The SEC recently charged Pinnacle Capital Markets LLC (Pinnacle) with failing to comply with an anti-money laundering (AML) rule that requires broker-dealers to identify and verify the identities of its customers and document its procedure for doing so. Pinnacle and its managing director, who was charged individually for causing the violations, settled with the SEC for $25,000 without admitting or denying the allegations. In a parallel action, the Financial Crimes Enforcement Network (FinCEN) assessed a $50,000 penalty against Pinnacle for violating certain provisions of the Bank Secrecy Act.
The SEC found that Pinnacle established, documented and maintained a customer identification program (CIP) that specified it would identify and verify the identities of all of its customers, but in fact failed to follow its own procedures during a six-year period. The SEC’s order states that many of Pinnacle’s foreign institutional customers hold omnibus accounts through which the entities carry sub-accounts for their own corporate or retail customers, and the sub-account holders are treated like regular account holders. According to the SEC, Pinnacle failed to collect or verify all identifying information for the vast majority of omnibus sub-account holders.
Particularly important to AML officers is the clarification in the order about FinCEN’s Q&A of October 1, 2003, regarding a broker-dealer’s CIP obligations with respect to transactions in omnibus accounts and sub-accounts. The 2003 Q&A addressed nonexclusive circumstances under which a broker-dealer could treat an omnibus account holder as the only customer for the purposes of the CIP rule and not as the underlying beneficial owner. The Q&A contemplated a scenario in which all securities transactions in the omnibus account or sub-account would be initiated by the financial intermediary holding the omnibus account, and the beneficial owner of the omnibus account or sub-account would have no direct control of the transactions effected in the account. Pinnacle’s foreign entity omnibus accounts, however, were not true intermediated relationships. Rather, Pinnacle treated the omnibus sub-account holders as its own customers and the omnibus sub-account holders directly effected transactions through their sub-accounts without intermediation.