New IOSCO initiative to facilitatemonitoring cross-border financial misconduct

Recognising the globalisation and the interconnectedness of financial markets, the International Organisation of Securities Commissions adopted in 2002 a Multilateral Memorandum of Understanding (MMoU) to promote the exchange of regulatory information on cross-border fraud and misconduct (1). This was formulated as a matter of urgency to respond to the events of September 2001. The MMoU soon became the global benchmark for cross-border international cooperation in the enforcement of securities and derivatives laws and regulations. G20, FATF and multilateral organisations have been supportive of this effort of IOSCO.  

By Dr. Dayanath Jayasuriya PC

In essence, the MMoU provided a means of seeking additional information required for ongoing investigations dealing with insider dealing and market manipulation; misrepresentation of material information and other fraudulent or manipulative practices relating to securities and derivatives; solicitation and handling of investor funds, and customer orders; the registration, issuance, offer, or sale of securities and derivatives; the activities of market intermediaries, including investment and trading advisers who are required to be licensed or registered, collective investment schemes, brokers, dealers, and transfer agents; and the operations of markets, exchanges, and clearing and settlement entities.

Paragraph 7 of the MMOU addressed the types of assistance and information that could be sought, including records to enable reconstruction of all securities and derivatives transactions, and records of all funds and assets transferred into and out of bank and brokerage accounts relating to these transactions; that identify the beneficial owner and controller of an account; for transactions, including the amount purchased or sold; the time of the transaction; the price of the transaction; and the individual and the bank or broker and brokerage house that handled the transaction; providing information identifying persons who beneficially own or control companies; and taking or compelling a person’s statement or, where permissible, testimony under oath, regarding the potential offence.

Up to now over 100 securities regulators have signed the MMoU. At the IOCSO annual conference hosted by the SEC in Colombo in 2005, it was noted that only a limited number of requests have been made using the MMoU and regulatory agencies were encouraged to make greater use of this unique arrangement. By 2015 more than 3200 annual request have been made; a significant increase from around 50 requests in 2003. Non-cooperative jurisdictions in the areas of securities regulation, market conduct and prudential supervision have been urged to become signatories. The organisation’s membership currently represents more than 95% of the world’s securities market regulators in more than 115 jurisdictions.

At subsequent IOSCO annual conferences, attention has been drawn to technological advances which on the one hand have been a boon to promoting financial transactions but on the other hand have fuelled cyber crime and cross-border financial crimes. On 31 March IOSCO approved the ‘Enhanced Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information’ (EMMoU) which offers securities regulators new enforcement powers for responding to the challenges arising from recent global financial crises and developments in cross-border financial misconduct. The MMOU and the EMMoU provide a broader mechanism for securities regulators to share essential investigative material, such as beneficial ownership information. An important requirement enshrined in both instruments is that no domestic banking secrecy laws or regulations prevent the sharing of enforcement information among securities regulators.

The EMMoU seeks to augment enforcement powers that are necessary for continuing to safeguard the integrity and stability of markets, protect investors, and deter misconduct and fraud.

These powers have been described by the acronym ACFIT and are intended to enable member states to:

A: Obtain and share Audit work papers, communications and other information relating to the audit or review of financial statements;

C: Compel physical attendance for testimony (by being able to apply a sanction in the event of non-compliance);

F: Freeze assets if possible or, if not, advise and provide information on how to freeze assets, at the request of another signatory;

I: Obtain and share existing Internet service provider records (not including the content of communications), including with the assistance of a prosecutor, court or other authority, and to obtain the content of such communications from authorised entities; and

T: Obtain and share existing Telephone records (not including the content of communications), including with the assistance of a court, prosecutor, or other authority, and to obtain the content of such communications from authorised entities.

As at present securities regulators are required to sign the MMoU to become a member of IOSCO. The MMoU will remain in effect as long as any signatories continue to wish to use it. However, IOSCO is urging all MMoU signatories to migrate eventually to the EMMoU.

The EMMoU is a timely initiative but it is left to the goodwill and commitment of regulators to extend the maximum cooperation envisaged. Given the relative speed with which cross-border financial transactions are finalised and the complexity involved in investigating, identifying and eventually bringing to justice perpetrators, IOSCO needs to consider what further needs to be done. An important item of its future agenda would be to examine to what extent regulators can make use of the the United Nations Convention against Transnational Organised Crime. Greater cooperation with the Financial Action Task Force would also help to prevent stock markets being used for money laundering and terrorist funding purposes (2).    

References

More details of the above information can be found in the IOSCO website (www.IOSCO.org) for ‘Text of the Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (MMoU)’ and related media releases. 

See, further, Jayasuriya D.C. ‘Anti Money Laundering Efforts, Stock Market Operations and Good Governance’, Journal of Qualitative Research in Financial Markets, Vol. 1, 2009.

(The writer is Former Chairman, SEC Sri Lanka and Chairman, IOSCO Presidents Committee, 2005).