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.
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.
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.
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.
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.
The SEC instituted enforcement proceedings against a clearing broker for failing to file required Suspicious Activity Reports as required by the Bank Secrecy Act. Although the broker-dealer had appropriate Written Supervisory Procedures, the firm failed in practice to implement its compliance program. The firm filed nearly 2000 SARs that omitted necessary descriptive information, failed to file follow-up SARs with respect to another 1900 transactions, and did not file 250 SARs within the required time frames. The SEC claims that the deficient SARs “facilitated illicit actors’ evasion of scrutiny by U.S. regulators and law enforcement.”
OUR TAKE: The BSA is no joke. Failure to file SARs can result in crippling fines (up to $25,000 per failed SAR) and land you in jail. It should be Chapter 1 of a broker-dealer’s compliance program.
The Chief Compliance Officer of a money transmitter agreed to pay a $250,000 penalty and a 3-year bar from serving in a compliance function in connection with anti-money laundering compliance failures. As part of his settlement with FinCEN and the U.S. Attorney, the CCO also admitted to failing to stop potential money laundering despite being “presented with information that strongly indicated that the outlets were complicit in consumer fraud schemes” and implementing an inadequate AML program. The settlement concludes the case which had initially imposed a $1 Million fine, which could have been as much as $4.75 Million based on the statutory penalty of $25,000 for each failure to file a Suspicious Activity Report. The Acting U.S. Attorney explained the decision to prosecute a CCO: “Compliance officers perform an essential function, serving as the first line of defense in the fight against fraud and money laundering.”
OUR TAKE: Compliance officers that assume anti-money laundering duties are subject to prosecution and significant fines by both FinCEN and the DoJ (in addition to FINRA and other financial regulators). Nobody condones the CCO’s conduct in this case, but one question many compli-pros have asked is why has the CCO been singled out for personal liability? Why didn’t the feds pursue the operations folks that vet clients or the senior executives in charge? And, why does the CCO pay a fine when he did not financially benefit from the misconduct?
The SEC commenced an enforcement action against a broker-dealer’s chief compliance officer/anti-money laundering officer for failing to file Suspicious Activity Reports. The SEC alleges that the CCO/AML Officer had actual knowledge of red flags of illegal penny stock trading and money laundering. Such red flags included physical deposits of large blocks of penny stocks followed by rapid liquidation, simultaneous trading in two customer accounts, quick changes in issuer business plans, and clearly misleading company press releases. Also, the SEC maintains that a quick Google search would have raised other red flags including prior enforcement actions and articles alleging pump and dump activity. The SEC accuses the CCO/AML Officer for aiding and abetting and causing his firm’s violations of Rule 17a-8, which requires a broker-dealer to comply with the SAR requirements of the Bank Secrecy Act.
OUR TAKE: The regulators have been keen to impose personal liability on CCOs for violations of the Anti-Money Laundering rules including failures to file SARs. In fact, FinCEN can impose a $25,000 fine on an AML Officer for each failure to file an SAR.
FINRA fined a large broker-dealer $16.5 Million for failing to devote sufficient resources to anti-money laundering compliance. According to FINRA, the firm’s AML monitoring analysts were “negatively impacted by the level of resources dedicated by the firm to AML surveillance.” With respect to exceptions generated by an automated system, FINRA claims that the internal staff was overwhelmed: “The number of analysts employed by the firm at any time (ranging from 3 to 5) did not have the ability to adequately review the tens of thousands of alerts generated.” FINRA also faults the firm for mis-programming an automated surveillance system and for over-relying on sales traders to report suspicious AML activities when most order flow came into the firm electronically.
OUR TAKE: The regulators have increasingly examined the level of resources devoted to compliance monitoring as an indication of a firm’s commitment to compliance. While every firm must assess its own needs, firms should spend no less than 5% of revenue on compliance monitoring.