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Category: AML

Broker-Dealer Failed to File SARs for Pump-and-Dump Transactions

A broker-dealer was censured, fined, and ordered to retain an independent consultant in connection with failures to file Suspicious Activity Reports about pump-and-dump schemes. The SEC alleges that the firm neglected to file SARs even though it acknowledged several red flags including deposits of physical securities followed by rapid fund withdrawals, SEC investigations that led the firm to close accounts, trading away through other firms, questionable attorney opinions, and suspicious communications. The SEC acknowledges that the firm’s AML procedures identified certain red flags and how employees should report suspicious transactions, but the SEC faults the firm for failing to implement procedures, investigate red flags, and file SARs. The Bank Secrecy Act requires broker-dealers to file SARs when it suspects a transaction that has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage.

We think that FINRA and the SEC should take a hard look at the SAR filing regime. In this case, the broker-dealer appears to have facilitated several pump-and-dump schemes, and we don’t question that the SEC should have acted. What creates confusion is the leveraging of the Bank Secrecy Act and the SAR system, which was intended to combat anti-money laundering, as a catch-all reporting mechanism for any suspected regulatory violation whether or not it involved money laundering activity. Why should FinCen be involved in policing pump-and-dump schemes or other non-AML securities violations?

FINRA Whacks Large BD with $10 Million Fine for AML Compliance Failures

FINRA has fined a large broker-dealer $10 Million for widespread anti-money laundering compliance failures arising from failed systems, insufficient resources, and poorly-designed supervision.  FINRA charges that the firm’s wire transfer surveillance system failed to collect required data and thereby omitted information that should have been transmitted to the AML surveillance system.  FINRA also faults the firm for significantly understaffing the AML surveillance team, resulting in cursory reviews.  The firm was also faulted for improperly allocating supervisory responsibility over surveillance of penny stock trades.  FINRA rules require member firms to implement an anti-money laundering program to ensure compliance with the Bank Secrecy Act.  A FINRA Enforcement official chided the industry, noting that the regulator “continues to find problems with the adequacy of some firms’ overall AML programs, including allocation of AML monitoring responsibilities, data integrity in AML automated surveillance systems, and firm resources for AML programs.”

Anti-Money Laundering compliance remains a huge challenge for broker-dealers that must spend significant resources on both technology and personnel to ensure adequate monitoring.  Regardless, we recommend upgrading your systems and processes before the regulators force your hand with enforcement actions and multi-million fines.  

Compliance Officer Failed to File Suspicious Activity Reports

A compliance officer was fined, and faces further action, for failing to file Suspicious Activity Reports.  The SEC asserts that the respondent observed significant red flags indicating illegal activity including high trading volume in companies with little business activity.  He also received alerts about suspicious trading activity from the clearing firm.  The SEC faults the respondent for ignoring his own Written Supervisory Procedures by failing to file reports, investigate suspicious trading, or produce a written analysis demonstrating that he had considered filing SARs.  His firm was previously censured and fined.

OUR TAKE:  The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) maintains that a compliance officer is liable for up to $25,000 for every SAR not filed.  It’s not enough to have policies and procedures.  A compliance officer must implement those procedures and monitor and address potential violations.

 

CCO/AML Officer Barred and Fined for Failure to File SARs

The SEC fined and barred a CCO/AML Officer from the industry for failing to file Suspicious Activity Reports and otherwise ignoring his AML due diligence responsibilities.  The SEC accuses the CCO/AML Officer and his firm with ignoring clear red flags that suggested significant churning of penny stocks.  Red flags included questionable customer backgrounds, absence of a business purpose, multiple accounts with the same beneficial owners, rapid transactions, and law enforcement inquiries.  The firm sold over 12.5 billion shares of penny stocks over a 9-month period.  The SEC also charged the firm and its clearing firm.

OUR TAKE: While we certainly don’t condone the CCO’s inactions here, why is he the only executive officer charged?  Also, the respondent’s problems may have only just begun as FinCEN can impose a $25,000 fine on the CCO/AML Officer for each failure to file an SAR.

https://www.sec.gov/litigation/admin/2018/34-83252.pdf

FINRA Fines BD $550,000 for Weak AML Procedures Related to DVP Accounts

FINRA fined a broker-dealer $550,000 for failing to properly monitor and detect red flags related to small cap securities traded via delivery versus payment accounts.  According to FINRA, the respondent did not implement the same level of due diligence as it utilized with accounts held at the broker-dealer.  FINRA also alleges that the firm failed to enhance its compliance procedures even after warnings from the SEC and its clearing firm.  FINRA faults the firm for over-relying on branch managers to conduct surveillance and report red flags.

OUR TAKE: It’s never a good idea to rely on producers or their supervisors to monitor activities.  They are not regulatory professionals, and they often have a significant conflict of interest with respect to activities that affect their compensation.

 

SEC Prosecutes Current and Former Compliance Officers for AML Failures

The SEC fined and barred from the industry an anti-money laundering compliance officer for failing to file Suspicious Activity Reports.  The SEC asserts that the AML CO ignored red flags about heavy trading in low-priced securities including specific alerts provided by the clearing firm and warnings from the SEC OCIE staff.  The SEC also commenced proceedings against the previous AML CO for similar failures. The Bank Secrecy Act and the firm’s Written Supervisory Procedures specifically required filing of SARs for several transactions that the respondents ignored over a 2-year period.    The SEC also fined the firm and its CEO.

OUR TAKE: This firm did not have the requisite compliance “tone at the top” when 2 compliance officers and the CEO all ignored AML red flags, yet the SEC seeks to hold the compliance officers specifically accountable.  Also, compliance officers should take note that they don’t escape liability for past actions when they quit a job.  The SEC can still bring charges against former employees for misconduct that occurred while they acted in a compliance function.

http://www.sec.gov/litigation/admin/2018/34-82957.pdf

http://www.sec.gov/litigation/admin/2018/34-82958.pdf

Bank-Affiliated BD Hit with a $13 Million Fine for AML Monitoring Flaws

The SEC fined a large bank-affiliated broker-dealer $13 Million for weaknesses in its anti-money laundering program and for failing to file suspicious activity reports over a 5-year period.  The SEC faults the firm for utilizing a patchwork monitoring system across its large enterprise that often failed to monitor certain accounts and uncover potential money laundering activity.  The SEC raised specific concerns about transactions in brokerage accounts that utilized banking services such as ATMs, check-writing, and wire transfers.  The firm also failed to quickly remedy some of the AML monitoring issues that it self-identified.

OUR TAKE: As firms get larger (especially through acquisition), account monitoring and AML management becomes much more difficult.  Larger firms should consider appointing an enterprise-wide AML czar to take control of all monitoring activities.

https://www.sec.gov/litigation/admin/2017/34-82382.pdf

BDs Must Implement Beneficial Ownership Due Diligence by May

Pursuant to recent FINRA guidance, broker-dealers will have until May 11, 2018 to amend their Anti-Money Laundering programs to include risk-based procedures for conducting ongoing customer due diligence as required FinCEN’s Customer Due Diligence Rule.  Most significantly, BDs must identify the beneficial owner of each account and implement risk-based procedures for verifying customer identities.  FINRA and FinCEN will allow firms to obtain such information by using FinCEN’s standard certification form.  FINRA calls this beneficial ownership requirement the “fifth pillar” of a required AML program, which must also include reasonable policies and procedures, independent testing, a designated AML officer, and ongoing training.

OUR TAKE: Next May might seem like a long way off, but the work required to implement this fifth pillar will be significant.  We recommend following FINRA’s guidance and using the FinCEN form as a starting point.

 

Large BD Fined $3.5 Million for Curtailing SAR Filings

The SEC fined a large bank-affiliated broker-dealer $3.5 Million for failing to file anti-money laundering Suspicious Activity Reports (SARs).  According to the SEC, the firm had an effective AML Surveillance and Investigations group, but new management attempted to reduce the number of filed SARs, investigations, and related record-keeping.  During the 15 months under the new management, the number of SARs filed per month dropped 60%, from 57 to 22.  The SEC charges that the respondent failed to file at least 50 required SARs during that period.  An employee complaint triggered an internal investigation that uncovered the failures.   Broker-dealers are required by the Bank Secrecy Act to file SARs to report transactions that the BD suspects involved funds derived from illegal transactions, had no apparent lawful business purpose, or used the BD to facilitate criminal activity.

OUR TAKE: Given the SEC’s allegations that the broker-dealer’s management intentionally tried to reduce SAR filings, the respondent and its management is fortunate that they do not face more severe civil or criminal penalties under the Bank Secrecy Act.  There is no regulatory upside for choosing not to file SARs.  When in doubt, file and avoid second-guessing by the regulators.

 

BD Fined for Failed AML Compliance

A broker-dealer was censured, fined $200,000, and ordered to hire an independent compliance consultant for failing to file Suspicious Activity Reports.  The SEC argues that the firm should have further investigated millions of penny stock transactions whereby customers deposited large blocks of penny stocks, liquidated them, and transferred the cash proceeds.  The SEC faults the BD for blindly accepting customer representations that the shares were exempt from registration under Rule 144.  The firm’s policies and procedures required a reasonable investigation into money laundering red flags.  The firm’s CCO has also been charged with wrongdoing.

OUR TAKE: Anti-Money Laundering compliance and the timely filing of SARs remain priority issues for both the SEC and FINRA.  FinCEN may also weigh in with criminal penalties including huge fines and jail time.