New on FinoLib · Volume II: Capital Markets
New on FinoLib, my finance education website: I have published an article called AML and KYC in Practice, and Insider Trading Law, from Volume II: Capital Markets. Here is what the article explains, written as a short expert briefing; the full piece, with every worked example, is one click away.
9.1 Insider Trading Law and Enforcement Mechanics
The idea in plain words
Insider trading means trading on important information that the public doesn’t have, called material non-public information, in breach of a duty. An insider owes that duty to shareholders; an outsider can owe it to whoever gave them the information. A tippee, the person who receives the tip, is liable when the tipper shared it for a personal benefit, and a gift to a friend or relative counts. Civil penalties can reach three times the profit, on top of giving back the gains.
Key points
■US law rests on Rule 10b-5 and two theories: classical (insiders) and misappropriation (outsiders, O’Hagan, 1997).
■A $40,000 options bet on a tip can make $635,000 and carry a civil exposure of $2.54 million (disgorgement plus three times the profit).
■Criminal penalties reach 20 years and $5 million for individuals (15 U.S.C. §78ff).
A closer look
Insider trading is trading a security based on material non-public information (MNPI) — information significant enough to affect a reasonable investor’s decision, and not yet available to the public market. The prohibition reaches well beyond company insiders.
Decision rule
Before any trade, ask: is the information public, and would a reasonable investor think it important? If it is not public and the answer is yes, or you cannot tell, do not trade or pass it on; take it to compliance, which can restrict the name. After Panuwat, treat comparable companies the same way. Directors and officers who must sell should do so only through a Rule 10b5-1 plan adopted while holding no MNPI, expecting no trades for 90 to 120 days.
The costliest mistake
Believing a tip is safe because it came secondhand or as a favor. A gift to a friend satisfies the personal-benefit test (Salman), and the penalty scales with the trade: in the worked example a $40,000 options bet carries a potential civil bill of $2.54 million before any criminal case. Avoid it by refusing the conversation, not by sizing the trade small.
9.2 AML/KYC in Practice
The idea in plain words
AML and KYC programs have two jobs: know who your customers are, and watch what they do. Money laundering moves illicit money through three stages: placement, layering and integration. In the US, cash over $10,000 in a day triggers a Currency Transaction Report. Splitting cash to dodge that limit, called structuring, is itself a crime. Suspicious activity of $5,000 or more must be reported within 30 days of detection.
Key points
■CTRs aggregate a customer’s cash within one business day (31 CFR 1010.313).
■Four deposits of $9,400 to $9,800 total $38,300 without triggering a CTR; a structuring scenario catches them.
■Alert thresholds set staffing: 10,000 monthly alerts at 30 minutes each is about 31 analysts.
A closer look
Know Your Customer (KYC) requires financial institutions to verify a client’s true identity, understand the source and purpose of their funds, and assess their risk profile before opening an account — the practical first line of defense against Anti-Money Laundering (AML) risk. AML itself targets the broader process of disguising illegally obtained money as legitimate, classically described in three stages: placement (introducing illicit cash into the financial system), layering (moving it through multiple transactions and accounts to obscure its origin), and integration (the now-“clean” money re-emerging as apparently legitimate funds).
Decision rule
If cash activity clusters just below $10,000, money moves in and out within days, or volumes do not fit the customer’s stated business, open an investigation; if it remains unexplained, file a SAR within 30 days of initial detection, whether or not you can prove a crime. Never tell the customer a SAR is being considered or filed, and never suggest keeping deposits under $10,000.
The costliest mistake
Letting transaction monitoring go stale to control cost. From January 2018 to April 2024, TD Bank left 92% of its transaction volume, about $18.3 trillion, unmonitored, and from 2014 to late 2022 it added no new monitoring scenarios; three laundering networks moved more than $670 million through its accounts. On October 10, 2024, it pleaded guilty to Bank Secrecy Act violations, paying $1.89 billion to the Justice Department and a $1.3 billion FinCEN penalty, with further OCC and Federal Reserve penalties.
What the full article covers
In the full article I take you through these sections:
■9.1 Insider Trading Law and Enforcement Mechanics
■9.2 AML/KYC in Practice
It includes a look under the hood at the mechanics, a clear decision rule, the one mistake that costs people the most, a recap, a reveal-on-click quiz and the official sources behind every figure.
Volume II: Capital Markets
Read the full article on FinoLib
The complete article, AML and KYC in Practice, and Insider Trading Law, with every worked example, diagram, quiz and source, is free to read in Volume II, Capital Markets on finolib.com.
Explore the Finance Education Series: Vol. II — Capital Markets · Vol. I — Global Economy · Vol. III — Finance Encyclopedia · Vol. IV — Finance Careers · Vol. V — Personal Finance