A Critical Need: The Importance of AML Compliance for Broker-Dealers

Transcription

1 A Critical Need: The Importance of AML Compliance for Broker-Dealers

2 AML is a FINRA Priority For broker-dealer or other financial services firms, it can sometimes appear that in order to reinforce the importance of a new rule, regulators can issue fines or take other disciplinary actions that are harsher than necessary. Given the long history of anti-money laundering (AML) rules and the high prioritization assigned by FINRA, however, no AMLrelated action can be deemed inappropriate or over-zealous. Yet, NRS finds that some broker-dealers implement minimalist AML programs that minimize the need to meet the requirements of critical AML regulations, including the USA PATRIOT Act and FINRA Rule And while these firms may see their choice as wise one, driven by bottom line or resource considerations, from a regulatory perspective such a stance is much more likely to be regarded as either ignorance or willful fraud. Given the importance of AML compliance in the U.S. and around the globe, it s no wonder that each and every year FINRA makes it clear that AML issues remain high up on its exam priorities list. Over the years, other areas of concern have dropped off the list as the regulator determined that industry was finally getting it right. But AML has been on FINRA s exam priorities list since 2006, if not earlier, and remains there today. Perhaps no greater proof of this emphasis is needed than FINRA s own words, as indicated in the following excerpts from their annual Exam Priority letters: 2006: NASD Rule 3011 has been in effect since April 24, 2002, yet members continue to have trouble complying with the requirements of the rule. 2007: All NASD member firms are required to comply with NASD Rule The nature of a firm s compliance program can and should be tailored to the firm s business mix. 2008: The AML requirements for broker-dealers, which have been in effect since April 24, 2002, continue to be an examination focus. 2009: FINRA examiners continue to focus on anti-money laundering (AML) requirements. 2010: FINRA expects firms to maintain robust supervisory systems reasonably designed to prevent and detect fraudulent activities (including AML violations) by employees. 2011: FINRA expects firms to maintain robust supervisory systems and AML monitoring systems that reasonably are designed to detect and report suspicious transactions. 1

3 AML Does Not Stand For Ask Me Later As a result of this ongoing emphasis, broker-dealer CEOs, CCOs and operations personnel who believe putting a complete and adequate Anti-Money Laundering program into effect can wait should re-evaluate their plans immediately. Here, the need for a new or renewed focus on AML compliance for broker-dealer can be easily seen through the lens of enforcement. For example, the following are only some of the recent FINRA enforcement actions resulting from insufficient AML programs or oversight. For a requirement that has been in effect for more than nine years, the laundry list of enforcement actions is easy for all to see. In fact, an Internet search or a review of disciplinary actions on FINRA s web site will reveal many more some recent and some going back through the years, including: Moors & Cabot, Inc., censured and fined $165,000. FINRA said Moore & Cabot failed to maintain a robust AML program. Sloan Securities Corporation, censured, fined $75,000. FINRA required the company to certify in writing to FINRA that it has conducted a comprehensive review of its AML compliance program. Penson Financial Services, fined $450,000. FINRA said the firm failed to establish and implement an adequate anti-money laundering (AML) program. Pinnacle Capital Markets, censured and fined $300,000. FINRA indicated the firm failed to implement AML procedures reasonably designed to detect and cause the reporting of suspicious activity as well as to verify the identity of customers. 2

4 More to AML Than Meets the Eye Given the potentially damaging effects of failing to meet the necessary compliance thresholds, how can a broker-dealer approach the design and implement a robust and effective AML compliance program? To begin with, firms must take a risk-based approach that spans the breadth of the organization and it s operations. Each broker-dealer s AML policies and procedures must contain a Customer Identification Program, designed to ensure that the customer is adequately known to the firm. Unfortunately, far too many broker-dealers continue to be under the misperception that they already know their customers and therefore don t need rigorous identification policies and procedures. However, broker-dealers and their front-line representatives don t necessarily know people they think they know. Rigorous AML programs may or may not identify cleverly structured fraud or deception, but it will definitely make it harder for the perpetrators to succeed and go undetected. Going somewhat above and beyond and looking closely at the client s source of funds can also help. Further, there is an extraordinary lack of knowledge concerning FinCEN (Financial Crimes Enforcement Network) Form 101, SAR-SF (Suspicious Activity Report by the Securities and Futures Industries ). There are some 20 events which are required to be filed with FinCEN on Form 101 other than Money Laundering/Structuring, including bribery, check fraud, computer intrusion, insider trading, identity theft and mail fraud. Firms should have policies and procedures covering all the Form 101 filing requirements, not just AML-related suspicious activities. When performing independent AML audits for our clients, NRS often finds deficiencies in this area and provides assistance in building-up these procedures based on a clients business practices. Should the regulators identify a red flag which should have been investigated to determine if a SAR-SF filing was required, with no indication that the firm identified the same red flag and documented why the determination was made not to file a SAR-SF, they will find an AML violation. A Need for Independent Audits FINRA Rule 3130 requires that the majority of broker-dealers have an annual independent audit of their AML program (some are permitted to do this on a bi-annual basis). While NRS finds that most firms fulfill this requirement with appropriately independent internal personnel or outside consultants, many don t take this task seriously and undertake only a superficial review of their program. FINRA has noted that some AML audits test too small a number of client files or relevant transactions (i.e. wire transfers). This is a missed opportunity for firms to ensure that they have minimized their risk. Uncovering an issue is never a good thing, but it is infinitely better to find and correct one than to let it be discovered during a regulatory examination. FINRA has always expressed the need for adequate testing to be part of an independent audit but has never clearly defined what would be considered an acceptable sampling size or methodology. Common sense would dictate that a firm with 5,000 foreign clients and 10,000 domestic accounts would not be undertaking a sufficient random sampling were it to review 50 files. In addition to the number of accounts reviewed, consideration has to be given to reviewing a greater number of at risk accounts (i.e. those in countries with less than stellar anti-money laundering safeguards). 3

5 An Effective Implementation Plan Given the regulatory requirement that broker-dealers get it right in terms of having the best possible AML policies and procedures in place, no firm should assume that what is has in effect cannot be improved. There is no one size fits all program. To be adequate and effective, it must be tailor made, based on the areas of risk, relative to the firm s business model and types of clients as well as other relevant considerations. NRS recommends that appropriate management and operational personnel be brought together to consider the following: Is the current AML Principal sufficiently knowledgeable to hold the position and, equally important, does s/he have sufficient time to focus on the firm s AML efforts. Have the firm s clients been evaluated in terms of risk levels? Are all PEPs (politically exposed persons) identified and handled appropriately? Are foreign clients identified based on country of residence, with an awareness of those countries which pose the greatest potential risk? Are there appropriate procedures in place for addressing source of funds inconsistencies? Has appropriate screening technology been employed to ensure that issues are identified without an inordinate number of false positive alarms? Has there been sufficient, documented due diligence to be certain the independent party engaged to perform the annual AML reviews is sufficiently qualified? Has there been sufficient diligence in reviewing each year s AML review report to consider all recommendations, documenting the rationale for those not implemented? Are appropriate search tools being utilized, based on the nature of the business and clientele, i.e. OFAC, European Union Terrorism List ( DSP ), Canadian Sanctions List, Department of State Trade Control ( DTC ), Online Compliance, etc.?. Does each affiliates person fully understand their AML responsibilities? Is the firm s AML training program sufficiently rigorous to adequately train all appropriate individuals based on their job functions, especially in terms of identifying and reacting to red flags? 4

6 Conclusion: Compliance is a Full-Time Job Too many broker-dealers appear to feel that so long as they are doing the minimum possible or a little more to AML rules and regulations, they are in compliance and safe from any potential regulatory or reputational risk. Unfortunately, until there is a company-wide understanding of the depth of the requirements, the reasons (beyond money laundering activities) for them and the ramifications for less than 100% of, and compliance with, the concept, as well as the rules, there is risk of significant regulatory fines. Accuity, NRS s parent company, offers Compliance Link, an efficient and cost-effective solution for AML and PEP screening. From data enhancements and customized risk scoring capabilities to multiple screening algorithms and the most sophisticated false positive reduction capabilities available in the industry, Compliance Link is the end-toend solution to streamline AML compliance workflow and screening processes. About Accuity Accuity is the leading provider of global payment routing data, AML screening data and software and professional services that allow organizations, across multiple industries, to maximize efficiency and facilitate compliance of their transactions. As the Official Registrar of ABA Routing Numbers since 1911, Accuity maintains the most authoritative and comprehensive databases globally with a reputation built on the accuracy and quality of our data, products and services. For more than 175 years, our worldwide clients, located in over 150 countries, have included C-level executives, managers, and technology professionals. The solutions and services we provide are packaged in multiple formats to serve their diverse needs. For more information, please visit About NRS National Regulatory Services (NRS) is the nation s leader in compliance and registration products and services for investment advisers, broker-dealers, hedge funds, investment companies and insurance institutions. NRS has the practical expertise, proven capability and unparalleled reach to deliver integrated and effective compliance solutions to a wide range of users within the financial services industry. NRS delivers these solutions through three interrelated offerings comprehensive education, best-in-class technology and expert consulting services enabling our clients to meet their regulatory requirements and minimize risk. For more information, please visit: 5

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