Anti-money laundering has been a key compliance and at
times enforcement issue for years. This is particularly true since the passage
of the PATRIOT Act in 2001. David Blass, Chief Counsel, Division of Trading and
Markets, recently provided insight on past compliance and enforcement efforts
and future directions in this area. David Blass, Broker-Dealer Anti-Money
Laundering Compliance - Learning Lessons from the Past and Looking to the Future
(February 29, 2012)(here).
Mr. Blass began by tracing the evolution of anti-money
laundering efforts following the passage of the PATRIOT Act. Initially, the
focus was on straight forward compliance. This meant ensuring that brokers
installed systems and that they appeared to be adequate.
Over time this initial focus evolved from a question of
adequate to effective. This is illustrated by a recent enforcement action
centered on an issued involving a foreign omnibus account, Pinnacle Capital
Markets LLC, Release No 34-62811 (Sept. 1, 2010). There, according to Mr.
Blass, the key issue was obtaining and verifying certain information about
customers. Pinnacle had master omnibus accounts for foreign entities which were
divided into sub-accounts for other foreign entitles. While there are many
legitimate account structures were it would be appropriate not to look through
the account to the underlying account holders, where the holders of the
sub-accounts were customers for CIP purposes that is not the case. This is
because they were able to conduct unintermediated transactions directly on the
U.S. securities markets. Under those circumstances the firm must verify the
identities of the sub-account holders.
The lesson from Pinnacle, according to Mr. Blass,
is that "we expect firms to look beyond the account label to the substance of
their relationship with the underlying accountholders to determine whether
those accountholders are in fact "customers" for purposes of CIP. Even
compliance with those requirements may not be sufficient. There are risks
associated with grouped and other accounts which must be considered."
Another key issue involves SARS or suspicious activity
reports. These require reporting of transactions conducted or attempted "by, at
or through" the broker-dealer. The Division interprets this language broadly.
Accordingly, Mr. Blass cautioned that "firms should be monitoring any activity
for red flags across their business lines, products, and transactions.
Monitoring is not limited to 'customer' activity or to certain types of
transactions such as cash or securities movement. Instead, monitoring extends
to all activity conducted by a 'customer' of a firm for CIP or other purposes."
This responsibility to monitor suspicious activity falls not just on the firms
but also individuals at the firm.
The duty to monitor suspicious activity also should not
be viewed in isolation. Rather, it should be considered in the context of the
firm's other obligations and compliance systems. Firms should consider "how to
best leverage these corresponding requirements for a more holistic view of
Finally, Mr. Blass reviewed the question of due
diligence. After conceding that there is no general requirement of due
diligence, he noted that firms are required to "have an AML program that at a
minimum includes the establishment of policies and procedures reasonably
designed to detect and cause the reporting of suspicious activity. It seems
difficult to envision how a firm can comply with AML program or SAR responsibilities
without having risk-based policies and procedures that allow firms to know who
their customers are, what activities they may be reasonably expected to engage
in, and also to have procedures to keep this information up to date. . . "
For more cutting edge commentary on
developing securities issues, visit SEC Actions, a
blog by Thomas Gorman.
For more information about LexisNexis
products and solutions connect with us through our corporate site.