Continuing AML Regulatory Issue Focus

• Published date: 23 October 2021
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Government, Public Sector, Financial Services, Money Laundering, Securities
• Law Firm: Bryan Cave Leighton Paisner LLP
• Author: Mr Jeffrey A. Ziesman and Shannon M. Wheaton

Garcia Case Highlights Necessity of Knowing Your Customer and Listening to Internal Fraud Watchdogs.

The SEC's recent Order against a broker-dealer (the 'Firm') imposed a $750,000 financial penalty for the Firm's failure to comply with its Customer Identification Program ('CIP') procedures and appropriately respond to other 'red flags' of malfeasance, all in violation of Section 17(a) of the Exchange Act and 17a-8 thereunder. The financial penalty was on top of the $3.3 million plus interest the Firm had already paid in restitution.

The underlying conduct, as outlined in the Order, related to an alleged fraud perpetrated by an unlicensed investment adviser against a municipal entity (all of which is discussed below).¹ The Order outlines how different departments within the Firm possessed relevant information of wrongdoing, yet this information was not shared adequately across departmental lines. The SEC's Order reminds firms of the importance of preventing information silos and ensuring critical know your customer ('KYC') information is appropriately bubbled up to management. This Order also demonstrates that anti-money laundering ('AML') issues continue to be a hot target for regulators in 2021, consistent with our prior client alert this year.

At the heart of the SEC's Order was the conduct of Garcia, who the Order found essentially acted as an unregistered investment adviser.² In particular, Garcia provided investment advice to a municipal corporation in Puerto Rico known as Mayaguez Economic Development, Inc. ('MEDI'). Garcia first opened an investment account at a brokerage firm (which the SEC did not name in its Order) with over $9 million of MEDI's funds, and purchased U.S. Treasuries notes. Garcia subsequently successfully wired out $4.1 million from that account.

Garcia then attempted to open an account for MEDI at the Firm. The Order found that the Firm had fallen short in its CIP requirements in two respects. First, the Firm's registered representative who handled Garcia's account application failed to verify that Garcia matched the photo ID he presented. Second, the Firm failed to notice that the address in Puerto Rico that Garcia provided for MEDI did not match the address in MEDI's corporate documents.

Further, Garcia attempted to transfer to the Firm a margin balance of $4.1 million, which drew the attention of the Firm's Financial Intelligence Unit ('FIU'). The FIU, after conducting an investigation, recommended that the Firm reject...