SEC gives securities sector Medium risk rating for dirty money

Published May 18, 2021, 3:46 PM

by James A. Loyola

The Securities and Exchange Commission (SEC) has given investment companies, brokers, dealers and other covered capital market participants an overall “medium” risk rating.

This is the result of its money laundering (ML) and terrorist financing (TF) risk assessment of the securities sector the commission released recently. 

The rating is based on the 2021 Sectoral Risk Assessment for the Securities Sector, conducted by the SEC with technical assistance from the Asian Development Bank.

The assessment covered all of the 304 brokers, dealers, investment houses, underwriters of securities, government securities eligible dealers (GESDs), investment company advisers, mutual fund distributors and investment companies under the supervision of the SEC. 

It was designed to identify the main criminal offenses and related threats currently being faced by the securities sector, the sector’s vulnerabilities most likely to be exploited for ML/TF purposes, and the potential impact or harm that ML/TF activities and other financial crimes in the sector may cause. 

Results of the risk assessment showed that the securities sector faces a “medium” threat of criminal exploitation, as covered persons submitted to the Anti-Money Laundering Council (AMLC) a total of 774 suspicious transaction reports (STRs) from 2017 to 2019. 

The STRs covered transactions worth P11.5 billion. Of the total, 4.9 percent was linked to the predicate crime of plunder, 2.5 percent to graft and corrupt practices, 0.9 percent to drug trafficking andrelated offenses, and 0.6percent to fraudulent practices and other violations of the Securities Regulation Code (SRC).

A majority of the transactions were suspected to have been facilitated for the commission of the predicate crimes within the Philippines, while five transactions were suspected to have been committed in China. 

Meanwhile, the level of terrorist financing reported by the securities sector to the AMLC was extremely low or nil, posing medium to low risks to the sector. 

“The   sector  attracts various   criminal   threats, with moderate level of sophisticated tactics and methods to commit offenses,” the Commission noted.

It added that, “The cheap availability of internet access, increasing functionality of mobile phones, and technological advancements that speed uptransactions… have provided criminals with tools to escape detection or to hide the proceeds of theirillegal activities.”

The securities sector’s risk exposure is likewise medium in terms of vulnerabilities, or characteristics that make it susceptible to criminal exploitation such as nature, size and complexity of business, as well as products and services, among others.

The SEC nevertheless noted a significant number of factors that render the sector vulnerable to criminal misuse.For instance, brokers/dealers have to deal with high liquidity and the speed at which trades can be made without suspicion, making the sub-sector vulnerable to ML.

Investment houses, which had an overall vulnerability of medium to low, showed significant transactional volume and value. The involvement of legal entities in the STRs filed by investment houses and underwriters of securities indicates the vulnerability of the sub-sector for being abused for crime by such entities.