distance the source of the funds. The new controlling owners appointed new directors, including family members. Shortly after the US$2.5 million was transferred to the account of company X, it was transferred back to the money service business account. Some of the money was transferred

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Last updated August 2021 as a loan to company W, which was associated with the same criminal organisation that originally transferred funds to Company Y. D and his family were well-known to the FIU for having acquired public shell companies in the past for money laundering purposes, including committing other predicate offences. They were also suspected of fraudulently influencing the movement of the stock share prices of companies owned by them, performing circular transfers of funds, and fraudulently removing funds from the companies. High risk indicators from this case included:
 the use of a publically traded shell company;  transferring funds through several accounts;  using a money service business to transfer funds; and  withdrawing the funds shortly after the acquisition by means of loans.
6.2 Securities transfers
The Tax Administration and the Fiscal Intelligence and Investigation Service has discovered methodologies involving the allocation of securities as a means to effect tax fraud. These activities involved the use of false documents, in violation of tax and criminal laws. To date, 14 cases have been detected, involving six different financial institutions. Seven cases have been investigated in greater depth. The key role played by the facilitating financial institutions in these cases was examined by the Dutch Central Bank and The Netherlands Authority for the Financial Markets. The cases investigated have in common the misuse of a normal and legitimate service provided by banks, broker-dealers and other institutions licensed to trade in securities: the ability to transfer securities held electronically. The misuse in the Dutch cases was triggered by a difference in the way capital gains and losses were treated for the income and corporate tax purposes. In short, capital losses are not deductible for income tax purposes, but are included in the tax base for corporate tax. In these cases, individuals transferred securities between their personal portfolio and a corporate securities portfolio over which they had control. Depending on what was necessary in the specific case, securities were transferred in either direction. In the case of a loss that occurred in the personal portfolio, the relevant securities were transferred to the corporate stock portfolio and vice versa. The attractive feature of the misuse of the securities-transfer service is its lack of transparency. In a transfer there is no mandatory current account relationship. As is the case with regular sale and purchase instructions, payment for securities transferred can be arranged by other means, such as cash payments. As a consequence, bank statements do not have to show that a share transfer has taken place. In the different cases that were

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Last updated August 2021 investigated, transfers of securities were communicated to the client by separate statements that were not consecutively numbered and that did not have any connection with the year￾end bank reconciliation. All cases investigated resulted in administrative or criminal sanctions. What was surprising in the cases investigated was:
 the number of cases detected;
 the similarity of modus operandi;
 the relative ease in which employees of financial institutions were persuaded to co￾operate in the scheme;  the fact that the cases took place at different players in the financial sector; and  the involvement of accountants and tax advisors. High risk indicators from this case included:
 transactions without an apparent economic rationale;  use of false documentation; and  ante-dating of documents.
6.3 Structuring of cash deposits
D became the subject of a STR submitted to the FIU that detailed activity involving the structuring of cash deposits into an account. A “contract for difference” (CFD) is a type of derivative where an agreement is made to exchange the difference in value of a particular security (or other financial instrument) between the time at which a contract is opened and the time at which it is closed. In this particular investigation, the profits were deposited in a major Australian bank. D used false identification documents, including a false citizenship certificate and driver’s licence, to open a trading account over the internet. The individual became the subject of an STR because of the structuring of cash deposits into an account. The STR highlighted that over an eight-day period, approximately AUD$ 400,000 was deposited into the account in amounts. An investigation into this resulted in criminal restraining orders being placed on the individual’s assets. High risk indicators from this case included:
 multiple same day transactions;
 use of false documentation; and
 structuring of cash deposits.

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6.4 Rapid purchase and sale of shares
A bank reported that large wire transfers ordered from a securities dealer were received into a business account administered by Person A. Once received, money was used to purchase bank drafts, and cheques were issued payable to various individuals and entities. The purpose of the transfers between the securities dealer and the bank is not known, since the individual has refused to respond to questions asked by the bank’s anti-money laundering section. It was suspected, however, that the client was “dumping” in the market a large number of shares purchased earlier (evidenced by previous wire transfers sent to the securities dealer) once they reached a certain value. The securities dealer that sent the wire transfers also reported the following on Person B:
 their listed investment advisor was Person A;  was the signing authority of 24 accounts held by two corporations located in two Central American countries. The review of the accounts activity revealed movement of funds from one account to another;  was purchasing shares of specific companies, selling them a short time later and wiring the proceeds to bank accounts held by the corporations at financial institutions located in Central America and the Caribbean; and also to a bank account administered by Person A; and  never held stocks long enough to take advantage of future dividend distributions. Another securities dealer reported that an individual, whose investment adviser was also Person A, purchased a large number of shares and sold them a short time later with no economic gain. When purchasing the stocks, the client never used wire transfers but rather cheques drawn on an account held in a financial institution located in a foreign country. The transactions always involved one particular company. The case relates to eight individuals and two corporations involved in a stock manipulation scheme:
 Person A was the investment adviser of a group of 7 individuals;  Person B was listed as the signing officer of two corporations;  the two corporations had addresses in two different Central American countries but also held bank accounts in other Caribbean locations. According to information posted in a market regulator’s website:
 Person A was the main subject of a stock manipulation investigation;  one person of the group was under investigation for banking fraud in an Asian country; the fraud cost investors close to CAN$100 million (awaiting extradition).

Isle of Man Financial Services Authority
Version 3 Page 19 of 19
Last updated August 2021
Person A appeared to be providing information on when to purchase and sell stocks of specific firms to the rest of the group. The investors did not hold the stocks enough to take advantage of dividend distributions. Proceeds of stocks sold were:
 wired to bank accounts held overseas;
 used to purchase banks drafts or to issue cheques payable to individuals and entities (it was suspected that the beneficiaries were nominees). Analysis of the financial transactions of the remaining individuals of the group revealed constant purchases and sales of securities whose proceeds were deposited in bank accounts followed by issuance of cheques or bank drafts payable to individuals and entities. Some transactions involved penny stocks and stocks traded on the pink sheets (which are less regulated, and therefore more easily manipulated). High risk indicators from this case included:
 buying and selling of securities with no discernible purchase in circumstances that appear unusual; and  use of multiple accounts at a single securities dealer for no apparent reason.
6.5. Employee of a securities intermediary assisting a PEP to launder money
D, an investment representative at a large broker-dealer, helped a PEP from a foreign jurisdiction launder over US$10 million that the PEP received from drug traffickers. The PEP received these illicit assets as payment for allowing drug shipments to safely pass through his jurisdiction. D helped the PEP establish numerous brokerage accounts at her firm in the name of various foreign shell companies and then deposited the illicit assets into these accounts. Weeks before the PEP was to lose prosecution immunity, D assisted the PEP in wire transferring the illicit assets out of the brokerage account and into a foreign account. D then set up a fictitious account for the PEP and wire transferred all of the assets back to her firm. High risk indicators from this case included:
 wide spread news regarding investigation of the PEP; and;  foreign wire transfers.