C.mrkets Cat

Moses matsekhe
Llb5203.21
3rd year 1st sem
Mr Collins omondi
Flb 308
Question1.
Compare and contrast CMAs guidelines on customer due diligence with the relevant
recommendations of the FATF global standards on combating money laundering and
financing of terrorism.
Money laundering
First of all, I would like to distinguish between these two by stating that CMA is an Act of
Parliament to establish a Capital Markets, Authority to promote, regulate, and facilitating the
development of orderly, fair, and efficient Capital Markets in Kenya and for connected purposes.
While the Financial Action Task Force (FATF) is an inter-governmental body established in
1989 by the Ministers of its Member jurisdictions. The mandate of the FATF is to set standards
and to promote effective implementation of legal, regulatory and operational measures for
combating money laundering, terrorist financing and the financing of proliferation, and other
related threats to the integrity of the international financial system.
Money laundering is a crime under any of Sections 3, 4, and 7 according to the Proceeds of
Crime and Anti-Money Laundering Act, 2009 (the Act). According to Section 3 of the Act, it is
unlawful for anyone to remove any property obtained as a result of the commission of an offense
or enter into an agreement or take any other action concerning such property that has the effect
of concealing its source or assisting anyone who has committed an offense to avoid prosecution.
The CMAs act, it states that inquiries should be made from time to time to establish whether
there have been any changes to directors or shareholders or to the original nature of the business
or activity. Such changes could be significant about potential money laundering activity even
though authorized signatories have not changed.
The Capital Markets Authority (CMA), acting under the authority granted to it by Section
12A(1) of the Capital Markets Act, Cap. 485A enacted the Guidelines on the Prevention of
Money Laundering and Terrorist Financing in the Capital Markets (the Guidelines) via Gazette
Notice Number 1421 on March 4, 2016. This was done to stop the aforementioned.
The Guidelines are intended to be a component of initiatives to enhance corporate governance
and promote capital inflows to Kenya. They are by the aforementioned Kenyan anti-money
laundering and counter-terrorism financing laws as well as FATF recommendations. The
Guidelines explain the characteristics of the capital markets that have rendered it vulnerable to
money laundering them and outline the three stages.
A market intermediary must adopt a risk-based approach and methodologies to determine a
holistic view of the level of risk posed and avoid a silo approach when assessing the relationship
between risks in order to effectively money laundering risks in capital markets, according to
Guideline 4(2). Customers in high-risk jurisdictions, such as those that have been identified by
the FATF as having high strategic Anti-Money Laundering deficiencies or are believed to have
such deficiencies, should be given special consideration when assessing their money laundering
risks. Market intermediaries may assess the money laundering risks of individual customers by
assigning money laundering risk ratings to their customers.
A market intermediary is required to report suspicious transactions to the Financial Reporting
Centre established under Section 21 of the Proceeds of Crime and Anti-Money Laundering Act,
2009 within seven (7) days of the date of the transaction.
secondly, it also states that Trust, nominees, are vehicles for criminals wishing to avoid the
identification procedures and mask the origin of the money accrued from criminal activities they
wish to launder. Particular care needs to be exercised when the accounts are set up in locations
with strict bank secrecy or confidentiality rules. Where the market intermediary has not
previously verified the identity of a trustee or has no current relationship with a trustee,
verification of the identity of the trustee, or where there are several trustees, the identity of all the
trustees should be undertaken in line with the normal procedures as set out in Regulation 16 of
the Proceeds of Crime and Anti Money Laundering Regulations, 2013.
In financing terrorism
Countries have the legal capacity to prosecute and apply criminal sanctions to persons that
finance terrorism. Given the close connection between international terrorism and, inter alia,
money laundering, another objective of Recommendation 5 is to emphasize this link by
obligating countries to include terrorist financing offenses as predicate offenses for money
laundering.
The Guidelines state that market intermediaries must, upon receiving instructions from the CMA,
keep abreast of the various resolutions adopted by the United Nations Security Council (UNSC)
on counterterrorism measures, maintain a database of the names and contact information of
people who have been listed, and make sure that its employees can easily access the database.
Market intermediaries must regularly compare the names of new, current, and potential
consumers to the names in the database. Additionally, where there is a name match and the
identity has been verified, the appropriate authorities must be informed and the customer's cash
must be frozen.
Terrorist financing offenses should apply, regardless of whether the person alleged to have
committed the offense (s) is in the same country or a different country from the one in which the
terrorist(s)/terrorist organization(s) is located or the terrorist act(s) occurred/will occur.
Question2
Explain the following concepts
(a)front running
Front running is the unlawful act of buying a security based on early unreleased information
about a future significant transaction that would impact the price of the security. Because a front
runner anticipates securities price movements based on inside knowledge, front running is
regarded as a type of market manipulation and insider trading.
Since a front runner anticipates securities price movements based on inside knowledge, front
running is regarded as a type of market manipulation and insider trading. Some front-running
variations, such index front-running, are not prohibited, though.
Churning
Churning is the act of a broker or brokerage firm making trades for a customer's investment
account solely for the goal of deriving commission from the account. It happens when a broker
buys and sells too many stocks in a client's account when doing so is not necessary to achieve the
client's investing objectives
Brokers may frequently trade in mutual funds, annuities, equities, bonds, and life insurance
contracts.
Most jurisdictions prohibit churning, which can result in harsh fines, penalties, and suspensions
from regulatory agencies.
The most prevalent type of churning involves the broker's aggressive trading of stocks and
bonds. Churning, however, is not exclusive to these particular securities. Mutual funds, annuities,
and life insurance plans are frequently churned by brokers.
Backward or reverse churning

Reverse churning is the term for the practice of charging clients large fees on inactive accounts.
It often happens when customers with infrequent trading habits are placed in fee-based brokerage
accounts.
Insider trading
Is defined as the use of non-public information in trading shares of a company by someone who
owes a fiduciary duty to the company. Insider trading is also described as an unfair and
unconscionable practice that discourages a free market economy.
The capital markets act (CMA) makes insider trading and other market abuses illegal with
regarding , their derivatives, and derivatives traded on any market subject to CMA regulation.
A person who trades listed securities or their derivatives whose prices are altered by information
in their possession commits insider trading under Section 32B (1) of the CMA Act if they:
encourages another person to trade in securities or their derivatives that are price-affected
securities, whether or whether that other person is aware of it, knowing or having a good reason
to expect that the trading would occur.
Regarding listed securities, their derivatives, and derivatives traded on any market governed by
the CMA, the CMA Act makes insider trading and other market abuses illegal.
According to Section 32B (1) of the CMA Act, a person who trades listed securities or their
derivatives whose prices are affected by information in their possession commits insider trading
if they:
encourages another person to trade in price-affected securities or their derivatives, regardless of
whether the other person is aware of it, knows about it, or has a reasonable expectation that
trading would take place; or
Know your client

Before creating accounts or conducting financial transactions with their consumers, financial
institutions and other regulated firms are required to do KYC or know your customer, or due
diligence and the, and bank rules.
Banks are obligated to set up a policy framework to get to know their customers before opening
any accounts or conducting any transactions in order to identify fraud, money laundering, and
terrorist financing, among other things.
This policy’s department's goal is to offer advice on the avoidance, identification, and
management of potential fraud, money laundering, and terrorism funding. All institutions with a
banking act license may use the policy to do business. It emphasizes techniques and procedures
for careful client identification, record keeping, the detection of suspicious activity, and the
requirement to report such activity to the relevant authority for additional inquiry.
Suitability of advice rule
The 'suitability rule' - section 945A(1) of the Corporations Act, otherwise known as a 'reasonable
basis for advice', saadvicet an Authorised Representative can only provide personal advice to a
client if the AR:
determine the client's personal circumstances relevant to the advice make reasonable enquiries
about those personal circumstances, then use the information from the client, consider it and do
other reasonable investigations relevant to the topic of the advice, and ensure that the advice is
appropriate in relation to all of the above.
The suitability rule can be met by followingthree-step step approach below:
The collection of information by asking appropriate questions of the client or the company that
issued the client's current products, then
Considering the client's needs and objectives, then
Advising the client by giving the appropriate and relevant recommendations.
The question phase of establishing a reasonable basis for advice incorporates the requirement for
the AR to make reasonable inquiries to determine the client's relevant circumstances. Good
questioning with the client leads to a strong foundation for advice.
The level of inquiry will depend on what is reasonable. This includes the complexity of the
advice and the potential impact of inappropriate advice on the client. It will also depend on the
financial literacy of the client and if the client has any impairment.

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Moses matsekhe

Backward or reverse churning

Know your client

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