The Division of Examinations’ Risk Alert reiterated the need for registered broker-dealers to establish and maintain sound AML programs for each firm designed to mitigate risks in the financial system.
In 2021, the SEC released an alert that focused on AML suspicious monitoring and reporting components of the broker-dealers’ AML program.
The recent announcement on July 31, 2023, focused on the broker-dealers’ periodic independent testing of the AML program, training of their personnel and identification and verification of their customers and beneficial owners through Know your Customer (KYC), Customer Identification Program (CIP), Customer Due Diligence (CDD).
What Are Broker-Dealers’ Anti-Money Laundering Requirements?
Statutory, regulatory provisions and related rules of the securities self-regulatory organizations (SROs) impose AML obligations on broker-dealers.
At a minimum, broker-dealer AML programs should:
- Designate a compliance officer responsible for the AML program.
- Develop internal policies, including AML policies and procedures.
- Create a training program for employees covering necessary AML topics.
- Ensure independent testing and auditing are performed periodically.
- Deploy in-depth risk assessment, which identifies the broker-dealers’ inherent risk, risk mitigation and residual risk.
In addition, the programs must satisfy these requirements:
- Customer Identification Program (CIP) Rule, which includes the recent beneficial ownership requirements, to obtain an understanding of the broker-dealer’s customers to quantify risks associated with doing business with the customer.
- The Know Your Customer (KYC) program is designed to help broker-dealers comply with CIP and beneficial ownership rules to identify who the actual owners of an entity are (greater than 25% ownership).
- Office of Foreign Asset Control Program (OFAC) of the U.S. Treasury Department for which broker-dealers need to screen the identities of their direct and indirect customers against lists compiled and managed by OFAC.
Challenges Associated With Compliance for AML Requirements
Well-functioning AML programs require sufficiently experienced personnel, proper management support and appropriate resourcing.
Today’s environment requires systems and programs designed to effectively carry out the various AML program requirements in the form of transaction monitoring, CIP research and analysis, OFAC list screening and matching, for example.
Conducting CIP reviews of customers to comply with the CIP program and beneficial ownership program requirements is intensive for both efforts and experienced skillsets are needed. The success of an independent AML program review heavily depends on the professional and experienced team performing the assessment.
What May Be Driving the SEC’s Risk Alert
There are a few factors that may have prompted the recently released Risk Alert.
The 2023 Risk Alert pointed out that the recent uptick in OFAC sanction program requirements coupled with the SEC’s observation that AML program effectiveness of their member firms has been reduced, indicating that in the upcoming regulatory examinations of SEC member firms, AML program effectiveness will be a focus. In other words, SEC has informed their members that they will be looking closely at the members’ AML programs due to their observations that the program’s effectiveness is not where it needs to be.
Also, on August 2020, the Financial Industry Regulatory Authority (FINRA) fined Interactive Brokers $15M for AML failures, specifically in the written AML program as well as their AML transaction monitoring program that was ineffective.
An effective and sufficiently rigorous AML program will positively impact your firm. Risk will be mitigated in the form of high-risk customers or activities, lessening financial penalties and fines by identification and avoidance of OFAC Sanctions violations as well as other suspicious activities. Compliance with the AML (Anti-Money Laundering) BSA (Bank Secrecy Act) rule and regulations will result in positive regulatory examinations.