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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions