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ANTI-MONEY LAUNDERINGREGULATION OFUS BROKER-DEALERS
Presented by:
Kathy H. [email protected]
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TOPICS Background
Bank Secrecy Act
USA PATRIOT Act
AML Compliance Programs
Customer Identification and Verification Programs
Correspondent Accounts for Foreign Financial Institutions
Private Banking Accounts for Non-US Persons/Senior Foreign Political Figures
Suspicious Transactions
Other BSA Reports
Funds Transfer Rules
Information Sharing
Special Measures
Office of Foreign Asset Control Sanctions and Other Lists
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Background
Proceeds from illegal activities frequently have to be laundered before they can migrate from the underground economy into the mainstream
Banks, broker-dealers and other financial institutions are attractive vehicles for laundering such funds
As a result, federal regulation has attempted to prevent the use of these institutions for money laundering
Money laundering is generally understood to mean engaging in acts designed to conceal or disguise the existence or origins of criminally derived proceeds in order to make them appear legitimate
Money laundering can take many forms and has proven difficult to detect and regulate as money laundering techniques become more sophisticated
U.S. laws criminalize not just the laundering of proceeds by the participants in the underlying crime, but also the facilitating of money laundering by financial institutions
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Bank Secrecy Act (BSA)
Adopted in 1970, the BSA authorizes the Secretary of the Treasury to issue regulations requiring financial institutions to keep records and file reports on financial transactions; those reports are used by the federal government to investigate and prosecute money laundering and other financial crimes
Financial Crimes Enforcement Network (FinCEN) was created by the Treasury Department to monitor money laundering activities; it acts as a central depository for reports by financial institutions and coordinates enforcement activities with other agencies
Rule 17a-8 under the Securities Exchange Act of 1934 requires broker-dealers to comply with the BSA’s reporting, recordkeeping and record retention retention requirements
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USA PATRIOT Act
The USA PATRIOT Act of 2001, adopted following the September 11 attack, included the International Money Laundering and Anti-Terror Financing Act, which amended and strengthened the BSA
The PATRIOT Act imposed significant new AML requirements on financial institutions, including:— AML compliance programs— customer identification programs— monitoring, detecting and filing reports of
suspicious activity— due diligence on correspondent accounts for foreign
financial institutions, including a prohibition on transactions with foreign shell banks
— due diligence on private banking accounts for non-US persons
— mandatory information sharing with federal law enforcement agencies
— compliance with Treasury special measures
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AML Compliance Programs
The PATRIOT Act amended the BSA to require financial institutions, including broker-dealers, to establish AML programs
NASD Rule 3011 and NYSE Rule 445 require their member organizations to establish risk-based AML compliance programs
Programs must be in writing and include:— policies and procedures reasonably expected to
detect and cause the reporting of specified transactions
— policies, procedures and internal controls reasonably designed to achieve compliance with the BSA and its implementing rules
— annual independent testing of the firm’s AML program
— designation of an AML compliance officer— ongoing AML training for employees
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Customer Identification Programs (CIP)
Broker-dealers must establish a written CIP with procedures for:— obtaining customer identifying information from
each customer prior to account opening— verifying the identity of each customer, to the
extent reasonable and practicable, to enable the broker-dealer to form a reasonable belief that it knows the true identity of each customer
— making and maintaining a record of all information obtained to verify a customer’s identity
— determining whether a customer appears on any list of known or suspected terrorists or terrorist organizations designated by Treasury
— providing customers with adequate notice that information is being requested to verify their identities
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Correspondent Accounts: Due Diligence and Prohibitions on Foreign Shell Banks
The PATRIOT Act requires financial institutions that establish correspondent accounts in the US for foreign financial institutions to develop risk-based due diligence procedures reasonably designed to detect and report instances of money laundering through those accounts
Correspondent accounts generally are accounts established by US financial institutions to receive deposits from, make payments on behalf of or handle other financial transactions for foreign financial institutions, including accounts to buy, sell, lend or hold securities, securities custody accounts, prime brokerage accounts, accounts for trading foreign currency, OTC derivatives accounts and futures and commodities accounts
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Correspondent Accounts: (con’t)
Prohibitions on Foreign Shell Banks: — Broker-dealers are prohibited from establishing,
maintaining, administering, or managing correspondent accounts in the US for, or on behalf of, foreign shell banks (i.e., foreign banks with no physical presence in any country)
— Broker-dealers also must take steps to ensure that they are not indirectly providing correspondent banking services to foreign shell banks through foreign banks with which they maintain correspondent relationships
— Treasury has provided a model certification that can be used to obtain information from foreign bank correspondents
— In addition, broker-dealers must obtain records in the US of foreign bank owners and agents for service of process
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Due Diligence Programs for Private Banking Accounts
Financial institutions, including broker-dealers, must establish risk-based due diligence programs for private banking accounts and provide enhanced scrutiny to any such accounts provided to senior foreign political figures (SFPFs)
A private banking account is an account that requires a minimum deposit of $1,000,000, is established or maintained for a non-US person and is managed by an employee of a financial institution acting as a liaison between the financial institution and the account owner
A SFPF is a current or former senior official in the executive, legislative, administrative, military or judicial branches of a foreign government, a senior official of a major foreign political party or a senior executive of a foreign government-owned commercial enterprise, or an immediate family member or person publicly known to be a close associate of the SFPF
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Private Banking Accounts (con’t)
Broker-dealers providing private banking accounts must take reasonable steps to: — determine the identity of all nominal and
beneficial owners of private banking accounts— determine the source of funds deposited— determine whether any such owner is a SFPF subject
to enhanced scrutiny to detect the proceeds of foreign corruption
— review the activity of the account as needed to guard against money laundering
— identify and report any suspicious activity
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Suspicious Transactions Financial institutions, including broker-dealers, must
monitor for and report suspicious transactions to FinCEN as a means of detecting money laundering and terrorist financing (SAR reporting)
The Treasury’s SAR rule for broker-dealers requires reporting of a transaction: (i) conducted or attempted to be conducted by, at or through a broker-dealer; (ii) involving at least $5000; and (iii) in which the broker-dealer knows, suspects, or has reason to suspect that the transaction involves funds from an illegal activity, is designed to evade requirements of the BSA, has no business or apparent lawful purpose, and the broker-dealer knows of no reasonable explanation for the transaction after examining the available facts, or involves use of the broker-dealer to facilitate criminal activity
A broker-dealer must report a suspicious transaction within 30 days of becoming aware of it on form SAR-SF
Financial institutions, including broker-dealers, filing SARs are prohibited from disclosing the reporting to anyone involved in the transaction
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Other BSA Reports
Currency Transaction Reports (CTRs): Broker-dealers must file with FinCEN a CTR for any transaction over $10,000 in currency, including multiple transactions occurring the same day
Foreign Bank and Financial Accounts Reports (FBARs): Broker-dealers must file with FinCEN an FBAR for any foreign bank, securities or other account with an aggregate value of more than $10,000
Currency and Monetary Instruments Transportation Reports (CMIRs): Broker-dealers must report any transportation of more than $10,000 in currency or monetary instruments into or outside of the US on a CMIR
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Funds Transfer Rules
Under the Joint Rule, broker-dealers must record and retain certain identifying information on funds transmittals of $3000 or more
Identifying information includes transmitter's name and address, amount of transfer, date, payment instructions, name of recipient institution and account information for transmittal recipient
Under the Travel Rule, most of the information required by the Joint Rule must be included in and travel with the transmittal through the transmittal process
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Information Sharing With Law Enforcement and Financial Institutions
The USA PATRIOT Act added two information sharing provisions to the BSA— One requires financial institutions, including broker-
dealers, to respond to mandatory requests for information made by FinCEN on behalf of federal law enforcement agencies
— The other provides a safe harbor to permit and facilitate voluntary information sharing among financial institutions for the purpose of identifying and reporting activities involving terrorist acts or money laundering activities
Mandatory Information Sharing: — Financial institutions are required to respond to
requests for information made by federal law enforcement agencies
— FinCEN, on behalf of a requesting federal law enforcement agency, may require broker-dealers to search their records to determine whether they have accounts for, or have engaged in transactions with, any specified individual, entity or organization
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Information Sharing (con’t)
— Broker-dealers must report to FinCEN if they have any account or transaction matching the information listed on the information request
— Broker-dealers must also designate a contact person (e.g., the AML compliance officer) to receive such requests and maintain the confidentiality of all requests and responsive reports to FinCEN
Voluntary Information Sharing: — The safe harbor protects a financial institution
from certain civil liabilities in connection with information sharing
— It permits information sharing among financial institutions regarding individuals, entities, organizations and countries suspected of engaging in money laundering or terrorist financing
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Information Sharing (con’t)
— A financial institution intending to share information must file an annual notice with FinCEN, maintain procedures to protect the security and confidentiality of the information and take reasonable steps to verify that the other financial institution with which it intends to share information has also filed a notice with FinCEN
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Special Measures
The Secretary of the Treasury can adopt special measures for US financial institutions to address particular money laundering concerns relating primarily to non-US jurisdictions
These measures include additional recordkeeping and reporting of financial transactions, obtaining additional information on beneficial ownership or on transactions and prohibiting US financial institutions from opening or maintaining certain correspondent accounts
Currently, there are final rules instituting special measures against (i) Burma, (ii) Myanmar Mayflower Bank, (iii) Asia Wealth Bank, (iv) Commercial Bank of Syria, (v) VEF Bank and (vi) Banco Delta Asia
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OFAC Sanctions and Other Lists
Financial institutions, including broker-dealers, are also subject to programs administered by OFAC
OFAC is an office within Treasury that administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries, terrorism sponsoring organizations, international narcotics traffickers, and those engaged in activities related to the proliferation of weapons of mass destruction
OFAC’s sanctions programs are separate and distinct from, and in addition to, the AML requirements imposed on financial institutions
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OFAC Sanctions (con’t)
OFAC publishes a list of Specially Designated Nationals and Blocked Persons (SDNs), who are individuals and entities whose property is subject to blocking and with whom US persons cannot conduct business
OFAC also administers country-based sanctions that are broader in scope than the list-based programs
Prior to conducing a transaction, broker-dealers generally check identification information concerning the transaction against OFAC’s lists of individuals and countries subject to sanctions
Depending on the applicable sanction program, if the transaction is prohibited, a broker-dealer may be obligated either to:— reject the transaction, or — freeze the funds or securities and establish a
blocked account to hold the frozen assets
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OFAC Sanctions (con’t)
A broker-dealer must report all blockings and rejections of prohibited transactions to OFAC within 10 days of being identified and annually
There are other relevant lists, such as the Financial Action Task Force (FATF) list of non-compliant countries (the NCCT list); if transactions originate from or are routed to any FATF-identified countries, it may be an indication of suspicious activity