Note: This post was originally published on LinkedIn in Jan 2024
This week the FCA have released an update on their focus of reducing and preventing financial crime. (https://lnkd.in/eB9-rqKX).
What the FCA report is silent on is the typologies of FinCrime, and some of the structural issues which can enable activities such as fraud to take place.
When SBF perpetrated fraud at FTX, he did so on multiple fronts as the correct guardrails were not in place. As the caretaker CEO, John J. Ray III stated: “Never in my career have I seen such a complete failure of corporate controls…”.
SBF, based on current convictions, committed multiple forms of fraud - Wire Fraud (Alameda transfers), Securities Fraud (Investors) and some Money Laundering too (KYC).
FTX was a vertically integrated service offering: Asset Manager, Broker, Exchange, Custodian etc. This vertically integrated typology, with a lack of appropriate governance arrangements, facilitated the flourishing of conflicts of interest. This culminated in a circa US$9 billion default.
To mitigate against the risk that this vertical typology presents, in traditional finance we decouple the transaction value chain into its constituent elements of: Trading, Clearing and Settlement.
Not only does this allow us to have a more rigorous approach around any potential conflicts of interest, it also allows us to test the resilience of each of the constituent elements of the value chain.
I found this paper from Optiver insightful on key lessons from testing financial market infrastructures. (https://lnkd.in/e9Xa4t5x)
And that is what working in a regulated, as opposed to an unregulated, environment gives you:
🎞 Transparency: who is doing what
💪 Resilience: how do we preserve the integrity of the system
⛑ Recourse: Where does the buck stop? The FCA makes this abundantly clear with the threshold CONDitions and SM&CR. (No room for virtual offices here!)
Financial crime does enormous damage to society. Each of us, as individuals have a role to play.
So stick with your trusted, and regulated, parties.
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