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 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.
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.
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: 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.
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.
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.
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.
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.
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.