Operational risk and compliance staffs are surely on alert after federal prosecutors charged SAC Capital Advisors with criminal acts of fraud. This growing scandal closely follows the CFTC’s monetary penalties and one-year trading ban for high frequency trading firm Panther Energy Trading, which allegedly used algorithms to place buy orders and then swiftly cancel them to manipulate prices for futures contracts.To help ops risk and compliance managers, I offer highlights from a panel of top industry representatives that took part in FTF’s Financial Crime & AML conference in New York last week.
Here are some key pointers for ops risk and compliance staffs:
- Compliance and ops risk managers and staff should push hard for the most they can get out of the budgeting process. The best arguments that they can make are that the money spent on crime prevention via anti-money laundering and anti-crime projects will wind up being about one-tenth of the damages caused by financial crimes not to mention the cost of investors pulling out their money;
- Get an effective change management team in place. Most ops risk and compliance people are too steeped in the day-to-day struggles to coordinate across the enterprise. Of course, getting such a team is easier if managers have buy-in from top management;
- When it comes to anti-financial crime measures, regulators want to see high quality AML and related operations, including comprehensive systems, policies and commitments across the firm;
- Ops risk and compliance staff should take a holistic approach to anti-crime strategies and systems. They should also integrate onboarding and other know-your-customer efforts across the enterprise. It’s also a good time to consider a centralized, single data repository;
- Consider independent, third-party consultants to help in refining anti-crime systems. In particular, an optimization manager can help ops managers and staff to be better focused on real money laundering and financial crime issues. The goal is to move away from monitoring 5,000 alerts — many of which are false alarms — and zero in on those issues they should be watching. One conference panelist says that with the help of an optimization manager his firm has a situation where five people are watching 1,000 troubling alerts filtered out of a flow 3,000-plus concerns.
- As many firms push to downsize staff, ops risk and compliance managers have to keep in mind that fewer eyes to watch potential crimes is risky. Improved automation could help maintain high levels of effective anti-crime measures and could help bring down costs and make staff members more productive;
- Ops risk and compliance managers should push for more training to help their staffs stay current on AML and related trends such as the “spoofing” allegedly conducted by Panther Energy Trading. Spoofing occurs when a firm sends an order to buy many shares and then suddenly cancels them with the hope of creating a false high demand that will attract others and let the instigator to profit by selling what they have at fraudulently inflated prices.
- Lastly, managers have to watch out for staff burnout and complacency, which is common given the intensity of their work.
As for current scandals caused by internal misdeeds, I do not know of any IT tool or platform that guards against a culture of insider trading. Laws and regulations are in place to protect investors, but they can’t instill old-fashioned ethics and a deep respect for investors and their concerns. Essentially, IT systems and the government cannot impose doing business in good faith — either financial services firms have it or they don’t. And, if they don’t, they have to suffer the consequences of betrayal.
While journalists and others have the luxury of pontificating about insider trading and other crimes, the compliance and ops risk staffs will have to find ways to protect the firm from a list of financial crimes that is growing longer each day. They will have to stay on top of new threats such as spoofing, the combination of internal and external fraud, ongoing sanctions compliance, wire transfers to suspicious nations and individuals, and the traditional money laundering and cyber-crime schemes. Given that recent scandals will likely spur more scrutiny from investors, counterparties and regulators, the ops risk and compliance people at financial services firms will have their work cut out for them.
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