With key regulatorsthe U.S. Department of the Treasurys Financial Crimes Enforcement Network (FinCEN), the Securities and Exchange Commission (SEC), and the Financial Industry Regulatory Authority (FINRA)actively promoting new anti-money laundering (AML) initiatives for 2013, stricter oversight for corporations is all but certain.
As a result, in-house counsel and compliance staff at broker-dealers and investment advisorsincluding those in the multitrillion-dollar hedge fund industryare advised to take this new focus on AML to heart and begin reviewing (and, if necessary, revising) their existing AML measures now, rather than later.
To start, in-house compliance officers should consider how the companys AML policies stack up against the issues or risks regulators have recently deemed serious enough to warrant a public enforcement or disciplinary action.
AML Program
The most obvious and straightforward compliance risk is the failure to establish and maintain an appropriate AML compliance program. Bank Secrecy Act regulations require broker-dealers to establish an AML compliance program, including a Customer Identification Program (CIP). Further, Rule 17a-8 under the Securities Exchange Act gives the SEC full authority to enforce those requirements.
Administrative enforcement proceedings against broker dealers alleging this type of failure typically involve one of two things: gaps in or deviations from the firms existing policies and procedures.
Lets start with an example of gaps in an existing AML policy. The SEC recently alleged that New York City-based broker-dealer Pinnacle Capital Marketss CIP failed to verify the identities of subaccount holders that comprise corporate omnibus accounts. Specifically, the SEC noted that an omnibus account can itself be deemed the broker-dealers customer when the omnibus account holder fully intermediates the transactions.
In this case, however, the SEC alleged that the subaccount holders directly affected transactions through their subaccounts via the broker-dealers direct market access software. That, in effect, made the subaccount holders the broker-dealers customers and subject therefore to CIP verification.
In another case involving customer identification, the SEC alleged that broker-dealer E-Trade had indicated that the company would verify each customers identity, yet it failed to verify the identity of secondary accountholders in joint accounts.
Similar issues can arise when a company deviates from existing policies and procedures. For example, the SEC recently alleged that broker-dealer Crowell, Weedon & Co. established a written CIP, but then employed informal procedures not set forth in the written policy to verify customers identities. Specifically, while the policies and procedures required photo identification or specific non-documentary methods, in practice the company simply relied on its registered representatives personal knowledge of the customer.
In light of these enforcement proceedings, broker-dealers and investment advisors should begin their due diligence by re-examining and, if necessary, updating their CIP policy.
