United States: SEC Sanctions Broker-Dealer For Paper-Only AML Program

On June 1, 2016, the Securities and Exchange Commission (SEC) for the first time ever charged a broker-dealer in a stand-alone action for failing to file suspicious activity reports (SARs) as required by the federal securities laws and the Bank Secrecy Act (BSA).[1] In announcing the settlement, the SEC's Director of the Division of Enforcement Andrew Ceresney stated: "Brokerage firms must take their anti-money laundering responsibilities seriously so they can serve as a line of defense against misconduct and market risks."[2]

It is clear from this settlement and other recent developments[3] that the SEC is increasingly scrutinizing anti-money laundering (AML) programs and verifying whether broker-dealers are, in practice, fulfilling their obligations to monitor and report suspicious activity. In the context of this increased regulatory enforcement, broker-dealers should familiarize themselves with these developments and review their AML compliance programs to ensure their policies and procedures are updated to reflect current regulatory guidance and their practices comply with those policies and procedures.

The Settlement With Albert Fried & Company, LLC

Without admitting or denying the allegations, Albert Fried & Company, LLC (Albert Fried) accepted the entry of the settled order charging it with violating Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8 thereunder, which requires broker-dealers to comply with the reporting, record-keeping and record retention requirements of the Bank Secrecy Act.[4]

According to the order, Albert Fried failed to file SARs for over five years despite knowing, suspecting or having reason to suspect that certain of its customers' transactions appeared to be fraudulent or have no business or lawful purpose, and despite the firm's AML policies and procedures that required it to file SARs in those circumstances.

The SEC alleged that Albert Fried's AML program outlined the process by which its employees were to monitor customer transactions and report suspicious activity to its compliance department for further review and the filing of a SAR where appropriate. The AML program required Albert Fried to file SARs "for transactions that may be indicative of money laundering activity," including, among other things, "trading that constitutes a substantial portion of all trading for the day in a particular security," "heavy trading in low-priced securities" and "unusually large deposits of funds or securities."

Yet Albert Fried allegedly failed to comply with its statutory responsibilities or to follow its own policies. As a result, from August 2010 through October 2015, Albert Fried did not file a single SAR even though its institutional customers were reportedly depositing and then selling high volumes in shares of low-priced securities obtained from convertible debentures. According to the SEC, these sales occurred where Albert Fried was aware of other red flags, including the following:

  • The respective issuers were delinquent in their SEC filings or had ongoing penny stock promotional campaigns, were being managed by executives with histories of securities fraud, or had significant accumulated deficits.
  • The customers were subject to regulatory inquiries or grand jury subpoenas.
  • Other broker-dealers rejected Albert Fried's attempts to transfer certain customer securities.
  • One customer transferred its cash proceeds out of its Albert Fried account immediately following the liquidation of its position in an issuer.
  • A customer's executive was charged with criminal securities fraud.
  • The SEC suspended trading of a security that had been recently liquidated by a customer.

For example, the SEC noted that, in one instance, Albert Fried did not file a SAR even though it terminated a customer account because the customer repeatedly traded high volumes of illiquid penny stocks. The SEC also provided other detailed descriptions of customer trading and circumstances surrounding the trades that it believed should have prompted Albert Fried to file SARs.

Pursuant to the order, Albert Fried agreed to a civil penalty of $300,000 and acknowledged that the SEC was not imposing a steeper civil penalty based upon its cooperation, which included entering into two tolling agreements and preparing a 57-page summary describing its AML policies, the various transactions in question and the review process for each. The SEC also noted Albert Fried's remedial measures, which included voluntarily retaining a third-party AML compliance firm and revising its AML program to comport with updated regulatory guidance. In particular, Albert Fried now conducts a customer AML risk assessment when opening an account, includes a low-priced security checklist in its account monitoring process, and maintains a written list of transactions where an AML inquiry was conducted and the firm determined the filing of a SAR was unnecessary.

Takeaways

The Albert Fried settlement may indicate a new line of enforcement cases to come. After all, the SEC noted in its accompanying release: "The case stemmed from the work of the Enforcement Division's Broker-Dealer Task Force, [which] .... focuses on current issues and practices within the broker-dealer community and develops national initiatives for potential investigations."[5]

Although the SEC noted in the release that this settlement was the first of its kind, Director Ceresney previously announced this task force would "pursue standalone BSA violations to send a clear message to the industry about the need for compliance."[6] Foreboding more similar enforcement actions to come, Director Ceresney stated that a review of SAR filings across different time periods revealed that "the number of firms that filed zero SARs or one SAR per year was disturbingly large."

AML is also one of the SEC's examination initiatives. In its examination priorities letter for 2016, the SEC's Office of Compliance Inspections and Examinations advised it would, among other things, continue to use its "analytic capabilities" to focus on firms that have not filed the number of SARs that would be consistent with their business models or have filed incomplete or late SARs.[7] Chair Mary Jo White highlighted these capabilities as one of the SEC's recent accomplishments, noting that OCIE is in the process of deploying the National Exam Analytics Tool (affectionately called NEAT) to assist with AML reviews of broker-dealers by quickly analyzing years of trading data.[8]

In short, it now appears that the SEC has brought its broken windows approach to AML cases. And given the SEC's new data analytic capabilities, window dressing with paper-only AML programs will no longer protect firms that fail to fulfill their AML obligations.

Footnotes

[1] Press Release, U.S. Securities and Exchange Commission, Brokerage Firm Charged With Anti-Money Laundering Failures, Rel. 2016-102 (June 1, 2016), http://www.sec.gov/news/pressrelease/2016-102.html.

[2] Id.

[3] Press Release, U.S. Securities and Exchange Commission, SEC: Miami Firm Broke Anti-Money Laundering Protocols, Rel. 2016-23 (Feb. 4, 2016), https://www.sec.gov/news/pressrelease/2016-23.html; Letter, U.S. Securities and Exchange Commission, Examination Priorities for 2016 (Jan. 11, 2016), https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2016.pdf; Speech, U.S. Securities and Exchange Commission, National Associate Director of Broker-Dealer Examination Program Kevin W. Goodman, Anti-Money Laundering:  An Often-Overlooked Cornerstone of Effective Compliance (June 18, 2015), https://www.sec.gov/news/speech/anti-money-laundering-an-often-overlooked-cornerstone.html; Speech, U.S. Securities and Exchange Commission, Director of Enforcement Andrew Ceresney, Remarks at SIFMA's 2015 Anti-Money Laundering & Financial Crimes Conference (Feb. 25, 2015), https://www.sec.gov/news/speech/022515-spchc.html.

[4] In the Matter of Albert Fried & Company, LLC, Order Instituting Administrative and Cease-and-Desist Proceedings Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order, Exchange Act Rel. No. 77971 (June 1, 2016), http://www.sec.gov/news/pressrelease/2016-102.html.

[5] Press Release, U.S. Securities and Exchange Commission, Brokerage Firm Charged With Anti-Money Laundering Failures, Rel. 2016-102 (June 1, 2016), http://www.sec.gov/news/pressrelease/2016-102.html.

[6] Speech, U.S. Securities and Exchange Commission, Director of Enforcement Andrew Ceresney, Remarks at SIFMA's 2015 Anti-Money Laundering & Financial Crimes Conference (Feb. 25, 2015), https://www.sec.gov/news/speech/022515-spchc.html.

[7] Letter, U.S. Securities and Exchange Commission, Examination Priorities for 2016 (Jan. 11, 2016), https://www.sec.gov/about/offices/ocie/national-examination-program-priorities-2016.pdf.

[8] Website, U.S. Securities and Exchange Commission, SEC Accomplishments, April 2013 — April 2016 (Apr. 29, 2016), https://www.sec.gov/about/sec-accomplishments.htm.

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