Brokerage firms must put into place systems to detect and report suspicious activities, in addition to performing customer due diligence – including verifying beneficial ownership for legal entity customers.
FinCEN acknowledges the unique risk profiles of each firm and does not expect an AML program that covers everyone equally. Instead, independent testing should take place to ensure compliance with BSA and associated regulations.
Identifying Suspected Money Launderers
SEC Enforcement actions, FINRA Risk Alerts and 2023 Examination Priorities all demonstrate regulators’ continued focus on anti-money laundering compliance by broker-dealers. This serves as a reminder that all participants in the securities industry – be they broker-dealers, registered investment advisers, holding companies or individual registered representatives – have responsibility to implement comprehensive AML programs that adhere to industry best practices.
Particularly, brokers must undertake extensive surveillance of fund movements and utilize Know Your Customer (KYC) procedures to examine each prospective customer for signs that could indicate money laundering activities. Brokers should remain vigilant and file Suspicious Activity Reports (SARs) within 30 days after any suspicious transaction or series of transactions is identified.
Broker-dealers must also implement policies and procedures designed to prevent them from opening or maintaining accounts for senior foreign political figures and their immediate family members or close associates, reporting any account openings to FinCEN and other federal law enforcement agencies when such account openings take place. Finally, these systems must demonstrate they can identify high net-worth individuals engaging in illegal activities with their accounts – showing they can identify suspicious activity that indicates their accounts may be being used illegally.
Brokers must implement training programs to ensure all their employees understand their AML responsibilities and the requirements of their firm’s AML programs. Training must include specific AML risks associated with each product or service and how these risks may be managed through internal controls such as dual controls or segregation of duties.
Identifying Beneficial Owners
Criminals have developed increasingly sophisticated techniques for using stolen and synthetic identities to open accounts and conduct illicit transactions, creating even greater challenges for anti-money laundering compliance and legal professionals. Fraudsters may use different IDs when moving assets between accounts – making tracking down funds much harder.
Broker-dealers employ various tools and resources to protect themselves against threats posed by brokers-dealers, including extensive transaction monitoring; robust Know Your Customer (KYC) processes with regard to funds sources for each new customer; filing an ample number of suspicious activity reports that aid law enforcement investigations.
Broker-dealers must comply with both the Bank Secrecy Act of 1970 and its accompanying regulations, as well as some provisions of the USA PATRIOT Act such as the 120 hour rule which mandates financial institutions such as broker-dealers to respond within 120 hours when federal banking agencies request documents and information about any person opening an account with that institution.
Broker dealers seeking to maintain up-to-date AML programs should regularly review and adjust their policies and procedures based on emerging risks, as well as communicate these changes to employees. They must also put systems in place for producing mandatory reports as well as keeping records.
Identifying Transactions That May Be Suspected of Money Laundering
Regulators expect broker dealers to implement risk-based Customer Identification Programs (CIP), which allow them to form a reasonable belief of knowing their customers’ true identities. A CIP must include procedures for responding when identity cannot be confirmed quickly enough, including when an account should be denied opening, suspended or closed and when suspicious activity reports (SARs) should be filed.
Broker-dealer firms must also adopt a risk-based approach when managing correspondent banking relationships, with particular care taken with accounts held by senior foreign political figures or their immediate family members or close associates. This may involve scrutinizing any suspicious transactions such as securities trading which has no apparent legitimate business purpose and transfers between high-risk jurisdictions.
SAR filings provide essential data to regulators in detecting money laundering schemes and other unlawful activities that might otherwise go undetected, while also aiding law enforcement agencies in investigating and prosecuting those committing these crimes.
Broker-dealers operating in an ever-more-complex regulatory environment must regularly evaluate and update their Anti Money Laundering (AML) programs, while making sure their training programs effectively educate employees about their responsibilities under AML while taking into account specific risks within each business.
Reporting Suspected Transactions
Broker-dealers must report suspicious activity to FinCEN, with failure to do so incurring civil and criminal penalties. Broker-dealers should ensure their AML compliance programs are in good order, testing them frequently to identify weaknesses and address gaps in coverage.
Brokers should monitor customer accounts for suspicious activities, such as wire transfers and account changes that appear suspicious, while also considering if any customers might be circumventing sanctions through shell companies or moving assets without sound explanation between accounts. With Russia’s invasion of Ukraine taking place recently, regulatory authorities are being extra vigilant about detecting signs that sanctions evasion may be taking place.
An effective AML compliance program should help broker-dealers detect money laundering risks and report timely, accurate reports of such activities. In order to do this, monitoring systems including automated analysis systems of trading and wire transfer activity as well as manual review processes of suspicious transaction reports must be established by the firm.
Broker-dealers must also implement risk-based procedures to screen and monitor correspondent accounts with foreign financial institutions, which should include conducting periodic reviews to assess whether activity in each of these accounts matches what was originally disclosed; otherwise, suspicious activity should be identified immediately.
