What Broker-Dealers Can Learn from FIBA’s AML Compliance Conference

I had the privilege of participating in a panel discussion about broker-dealers’ regulatory compliance obligations at the Florida International Bankers Association Anti Money Laundering Conference on March 5, 2015.

My fellow panelists were:

• Lourdes Gonzalez, assistant chief counsel of Sales Practice Division of Trading and Markets at the U.S. Securities and Exchange Commission (SEC)
• Sarah Green, senior director in the Enforcement Division of the Financial Industry Regulatory Authority (FINRA)
• Jeff Horowitz, managing director and chief compliance officer of Pershing
• Marco Egoavil, head of AML for the Americas of Credit Suisse

The panel was moderated by Sergio Alvarez-Mena III, Director of Private Banking Americas Legal & Advisory Group at Credit Suisse Securities.

We discussed various anti-money laundering (AML) concerns for broker-dealers, from regulatory expectations regarding broker-dealers’ EB-5 activities to clearing firm priorities. The panel covered a lot of ground, but I want to focus on the message by the regulators, Lourdes Gonzalez and Sarah Green, regarding their agencies’ examination priorities and AML examination focus for 2015.

SEC looking at quantity of SARs filings

Broker-dealer firms, on the whole, have increased their suspicious activity report (SAR) filings in the past couple of years. However, some broker-dealers are still not living up to their Bank Secrecy Act (BSA) obligations, according to Andrew Ceresney, director of the SEC’s Enforcement Division. He discussed that topic in his remarks at the 2015 Securities Industry and Financial Markets Association (SIFMA) Anti-Money Laundering and Financial Crimes Conference in February. Gonzalez echoed that message at the FIBA conference, addressing over 200 attendees.

According to Ceresney, U.S. securities firms file between 18,000 and 25,000 SARs per year, which is, on average, only about five SARs per year for each registered broker-dealer. “This is disconcerting and hard to understand,” he said. “Think about your businesses – is it possible that only five transactions a year were suspicious enough to justify a SAR filing? The nature of your industry and the sheer volume of transactions executed each year suggest to me that this number is far too low.”

He noted that the Enforcement Division’s BSA Review Group began analyzing the suspicious activity reports filed by broker-dealers and concluded that the number of firms that filed zero or one SARs per year was disturbingly large. These findings “are troubling, and suggest a need for further investigation,” Ceresney said. “I find it hard to believe that the industry as a whole is fulfilling its obligations.”

Based on Ceresney’s remarks and Gonzalez’s reiteration of those remarks at the recent FIBA conference, broker-dealers who have filed zero or one SARs per year should expect to face increased scrutiny from the SEC. Securities and Exchange Commission staff will examine broker-dealer’s activities and review firms’ SARs filing decision process to determine whether firms are meeting their reporting obligations.

SEC taking enforcement actions for standalone BSA violations

Gonzalez also reiterated Ceresney’s comments regarding the pursuit of enforcement actions for standalone BSA violations. Historically, the SEC has brought BSA violation charges along with other underlying charges. According to Ceresney, this makes sense because “SARs reporting obligations do not exist in a vacuum. Problems in BSA reporting often go hand in hand with problems elsewhere.”

Ceresney noted that the lack of SARs reporting suggests there is a need to pursue standalone BSA violations to send a “strong and clear message” to the industry about the need for compliance. The SEC’s Broker-Dealer Task Force has targeted those firms who have filed few or no SARs over extended periods of time and whose failure raises questions about their compliance with their BSA obligations.

“Whether or not this initiative generates enforcement actions, it will almost certainly increase focus on SARs filings in the broker-dealer community – which is a good thing,” he said.

Based on those remarks, broker-dealers who believe that the SEC must find an underlying violation to bring BSA violations charges need to re-evaluate their positions. Ceresney’s remarks are clear; if the activities exhibit red flags in accordance with the firm’s anti-money laundering compliance program, the SEC does not need to determine if a violation has occurred to bring BSA violation charges.

FINRA focusing on firms with cash management accounts

Cash Management Accounts (CMAs) are brokerage accounts used for activities typically associated with bank accounts. At the FIBA conference, Sarah Green reiterated the points in FINRA’s 2015 Regulatory and Examination Priorities letter, which stated that FINRA will focus on firms that provide non-traditional brokerage services or “bank-like” services (i.e., check writing privileges and  debit card access) as part of its brokerage accounts. FINRA examiners will review broker-dealers’ policies and procedures to confirm that firms have a surveillance system in place to monitor the activities in cash management accounts.

Broker-dealer firms that provide non-traditional brokerage services must have robust surveillance systems in place to monitor activity in these types of accounts. The systems could include, but are not limited to, the following:

• Policies and procedures for CMA accounts, such as how to identify and escalate potential “red flags”
• Due diligence during onboarding to gain an understanding of the expected use of the CMA accounts (i.e., the business purpose and the expected volume)
• Exception reports provided by the clearing firm regarding the activities
• Third-party or in-house software designed to detect suspicious activities

The overarching message from the FIBA conference panel discussion is that broker-dealers’ anti-money laundering compliance obligations continue to expand as firms try to stay in compliance with BSA and AML regulations and meet regulatory expectations. Broker-dealers should be aware of the SEC’s increased expectations for firms to file an adequate number of SARs as well as the agency’s plans to potentially take action on standalone BSA violations. In addition, broker-dealer firms that provide non-traditional brokerage services should expect increased scrutiny of their surveillance systems by regulators.

For help with meeting regulatory expectations and keeping your firm in compliance, contact me or another member of Kaufman Rossin’s risk advisory services team.