SEC Enforcement Sends Clear Message That "AML Obligations Are Sacrosanct"

• Published date: 30 May 2022
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Government, Public Sector, Financial Services, Compliance, Corporate and Company Law, Money Laundering, Securities
• Law Firm: Arnold & Porter
• Author: Ms Kathleen Reilly, Kevin M. Toomey and Paul Q. Andrews

On May 20, 2022, the US Securities and Exchange Commission settled charges against a dually registered broker-dealer and investment adviser, which also is a subsidiary and nonbank affiliate of a bank holding company, for failing to file at least 34 Suspicious Activity Reports (SARs) in a timely manner. According to the findings in the SEC order, which the company neither admitted nor denied, the failure to file SARs resulted from two technical breakdowns in the implementation and testing of the company's compliance process for anti-money laundering (AML) transaction monitoring. Despite the technical nature of the violations, and even with the company's full cooperation and remedial efforts, the company agreed to pay a $7 million penalty. The action is a good reminder for all broker-dealers and financial services companies of the overlapping enforcement regime among their regulators.

Section 17(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 17a-8 thereunder requires every registered broker-dealer subject to the Bank Secrecy Act (BSA) to comply with the recordkeeping requirements set forth by the US Treasury's Financial Crimes Enforcement Network (FinCEN). In turn, FinCEN has promulgated regulations that require broker-dealers to file a SAR when a transaction is relevant to a possible violation of law or regulation. As discussed in a prior Advisory, the Second Circuit recently affirmed the SEC's independent authority as the primary federal regulator of broker-dealers to enforce Rule 17a-8 and its requirements to comply with the BSA. See United States Sec. & Exch. Comm'n v. Alpine Sec. Corp., 982 F.3d 68, 77 (2d Cir. 2020), cert. denied, 142 S. Ct. 461, (2021).

Here, the hook for enforcement by the Commission was compliance monitoring. According to the recent order, there were two technical compliance failures that led to the enforcement action, both of which involved the company's AML transaction monitoring system:

• First, after transitioning to a new AML transaction monitoring system in 2019, the new system did not properly cross-reference certain country codes when monitoring wire transfers made to foreign countries. As a result, brokerage customers with transactions in certain high-risk or moderate-risk countries did not trigger alerts in the monitoring system for further review and no SARs were filed. This cross-reference issue was identified to the company during an annual exam conducted by the Financial Industry Regulatory Authority...