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Which red flag is most relevant to money laundering through capital markets?
Correct Answer: A
Money laundering through capital markets often involves pump-and-dump schemes, wash trading, and layering funds through rapid trading activity. Option A (Correct): A sudden spike in demand for a low-priced security is a red flag for pump-and-dump schemes, where criminals manipulate the market to inflate stock prices artificially before selling off shares for a profit. Option B (Incorrect): A gradual decline in trading volume and price does not indicate suspicious activity related to money laundering. Option C (Incorrect): An increase in demand for ETFs is common and not necessarily linked to money laundering. Option D (Incorrect): Holding securities in one specific emerging market may indicate a geographic investment strategy, not necessarily money laundering. Common Money Laundering Typologies in Capital Markets: Pump-and-Dump Schemes - Fraudulently inflating stock prices to cash out illicit funds. Wash Trading - Conducting self-trades to create an illusion of high market activity. Layering Funds Through Rapid Trading - Engaging in frequent buy-and-sell orders to obfuscate the origin of funds. Best Practices for AML in Capital Markets: Monitor unusual trading volume and price fluctuations. Use AI-driven surveillance systems to detect manipulative behavior. Investigate transactions involving offshore brokers or shell entities. Reference: FATF Report on Money Laundering in Capital Markets SEC and FINRA Guidance on Market Manipulation Risks Wolfsberg Group Principles for Capital Markets AML Compliance