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BDs' Anti-Money Laundering Policies Fall Short: SEC

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The Securities and Exchange Commission on Monday alerted broker-dealers to deficiencies found during exams as it relates to key anti-money laundering requirements.

According to the Risk Alert, some BDs “did not appear to devote sufficient resources, including staffing, to AML compliance given the volume and risks of their business.”

This issue can be exacerbated, the SEC warned, “in the current environment of new and increasing sanctions imposed by the Office of Foreign Assets Control (OFAC) against individuals and entities, particularly where the same firm personnel perform both AML and sanctions compliance functions.”

The agency’s Risk Alert also details observations about other key AML requirements, “such as independent testing of firms’ AML programs and training of their personnel, and identification and verification of customers and their beneficial owners,” the alert explains.

The SEC’s exam division also noticed that “the effectiveness of policies, procedures and internal controls was reduced when firms did not implement those measures consistently.”

As the alert explains, all U.S. persons, including broker-dealers as well as investment advisors and registered investment companies, “must comply with regulations promulgated by OFAC, which administers and enforces sanctions against certain jurisdictions and foreign persons based on U.S. foreign policy and national security interests.”

During exams for compliance with the federal securities laws and the Bank Secrecy Act, SEC exam staff observed certain weaknesses in OFAC compliance programs, including instances in which entities did not adopt or implement reasonable, risk-based internal controls for:

  • Following up on potential matches with the sanctions lists and documenting the outcome of such follow-up.
  • Performing periodic or event-based screening of existing clients or customers based on, among other things, changes in ownership or to the sanctions lists.
  • Conducting OFAC searches in a timely manner (or documenting that such searches were completed).

The SEC exam team also found instances where broker-dealers whose Customer Identification Program, or CIPs, “appeared not to be properly designed to enable the firm to form a reasonable belief that it knows the true identity of customers.”

The SEC staff also observed broker-dealers that had not updated their AML programs and, as appropriate, new account forms and procedures to account for the adoption of the Customer Due Diligence, or CDD, Rule.

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