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Insider Trading in AML- Key Takeaways

  • Insider trading is the use of non-public, price-sensitive information to gain unfair profits.
  • The key red flags of insider trading include unusual trading activity, inconsistent trading patterns, or the use of related accounts.
  • Regulatory expectations for detecting insider trading are to conduct ongoing monitoring, record-keeping, and report the suspicious activity to the relevant authorities.
  • Citadel365 helps in detecting the risk of insider trading through its onboarding and risk profiling, transaction monitoring, and case management workflows.

What Is Insider Trading in an AML/CFT

Insider trading refers to the illegal practice of buying or selling securities based on non-public information, which is obtained through privileged access. It is considered a market abuse because it undermines the integrity of the financial market and the principles of fairness and transparency. Insider trading often generates illicit proceeds which may subsequently be subject to money laundering by exploiting confidential non-public information, which is then concealed or integrated into the financial system. Insider trading is treated as a predicate offence within broader financial crime frameworks due to its potential to facilitate the laundering of illicit funds.

How Insider Trading Intersects with Money Laundering

Insider trading uses non-public information to generate illicit gains. Once the trades are made and profits are realised, the money is considered dirty because of its unlawful origin.

 

Traders often use intermediaries (friends or relatives executing trades on behalf of an insider), nominee accounts (accounts with different names), or layered transactions (rapid fund movements, use of shell companies, structuring or smurfing of transactions) to conceal the origin of illicit funds.

 

The laundered money is then reintroduced into the financial system through the integration stage of money laundering, making the funds appear legitimate while making detection harder.

Red Flags and Suspicious Indicators of Insider Trading

The key red flags and suspicious indicators of insider trading are as follows:

 

  • Unusual trading activity, including frequent buying and selling of securities before any major announcements or corporate events, often indicates a red flag.
  • Trading patterns that are inconsistent with the customer profiles or their historical behaviour, such as sudden high-value or high-risk trades, indicate a warning sign.
  • Use of related accounts or coordinated trading among connected parties, including family, friends, or business partners, indicates the sharing of insider information or working together.
  • Unusually sudden spikes in profit in a short period of time without a clear market rationale may suggest insider knowledge.

Regulatory Expectations for Detecting Insider Trading

Key regulatory expectations for detecting insider trading include:

 

  • The regulators expect financial institutions to continuously monitor the trading behaviour and identify the suspicious patterns associated with insider trading.
  • The institutions are required to promptly escalate the suspicious activity to senior management and report it to relevant authorities in a timely manner.
  • Institutions are also required to document all the alerts and monitoring records to show how decisions were made, and actions have been taken to support the regulatory investigations.

Monitoring Insider Trading Risk with Citadel365

Citadel365 supports the detection of insider trading-related financial crime risks through its onboarding and risk profiling, helping institutions to proactively assess the insider trading risk at the customer level.   Citadel365 transaction monitoring capabilities help in detecting unusual trading patterns, inconsistent customer activities, and linked account activities, reducing ML/TF risks.   Its case management, investigation workflows, and audit trails support the regulatory investigations and timely escalations to senior management.

Integrating Insider Trading Controls into AML Frameworks

Integrating insider trading controls into AML frameworks helps in detecting, preventing, and responding to insider trading risks more effectively.

  • Conducting customer due diligence helps financial institutions in identifying customers whose roles, positions, or relationships may expose them to insider information.
  • Risk assessment helps in incorporating insider exposure into customer risk scoring models, which enables institutions to focus more on high-risk areas.
  • Ongoing monitoring of trading behaviour helps in detecting unusual patterns linked to insider trading, which includes linked or related account activities.
  • Clear governance and reporting, supported by centralised documentation, clear audit trails, and a structured reporting process, help and support regulatory inquiries and effective enforcement actions.

Insider Trading FAQs for AML Professionals

Insider trading refers to the illegal practice of buying or selling securities based on non-public information. It is relevant to AML because it generates illicit gains, making it an ML/TF and other financial crime risk.

The illicit profits from insider trading are often laundered using intermediaries, nominee accounts, and layered transactions before being integrated into the financial system.

The common red flags that indicate potential insider trading activity include unusual trading activity, inconsistency in customer profiles, and use of related accounts.

Regulators assess insider trading controls by evaluating monitoring systems, escalations and reporting processes, and the presence of documents and audit trails.

Yes, technology like Citadel365 improves the detection of insider trading risk via automated monitoring and case management workflows.