Capital Market Fraud - A Peek into The Regulatory Compliance in Capital Markets

The main objective of any investor entering the market is to generate significant profits on his investments. However, investors might come across specific brokers, dealers, and traders who can trick them and ask them to purchase stocks of companies that might be unreasonably priced.

The question that arises now is how many ways are there to cheat an investor? The straightforward answer is yes. There are several methods through which investors can be tricked into investing in stocks they did not intend to invest in initially. Let us discuss some of the capital market frauds one by one.

Investment in Shell Companies:

Shell companies are companies with no active business and no significant asset. These companies do not have office or employees but might have a bank account. These companies generally use the name of big brands in the market and attract investors to invest their money in them.

Boiler Room:

In this type of fraud, the broker recommends stocks to the investors that are not as per the investor’s risk appetite. For example, a conservative investor might be being asked to invest in those stocks which are highly volatile. In such a case, if the market is not doing well, the investor would incur huge losses.

In boiler room tactics, the broker gives only positive data about the stock to the investor & disheartens them doing any outside research.

Forcing investors to sell their holdings:

There are also instances where the brokers in the market ask investors to sell their investments to create more brokerage. These brokers provide incorrect advice to the investors and force them to sell their holdings.

Insider Trading:

Insider trading means the buying or selling of the stock of any publicly-traded company from a person who has access to some non-public, strategic information about the stock.

Financial Statement Frauds:

Financial Statement Frauds occurs when the company’s management manipulates the financial statement to beat analyst expectations from the stock. In such a case, the revenues in the companies are exaggerated, the expenses are understated, assets overstated, and liabilities understated. The motive behind financial statement fraud is to increase the stock price and gain the confidence of the bankers by showing a better image of the company and raise money from them.

Because of the worsening financial crisis that is ongoing at a global level, there is a fear amongst the investors who are entering into the capital market.

In Australia, we have ASIC or Australian Securities & Investment Commission which is a regulatory body in Australian financial services and markets. It includes not only the stock exchanges and markets, but also consists of those who develop, sell, and advise on investment and credit products. Let us know about the role of ASIC.

ASIC, Roles and Responsibility:

ASIC’s role under the ASIC Act includes:

• Maintaining, enabling, and refining the performance of the financial system & units in it.
• Encourage assured & informed contribution by investors & consumers in the financial system.
• Manage the law in an effective way and with nominal procedural needs.
• Receive, process, and store the information received efficiently and quickly.
• Make information available to the public about the company and other bodies as soon as possible.
• Take necessary actions to implement and give effect to the law.

Some Common Frauds in Australia:

With the financial market diversification, increasing economic activities and technology development is increasing the chances of frauds.

Frauds are categorised by type or the industry where it happened. In Australia, the main types of fraud are:

• Superannuation fraud
• Mass marketed fraud or the frauds which take place over phone, email, or internet.
• Serious, organised investment fraud or boiler room fraud.
• Card fraud: fraudulent attainment and usage of debit & credit cards, or card facts, for financial benefits.
• Financial market fraud: It includes securities & share market fraud and mortgage & loan fraud.
• Revenue and taxation fraud
• Identity fraud: It is the usage of other personal details to commit a crime.

How ASIC prevents Capital Market Fraud?

As highlighted above, ASIC is Australia’s corporate, markets & financial services regulator. It contributes to the country’s economic status and its well-being by confirming that the financial markets are impartial and transparent.

In case ASIC receives the notification of any misconduct, it makes preliminary inquiries and conducts an initial assessment of the report and checks if any law related to corporations or financial services has been violated or not. ASIC targets to complete the initial assessment and respond to the request within 28 days.

In case, the matter falls under the boundaries of ASIC’s responsibilities, it acts only in case it is on the broader public interest.

Any report of misconduct is weighed on four parameters. These include the:

• The extent of loss or damage.
• Effect of issues such as the type and importance of the wrongdoing and the available proof, on the matter.
• Advantages of pursuing misconduct.
• ASIC sees any alternate plan.

After the initial assessment of the report of misconduct, ASIC communicates the person reporting the case and then take the matter further. ASIC may raise the issue to the surveillance team or specialist investigation within ASIC to seek compliance with the ASIC’s laws. It may even be possible that ASIC may take administrative, licensing, a criminal or civil act in case of any violation of the regulations.

Understanding AML, SAR, and BSA Compliance Requirements:

As a market participant or a market intermediary in the capital market, it is essential that one is aware of the compliance obligations as it enables them to do business. Let us know about some compliances.

AML or Anti Money Laundering:

Money laundering is a way of making huge money through illegal activities and making money appear legitimate. Criminals involved in these activities use money laundering techniques to make their funds look clean.

AML is a set of rules, regulations and procedures that enables financial institutions to track the customer’s transaction and report in case of any suspicious activity taking place.

SAR or Suspicious Activity Report:

Suspicious Activity Report is a document that a financial institution is required to provide to the AUSTRAC if it finds any money laundering activities. AUSTRAC or Australian Transaction Reports and Analysis Centre is engaged in shielding the country and the people from any serious crime and terrorism. AUSTRAC used financial intelligence and regulation to:

• Stop criminal abuse of the financial sector.
• Assist the law enforcement authorities and the Australian government find, prevent, and interrupt money laundering, terrorism funding and other severe misconduct.
• Build & keep faith & truthfulness in Australia’s financial system.

Bank Secrecy Act:

Bank Secrecy Act is a US legislation which aims to stop criminals from using financial institution to hide their illegal money. Under this law, the financial institutions are required to provide the related documents to the regulatory body in case any suspicious transaction takes place over more than US$10,000.