For banking regulators in recent years, the fight against money laundering has been a top priority. To that end, brokers and dealers have been required to implement compliance programs designed to detect and prevent suspicious transactions.
But what exactly does an effective anti-money laundering (AML) compliance program for Broker-Dealers look like? In this blog post, we’ll examine the key components of an AML compliance program for broker-dealers, including customer identification and due diligence, transaction monitoring, and reporting requirements. By understanding these requirements, you can ensure compliance with the latest regulations.
Who are Broker Dealers?
Broker-dealers are firms that trade securities on behalf of their clients. They buy and sell stocks, bonds, mutual funds, and other financial instruments for customers. Brokers are compensated by commissions or other fees for each transaction. Most broker-dealers are registered with the Securities and Exchange Commission (SEC) and regulated by FINRA, the Financial Industry Regulatory Authority.
Broker-dealers must adhere to a set of regulations and laws, including the Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) rules. These regulations are designed to detect and prevent money laundering and other financial crimes.
Broker-dealer AML / CFT requirements are severe due to the high money laundering risk associated with them,mainly because they deal with big sums of money and a variety of financial products, as well as frequently conduct transactions on behalf of customers around the world.
New Risk Alert Issued by SEC Division of Examinations
The Risk Alert explains the SAR reporting obligation for broker-dealers and gives an overview of the AML program requirements. It also includes a part that describes the staff’s observations of typical mistakes or flaws in the monitoring and reporting of suspicious activities.
1. lack of policies and procedures,
2. failure to put policies into practice
3. failure to react to suspicious activity
4. submission of false or incomplete SARs.
Broker-dealers looking to upgrade their AML processes or tighten internal controls may find the detailed staff observations presented here to be insightful.
AML Regulations for Broker-Dealers
The USA Patriot Act and the Bank Secrecy Act (BSA) are the two main bodies of law that influence broker-dealer AML requirements in the US.
The Bank Secrecy Act (BSA), introduced in 1979, establishes the framework for AML compliance for all U.S. banks and financial institutions. Under the BSA, broker-dealers must follow U.S. Treasury regulations, maintain financial transaction records, and submit reports to the Financial Crimes Enforcement Network (FinCEN) when they detect suspicious activity that may indicate money laundering.
The USA Patriot Act: The Patriot Act, passed in 2001 in response to the 9/11 terrorist attacks, expanded and strengthened the BSA. Under the Patriot Act, broker-dealers must perform due diligence on their customers and monitor customer transactions for suspicious activity.
In accordance with the Patriot Act, broker-dealers must create and implement a written, risk-based AML program. This program must include policies, procedures, and controls designed to ensure reasonable compliance with the Bank Secrecy Act (BSA).
The Securities and Exchange Commission (SEC) Division of Examinations (EXAMS) issued a Risk Alert on March 29, 2021, addressing broker-dealers’ adherence to the BSA’s and the Securities Exchange Act of 1934’s anti-money laundering (AML) standards. Broker-dealers in particular must comply with the BSA’s reporting and recordkeeping requirements as well as submit Suspicious Activity Reports (SARs) with FinCEN. This is in addition to having an effective AML program.
Broker-dealer AML standards under the Patriot Act should:
- Identification of the customer and due diligence processes.
- Monitoring transactions and reporting suspicious activities.
- sharing of information at the request of federal law enforcement.
- adherence to any unique restrictions the Treasury may have put in place.
Money Laundering Red Flags for Broker-Dealers
In 2019, the US Financial Industry Regulatory Authority (FINRA) released Regulatory Notice 19-18, describing the “red flag” actions related to money laundering in the securities sector.
Broker-dealers must be on the lookout for any suspicious activity that could indicate money laundering. This includes:
- unclear Background of the clients: Clients that are hesitant to disclose personal information during the client due diligence process usually try to evade AML rules. Similar to this, businesses should keep an eye out for clients who frequently trade with high-risk regions, clients who are subject to legal proceedings or have previously been turned away by another financial institution.
- securities Trading: Broker-dealer companies should be on the lookout for consumers trading in thinly-traded securities, making deals without a clear reason, or trading inconsistently with their profile and history.
- Deposits: Broker-dealers should closely examine clients who deposit securities and subsequently sell the shares or move them to unrelated accounts right away. Similar to this, clients who are money launderers could get large amounts of securities that don’t correspond to their holdings.
- Structuring: Customers who are involved in money laundering may try to avoid AML reporting and record-keeping by splitting up large financial transactions or structuring their deposits and withdrawals. Broker-dealers should steer clear of clients that use third parties to move money, transactions involving high-risk regions, and moves with no apparent purpose.
Broker-Dealer AML Compliance Program
The USA Patriot Act and the Bank Secrecy Act require broker-dealers to develop a risk-based AML compliance program. Broker-dealers must implement policies, procedures, and controls that ensure reasonable compliance with BSA regulations. The compliance program should include:
1. Client Identification Program
Obtaining a customer’s name, address, date of birth, and other identifying details, such as their social security number or similar, falls under this. Organizations need to Develop processes for identifying customers and ensuring they meet the “Know Your Customer” (KYC) requirements.
Broker-dealers must fulfill the AML customer due diligence (CDD) requirement, which includes identifying the beneficial owners of legal entity customers. Beneficial owners are those who own 25% or more of a company’s stock interests or have significant control over the entity. After completing CDD, broker-dealers must track and retain customer identities for future reference or potential money laundering investigations.
2. Transaction Monitoring and Reporting
Establishing an automated transaction monitoring program, scanning customer accounts for suspicious activities or transactions.
As part of their AML compliance program, broker-dealers must implement a transaction monitoring procedure under Section 356 of the Patriot Act. If a transaction involves $5000 or more, broker-dealers must submit a suspicious activity report (SAR) to the Treasury.
other than that if broker-dealers have any suspicion on the below Client activities they need to submit a suspicious activity report :
- If the client is making an effort to hide illicit funds.
- The client is making an effort to avoid BSA obligations.
- The client’s transaction appears to be taking place for no apparent commercial or legitimate reason.
- The client is trying to use broker-dealer services for illegal activity.
point to note: Broker-dealers are required to submit suspicious activity reports using form SAR-SF, commonly known as FINCEN Form 101, which is specific to the securities and futures business.
3. Sanctions screening
Sanctions-screening is essential for broker-dealers in order to detect and stop transactions that involve sanctioned individuals or entities, as well as those involving countries subject to sanctions.
Broker-dealers should have a process for regularly searching for customer names on the U.S Office of Foreign Assets Control’s (OFAC) list of Specially Designated Nationals and Blocked Persons (SDN).
Broker-dealers must block transactions and accounts if they discover any client connections to the SDN list or country-based list.
Conclusion
In conclusion, broker-dealers are required to have AML compliance programs in place that include customer due diligence measures, transaction monitoring and reporting, and sanctions screening. These measures help ensure the safety of customers’ funds, protect the integrity of financial markets, and reduce the risk of money laundering activities. Broker-dealers need to actively monitor their customer accounts and transactions to detect suspicious activity and follow up with appropriate reporting. While implementing these measures is a legal requirement, it also helps broker-dealers maintain good reputation in the financial industry.
By following the guidance outlined above, brokers can establish an effective AML compliance program that guards against money laundering activities while keeping regulatory authorities informed. This helps ensure the safety of customers and protect the integrity of the financial markets.
