SEC Takes Aim at Broker-Dealer Anti-Money Laundering Program Violations
In January 2017, the SEC announced that “Anti-Money Laundering” was on the agency’s List of Examination Priorities for the second year in a row. The SEC’s examination priorities “reflect certain practices, products, and services that [SEC’s Office of Compliance Inspections and Examinations] perceives to present potentially heightened risk to investors and/or the integrity of the U.S. capital markets.” In the priority list, the SEC highlights that it will continue to scrutinize broker-dealers’ anti-money laundering programs by:
- Examining the appropriateness and effectiveness of broker-dealers’ anti-money laundering programs;
- Reviewing how broker-dealers are monitoring for suspicious activity; and
- Assessing broker-dealers’ compliance with Suspicious Activity Report (SAR) requirements.
Recently, the SEC announced that it would share more of its oversight responsibilities of the broker-dealer industry with the Financial Industry Regulatory Authority (FINRA). In 2017, and in lockstep with the SEC, FINRA included “Anti-Money Laundering and Suspicious Activity Monitoring” on its 2017 Annual Regulatory and Examination Priorities Letter. Both the SEC and FINRA have increased enforcement actions against broker-dealers for anti-money laundering program violations.
SEC Whistleblower Program
Under the SEC Whistleblower Program, whistleblowers are eligible for awards when they provide original information to the SEC about federal securities laws violations, including anti-money launderings program violations, that leads to successful enforcement actions with total monetary sanction in excess of $1,000,000. Whistleblowers are eligible to receive an award of between 10% to 30% of the monetary sanctions collected. Whistleblowers can submit tips anonymously through an SEC whistleblower attorney.
Since 2011, the SEC Whistleblower Office has awarded more than $154 million to whistleblowers. The largest award to date is more than $30 million. In 2016 alone, the office issued more than $57 million in awards to whistleblowers, including six of the ten largest awards in the program’s history.
Broker-Dealer Anti-Money Laundering Regulations
The primary anti-money laundering regulations for brokers or dealers require, among other things, the establishment and implementation of an anti-money laundering program, which includes, at a minimum:
- Policies, procedures, and internal controls reasonably designed to achieve compliance;
- Independent testing for compliance;
- Monitoring of the operations and internal controls of the program;
- Ongoing training for appropriate persons; and
- Appropriate risk-based procedures for conducting ongoing customer due diligence, which includes:
- Establishing, documenting, and maintaining a written Customer Identification Program; and
- Continuous monitoring to identify and report suspicious transactions.
In the event a broker-dealer identifies a suspicious transaction, the firm is required to file a SAR with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN). In the SAR’s narrative section, broker-dealers must “[p]rovide a clear, complete and chronological description . . . of the activity, including what is unusual, irregular or suspicious about the transactions(s).” Broker-dealers violate Section 17(a) of the Exchange Act and Rule 17a-8 when the firms:
- Fail to file SARs; or
- File inaccurate SARs (e.g., incomplete narratives, incomplete critical field information, incomplete identification of suspicious activity, etc.).
These violations deprive regulators and law enforcement of important information that could be used to identify potential securities law and money laundering violations.
SEC and FINRA Enforcement Actions Against Anti-Money Laundering Violations
Suspicious Activity Report Violations – Alpine Securities Corporation
On June 5, 2017, the SEC charged brokerage firm Alpine Securities Corporation (Alpine) with securities law violations related to its ineffective anti-money laundering program. According to the SEC’s complaint, Alpine failed to adequately file suspicious activity reports (SARs) for at least 1,950 stock transactions that the firm flagged as suspicious. Specifically, the SEC found that Alpine’s “records contained information reflecting material red flags of money laundering, securities fraud, or other illicit financial activities relating to its customers and their transactions,” yet Alpine “routinely and systematically failed to identify and report suspicious activity in its SAR filings.”
The SEC charged Alpine with thousands of violations of Section 17(a) of the Exchange Act and Rule 17a-8. The SEC requested that the court order Alpine to pay civil money penalties pursuant to Section 21(d) of the Exchange Act, which provides for penalties ranging from $5,000 to $500,000 for each violation depending on the facts and circumstances of the case. In addition to Alpine’s violations, the SEC’s complaint revealed that many of Alpine’s customers have also been charged with federal securities laws violations, including violations related to transactions that cleared through Alpine.
Anti-Money Laundering Programs Violations – RJ&A and RJF
In May 2016, FINRA fined Raymond James & Associates and Raymond James Financial Services $17 million for widespread violations related to their anti-money laundering programs. The violations stemmed from the firms’ failures to establish and implement adequate anti-money laundering programs, which resulted in their failures to prevent or detect, investigate, or report suspicious activity from at least November 2011 through June 2014.
Anti-Money Laundering Program Violations – Credit Suisse Securities
In December 2016, FINRA fined Credit Suisse Securities (USA) LLC $16.5 million for “significant deficiencies” in its anti-money laundering program. According to FINRA, Credit Suisse’s program failed to effectively monitor/detect suspicious trading and money movements from at least January 2011 through December 2015. As a result, Credit Suisse was unable to determine, as it was required to do, whether SARs needed to be filed.
Suspicious Activity Report Violations – Oppenheimer & Company
In January 2015, Oppenheimer & Company paid $10 million to settle an action by the SEC and FinCEN for failure to file SARs. According to the SEC’s complaint, Oppenheimer’s anti-money laundering program identified suspicious activity that needed to be “escalated” immediately. Specifically, the activity stemmed from an account that “(i) was a foreign broker-dealer doing business in the U.S.; (ii) selling ‘low-priced stock’ on behalf of customers; and (iii) that it immediately wired the proceeds out of the Oppenheimer account.” Despite these red flags, Oppenheimer failed to file SARs with FinCEN as required.
Failure to Maintain an Adequate Customer Identification Program – E.S. Financial Services
In February 2016, the SEC fined E.S. Financial Services $1 million for violating anti-money laundering laws by “allowing foreign entities to buy and sell securities without verifying the identities of the non-U.S. citizens who beneficially owned them.” As mentioned, federal securities laws require broker-dealers to establish, document, and maintain a written Customer Identification Program.
Whistleblower Protection for SEC Whistleblowers
The SEC Whistleblower Program also protects the confidentiality of whistleblowers and does not disclose information that might directly or indirectly reveal a whistleblower’s identity. Furthermore, the Dodd-Frank Act protects whistleblowers from retaliation by their employers for reporting violations of securities laws.
SEC Whistleblower Law Firm
To learn more about the SEC Whistleblower Program, download Zuckerman Law’s eBook: SEC Whistleblower Program: Tips from SEC Whistleblower Attorneys to Maximize an SEC Whistleblower Award