It’s imperative that financial institutions, including broker-dealers, investment companies, futures commission merchants (FCMs) and introducing brokers (IBs) have effective anti-money laundering (AML) programs to help detect and report suspicious activity, including the predicate offenses to money laundering and terrorist financing, such as securities fraud and market manipulation. The Bank Secrecy Act (BSA) is designed to prevent, detect and prosecute international money laundering and the financing of terrorism. As a result, the BSA and related regulations require FCMs and IBs to establish AML programs, maintain customer identification programs, monitor and report suspicious activity, verify the identity of customers and conduct enhanced due diligence for certain types of accounts involving foreign persons.
These programs should include, but not be limited to, implementing policies and procedures to ensure proper identification of customers and the beneficial owners of the entities they are associated with, conducting robust customer due diligence, completing suspicious activity reports and when applicable the filing of suspicious activity reports (SARs) with FinCEN. SARs document the detection of illicit conduct that includes money laundering, terrorist financing, public corruption, market manipulation and a wide range other potential fraudulent behavior.
Recently, the SEC, CFTC and FINRA (the “regulatory agencies”) collectively ordered a U.S.-based brokerage firm to pay a total of $38 million in penalties to settle charges related to AML failures. The regulatory agencies identified a number of deficiencies that offer critical takeaways for other firms to reference when evaluating their current compliance program.
How to enhance your AML program:
Ensure that senior leadership provides adequate human and technological resources commensurate to their firm’s AML program along with proper internal controls to reasonably monitor, detect, escalate and report suspicious activity. Additionally, organizations should have strong quality controls around customer due diligence, risk scoring during the onboarding process, and implementing robust and scalable case management systems with comprehensive reporting capabilities that will assist in identifying customers activity over time.
Implement transaction monitoring systems and capabilities to properly detect, monitor and report suspicious activity such as Ponzi schemes, market manipulation schemes and other types of misconduct.
Develop and deploy appropriate policies and procedures to understand customers expected transactional patterns (e.g. wire transfers and third-party deposits from “high risk” jurisdictions).
Create and execute formal internal controls consisting of written policies and procedures, documented SAR decision-making process (either an approver or committee) to sufficiently identify, document, escalate and report SAR filings in a timely manner per regulatory expectations and requirements.
Sustain a comprehensive compliance BSA/AML program that encompasses the five pillars: internal controls, in the form of written policies and procedures; dedicated and designated compliance resources; BSA training with a focus on each individuals job tasks; independent audits and reviews; and risk-based customer due diligence including conducting ongoing monitoring to identify and report suspicious transactions.
Develop and maintain internal controls, policies and procedures and quality control measures with financial recordkeeping and reporting provisions to comply with BSA requirements, CFTC Regulation 42.2 and federal securities laws.
This settlement highlights the critical need for strong leadership and the boards of directors to be fully engaged in all areas of the firm, including compliance and the BSA. Their commitment is imperative to prevent money laundering, identify and report suspicious activity and maintain risk-based AML controls. This regulatory action should serve as a reminder to firms to dedicate and maintain the appropriate resources for their AML programs to be consistent with their risk tolerance, procedures, business model and customer base.
Read Duff & Phelps’ Global Enforcement Review 2020 for further insights on anti-money laundering enforcement.