Articles Tagged with Anti-Money Laundering

On June 5, 2017, the Securities and Exchange Commission (“SEC”) filed a complaint in the United States District Court for the Southern District of New York against Alpine Securities Corporation (“Alpine”), a Salt Lake City-based broker-dealer.  The complaint alleges that Alpine failed to file Suspicious Activity Reports (“SARs”) in the manner prescribed by the Bank Secrecy Act (“BSA”).  According to the SEC’s complaint, Alpine’s alleged misconduct “facilitated illicit actors’ evasion of scrutiny by U.S. regulators and law enforcement, and provided them with access to the markets they might otherwise have been denied.”

The BSA obligates a broker-dealer to file SARs with the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) to report transactions that the broker-dealer knows or suspects involve funds obtained from illegal activities or that were used to conceal such activities.  Broker-dealers are also obligated, under the “SAR Rule” (31 C.F.R. § 1023.320), to file SARs if they know or suspect that a transaction’s purpose was to evade BSA obligations or that the transaction did not have an obvious business or lawful purpose.  Broker-dealers are also required to file SARs if they know or suspect that a transactions’ purpose is to instigate criminal activity.  In addition, both FinCEN, under the SAR Rule, and the Financial Industry Regulatory Authority (“FINRA”), under FINRA Rule 3310, require that broker-dealers establish and enforce anti-money laundering programs that are tailored to guarantee compliance with the BSA and its regulations.  Since Alpine was a FINRA-member firm, it was obligated to comply with FINRA’s rule regarding the adoption and enforcement of an anti-money laundering program.

The SEC alleged that while Alpine had adopted an anti-money laundering compliance program, it did not adequately put this compliance program into practice.  For example, evidence showed that Alpine’s records included information revealing incidents of “money laundering, securities fraud, or other illicit financial activities relating to [Alpine’s] customers and their transactions.”  These constituted so-called “material red flags” and were required to be reported in Alpine’s SARs.  However, the SEC alleged that at least 1,950 of Alpine’s SARs did not report these material red flags.  Evidence also showed that Alpine filed SARs on about 1,900 deposits of a security, but did not file SARs upon the subsequent liquidation of deposits.

On November 17, 2016, the Financial Industry Regulatory Authority, Inc. (“FINRA”) issued a Letter of Acceptance, Waiver and Consent (“AWC”), in which Oppenheimer & Co., Inc. (“Oppenheimer”) agreed to settle numerous charges.  Pursuant to the AWC, Oppenheimer will be fined $1.575 million.  It will also be required to make remediation payments of $703,122 to seven arbitration claimants and $1,142,619 to customers who qualified for but did not receive applicable sales charge waivers pertaining to mutual funds.

Many of the violations related to FINRA Rule 4530. Rule 4530(f) requires FINRA members promptly to provide FINRA with copies of certain civil complaints and arbitration claims.  Rule 4530(b) provides that if a FINRA member realizes that it or an associated person has violated any securities or investment-related laws that have widespread or potential widespread impact to the firm, the member must notify FINRA.  The notification should take place within either 30 calendar days after the determination is made or 30 calendar days after it reasonably should have been made.

According to FINRA’s findings, Oppenheimer failed to file in excess of 350 of these required filings.  Moreover, FINRA found that when Oppenheimer did make the required filings, the disclosures were, on average, more than four years late.

Although there is currently no requirement that registered investment advisers maintain anti-money laundering programs pursuant to the USA PATRIOT Act, the Bank Secrecy Act (“BSA”) or any of the other acts that apply to certain financial institutions, that may change if the Treasury Department’s Financial Crimes and Enforcement Network (“FinCEN”) adopts a rule proposed earlier this year. Specifically, the proposed rule would subject investment advisers registered with the Securities and Exchange Commission (“SEC”) to formal AML compliance program adoption and reporting requirements. The rule, if adopted, would expand the current definitions of “financial institutions” to cover SEC-registered advisers. The rule would require compliance with the Bank Secrecy Act (“BSA”) and the USA PATRIOT Act, resulting in an adviser being required to establish AML compliance programs, file suspicious activity reports, and keep records relating to AML activity, among other things.

Currently, most registered investment advisers do adopt policies relating to AML and suspicious activity reporting procedures, even though they are not so required by law or regulation. In a sense, it has become a “best practice” to do so. Practically speaking, because all investment advisers conduct activity on behalf of their clients through qualified custodians, broker-dealers, and other financial intermediaries that are expressly covered by the PATRIOT Act, the BSA and other laws, AML, the intermediaries who partner with investment advisers usually require such advisers to have AML and suspicious activity reporting programs or procedures in place as a means of aiding the broker or other primarily responsible firm fulfilling its obligations.
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