It appears that the SEC is beginning to use a new weapon against broker dealers and other financial institutions. The SEC recently filed suit in the Southern District of New York against a broker-dealer, alleging that it “routinely and systematically” violated the Bank Secrecy Act (BSA) by failing to file Suspicious Activity Reports (SARs) for stock transactions it had flagged as suspicious, and by filing SARs that omitted critical information, such as the customer’s history of criminal or regulatory violations or connections to foreign institutions. SARs pertain to reports of transactions or patterns of transactions involving at least $5,000 and the filer “knows, suspects, or has reason to suspect” that the transaction involves funds representing ill-gotten gains; is intended to hide funds from illegal activities; is designed to evade the BSA; or has no business or apparent lawful purpose.

The SEC alleges that the broker-dealer violated Section 17(a) of the Securities Exchange Act of 1934, (the Exchange Act in Section 10(b) generally prohibits fraud and misrepresentations in the sale of securities), and Rule 17a-8, which specifically requires broker-dealers to comply with the recordkeeping, retention, and reporting obligations of the BSA. Although the broker-dealer had an Anti-Money Laundering (AML)/BSA compliance program (as required for broker-dealers by both the BSA and FINRA Rule 3310), the complaint alleges that the defendant did not properly implement the program, and that required SARs either were deficient or were not filed at all, despite an earlier warning from FINRA. 

Under the BSA, broker-dealers and mutual funds must establish and implement written AML and customer identification programs, file SARs with the Financial Crimes Enforcement Network (FinCEN), and comply with other filing, due diligence and record keeping requirements. Further, the already broad reach of the BSA is expanding. In September 2015, FinCEN published a proposed rule that is expected to become a new regulation. It would require SEC-registered investment advisors to establish AML programs, file SARs, and comply with other filing and record-keeping requirements under the BSA. Violations of the BSA can represent both civil and criminal offenses.

Historically, AML and BSA enforcement has been pursued by the Department of Justice, FinCEN, federal bank examiners, the FBI, and the IRS. These agencies have extracted high-profile AML/BSA settlements from banks and other financial institutions. However, this recent action suggests that the SEC is going to bring BSA/AML cases against entities that have not typically faced this type of scrutiny. 

This most recent complaint filed by the SEC is not an isolated event, but rather part of a trend. Earlier this year, another broker dealer was charged in a similar civil enforcement action with failing to file SARs. These enforcement actions – and others – are consistent with the public pronouncements of the former SEC Enforcement Director, who has stated that the SEC Broker-Dealer Task Force must “pursue standalone BSA violations to send a clear message about the need for compliance.” 

Akin to the SEC's now-established role in pursuing alleged violations of the Foreign Corrupt Practices Act, another statute that historically had been the province of other enforcement agencies, the SEC has confirmed its desire to stake its own claim in AML/BSA enforcement. The securities industry must anticipate and meet this emerging trend. As the SEC's recent complaint reflects, a solid AML compliance plan is a must for any company covered by the BSA. Even more important is the effective real-world implementation of such a plan. 

Ballard Spahr's Securities Enforcement and Corporate Governance Group advises companies and their officers and directors on every type of securities and corporate governance claim – from derivative actions and regulatory or internal investigations to significant shareholder class actions. The firm's White Collar Defense/Internal Investigations Group represents clients across a range of industries in government investigations including regulatory actions, search warrants, and state and federal grand jury investigations. Our Anti-Money Laundering Group represents financial institutions, including banks, broker-dealers, and investment advisors. They help clients establish and refine AML procedures, advise on customer identification and due diligence, handle government exam preparation and response, conduct internal investigations, and respond to enforcement actions. They also represent individuals facing money laundering and monetary reporting investigations and litigation. To learn more, subscribe to our blog, Money Laundering Watch at www.moneylaunderingwatchblog.com.