On February 12-13, 2018, members of the securities industry, regulators and financial crime experts met in New York City at the Securities Industry and Financial Markets Association (SIFMA) Anti-Money Laundering (AML) and Financial Crimes Conference to discuss current trends, regulatory issues and enforcement matters related to AML and financial crimes. Although the conference covered many AML-related topics, a few themes emerged:
- There is a continued focused on AML and financial crimes and an anticipated increase in AML-related enforcement actions
- Many unknowns exist as firms prepare for the implementation of the Customer Due Diligence Rule
- Firms are struggling with how to handle cryptocurrency and marijuana-related businesses
Susan Schroeder, FINRA executive vice president and head of Enforcement, kicked off the conference discussing FINRA’s approach to enforcement. To determine whether an enforcement action is appropriate, FINRA considers the following: (1) Was there demonstrated financial harm? (2) Has there been a significant impact to market integrity? (3) Did the conduct create significant risk? With regard to sanctions, the first objective is to obtain restitution for harmed investors. In addition, sanctions will be tailored to address proportionately the root cause of the issue, to encourage the remediation of systemic problems, and to reflect credit for cooperation. Finally, FINRA’s goal is to be more transparent in its enforcement matters to reflect the legal framework including the legal basis for supervisory liability. FINRA needs to be clear to the industry about what exactly constitutes a rule violation and why, so that firms and individuals can pattern their behavior accordingly.
The regulators also discussed a few recent AML cases that involved the failure by a firm to implement its AML surveillance system properly, a failure by some firms to identify and report “red flags” on suspicious activity reports (SARs), and cases involving obstruction in AML investigations. These cases resulted in significant sanctions and involved both large and small firms. There was also a discussion regarding the increase in individual liability. The regulators indicated that they only named individuals in the most extreme cases and that often the supervisors were wearing more than one hat or were actually involved in the activities leading to the action. The regulators said they generally only consider individual action where there is broad-based failures, obstruction of an investigation, awareness of a problem and not addressing it, or prior sanctions.
FinCen – Customer Due Diligence Rule
Given the short time left before the new Customer Due Diligence Rule becomes effective (May 11, 2108), there was much discussion about the issues firms are facing in implementing new policies and procedures. A few of the discussion points included the certification process for collecting beneficial ownership information, the various exemptions to the rule, and the triggers for gathering required information for existing accounts when there has been a change in the account status or profile.
Novel AML Issues
Several panels during the conference discussed cryptocurrency and marijuana-related businesses. These matters are relatively new and do not fit neatly into most broker-dealer supervisory and/or surveillance systems, but still contain significant AML risk. Many of the firms at the conference indicated that they were prohibiting business in these two areas; however, one of the issues that most firms are grappling with is how to identify the accounts or securities that are connected to those businesses. Most of the panelists indicated that firms would have to monitor these issues very closely over the next year, because it is evolving quickly as regulators scramble to initiate rulemaking related to cryptocurrency, and the industry waits to see how the Sessions memo related to marijuana enforcement will change marijuana-related businesses.
In conclusion, broker-dealers should expect that the regulators will continue to vigorously pursue AML-related rule violations since both FINRA and the Securities and Exchange Commission had identified this area in its 2018 exam priorities. Furthermore, firms should be making their final preparations for the implementation of the Customer Due Diligence Rule. Finally, firms should be mindful of any exposure to cryptocurrency and marijuana-related businesses.