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Insider Trading

Definition

Insider trading refers to the buying or selling of a company’s securities by an individual who has access to material, nonpublic information about that company, or the wrongful tipping of such information to another person.

In many jurisdictions, this conduct is illegal because it breaches a duty of trust or confidentiality and gives an unfair advantage to the insider over general market participants.

In the context of AML/CFT frameworks, insider trading is relevant because it can be a predicate offence for money laundering, or a means by which illicit actors misuse capital markets to legitimise or distribute illicit funds. 

Explanation

Insider trading arises when a person trades based on information that is both material (i.e., likely to affect the value of a security) and non-public.

For example, if an executive knows that a takeover is about to be announced and buys shares in the target company beforehand, that constitutes insider trading. 

Not all insider trades are illegal. In many jurisdictions, company insiders (such as officers or major shareholders) may trade their company shares provided they follow disclosure rules and trade without exploiting undisclosed, material information.

From an AML/CFT perspective, insider trading may connect to financial crime in various ways:

  • It may be used to convert insider knowledge into profit and then layer or integrate illicit funds through trading profits.
  • It may indicate abuse of privileged access or bribery/corruption, which in turn generates illicit proceeds requiring laundering.
  • It may serve as a façade for other misconduct (market manipulation, fraud) whose proceeds should be subject to AML controls.

Insider Trading in AML/CFT Frameworks

Financial institutions and securities firms must consider insider trading risk as part of their broader financial crime risk management.

Key intersections include:

Customer and Counterparty Risk

  • Persons with executive or senior positions in listed companies or access to market-sensitive information may pose a higher inherent risk.
  • Trading counterparties who frequently deal with such insiders or who participate in listings, mergers, acquisitions, or corporate restructurings can be high risk.
  • Entities or individuals funneling funds into or out of securities trades may require enhanced due diligence if their behaviour resembles typical insider trading patterns.

Transaction Monitoring

  • Unusual trading patterns (e.g., sudden increase in volume, trading ahead of announcements) may indicate insider trading and also other misuse of the market.
  • Alerts should be designed to recognise early trades relative to public announcements, use of unusual counterparties, layering of profits, or transfers of trading gains to unrelated persons or entities.
  • These monitoring controls align with AML obligations to detect suspicious transactions and suspicious behaviour.

Reporting and Investigation

  • If suspicious trading is suspected, firms may need to submit Suspicious Activity Reports (SARs) or equivalent to their regulator or FIU, especially where proceeds may be laundered.
  • Investigation teams should coordinate disguised insider trades with broader criminal investigations (e.g., securities regulators, law enforcement) because insider trading may be tied to broader offences like fraud, corruption, or market manipulation.

Governance and Controls

  • Adequate governance must address insider trading risk through policies, training, blackout periods, trade pre-clearance, disclosure obligations, and monitoring of personnel with access to sensitive information.
  • AML/CFT programmes should include insider trading as a predicate offence when designing risk assessments, screening, monitoring, and audit procedures.

Key Components of Insider Trading Risk

Material Nonpublic Information (MNPI)

  • Information is material if a reasonable investor would consider it likely to affect the price of the securities.
  • Nonpublic means the information is not generally available to the market and has not been disseminated in a manner that allows prompt price reaction.
  • Access to MNPI may arise via employment, consultancy, board membership, adviser role or indirect relationships (tippees).

Fiduciary or Confidential Relationship

  • The insider often owes a duty of loyalty or confidentiality to the principal (e.g., company, shareholders). Breach of that duty is central to establishing illegal insider trading. 
  • Tippees (those who receive information from insiders) may also be liable if they knew the information was MNPI and traded on it.

Trading or Tipping

  • Trading: Direct purchase or sale of securities by the insider based on MNPI.
  • Tipping: Providing MNPI to someone else who trades (the tippee), or trades on behalf of the insider or nominee.
  • Misappropriation theory extends liability to persons who misuse confidential information regardless of their duty to the issuer. 

Enforcement and Penalties

  • Jurisdictions vary: some impose civil penalties, others criminal sanctions, including imprisonment.
  • Securities regulators (such as the U.S. Securities and Exchange Commission) and enforcement agencies actively monitor and prosecute insider trading. 
  • For AML/CFT, the consequence is that illicit profits from insider trading may require reporting and remediation under financial crime laws.

Examples of Insider Trading Scenarios

  • An employee at a listed company learns of a pending earnings surprise and buys shares before the announcement, profiting when the price rises.
  • A consultant receives board-level information about a merger and passes the information to a friend, who then trades ahead of the market, constituting tipping.
  • An executive instructs a relative to buy company stock just before a public disclosure, then shares in the gains—collaboration to exploit MNPI.
  • A fund manager receives confidential information about a takeover and trades accordingly—misappropriation of confidential information.
  • A company insider enters a pre-planned trading arrangement (e.g., trading plan under Rule 10b5-1 in the US) but then trades outside of that when MNPI arises, breach of the plan.

Impact on Financial Institutions

Regulatory and legal risk

Financial firms involved in facilitating or failing to detect insider trading risk face regulatory sanctions, legal liability, or reputational damage.

AML/CFT exposure

If trading gains from insider trading are used to move funds through financial institutions, these gains could be laundered, requiring AML controls to detect and respond.

Operational burden

Markets and institutions must deploy surveillance tools, alerting, and investigation teams, and share information with regulators and law enforcement.

Market integrity

Insider trading undermines market fairness and investor confidence; financial institutions must support integrity by having robust controls.

Challenges in Managing Insider Trading Risk

Detection difficulty

Insider trading often occurs through subtle timing, nominee accounts, offshore structures, and complex trades, making detection challenging.

Data and analytics

Effective surveillance requires granular trade data, counterparty linkages, communication patterns, and coordination with market regulator data.

Cross-border complexity

With global securities markets, information flows, and trading may cross jurisdictions, complicating enforcement and AML/CFT oversight.

Overlap with other crimes

Insider trading may be linked to fraud, bribery, corruption, and market manipulation, requiring a multidisciplinary investigation.

Evolving technology

New instruments (crypto-assets, digital tokens) raise unique insider trading risks and require updated controls.

Regulatory Oversight & Governance

  • The FATF recognises that the securities sector is vulnerable to money laundering and terrorist financing, and the misuse of trading platforms. 

  • Securities regulators in each jurisdiction oversee insider trading laws, corporate disclosure regimes, and market abuse frameworks. For example, the US SEC, the UK’s Financial Conduct Authority, and India’s Securities and Exchange Board of India (SEBI).

  • Financial institutions must integrate insider risk into their AML/CFT governance frameworks, including board oversight, risk assessments, policies, training, internal audit, and external reporting.

  • Suspicious activity indicators applicable to the securities and derivatives sector support the detection of misuse of securities markets. 

Importance of Addressing Insider Trading in AML/CFT Compliance

Treating insider trading as part of the financial crime risk universe is critical. Effective risk management of insider trading contributes to:

  • The identification of illicit funds generated through market abuse.

  • Strengthening the link between market-abuse surveillance and AML/CFT programmes.

  • Reducing the potential for securities platforms being used to launder or distribute illicit proceeds.

  • Enhancing institutional resilience and market integrity by aligning controls against abuse and misuse.

  • Ensuring that surveillance, monitoring, and reporting efforts cover not only predictable ML/TF flows but also abuse of privileged information.

By integrating insider trading awareness, surveillance tools, and cross-department coordination, institutions support their AML/CFT programmes and contribute to the fairness, safety, and transparency of capital markets.

Related Terms

  • Market abuse
  • Material non-public information
  • Tippee/tipper liability
  • Securities surveillance
  • Predicate offences
  • Trade surveillance
  • Transaction monitoring

References

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