Anti-Money Laundering Compliance Issues

Anti-Money Laundering Compliance Issues

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 their risks."

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.

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