AML Regulations for Broker-Dealers

Individuals or businesses are known as broker-dealer's purchase and sell securities for their own accounts or on behalf of their clients. Broker-dealers pose a substantial money laundering risk since they deal with enormous quantities of money and a variety of financial instruments on behalf of customers all over the world, and they are subject to rigorous AML/CFT requirements.


Financial authorities in the United States frequently target broker-dealer businesses as part of their anti-money laundering efforts: the Securities and Exchange Commission's (SEC) enforcement proceedings against broker-dealers accounted for 25% of the SEC's total activity in 2017. More lately, the SEC has focused on the supervision of online broker-dealers in collaboration with the US Treasury. In August 2020, it fined Interactive Brokers $38 million for failing to create an adequate AML/CFT program.


Broker-dealers must ensure that they follow their regulatory duties and develop an efficient AML/CFT program to cope with the money laundering dangers they face to avoid sanctions, penalties, and reputational harm.

 

Broker-Dealer AML Regulations

Broker-dealer AML legislation in the United States is based on two primary legislation: the Bank Secrecy Act (BSA) and the USA Patriot Act.


The Bank Secrecy Act (BSA): The BSA, which was enacted in 1979, establishes an AML compliance framework for all banks and financial institutions in the USA. The US Treasury regulates Broker-dealers under the BSA, which includes the obligation to preserve financial transaction records and make notifications with the Financial Crimes Enforcement Network (FinCEN) when any unusual activity that might signal money laundering is found. Part 1023 of the BSA has regulations for broker-dealers.


USA Patriot Act: The Patriot Act was established in 2001 in the aftermath of the September 11 terrorist attacks as a method to reinforce the BSA by improving customer due diligence and monitoring procedures. Broker-dealers are required by the Patriot Act to establish and implement a documented, risk-based anti-money laundering program that includes policies, procedures, and measures that may be reasonably expected to provide BSA compliance. 

  • Broker-dealer AML obligations should facilitate customer identification and due diligence processes under the Patriot Act.
  • Transaction monitoring and reporting of suspicious activity.
  • Sharing of information in response to a request from federal law enforcement agencies.
  • Adherence to any requirements introduced by the Treasury.

Broker-Dealer AML Compliance Programs

Broker-dealers' AML programs should have the following features to comply with the BSA and the Patriot Act:


Client identification: Under Section 326 of the Patriot Act, broker-dealers must correctly establish and confirm their clients' identities to guarantee that they are who they claim they are and that they are honest about the nature of their company. In practice, this entails gathering a customer's name, address, date of birth, and other personal details, such as a social security number or equivalents. The AML Customer Due Diligence (CDD) mandate, which involves verifying beneficial ownership of legal entity clients, is fundamentally covered by these client identification programs (CIPs). Customers are considered useful owners in the context of beneficial ownership if they possess 25% or more of a company's stock holdings or if they have considerable control, management, or direction over a legal entity customer. Brokers-dealers must keep track of customer identities after executing CDD for future reference or use in money laundering operations.


Transaction Monitoring and Reporting: Broker-dealers must develop a Transaction Monitoring procedure as part of their Anti-Money Laundering Program, according to Section 356 of the Patriot Act. Broker-dealers are required to submit a Suspicious Activity Report (SAR) with the Treasury if a transaction involves $5000 or more in money or aggregates money, and there are grounds to think that the customer:

 

  • Is seeking to conceal illicit cash.
  • Is seeking to circumvent BSA regulations.
  • Is doing their transaction for no apparent commercial or legal cause.
  • Is aiming to criminalize the use of broker-dealer services.

Broker-dealers must report suspicious behavior using form SAR-SF (also known as FINCEN FORM 101), a specific format for the securities and futures business.


Sanction screening: Broker-dealers must screen customers against sanctions issued by the Office of Foreign Assets Control (OFAC) in addition to BSA AML standards. In reality, this entails cross-checking individual customers against OFAC's Specially Designated Nationals and Blocked Persons (SDN) list as well as the agency's wider, country-based sanctions list. When a broker-dealer discovers an applicable penalty on the SDN list or a country-specific list, it is required to ban the transactions proposed by the relevant customers, as well as their accounts and any other property or interests implicated.


Money Laundering Red Flags

Broker-dealers may improve their AML compliance performance by being acquainted with the methods criminals try to take advantage of their services. The Financial Industry Regulatory Authority (FINRA) of the United States published Regulatory Notice 19-18 in 2019, outlining the "red flag" behaviors linked with money laundering in the securities industry. With that in mind, here are several AML red flags for broker-dealers:



Customer backgrounds: Customers who refuse to reveal personal information throughout the due diligence process frequently seek to circumvent AML regulations. Firms should also be on the view for consumers who often deal with high-risk jurisdictions, have legal actions pending against them, or have been denied by another financial institution.


Depositing: Broker-dealers should scrutinize customers who deposit securities and later sell or transfer them to unrelated accounts. Customers involved in money laundering may also get significant quantities of securities that do not correspond to their assets.


Securities trading: Customers dealing in highly volatile securities, making deals with no apparent reason, or trading in a manner that does not reflect their profile and history should be monitored by broker-dealer businesses.


Structuring: Customers involved in money laundering may try to circumvent AML reporting and record-keeping by structuring their deposits and withdrawals or breaking up significant financial transactions. Customers employing third parties to move money, transactions involving high-risk jurisdictions, and moves with no obvious purpose should all be avoided by broker-dealers.

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