By: Kenneth Corbin
Anti-money laundering policies were
identified by both FINRA and the SEC as a top priority for examinations of
broker-dealers in 2013. In its exam guidance, FINRA noted "an increase in
foreign currency conversion transactions." It also stressed that there are
no exemptions from the AML requirement for member firms, even if the company
holds no customer funds.
What this means for advisors is
clear. Although, by statute, an advisor isn't required to have his or her own
individual AML policy, all advisors are covered by—and expected to uphold—their
firm's AML policy. And FINRA is paying close attention to how well advisors
execute the task.
"Anybody who works at a
broker-dealer will have an obligation to implement the policies that the firm
is under," says Sarah Greene, senior director of AML compliance with
FINRA's enforcement division. "An employee of a firm cannot ignore their
responsibilities under this rule. For a firm to comply, its people have to
comply."
Broker-dealers came under the Bank
Secrecy Act's AML framework under the provisions of the 2001 Patriot Act aimed
at curbing money laundering and terrorist financing. The SEC's authority is
limited to firms' reporting and record-keeping, while FINRA has a broader
enforcement mandate that covers a complete AML program and generally operates
as the lead regulator.
At a minimum, FINRA expects firms to
set policies and procedures to detect and report suspicious transactions. They
must also conduct independent testing of the program, designate an AML officer
and provide advisors, broker-dealers and other personnel with ongoing training.
Although advisors aren't likely to
be the focal point of an AML enforcement action by FINRA, it does happen. A
recent case involving Raymond James Financial Services suggests that regulators
are taking a broader view of money laundering cases and raising their
expectations that financial firms establish a culture of vigilance.
The case, which Raymond James
settled without admitting guilt, involved an investor who was moving large
volumes of funds through his brokerage account and then writing checks for
round dollar amounts from a money market account. It was a Ponzi scheme that
amounted to losses of $17.8 million for investors, and the account holder
received a prison sentence of 20 years.
FINRA cited Raymond James for
failing to maintain an adequate AML policy, and while the company's AML officer
and legal team were not exempt from blame, some of the sharpest criticism was
leveled at staffers in an Ohio branch office. The letter described a string of
inquiries from the AML officer asking about suspicious transactions that were
not addressed by a registered representative and office manager. At one point
late in the game, the investor told branch staffers that he had committed fraud
and was headed to jail. No one relayed that information to Raymond James' AML
officer.
Know Your Laundry
Experts stress that advisors' obligations under AML policies vary from firm to
firm.Each company's policy must be tailored to the nature of the practice,
accounting for the risks associated with clients, geographic footprint and
business model.
For advisors, much of the risk involved
with money laundering sits at the front end, in the process of onboarding new
clients. Advisors must adhere to the procedures in their firm's customer
identification program, a required element in FINRA's AML program template. Advisors
should ask prospective clients for representations about their identity and
assets and then do their own background checking based on the information
provided.
Advisors should be checking
prospective clients against the Treasury Department's Office of Foreign Assets
Control list of foreign countries, terrorists, drug traffickers and others
barred from trade with U.S. firms, as well as other relevant overseas
databases. Commonly firms will engage a third-party vendor to perform those
onboarding cross-checks.
Then, too, an AML program should aim
to ensure the investor is not moving money through a shell bank, which can
sometimes be verified by obtaining a foreign bank certificate. Likewise,
advisors might probe investors' political connections to determine whether a
prospective client may be deemed a "senior foreign political figure"
under the Patriot Act.
Much of that monitoring can be
automated, with reports of high-volume trades, large cash transfers and other
exceptional activity routinely delivered to the firm's AML officer. But any
effective AML program also counts a strong human element provided by advisors
who often know their customers and their investment objectives best. This is a
crucial line of defense in flagging suspicious activity.
Look for Danger Signs
Advisors have a fair amount of discretion in how they handle dubious activity,
although experts note that some flags are redder than others. "If they are
asked to facilitate sending a wire out of the account to an Iranian bank,
that's clearly some suspicious activity," says Byron Bowman, general
counsel at consulting firm fi360.
Other potential warning signs
include investors who move large volumes of cash equivalents through their
accounts and do so frequently.
Call for Backup
That's not to say that there aren't false positives. What if a customer puts in
an order to liquidate all of his or her assets and arrange for a wire transfer
to Costa Rica? Although this might appear to be an unusual transaction, it's
not necessarily one to send the advisor running to the Feds. Often, the first
call will be to compliance.
Compliance, in turn, might tell the
advisor to get in touch with the client and find out what's going on. After
all, the client requesting the wire transfer could have just bought a house in
Costa Rica, where he or she plans to retire.
If an advisor can't obtain a reasonable
explanation and concludes that the matter should be escalated—often a wrenching
decision when a longstanding client is involved—the next stop will be back at
the compliance department. At that point, compliance would determine whether
the case warrants the firm filing a suspicious activity report with the
Treasury Department's Financial Crimes Enforcement Network.
Once the matter is in the hands of
compliance, the advisor is often shut out of the process due to the highly
sensitive nature of filing a report. Then the firm must
make the call, often in consultation with law-enforcement authorities, about
whether to keep the account open or cut ties with the client.
Michael Hearns an Anti Money Laundering specialist with over 24 years of AML experience can also be found at http://www.launderingmoney.com/ and on twitter at : http://twitter.com/#!/LaunderingMoney also http://moneylaunderingworld.blogspot.com/ and http://launderingmoney.com/
