Broker-Dealer Anti-Money Laundering Compliance: The Untenable Chase of Perfection

In his first team meeting as the Green Bay Packers head coach, Vince Lombardi challenged his team to “chase perfection” knowing all the while that it would never be attained. While the regulatory standards for anti-money laundering (AML) compliance have undoubtedly increased, the good news is that broker-dealers are not required to attain perfection in the implementation of their anti-money laundering compliance programs. The standard for any AML compliance program (AMLCP) is reasonableness, not perfection. In fact, Financial Industry Regulatory Authority Rule 3310 (a) requires a firm’s AMLCP to be “reasonably designed to achieve and monitor the member’s compliance with the requirements of the Bank Secrecy Act and the implementing regulations there under.” However, while perfection may not be the standard by which any compliance program should be measured, regulatory agencies have increasingly been calling into question the reasonableness of broker-dealers’ AMLCPs.

In its simplest form, the spirit of FINRA’s anti-money laundering rule seeks to mirror the Bank Secrecy Act (BSA) by ensuring that broker-dealers have an effective, risk-based AMLCP that adequately monitors the firm’s transactions for money laundering and other suspicious activity. Unfortunately, the implementation of such a program has proven to be anything but elementary. First, while AML rules for broker-dealers have not materially changed since being established, FINRA’s standards for broker-dealers’ AMLCP’s have undoubtedly increased. Additionally, the very subjective nature of what type of account activity is “suspicious” continues to result in differences of opinion between regulatory examiners, anti-money laundering compliance officers (AMLCOs), and the person(s) introducing the subject accounts. However, the undeniable lessons learned from the recent regulatory actions are that FINRA’s AML “grace period” is long over and broker-dealers should expect FINRA to take a deep dive into their suspicious activity detection and reporting systems and the independent tests of such programs.

This article will provide insight into how firms can best be prepared for self-regulatory organizations’ (SRO) and federal examinations of their AML programs. The article will also discuss why conducting robust independent tests of broker-dealers’ AMLCPs will best prepare broker-dealers for their upcoming anti-money laundering examination.