While most, if not all, broker-dealers likely have some form of AML program, this continued focus by the SEC and FINRA indicates that having just any program is not enough.
Key Aspects for an AML Program
Taking the SEC and FINRA announcements together, these are the key aspects for a broker-dealer to consider when implementing and reviewing its AML program:
- How does a broker-dealer monitor for suspicious activity?
- If suspicious activity has been found, have suspicious activity reports (“SARs”) been filed appropriately and timely?
- Has a firm’s prior shortcomings identified by a regulator been remediated?
- Has a broker-dealer’s AML program been tailored to the specific risks that firm faces?
The key takeaways appear to be that there is no “one size fits all” AML program. AML programs must be able to be tailored, modified, and adjusted as trends and risks change.
Recent SEC and FINRA Actions
Recent SEC and FINRA enforcement actions further support this.
- In June 2017, the SEC alleged that Salt Lake City-based brokerage firm Alpine Securities Corporation had violated securities laws by failing to file SARs for stock transactions flagged as suspicious, primarily involving microcap securities. When SARs were filed, it is alleged that the firm omitted the “suspicious” – the very basis for the SAR filing – information from the form.
- In May of last year, FINRA fined broker-dealer Raymond James $17 million for widespread failures related to the firm’s AML program. Highlighted shortcomings included Raymond James’ failure to establish AML programs commensurate in size with its growth, inadequate procedures and policies, and failure to detect, investigate, and report suspicious activity.
What can be done?
The SEC and FINRA continue to examine broker-dealers’ AML programs for their effectiveness, adaptability, and accuracy. This trend appears to be continuing, and all entities subject to AML requirements (broker-dealers, financial institutions, money services providers) must continue to improve and adapt their programs for emerging risks.
In a specific example, SEC and FINRA actions relating to deficiencies in AML programs for microcap securities have been increasing over the last few years. In response to this increased scrutiny, the TransparINT team has worked with a client to implement a negative news monitoring program on all companies contained in their microcap fund portfolio. This let the financial institution passively monitor the news in real-time to identify new or emerging risk information on any of the companies. As a direct result of this monitoring program, several of the companies and executives were identified to have been involved in SEC and Department of Justice actions involving “pump and dump” schemes and other illegal activity.
This program not only lessened the financial institutions AML risk exposure, but it allowed them to eliminate the workload burden of having to continually conduct manual negative news reviews on all the parties.
Proactive thinking tailored to a company’s specific risk profile is key to an effective AML program for all institutions, including broker-dealers.