Securities and Exchange Commission (“SEC”) Enforcement Division Director Andrew Ceresney, recently drew attention when he announced that the SEC intends to include among its enforcement priorities compliance with the Bank Secrecy Act (the “BSA”). Ceresney’s comments, made during SIFMA’s 2015 Anti-Money Laundering and Financial Crimes Conference, focused on broker-dealers and the SEC’s concern that broker-dealers have not implemented adequate anti-money laundering (“AML”) programs to comply with the BSA’s reporting and recordkeeping requirements. BSA enforcement actions against financial institutions – and the significant penalties and forfeitures associated with those actions – have garnered significant press in the past few years. Broker-dealers have historically avoided much of this scrutiny, as the SEC has generally viewed AML lapses as attendant to other violations. Those days, however, appear to be numbered. This issue has received recent attention by Financial Industry Regulatory Authority (“FINRA”) enforcement, as well as by the SEC’s Office of Compliance Inspections and Examinations.
The BSA requires financial institutions, which include broker-dealers, to establish and implement policies to detect and prevent money laundering, effectively imposing upon financial institutions the role of gatekeeper to the U.S. banking system. One of the BSA’s requirements is that broker-dealers file Suspicious Activity Reports (“SARs”) for suspicious transactions relevant to a possible violation of law, i.e., transactions that the institution knows or suspects involves money laundering, implicates an attempt to avoid BSA reporting requirements, or has no apparent business or lawful purpose and is not the kind of transaction in which the customer would normally engage.
In his recent speech, Ceresney noted that – based on a quantitative analysis of SAR filings – it appears that broker-dealers are not filing SARs in the numbers that would be expected and, in many cases where SARs were filed, word counts in the narratives suggest that the broker-dealers are not reporting all of the relevant information. The SEC Enforcement Division’s recently created Broker-Dealer Task Force will be looking at firms that do not appear to be meeting their books and records obligations under both Exchange Act Rule 17a-8 and the BSA. Firms that have filed few SARs without good reason should expect questions from the SEC and possible enforcement action. Indeed, the SEC, in conjunction with the Financial Crimes Enforcement Network (“FinCEN,” the agency charged with enforcing the BSA), recently imposed a record penalty upon a broker-dealer. This enforcement action, which, according to Ceresney, was the first in which the SEC and FinCEN worked together, is likely a harbinger of things to come.
Indeed, the SEC also recently settled a major enforcement action against another broker-dealer, along with two of its employees, for violations that included willfully violating Section 17(a) of the Exchange Act and Rule 17a-8 thereunder, because of failures to detect and file reports of suspicious trading activity in connection with its market access business. Critically, weakness in its AML controls had been brought to the broker’s attention in an earlier SEC examination. The action found that the employees were aware of potentially manipulative transactions yet did not file SARs, and the broker’s policies and procedures did not cause the employee to detect the suspicious activity and file such reports. The firm was sanctioned, made certain admissions, paid a penalty, and agreed to hire a consultant to address its procedures relating to suspicious activity reporting.
Ceresney’s comments are also consistent with FINRA’s recent efforts to scrutinize broker-dealers’ AML programs and charge its member firms for related violations. FINRA Rule 3310 requires all member firms to establish and implement policies and procedures that can be “reasonably expected” to detect and cause the reporting of transactions in accordance with the requirements of the BSA and its implementing regulations. FINRA Notice to Members 02-47 advised broker-dealers of their duty to file a SAR to report transactions that fall into any one of several categories of suspicious activity, including market manipulation, pre-arranged or other non-competitive trading, securities fraud, and wash or other fictitious trading. The SAR instructs broker-dealers to report a transaction if it involves at least $5,000 and the broker-dealer knows, suspects, or has reason to suspect that the transaction or a pattern of transactions falls within one of the categories of itemized suspicious activity, including that the transaction “has no business or apparent lawful purpose.”
In 2014, FINRA sanctioned numerous member firms for failing to establish and implement adequate AML policies and procedures reasonably designed to achieve compliance with the BSA and related implementing regulations. The deficiencies noted in these FINRA enforcement actions included, among others, the firms’ failure to (1) implement automated systems to monitor trading activity, making the detection of potential market manipulation “difficult, if not impossible,” (2) adopt procedures for investigating exception report items such that the firm could determine whether to file a SAR, (3) document any AML review or investigations, (4) detect and report suspicious trading activity associated with high volumes of stock liquidations in penny stocks, (5) address “red flags” indicating potentially suspicious activity related to correspondent accounts the firm maintained for foreign financial institutions, (6) monitor, investigate and report suspicious trading activities of customers who were previously disciplined by foreign securities regulators, and (7) adequately investigate and report spoofing or layering activity by which a trader created the false appearance of market activity by entering multiple non-bona-fide orders. Perhaps the most notable of these enforcement actions reviewed approximately 4-1/2 years of activity and concluded with one firm agreeing to pay a fine of $8 million for its failure to, among other things, adequately monitor, detect, and investigate suspicious penny stock transactions, and to establish and maintain a robust AML program that included independent testing and regular training of personnel.
Continuing that trend, FINRA, in its 2015 Regulatory and Examination Priorities Letter, identified the following AML-related issues as areas of focus in 2015: (1) the adequacy of firms’ surveillance systems and processes to identify potentially suspicious transfers to and from Cash Management Accounts, which are brokerage accounts used for activity typically associated with bank accounts, and to verify the business purpose of the activity in those accounts; (2) the increase in microcap trading activity and foreign currency conversion activity in Delivery versus Payment/Receipt versus Payment accounts that may be based in foreign jurisdictions with relatively weak regulatory regimes; (3) the adequacy of firms’ surveillance of customer trading, including an admonition that firms tailor their trading surveillance around AML-related risks inherent in their business lines, products and customer bases; and (4) the sufficiency of firm systems’ ability to monitor indicia of suspicious customer activity that is reportable on a SAR, including market manipulation, insider trading and microcap fraud. FINRA also notes that its emphasis on microcap fraud and insider trading is made evident by its more than 700 referrals to the SEC and other state or federal law enforcement agencies in 2014 relating to fraudulent conduct through insider trading, private investment in public equity transactions, microcap fraud and market manipulation.
Certainly, all financial institutions should be taking this speech and enforcement actions as signals. They should take the opportunity to review their BSA/AML policies and procedures, and pay attention to how many SARs they file, and how much they say in those SARs. We know now that the SEC and FINRA are certainly paying attention.