SEC Flags Weak Policies and Staffing Issues with AML in Broker-Dealers

The U.S. Securities and Exchange Commission (SEC) has raised concerns about weak anti-money laundering (AML) policies and staffing issues within broker-dealers, highlighting the critical importance of AML compliance for investor asset safety and financial market integrity. The Division of Examinations conducted examinations of broker-dealers in 2021, focusing on AML and countering the financing of terrorism (CFT) requirements. A Risk Alert was issued by the Division, addressing compliance issues related to suspicious activity monitoring and reporting components of AML programs, as well as other key AML requirements.

One of the key observations made by the Division was the apparent lack of sufficient resources, including staffing, devoted to AML compliance in some broker-dealers. Given the volume and risks associated with their business, this deficiency poses a significant challenge. The current environment of new and increasing sanctions imposed by the Office of Foreign Assets Control (OFAC) against individuals and entities further adds to the complexity of AML and sanctions compliance functions for some firms. The need for distinct AML and sanctions compliance personnel is evident to maintain the effectiveness of policies, procedures, and internal controls.

The second general staff observation was related to the consistency of implementing measures. The effectiveness of AML programs diminished when firms failed to consistently implement the policies, procedures, and controls intended to mitigate money laundering risks. Consistency is vital in ensuring the efficacy of these measures in detecting and preventing financial crimes.

The Risk Alert also highlighted specific observations related to independent testing of AML programs and ongoing employee AML training. Some broker-dealers were found to have either delayed or inadequately conducted independent testing. Moreover, the effectiveness of testing was compromised when it did not cover all relevant aspects of the firm's business or AML program. The personnel conducting the testing lacked independence or sufficient knowledge of BSA requirements. Additionally, some firms failed to address issues identified by independent testing in a timely manner.

Regarding ongoing employee AML training, the SEC observed materials that were not updated based on changes in the law, such as the adoption of the Customer Due Diligence (CDD) Rule, or tailored to the specific risks and activities of the broker-dealer. Some firms could not demonstrate that all personnel attended the required training, raising concerns about the training process's efficacy.

The SEC's examination also scrutinized broker-dealers' compliance with the Customer Identification Program (CIP) Rule. The CIP Rule mandates that broker-dealers establish written procedures to identify and verify the identity of customers. However, some firms were found to have CIPs that did not adequately enable them to form a reasonable belief about their customers' true identity. Issues included the lack of appropriate CIP procedures for investors in private placements, incomplete or missing customer information, failure to verify customer identity, and a lack of appropriate use of exception reports.

Furthermore, the SEC reviewed broker-dealers' adherence to the Customer Due Diligence and Beneficial Ownership Requirements. These requirements necessitate firms to identify and verify the beneficial owners of legal entity customers. The staff observed that some firms had not updated their AML programs to account for the adoption of the CDD Rule. In addition, certain firms opened new accounts for legal entity customers without fully identifying their beneficial owners or verifying their identities adequately.

The SEC's Risk Alert underscores the importance of robust AML compliance in broker-dealers and encourages registrants to review and strengthen their AML policies, procedures, and internal controls. Compliance with federal AML rules and regulations is essential to safeguarding investor assets and maintaining the integrity of financial markets. Broker-dealers are advised to address the observations made by the SEC promptly and ensure consistent and effective implementation of AML measures to prevent money laundering risks effectively.