What are two reasons physical certificates present a money laundering risk to broker-dealers? (Choose two.)
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A. B. C. D.CD
Certainly, I'd be happy to provide a detailed explanation of the two reasons physical certificates present a money laundering risk to broker-dealers.
One reason why physical certificates pose a money laundering risk to broker-dealers is that the trade information on a physical certificate can be easily altered. Physical certificates can be tampered with by fraudsters, enabling them to change the trade information to suit their purposes. For instance, fraudsters could alter the name of the owner or the number of shares listed on the certificate, or even create fake certificates altogether. Once the fraudulent certificates are introduced into the market, they can be used to launder illicit proceeds through securities transactions. Broker-dealers that accept physical certificates as collateral or as proof of ownership may unknowingly facilitate the laundering of illicit proceeds by accepting fraudulent certificates as legitimate.
Another reason why physical certificates present a money laundering risk to broker-dealers is that they may be provided to nominees for deposit or settled in off-market transactions. Nominees are individuals or entities that hold assets on behalf of another person or entity. Because physical certificates can be easily transferred or deposited into a nominee's account, they can be used to hide the true ownership of the underlying assets. This makes it easier for criminals to launder illicit proceeds through securities transactions without being detected by law enforcement or regulatory agencies. Off-market transactions, which occur outside of the formal exchange, can also facilitate money laundering by enabling criminals to sell securities at inflated prices or purchase them at a discount, thereby transferring illicit proceeds without alerting the authorities.
In summary, physical certificates present a money laundering risk to broker-dealers because the trade information on a physical certificate can be easily altered and because physical certificates may be provided to nominees for deposit or settled in off-market transactions, making it easier for criminals to launder illicit proceeds through securities transactions. Broker-dealers must remain vigilant when accepting physical certificates as collateral or as proof of ownership and implement effective anti-money laundering controls to mitigate the risks associated with physical certificates.