Anti-Money Laundering for Advisers Prepare for New Regulations!
Anti-Money Laundering for Advisers Prepare for New Regulations!
May 12, 2016
Panelists •
PAUL D. GLENN is Special Counsel for the Investment Adviser Association. Previously, he worked for 14 years at the U.S. Securities and Exchange Commission as a trial attorney and special counsel in the Division of Enforcement and the Office of General Counsel, respectively. He also worked at the Office of the Comptroller of the Currency (OTS), US Treasury, as Deputy Chief Counsel and Special Counsel. Mr. Glenn also served as Vice President and Director of Compliance for PNC Bank N.A. in Washington, DC, (formerly Riggs) and WashingtonFirstBank N.A. in Reston, VA. He holds an LL.M from Georgetown University Law Center and his J.D. and B.A. from Case Western Reserve University. He holds an honorary doctor of laws degree from Nyack College.
•
CHRISTIAN B. HENNION is a partner at Katten Muchin Rosenman LLP and concentrates his practice in financial services and asset management matters, including counseling fund managers, registered investment advisers and commodity trading advisors on both transactional and regulatory matters. Mr. Hennion has advised a wide range of US and international managers, from start-ups to large institutions, on matters relating to the SEC and CFTC including registrations and examinations and related corporate and transactional matters. He is experienced with the preparation and negotiation of offering and advisory documents for asset management firms, and SEC and CFTC regulatory requirements and applicable filings. Mr. Hennion was an executive articles editor of the Chicago-Kent Law Review and a judicial extern to the Honorable Samuel Der-Yeghiayan of the US District Court, Northern District of Illinois. 2
Panelists (cont.) •
RICHARD T. KIRCHER is the Assistant Director, Operational Compliance, Legal & Compliance Division at Putnam Investments in Boston. He manages teams responsible for administering the Bank Secrecy Act, USA PATRIOT Act, and OFAC compliance programs adopted by the Putnam mutual funds, the funds’ underwriter and distributor, and Putnam’s captive trust company. Mr. Kircher supports the Putnam fund’s distributor and transfer agent in administering various fund compliance programs. Mr. Kircher also supports Putnam’s investment adviser, transfer agent, and broker-dealer recordkeeping compliance programs. Prior to joining Putnam in 1998, Mr. Kircher was a Compliance Manager at T. Rowe Price Associates. He graduated from Washington College, Chestertown, MD, B.A.
•
ERIC KRINGEL is the Bank Secrecy Act Specialist in the SEC’s Division of Enforcement, where he administers the Division’s BSA Review Program, leads the Division’s Rule 17a-8 Working Group, and works with colleagues on a wide range of AML and BSA policy issues. Mr. Kringel joined the SEC from the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) where, over the course of seven years, he served as Senior Advisor in the Analysis and Liaison Division, Acting Assistant Director of the Office of Law Enforcement Support, and as Senior Policy Advisor to three consecutive Directors. Prior to that, Mr. Kringel was an attorney in the Bureau of Alcohol, Tobacco, and Firearms’ Office of Chief Counsel, and a contract attorney in the Department of Justice’s Asset Forfeiture and Money Laundering Section. He is a graduate of the University of Nebraska and American University’s Washington College of 3 Law.
Agenda • Introduction and Panelists • Announcements – Customer Due Diligence rule and FinCEN changes • Background on AML Rule for Investment Advisers • Polling questions • Pre-Implementation Risk Assessment • Suspicious Activity Reporting (SARs), Customer Identification Program (CIP), Staffing and Testing • International • SEC oversight 4
Background • •
•
1970: Bank Secrecy Act. • Primarily a reporting and recordkeeping statute. 2001: USA PATRIOT Act. • Required all entities defined as “financial institutions” to implement an effective AML program. • Certain types of entities covered by the statute; other categories can be created by rule. • Minimum statutory requirements found in § 5318(h): • Develop internal policies, procedures and controls. • Designate a compliance officer. • Maintain an ongoing employee training program. • Conduct an independent audit function to test programs. • Statute supplemented by industry specific regulations. • E.g., Broker-Dealer specific regulations (Part 1023). Investment advisers not presently included in the BSA’s definition of “financial institution.” 5
Current Practices (Poll) Question #1: Does your RIA currently voluntary AML program? • A. Yes • B. No
implement
a
6
Background (cont.) •
•
Long-running discussions to bring investment advisers under the BSA umbrella: • 2003: Financial Crimes Enforcement Network (FinCEN) published a proposed rule to subject certain investment advisers and hedge funds to AML program requirements. • 2008: Proposed rulemaking is withdrawn. • 2011: FinCEN Director James Freis, Jr. announces discussion to propose a rule covering investment advisers once again. • 2013: FinCEN Director Jennifer Shasky Calvery repeats intention to release a proposed rule defining investment advisers as a financial institution. • 2015: On August 25, 2015, FinCEN issues a new notice of proposed rulemaking on AML programs and suspicious activity reporting for registered investment advisers. Comment period closed on November 2 with 29 comments received. Some investment advisers have a voluntary Anti-Money Laundering program (satisfy SEC broker dealer no-action letter). 7
Proposed Rule •
• •
• •
Proposal would require “investment advisers” to: • Implement AML programs. • Prepare and file suspicious activity reports (SARs). • Comply with other BSA/USA PATRIOT Act provisions applicable to “financial institutions” (e.g., currency transaction reporting and the travel rule). Definition of “investment adviser” covers all advisers who are registered or required to be registered with the SEC. Requires implementation of AML program consistent with the four pillars. • Program must cover all of the investment advisers activities, including advisory services that do not include the management of client assets. • If investment adviser is dually registered as a broker dealer, can have one program enterprise-wide program or two programs. • Can delegate aspects of program to third parties, but investment advisers remain ultimately responsible for compliance. Expects investment advisers to analyze the money laundering and terrorist finance risks posed by clients using a risk-based approach. 8 SEC would be delegated authority to examine RIA AML programs.
Scope of Coverage • •
•
•
Coverage of all RIAs would result in duplicative coverage in certain cases (e.g., advisers to RICs, dual registrants). In other cases, there appears to be limited benefit to subjecting certain types of RIAs to AML requirements. • E.g., non-custodial and non-discretionary advisers often have little or no visibility to both trading and cash moves by clients. • FinCEN requested comment in this area, but as yet uncertain if any exemptions will be created, or if they will be client- or firm-specific. In other cases, while RIAs may have some relevant information, they may have less access to information than other parties servicing the client’s account, which could suggest a “third-party reliance” approach – for example: • Sub-advisers (reliance on primary adviser) • Integrated financial service institutions (reliance on other regulated affiliates/service providers) Some precedent for third-party reliance under SIFMA letter (i.e., brokerdealers relying upon RIAs). 9
Pre-Implementation Risk Assessment •
Firms should conduct a risk assessment prior to implementing an AML program (and periodically thereafter). Subject to firmspecific considerations, the assessment should generally consider: • Products/accounts/services you offer • Types of clients you have: Individuals vs entities • Clients’ locations – U.S. vs. Non-U.S. • Source of new clients referrals • Client on-boarding process • Source of client assets • Custody of client assets.
10
Current Practices (Poll) Question #2: • Does your RIA have custody of client accounts? A. No, or not applicable. B. No, and cash and securities are held at a custodian of the client’s choosing. C. No, but we recommend or require clients to use a particular custodian (or custodians). D. Yes, but technical custody only (due to fee deduction). E. Yes, and cash and securities are held by a qualified custodian of the client’s choosing. F. Yes, but cash and securities are held by a qualified custodian of our choosing. 11
Suspicious Activity Reporting •
•
•
Proposal also requires RIAs to engage in SAR reporting – must report transactions of $5,000 or more that the RIA suspects: • Involves or is meant to disguise funds derived from illegal activity • Is designed to evade AML rules or other BSA regulations • Has no business or apparent lawful purpose • Involves the use of the RIA to facilitate criminal activity SAR reporting obligations are ripe for coordination among affiliates and service providers. • Sharing within organizational structure among affiliates • Coordination with custodians Proposal does not provide specific guidance on sharing and its permissibility/substitution for separate reporting •
Practical considerations and current practices
•
Regulatory/enforcement views
•
Other potential avenues for coordination 12
RK1
Customer Identification Program •
•
•
Proposed rulemaking did not include a customer identification program (CIP) element • FinCEN stated that it expected to cover in later rulemaking – timing uncertain For currently regulated firms, CIP has been incorporated into their AML programs: • Requires specific customer identity verification procedures, including procedures where verification is not possible • Also include notice and recordkeeping requirements • Pending a proposed CIP rule, RIAs are not fully informed on what their AML programs will ultimately be required to cover • May lead to inefficiency and subsequent modifications to initial programs Practical considerations/current practice for regulated industries 13
Slide 13 RK1
Richard Kircher, 5/10/2016
Current Practices (Poll) Question #3: Does your RIA currently implement a voluntary Customer Identification Program (CIP)? A. Yes B. No
14
Staffing and Testing •
•
• •
Proposal includes requirements governing the approval and enforcement of the AML program: • AML program must be approved by management (e.g., board, GP, sole proprietor). • Firm must designate an AML Compliance Officer. • AML program must be tested by individuals who are not involved in implementation or oversight of the program. Not clear to what extent the AML program can be in the RIA’s existing compliance program. • For example, can AML Compliance Officer be the CCO? • Independent testing requirement may effectively result in forced outsourcing for certain RIAs. – For example, in 2015, 57.3% of RIAs reported having fewer than 10 non-clerical employees. Practical considerations/current practice for regulated industries Regulatory/enforcement views
15
Independent Testing (Poll) Question #4: Based on the independence requirements in the current proposal, how do you anticipate your firm would address the independent AML testing requirement? A. Outsourced/third-party testing B. In-house testing with existing staffing C. In-house testing, but make new hires
16
International Coordination • Proposal also raises questions about coordination among international affiliates and clients • Local laws may not permit sharing of certain client information across borders • Substituted compliance/recognition of comparable AML regimes • Application to RIAs headquartered outside of the U.S. • Practical issues/experience with international coordination • Regulatory/enforcement views
17
International Coordination (Poll) Question #5: Does your firm have a physical or business presence outside of the U.S.? A. No – solely U.S. clients and offices B. Yes – solely U.S. clients, but nonU.S. offices C. Yes – non-U.S. clients, but solely U.S. offices D. Yes – both non-U.S. clients and offices
18
Other Considerations • Currency Transaction Reporting and Travel Rule • Implementation Period and Timing • Regulatory/Enforcement Considerations
19
Anti-Money Laundering for Advisers Prepare for New Regulations! -- Continued
The Securities and Exchange Commission (“SEC”), as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues upon the staff of the Commission.
Create a Financial System that is Resistant to Abuse and Manipulation by Illicit Actors ◦ Deterrence based on Awareness of Reporting ◦ “Forced Errors” by Illicit Actors
Exploit the Financial Intelligence Generated
◦ Investigative Leads may Initiate New Investigations ◦ Support non-AML Mission as Well as AML Mission
21
Traditional BSA Obligations Apply to ◦ Broker-Dealers ◦ Mutual Funds
Key Differences Between Securities and Banking ◦ Cash Transactions ◦ Intermediation ◦ Placement Typologies
22
Securities Exchange Act Section 17(a) Rule 17a-8 (17 C.F.R. § 240.17a-8)
◦ Broker Dealers Must Comply with the Reporting, Recordkeeping and Record Retention Requirements of the BSA and its Implementing Regulations ◦ SAR Reporting ◦ CIP Rule
23
Investment Company Act Rule 38a-1 (17 C.F.R. § 270.38a-1)
◦ Mutual Fund Boards Must Adopt Written Policies and Procedures Reasonably Designed to Prevent Violations of the Federal Securities Laws, including the BSA and its Implementing Regulations ◦ SAR Reporting ◦ CIP Rule
24
Investment Advisers and Non-Bank Transfer Agents are Not Currently Subject to Any Specific AML Obligations. BSA Requirements Generally Applicable to Any “Person,” such as: ◦ ◦ ◦ ◦
CMIR reporting CTR obligations (Form 8300) FBAR OFAC obligations
25
SEC Examination Referrals
◦ National Examination Program (NEP) ◦ Regional Office Staff
FINRA Referrals Tips, Complaints and Referrals (TCRs) Bank Secrecy Act Reporting Enforcement Investigations
26
Allegations of Securities Law Violations TCR Sources:
◦ General Public, Financial Industry Professionals, Whistleblowers ◦ Regulatory or Law Enforcement Agencies ◦ Internal/Self-Generated Referrals
Centrally Assessed and Researched Assigned Throughout SEC for Investigation ◦ 11 Regional Offices and Home Office Units
27
Review of SARs
◦ SARs Filed by or About SEC Registrants ◦ SARs Reporting Various Securities Laws Violations
Assessment, Research, and Allocation
28
Serious AML Non-Compliance
◦ “Books and Records” Violations – CIP and SAR Filing ◦ Penalties for Firm and Individuals
Securities Violations
◦ Suspicious Activity Reports as Leads ◦ Financial Intelligence
29
Administrative Proceedings ◦ Exchange Act § 21B
Cease and Desist Proceedings ◦ Exchange Act § 21C
Civil Actions
◦ Exchange Act § 21(d)
30
Available Remedies ◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦
Accounting and Disgorgement; Interest Cease and Desist Order Undertakings Temporary Freeze Temporary or Permanent Injunction Suspension/Revocation Civil Money Penalties Industry Bar – Temporary or Permanent
Officer and Director Bar (Certain Violations) Collateral Bar (Dodd-Frank) 31
Three Tier System
◦ First Tier – Any Violation
Fixed Penalties or Maximum of Gross Pecuniary Gain
◦ Second Tier – Fraud, Deceit, Manipulation, or Deliberate or Reckless Disregard of a Regulatory Requirement
Fixed Penalties or Maximum of Gross Pecuniary Gain
◦ Third Tier – Second Tier Violation that Directly or Indirectly Resulted in Actual or Significant Risk of Substantial Losses to Others
Fixed Penalties or Maximum of Gross Pecuniary Gain
32
Microcap Securities
◦ Gatekeepers – Attorneys, Auditors, Promoters
Master/Sub or Omnibus Accounts
◦ Obscured Beneficiaries and Customers
Direct Market Access Retail Level Fraud
◦ Ponzi Schemes, Offering Fraud, Elder Abuse
Little or No Securities Trading on Accounts ◦ Pass-Through Transactions
33
34
May 12, 2016
Panelists •
PAUL D. GLENN is Special Counsel for the Investment Adviser Association. Previously, he worked for 14 years at the U.S. Securities and Exchange Commission as a trial attorney and special counsel in the Division of Enforcement and the Office of General Counsel, respectively. He also worked at the Office of the Comptroller of the Currency (OTS), US Treasury, as Deputy Chief Counsel and Special Counsel. Mr. Glenn also served as Vice President and Director of Compliance for PNC Bank N.A. in Washington, DC, (formerly Riggs) and WashingtonFirstBank N.A. in Reston, VA. He holds an LL.M from Georgetown University Law Center and his J.D. and B.A. from Case Western Reserve University. He holds an honorary doctor of laws degree from Nyack College.
•
CHRISTIAN B. HENNION is a partner at Katten Muchin Rosenman LLP and concentrates his practice in financial services and asset management matters, including counseling fund managers, registered investment advisers and commodity trading advisors on both transactional and regulatory matters. Mr. Hennion has advised a wide range of US and international managers, from start-ups to large institutions, on matters relating to the SEC and CFTC including registrations and examinations and related corporate and transactional matters. He is experienced with the preparation and negotiation of offering and advisory documents for asset management firms, and SEC and CFTC regulatory requirements and applicable filings. Mr. Hennion was an executive articles editor of the Chicago-Kent Law Review and a judicial extern to the Honorable Samuel Der-Yeghiayan of the US District Court, Northern District of Illinois. 2
Panelists (cont.) •
RICHARD T. KIRCHER is the Assistant Director, Operational Compliance, Legal & Compliance Division at Putnam Investments in Boston. He manages teams responsible for administering the Bank Secrecy Act, USA PATRIOT Act, and OFAC compliance programs adopted by the Putnam mutual funds, the funds’ underwriter and distributor, and Putnam’s captive trust company. Mr. Kircher supports the Putnam fund’s distributor and transfer agent in administering various fund compliance programs. Mr. Kircher also supports Putnam’s investment adviser, transfer agent, and broker-dealer recordkeeping compliance programs. Prior to joining Putnam in 1998, Mr. Kircher was a Compliance Manager at T. Rowe Price Associates. He graduated from Washington College, Chestertown, MD, B.A.
•
ERIC KRINGEL is the Bank Secrecy Act Specialist in the SEC’s Division of Enforcement, where he administers the Division’s BSA Review Program, leads the Division’s Rule 17a-8 Working Group, and works with colleagues on a wide range of AML and BSA policy issues. Mr. Kringel joined the SEC from the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) where, over the course of seven years, he served as Senior Advisor in the Analysis and Liaison Division, Acting Assistant Director of the Office of Law Enforcement Support, and as Senior Policy Advisor to three consecutive Directors. Prior to that, Mr. Kringel was an attorney in the Bureau of Alcohol, Tobacco, and Firearms’ Office of Chief Counsel, and a contract attorney in the Department of Justice’s Asset Forfeiture and Money Laundering Section. He is a graduate of the University of Nebraska and American University’s Washington College of 3 Law.
Agenda • Introduction and Panelists • Announcements – Customer Due Diligence rule and FinCEN changes • Background on AML Rule for Investment Advisers • Polling questions • Pre-Implementation Risk Assessment • Suspicious Activity Reporting (SARs), Customer Identification Program (CIP), Staffing and Testing • International • SEC oversight 4
Background • •
•
1970: Bank Secrecy Act. • Primarily a reporting and recordkeeping statute. 2001: USA PATRIOT Act. • Required all entities defined as “financial institutions” to implement an effective AML program. • Certain types of entities covered by the statute; other categories can be created by rule. • Minimum statutory requirements found in § 5318(h): • Develop internal policies, procedures and controls. • Designate a compliance officer. • Maintain an ongoing employee training program. • Conduct an independent audit function to test programs. • Statute supplemented by industry specific regulations. • E.g., Broker-Dealer specific regulations (Part 1023). Investment advisers not presently included in the BSA’s definition of “financial institution.” 5
Current Practices (Poll) Question #1: Does your RIA currently voluntary AML program? • A. Yes • B. No
implement
a
6
Background (cont.) •
•
Long-running discussions to bring investment advisers under the BSA umbrella: • 2003: Financial Crimes Enforcement Network (FinCEN) published a proposed rule to subject certain investment advisers and hedge funds to AML program requirements. • 2008: Proposed rulemaking is withdrawn. • 2011: FinCEN Director James Freis, Jr. announces discussion to propose a rule covering investment advisers once again. • 2013: FinCEN Director Jennifer Shasky Calvery repeats intention to release a proposed rule defining investment advisers as a financial institution. • 2015: On August 25, 2015, FinCEN issues a new notice of proposed rulemaking on AML programs and suspicious activity reporting for registered investment advisers. Comment period closed on November 2 with 29 comments received. Some investment advisers have a voluntary Anti-Money Laundering program (satisfy SEC broker dealer no-action letter). 7
Proposed Rule •
• •
• •
Proposal would require “investment advisers” to: • Implement AML programs. • Prepare and file suspicious activity reports (SARs). • Comply with other BSA/USA PATRIOT Act provisions applicable to “financial institutions” (e.g., currency transaction reporting and the travel rule). Definition of “investment adviser” covers all advisers who are registered or required to be registered with the SEC. Requires implementation of AML program consistent with the four pillars. • Program must cover all of the investment advisers activities, including advisory services that do not include the management of client assets. • If investment adviser is dually registered as a broker dealer, can have one program enterprise-wide program or two programs. • Can delegate aspects of program to third parties, but investment advisers remain ultimately responsible for compliance. Expects investment advisers to analyze the money laundering and terrorist finance risks posed by clients using a risk-based approach. 8 SEC would be delegated authority to examine RIA AML programs.
Scope of Coverage • •
•
•
Coverage of all RIAs would result in duplicative coverage in certain cases (e.g., advisers to RICs, dual registrants). In other cases, there appears to be limited benefit to subjecting certain types of RIAs to AML requirements. • E.g., non-custodial and non-discretionary advisers often have little or no visibility to both trading and cash moves by clients. • FinCEN requested comment in this area, but as yet uncertain if any exemptions will be created, or if they will be client- or firm-specific. In other cases, while RIAs may have some relevant information, they may have less access to information than other parties servicing the client’s account, which could suggest a “third-party reliance” approach – for example: • Sub-advisers (reliance on primary adviser) • Integrated financial service institutions (reliance on other regulated affiliates/service providers) Some precedent for third-party reliance under SIFMA letter (i.e., brokerdealers relying upon RIAs). 9
Pre-Implementation Risk Assessment •
Firms should conduct a risk assessment prior to implementing an AML program (and periodically thereafter). Subject to firmspecific considerations, the assessment should generally consider: • Products/accounts/services you offer • Types of clients you have: Individuals vs entities • Clients’ locations – U.S. vs. Non-U.S. • Source of new clients referrals • Client on-boarding process • Source of client assets • Custody of client assets.
10
Current Practices (Poll) Question #2: • Does your RIA have custody of client accounts? A. No, or not applicable. B. No, and cash and securities are held at a custodian of the client’s choosing. C. No, but we recommend or require clients to use a particular custodian (or custodians). D. Yes, but technical custody only (due to fee deduction). E. Yes, and cash and securities are held by a qualified custodian of the client’s choosing. F. Yes, but cash and securities are held by a qualified custodian of our choosing. 11
Suspicious Activity Reporting •
•
•
Proposal also requires RIAs to engage in SAR reporting – must report transactions of $5,000 or more that the RIA suspects: • Involves or is meant to disguise funds derived from illegal activity • Is designed to evade AML rules or other BSA regulations • Has no business or apparent lawful purpose • Involves the use of the RIA to facilitate criminal activity SAR reporting obligations are ripe for coordination among affiliates and service providers. • Sharing within organizational structure among affiliates • Coordination with custodians Proposal does not provide specific guidance on sharing and its permissibility/substitution for separate reporting •
Practical considerations and current practices
•
Regulatory/enforcement views
•
Other potential avenues for coordination 12
RK1
Customer Identification Program •
•
•
Proposed rulemaking did not include a customer identification program (CIP) element • FinCEN stated that it expected to cover in later rulemaking – timing uncertain For currently regulated firms, CIP has been incorporated into their AML programs: • Requires specific customer identity verification procedures, including procedures where verification is not possible • Also include notice and recordkeeping requirements • Pending a proposed CIP rule, RIAs are not fully informed on what their AML programs will ultimately be required to cover • May lead to inefficiency and subsequent modifications to initial programs Practical considerations/current practice for regulated industries 13
Slide 13 RK1
Richard Kircher, 5/10/2016
Current Practices (Poll) Question #3: Does your RIA currently implement a voluntary Customer Identification Program (CIP)? A. Yes B. No
14
Staffing and Testing •
•
• •
Proposal includes requirements governing the approval and enforcement of the AML program: • AML program must be approved by management (e.g., board, GP, sole proprietor). • Firm must designate an AML Compliance Officer. • AML program must be tested by individuals who are not involved in implementation or oversight of the program. Not clear to what extent the AML program can be in the RIA’s existing compliance program. • For example, can AML Compliance Officer be the CCO? • Independent testing requirement may effectively result in forced outsourcing for certain RIAs. – For example, in 2015, 57.3% of RIAs reported having fewer than 10 non-clerical employees. Practical considerations/current practice for regulated industries Regulatory/enforcement views
15
Independent Testing (Poll) Question #4: Based on the independence requirements in the current proposal, how do you anticipate your firm would address the independent AML testing requirement? A. Outsourced/third-party testing B. In-house testing with existing staffing C. In-house testing, but make new hires
16
International Coordination • Proposal also raises questions about coordination among international affiliates and clients • Local laws may not permit sharing of certain client information across borders • Substituted compliance/recognition of comparable AML regimes • Application to RIAs headquartered outside of the U.S. • Practical issues/experience with international coordination • Regulatory/enforcement views
17
International Coordination (Poll) Question #5: Does your firm have a physical or business presence outside of the U.S.? A. No – solely U.S. clients and offices B. Yes – solely U.S. clients, but nonU.S. offices C. Yes – non-U.S. clients, but solely U.S. offices D. Yes – both non-U.S. clients and offices
18
Other Considerations • Currency Transaction Reporting and Travel Rule • Implementation Period and Timing • Regulatory/Enforcement Considerations
19
Anti-Money Laundering for Advisers Prepare for New Regulations! -- Continued
The Securities and Exchange Commission (“SEC”), as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues upon the staff of the Commission.
Create a Financial System that is Resistant to Abuse and Manipulation by Illicit Actors ◦ Deterrence based on Awareness of Reporting ◦ “Forced Errors” by Illicit Actors
Exploit the Financial Intelligence Generated
◦ Investigative Leads may Initiate New Investigations ◦ Support non-AML Mission as Well as AML Mission
21
Traditional BSA Obligations Apply to ◦ Broker-Dealers ◦ Mutual Funds
Key Differences Between Securities and Banking ◦ Cash Transactions ◦ Intermediation ◦ Placement Typologies
22
Securities Exchange Act Section 17(a) Rule 17a-8 (17 C.F.R. § 240.17a-8)
◦ Broker Dealers Must Comply with the Reporting, Recordkeeping and Record Retention Requirements of the BSA and its Implementing Regulations ◦ SAR Reporting ◦ CIP Rule
23
Investment Company Act Rule 38a-1 (17 C.F.R. § 270.38a-1)
◦ Mutual Fund Boards Must Adopt Written Policies and Procedures Reasonably Designed to Prevent Violations of the Federal Securities Laws, including the BSA and its Implementing Regulations ◦ SAR Reporting ◦ CIP Rule
24
Investment Advisers and Non-Bank Transfer Agents are Not Currently Subject to Any Specific AML Obligations. BSA Requirements Generally Applicable to Any “Person,” such as: ◦ ◦ ◦ ◦
CMIR reporting CTR obligations (Form 8300) FBAR OFAC obligations
25
SEC Examination Referrals
◦ National Examination Program (NEP) ◦ Regional Office Staff
FINRA Referrals Tips, Complaints and Referrals (TCRs) Bank Secrecy Act Reporting Enforcement Investigations
26
Allegations of Securities Law Violations TCR Sources:
◦ General Public, Financial Industry Professionals, Whistleblowers ◦ Regulatory or Law Enforcement Agencies ◦ Internal/Self-Generated Referrals
Centrally Assessed and Researched Assigned Throughout SEC for Investigation ◦ 11 Regional Offices and Home Office Units
27
Review of SARs
◦ SARs Filed by or About SEC Registrants ◦ SARs Reporting Various Securities Laws Violations
Assessment, Research, and Allocation
28
Serious AML Non-Compliance
◦ “Books and Records” Violations – CIP and SAR Filing ◦ Penalties for Firm and Individuals
Securities Violations
◦ Suspicious Activity Reports as Leads ◦ Financial Intelligence
29
Administrative Proceedings ◦ Exchange Act § 21B
Cease and Desist Proceedings ◦ Exchange Act § 21C
Civil Actions
◦ Exchange Act § 21(d)
30
Available Remedies ◦ ◦ ◦ ◦ ◦ ◦ ◦ ◦
Accounting and Disgorgement; Interest Cease and Desist Order Undertakings Temporary Freeze Temporary or Permanent Injunction Suspension/Revocation Civil Money Penalties Industry Bar – Temporary or Permanent
Officer and Director Bar (Certain Violations) Collateral Bar (Dodd-Frank) 31
Three Tier System
◦ First Tier – Any Violation
Fixed Penalties or Maximum of Gross Pecuniary Gain
◦ Second Tier – Fraud, Deceit, Manipulation, or Deliberate or Reckless Disregard of a Regulatory Requirement
Fixed Penalties or Maximum of Gross Pecuniary Gain
◦ Third Tier – Second Tier Violation that Directly or Indirectly Resulted in Actual or Significant Risk of Substantial Losses to Others
Fixed Penalties or Maximum of Gross Pecuniary Gain
32
Microcap Securities
◦ Gatekeepers – Attorneys, Auditors, Promoters
Master/Sub or Omnibus Accounts
◦ Obscured Beneficiaries and Customers
Direct Market Access Retail Level Fraud
◦ Ponzi Schemes, Offering Fraud, Elder Abuse
Little or No Securities Trading on Accounts ◦ Pass-Through Transactions
33
34
