back to basics compliance (b2bc) – aml thursday, may 28 …...back to basics compliance (b2bc) –...

Back To Basics Compliance (B2BC) – AML Thursday, May 28 4:15 p.m. – 5:15 p.m. Topics:

• Discuss and apply the Bank Secrecy Act • Understand customer identification procedures (CIP) and due diligence obligations with respect to

different clients. • Incorporate leading practices for handling various “red flags” in a suspicious activity monitoring

program.

Speakers: Sarah Green (moderator) Senior Director, AML Compliance FINRA Enforcement Blake Snyder Director FINRA AML Program

© 2015 Financial Industry Regulatory Authority, Inc. All rights reserved.

Back To Basics Compliance (B2BC) -AML

FINRA Annual ConferenceMay 28, 2015 • Washington, DC

2015 FINRA Annual Conference © 2015 FINRA. All rights reserved. 1

Panelists

Moderator:Sarah Green, Senior Director, AML Compliance, FINRA

EnforcementPanelists:Blake Snyder, Director, FINRA AML Program

2015 FINRA Annual Conference © 2015 FINRA. All rights reserved.

Anti-Money Laundering (AML)

What is Money Laundering? Involves acts committed to conceal or disguise the

criminal origin of funds.Process to make illegitimate income appear legitimate. Includes use, acquisition and possession of such

criminal property if its origin is or should have been known.

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Anti-Money Laundering

Three Stages of Money Laundering:1. Placement – Launderers attempt to physically insert

illegally obtained cash or bearer instruments into financial system.

– Proceeds can be generated in securities account – no placement

2. Layering – Launderers create complex or multiple layers of financial transactions to disguise trail of funds and to provide anonymity.

3. Integration – Process of inserting illegal funds back into the economy. Often done by mixing them with funds from legitimate sources, so appear to have legitimate origins. Provides money launderer with an apparently legitimate explanation for his/her wealth.

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Bank Secrecy Act (BSA)Designed to require firms to detect and prevent money

launderingAmended by the Patriot Act in 200131 CFR 1023.210: “Anti-Money Laundering Requirements

for Brokers or Dealers in Securities”Connection to FINRA Rule 3310 (Anti-Money Laundering

Compliance Program)

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FINRA Rule 3310An AML Program must be:Approved in writing by senior management; andReasonably designed to achieve and monitor firms’

ongoing compliance with requirements of Bank Secrecy Act and implementing regulations.Bank Secrecy Act – requires most of program to be

“Risk-Based”

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Anti-Money Laundering – FINRA Rule 3310

AML Program Requirements – FINRA Rule 3310a) Procedures to detect and cause reporting of

suspicious activityb) Procedures to achieve compliance with Bank Secrecy

Act c) Independent testingd) Designate AML compliance officere) Ongoing training

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Anti-Money Laundering – Rule 3310 (a) and (b)

Implementing Bank Secrecy Act (BSA) Requirements Customer Identification Program Suspicious Activity Monitoring Currency Transaction Reporting

– Currency Transaction Reports (CTRs)– Currency and Monetary Instrument Transportation Reports (CMIRs)– Funds Transfers and Transmittals (Joint/Travel Rule)– Report of Foreign Bank and Financial Accounts (FBARs)

Due Diligence for Correspondence Accounts and Private Banking Accounts Shell Bank Prohibitions Mandatory and Voluntary Information Sharing Section 311 – Countries/Entities of “Primary Money

Laundering Concern”

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Anti-Money Laundering – Risk

Customer Risk: Online accounts Intermediated accounts (hidden beneficiaries, mult. levels of ownership) Customer type (PEP, non-U.S. customer, hedge funds, charities) Entities that obscure ownership or beneficial interest (LLCs, PICs, offshore

trusts)Geographic Risk: Location of BD Location of customer/customer’s business High-risk jurisdictions Offshore funding sources / funds transfers

Business Risk: Source of wealth (offshore funding sources/transfers of funds) Product risk (variables, derivatives, penny stocks, money movements, retail,

institutional)

8


North Woodward Financial – OHO Decision

North Woodward operates a small retail brokerage business. The Firm adopted FINRA’s AML small firm template

without modification. The Firm failed to conduct three years of independent

testing of its AML program.The Panel found that North Woodward failed to

adequately tailor their AML procedures to their business and failed to conduct independent testing. The Firm was fined $25,000.

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Anti-Money Laundering – Rule 3310(b) – CIP

Customer Identification Program – CIP Goal: Procedures must enable firm to form a reasonable

belief that it knows the true identify of the customer. Approval: Must be approved by senior managementBe appropriate for its size and businessAt a minimum, contain procedures to:

– Identify customer– Verify customer’s identity– Recordkeeping– Comparison with government lists– Customer notice

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Customer: a person that opens a new account or an individual who opens a new

account for an individual who lacks legal capacity or for an entity that is not a legal person. does not include persons who fill out account opening paperwork or who

provide information necessary to establish an account, if such persons are not the accountholder as well. Exemptions: a financial institution regulated by a federal functional

regulator, governmental entities, publicly listed companies or a person that has an existing account with the broker-dealer, provided the broker-dealer has a reasonable belief that it knows the true identity of the person.

Account: a formal relationship with a broker-dealer established to effect

transactions in securities, including, but not limited to, the purchase or sale of securities, securities loan and borrowing activity, and the holding of securities or other assets for safekeeping or as collateral. Exemptions: accounts acquired through acquisition, merger, purchase of

assets or assumption of liabilities and (2) an account opened under an ERISA plan.

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Identification: Required informationNameDate of Birth (for an individual)Street Address Identification Number (US: SSN, non-U.S.: passport, TIN,

etc.)Verification:Must be verified in “reasonable” amount of timeHow long is “reasonable” depends on the riskConsider terms under which customer may conduct

transactions while BD attempts to verify customer’s identify

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Verification through documentsSuitable documentsNatural persons – Unexpired, government-issued

identification evidencing nationality or residence and bearing photograph or similar safeguard (picture license or passport)Entities – Documents showing existence of entity, e.g.,

certified articles of incorporation, government-issued business license, partnership agreement or trust instrument

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Verification through non-documentary methodsCIP must describe non-documentary methods that BD

will use to verify customers’ identities.Methods may include:

– Comparing information provided by customer with information obtained from consumer reporting agency, public database or other source;

– Checking references with other financial institutions; or – Obtaining financial statement.

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What about?Omnibus accounts

RVP/DVP accounts

Private placement firms

M&A firms

15


Wells Fargo AWC – CIP Violation

Between October 1, 2003 and October 19, 2012, the firms’ Customer Identification Program (CIP) was deficient, in that it did not subject certain new customers to identity verification in violation of NASD Rule 3011 (b) and FINRA Rule 3310 (b). The Firm’s automated verification system failed to conduct

client verification on new customers that were issued previously used account numbers. The system recognized the existing accounts as already verified and thus new customers issued those accounts were not reviewed.This resulted in the firms’ failure to conduct customer-

identity verification for nearly 220,000 accounts between 2003 and 2012. The Firm was fined $1.5 million.

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Anti-Money Laundering – Account Opening

Customer due diligenceGeneral “Know Your Customer” – based on riskDue diligence for suspicious activity monitoringSection 312 – Due diligence for foreign correspondent

accounts:– Banks– Business organized under a foreign law that if located in the U.S. would

be a broker-dealer, FCM, introducing broker in commodities or mutual fund

– Money transmitter or currency exchanger

Enhanced due diligence for certain foreign accountsPrivate banking accounts for non-U.S. persons

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Anti-Money Laundering – Rule 3310(a) – SARs

Broker-dealers required to file a suspicious activity report (SAR) for:Any transaction conducted or attempted by, at or through

broker-dealer involving (separately or in aggregate) funds or assets of at least $5,000, and Broker-dealer knows, suspects, or has reason to suspect

transaction (or pattern of transactions of which the transaction is a part);– Involves funds related to illegal activity, or is hiding or disguising funds or

assets derived from illegal activity;– Is designed, whether through structuring or other means, to evade

requirements of Bank Secrecy Act . – Has no business or apparent lawful purpose, or is not the sort in which this

particular customer would normally be expected to engage, or– Involves use of broker-dealer to facilitate criminal activity.

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Suspicious Activity Reporting What: Form SARWhere: Filed with FinCEN (instructions are on the form)When: Not later than 30-calendar days after date that the

firm has determined that that activity is suspicious (although regulation says 30 days after initial detection by reporting Broker-Dealer of facts that may constitute a basis for filing the SAR) (60 days if accountholder is unknown)Recordkeeping: Five years

19



Firms need to have reasonable procedures to detect and reportMonitoring

– Automated or manual is OK but it must be adequate– Does the monitoring identify potential suspicious transactions or patterns

of transactions? Wires, penny stocks, foreign customers? One day snapshots or reports that show trends? Does their monitoring cover potentially suspicious securities

transactions? > FINRA Enforcement Actions: Scottrade, E*Trade, Legent

Reporting– Does the firm’s process and staffing ensure timely reporting?

> FINRA Enforcement Action: Penson

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Suspicious Activity Red FlagsPublished in numerous guidance documents; never an

exhaustive listAn awareness of “red flags” will ensure that broker-

dealer personnel can identify circumstances warranting further due diligenceAppropriate “red flags” should be described in firm’s

written AML policies and compliance procedures. (Updated Small Firm Template)Red flags should be tailored to the firm’s risks

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Anti-Money Laundering – Rule 3310(a) – Red Flags

“Structures” deposits, withdrawals or purchase of monetary instruments below a certain amount to avoid reporting or recordkeeping requirements.

Wire activity that is unexplained, repetitive, unusually large Physical certificate does not bear a restrictive legend, but based on

history of the stock and/or volume of shares trading, it should have such a legend

Customer engages in prearranged or other non-competitive trading, including wash or cross trades of illiquid securities.

Two or more accounts trade an illiquid stock suddenly and simultaneously.

Customer journals securities between unrelated accounts for no apparent business reason.

Customer has opened multiple accounts with the same beneficial owners or controlling parties for no apparent business reason.

Customer transactions include a pattern of receiving stock in physical form or the incoming transfer of shares, selling the position and wiring out proceeds.

22


Suspicious Trading and Market Manipulation

Prearranged, directed or controlled trading of the security. For example, matched and wash trades.

Purchases or increases in bids when already substantially long.Patterns of orders executed at successive increasing or

decreasing prices.Large limit orders that are canceled once the order hits the

market place. Overall leadership in movement or maintaining the market price

of stock and/or concentration of trading volume over a period of time.

Sudden and/or rapid surge or spike in price and/or volume that is not directly proportional to news events surrounding the security.

A movement of price back to normal ranges when artificial price supports are removed.

23


Lek Securities Corporation-OHO Decision

Between January 1, 2008 and October 31, 2010, LEK offered automated access to the securities markets to clients with engage in high-volume, high-frequency trading.

During that time period, the Firm employed an ad-hoc manual system to review for potentially suspicious manipulative trades.

The Panel found that LEK’s system, which consisted of ad-hoc undocumented manual trade reviews, was inadequate to capture potential manipulative trading based on the frequency and volumes executed on a real time basis.

The Panel also found that modifications made after regulatory notice, in the form of a Wash Sale Report, was also inadequate as their were no procedures for how the firm would utilize the report to monitor for suspicious activity.

The Panel fined LEK $100,000.

24


Capital Path Securities- Order of Settlement

Between June 2008 and February 2013, the firm through, Davis, its Principal and AMLCO, failed to establish and implement an adequate AML program to adequately identify, investigate and respond to red flags of potentially suspicious activity. They allowed multiple customers, some with ties to each

other or to issuers of penny stocks to liquidate blocks of stock without properly monitoring the accounts for suspicious activity. The clients deposited and liquidated over 1.4 billion shares

of penny stocks of 22 issuers for proceeds of over $18 million.The Firm and Davis were fined $175,000 jointly and

severally.

25


Rule 3310 (b) – Foreign Correspondent Accounts

Due diligence on correspondent accounts for foreign financial institutionsAppropriate, specific, risk-based, and where necessary,

enhanced policies, procedures and controls reasonably designed to detect and report known or suspected money launderingPolicies and procedures shall include:

– Determining whether the foreign financial institution is a foreign bank;– Assessing the money laundering risk presented by the correspondent

account; and– Applying risk-based procedures and controls to such accounts to detect

and report suspicious activity, including periodic review of account activity, to determine consistency with the type, purpose and anticipated activity of the account.

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Relevant risk factors: The nature of the foreign financial institution’s business (e.g.,

banking, insurance, securities, etc.) and the markets it serves The type, purpose and anticipated activity of the account The nature and duration of the relationship with the foreign

financial institution The AML supervisory regime of the country that issued the

foreign financial institution’s charter or license and, if reasonably accessible, of the jurisdiction in which an owner of the foreign financial institution is incorporated or charteredKnown or reasonably available information about the foreign

financial institution’s anti-money laundering record

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Enhanced due diligence requirementsSection 312 requires U.S. financial institutions to apply

enhanced due diligence when establishing or maintaining a correspondent account for certain foreign banks:Under an offshore license; In a jurisdiction found to be non-cooperative with

international AML principles; In a jurisdiction found to be of “primary money

laundering concern” under Section 311 of the USA PATRIOT Act.

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Anti-Money Laundering – Rule 3310(b)

Enhanced due diligence requirementsSection 312 requires U.S. financial institutions to take

reasonable steps to:Conduct appropriate enhanced scrutiny;Obtain information about customer for whom the bank

has “payable through” accounts;Determine whether your customer has correspondent

accounts for other banks and take reasonable steps to mitigate risk; Identify owners of such foreign bank if its shares are not

publicly traded.

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Rule 3310(b) – Private Banking Accounts

Section 312 – Private BankingPrivate banking account:The account requires a minimum aggregate deposit of

funds or other assets of at least $1,000,000; Is established or maintained on behalf of one or more

non-U.S. individuals who are direct or beneficial owners of the account; and Is assigned to, or is administered or managed by, an

officer, employee, or agent of a financial institution acting as a liaison between the financial institution and the direct or beneficial owner of the account.

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Rule 3310(b) – Private Banking Accounts

Section 312 – Private BankingDue diligence requirements:Determine identity of all nominal and beneficial owners of the

account.Determine whether any such owner is a Senior Foreign Political

Figure (SFPF) and thus subject to enhanced scrutiny.Determine the source of funds deposited into the private

banking account and the purpose and expected use of the account. Review the activity in the account to ensure that the activity is

consistent with the information obtained about the source of funds, the stated purpose and the expected use of the account, to guard against money laundering and to report any suspicious activity.

31


Rule 3310(b) – Section 314(a) Information Requests

FinCEN requests for information on behalf of law enforcementWhat: Request for information about suspected money

laundering and terrorist financing.When: FinCEN batches and sends requests every two

weeks.How: Via email of URL.Timing: Firms have two weeks to complete their searches

and respond with any matches.FinCEN has implemented a new system so the firm

can prove that it accessed the database.

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Rule 3310(b) – Section 314(a) Information Requests

Procedures:Conduct an immediate search of specific records.Review current accounts and accounts maintained by a

named subject during the preceding 12 months and transactions not linked to an account conducted by a named subject during the preceding six months. Report only matches.

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Section 314(b) Information Sharing

Information sharing among financial institutions Firms can share client account information with other

firms under the privacy safe harbor, which provides protection from charges for violating of Reg. S-P and RFPA related to information concerning terrorist financing, or money laundering. Firms file an initial, and then annual notice with FinCEN.Firms may share information about money laundering

and terrorist financing, they may not share SARs (or fact that a SAR was filed).

34


Section 314(b) Information Sharing

Notice requires broker-dealer to take necessary steps to protect confidentiality of information and to use information only for purposes of: Identifying, and where appropriate, reporting on money

laundering or terrorist activities;Determining whether to establish or maintain an account

or to engage in a transaction;Assisting the firm in complying with any requirement of

the BSA.

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Anti-Money Laundering – Independent Testing

FINRA Rule 3310(c) – Independent Testing Must review and assess adequacy and level of

compliance with firm’s AML compliance program.Member personnel or a qualified outside party may

perform testing. If a firm uses internal personnel, sufficient separation of

functions should be maintained to ensure independence.Most firms required to perform test annually (on a

calendar basis).Firms may test every two years if they:

– Engage solely in proprietary trading; or – Conduct business with only other broker-dealers.

36


Anti-Money Laundering – AML Compliance Officer

FINRA Rule 3310(d) requires:Designate and identify to FINRA (by name, title,

mailing address, e-mail address, telephone number, and facsimile number) an individual or individuals responsible for implementing and monitoring the day-to-

day operations and internal controls of the program such individual or individuals must be an associated

person of the member and Provide prompt notification to FINRA regarding any

change in such designation(s).

37


Anti-Money Laundering – Training – Rule 3310(e)

Provide ongoing training for appropriate personnel. Developed under the leadership of the AML compliance

person or senior management. Vary based on the type of firm and its size, its customer

base, and its resources. Written educational materials, videos, online resources,

in-person lectures and explanatory memos may be appropriate training vehicles for AML training.

Tailored Training: A broker-dealer should scrutinize its operations to determine if there are certain employees who may need additional or specialized training because of their duties and responsibilities.

38


Enforcement Cases: Atlas One

Key allegations: Failure to implement a program reasonably designed to be able

to monitor for, detect and report suspicious activity; failure to maintain books and records; failure to report customer complaints and update Forms U4 and U5

Facts: In 2007, DOJ froze six Atlas One accounts that were all

controlled by one customer in connection with a money laundering scheme. Additional red flags:

– Multiple accounts controlled by same individual– Accounts all listed the same mailing address in San Jose, Costa Rica– Accounts all listed the email address for another Atlas One customer as

contact information for the account

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Enforcement Cases: Atlas One

Facts: 18 additional accounts that had not been part of DOJ's action. Certain customers' accounts engaged in significant money

movements with little to no securities activity. Atlas One's AML program required Aponte to monitor for

potentially suspicious activity and AML red flags, investigate suspicious activity and report suspicious activity by filing a suspicious activity report (SAR), when necessary.

Result: $350,000 fine for Atlas One $25,000 joint and several fine and 3 month suspension for

Aponte

40


Enforcement Cases: Brown Brothers Harriman

Key allegations: Failure to have an adequate anti-money laundering program to

monitor and detect suspicious penny stock transactions. BBH also did not have an adequate supervisory system to prevent the distribution of unregistered securities.

Facts:Omnibus Accounts opened for Foreign Financial Institutions

(FFIs)located in bank-secrecy havens; FFIs deposited billions of shares of low-priced securities at

BBH;BBH failed to conduct a searching inquiry to determine if the

shares were registered or subject to an exemption;BBH facilitated billions of penny-stock liquidations resulting in

almost $1 billion in proceeds for the underlying clients of the FFI;

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Enforcement Cases: Brown Brothers Harriman

Facts (con’t): BBH failed to investigate red flags associated with the

liquidations including reviewing contemporaneous market events, promotional campaigns, issuer’s history etc. The Firm’s monitoring deficiencies were further

exacerbated as the firm allowed for the FFIs to refuse to provide information about their underlying clients due to the assertion of the client’s privacy rights in their home jurisdiction.

Results:BBH fined $8 million AMLCO fined $25,000, suspended for one-month

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Enhancing Anti-Money Laundering Procedures Thursday, May 28 11:15 a.m. – 12:15 p.m. Resources FINRA Resources

• Notice to Members 02-21 (NASD Provides Guidance to Member Firms Concerning Anti-Money Laundering Compliance Programs Required by Federal Law) (April 2002)

www.finra.org/sites/default/files/NoticeDocument/p003704.pdf

• Anti-Money Laundering FAQ

www.finra.org/industry/faq-anti-money-laundering-faq

• FINRA AML Small Firm Template

www.finra.org/sites/default/files/Industry/p011419.doc

SEC Resources

• Responses to Frequently Asked Questions about a Broker-Dealer's Duties When Relying on the Securities Act Section 4(a)(4) Exemption to Execute Customer Orders (October 2014)

www.sec.gov/divisions/marketreg/faq-broker-dealer-duty-section4.htm

• Anti-Money Laundering (AML) Source Tool for Broker-Dealers (June 2012)

www.sec.gov/about/offices/ocie/amlsourcetool.htm

• Question and Answer Regarding the Broker-Dealer Customer Identification Program Rule (31 CFR 103.122) (October 2003)

www.sec.gov/divisions/marketreg/qa-bdidprogram.htm

© 2015 Financial Industry Regulatory Authority, Inc. All rights reserved.

http://www.finra.org/sites/default/files/NoticeDocument/p003704.pdf

http://www.finra.org/industry/faq-anti-money-laundering-faq

http://www.finra.org/sites/default/files/Industry/p011419.doc

http://www.sec.gov/divisions/marketreg/faq-broker-dealer-duty-section4.htm

http://www.sec.gov/about/offices/ocie/amlsourcetool.htm

http://www.sec.gov/divisions/marketreg/qa-bdidprogram.htm