Anti-Money Laundering (AML) Source Tool for Broker-Dealers

Date: January 14, 2010

This research guide, or “source tool,” is a compilation of key AML laws, rules, and guidance applicable to broker-dealers. Several statutory and regulatory provisions, and related rules of the securities self-regulatory organizations (SROs), impose AML obligations on broker-dealers. There is also a wealth of related AML guidance materials. To aid research efforts into AML requirements and to assist broker-dealer compliance efforts, this source tool organizes key AML compliance materials and provides related source information.

When using this research “tool” or guide, you should keep the following in mind:

First, securities firms are responsible for complying with all applicable AML requirements. Although this research guide summarizes some of the key broker-dealer AML obligations, it is not comprehensive. You should not rely on the summary information provided, but should refer to the actual statutes, rules, orders, and interpretations.

Second, AML rules, regulations, and orders are subject to change and may change quickly. While the information summarized in this guide is current as of January 14, 2010, please note that in July 2007, the SEC approved the establishment of the Financial Industry Regulatory Authority (FINRA). FINRA consolidated the former NASD and the member regulation, enforcement, and arbitration operations of NYSE Regulation. The Source Tool reflects the historical issuance of AML rules and guidance by the NASD and NYSE as well as new rules and guidance issued by FINRA.

Finally, you will find a list of telephone numbers and useful websites at the end of this guide. If you have questions concerning the meaning, application, or status of a particular law, rule, order, or interpretation, you should consult with an attorney experienced in the areas covered by this guide.

This compilation was prepared by staff in the Office of Compliance Inspections and Examinations (OCIE), Securities and Exchange Commission. The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed in this document are those of the staff and do not necessarily represent the views of the Commission, or other Commission staff.¹

TABLE OF CONTENTS

The following topics are addressed in this guide:

1. The Bank Secrecy Act
    
2. The USA PATRIOT Act
    
3. AML Compliance Programs
    
4. Customer Identification Programs
    
5. Correspondent Accounts: Prohibition on Foreign Shell Banks and Due Diligence Programs
    
6. Due Diligence Programs for Private Banking Accounts
    
7. Suspicious Activity Monitoring and Reporting
    
8. Other BSA Reports
    
9. Records of Funds Transfers
    
10. Information Sharing With Law Enforcement and Financial Institutions
     
11. Special Measures Imposed by the Secretary of the Treasury
     
12. Office of Foreign Asset Control (OFAC) Sanctions Programs and Other Lists
     
13. Selected Additional AML Resources
     
14. Useful Contact Information

1. The Bank Secrecy Act

The Bank Secrecy Act (BSA), initially adopted in 1970, established the basic framework for anti-money laundering obligations imposed on financial institutions. Among other things, it authorizes the Secretary of the Treasury (Treasury) to issue regulations requiring financial institutions (including broker-dealers) to keep records and file reports on financial transactions that may be useful in investigations and prosecuting money laundering and other financial crimes. The Financial Crimes Enforcement Network (FinCEN), a bureau within Treasury, is the administrator of the BSA.

Rule 17a-8 under the Securities Exchange Act of 1934 (Exchange Act) requires broker-dealers to comply with the reporting, recordkeeping, and record retention requirements adopted under the BSA.

Source Documents:

• Bank Secrecy Act: The Bank Secrecy Act is codified at 31 U.S.C. §§ 5311 et seq. and is available at:
   
  http://www4.law.cornell.edu/uscode/html/
  uscode31/usc_sup_01_31_08_IV_10_53_20_II.html
   
• Bank Secrecy Act Rules: The rules adopted by Treasury implementing the BSA are located at 31 C.F.R. Part 103 and are available at:
   
  http://www.access.gpo.gov/nara/cfr/waisidx_09/31cfr103_09.html

• Exchange Act Rule 17a-8: 17 C.F.R. § 240.17a-8.
   

2. The USA PATRIOT Act

The official title of the USA PATRIOT Act is “Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT Act) Act of 2001.” The USA PATRIOT Act, enacted by Congress in 2001 in response to the September 11, 2001 terrorist attacks, (among other things) amended and strengthened the BSA . It imposed a number of AML obligations directly on broker-dealers, including:

• AML compliance programs;
   
• customer identification programs;
   
• monitoring, detecting, and filing reports of suspicious activity;
   
• due diligence on foreign correspondent accounts, including prohibitions on transactions with foreign shell banks;
   
• due diligence on private banking accounts;
   
• mandatory information-sharing in response to requests by federal law enforcement); and
   
• compliance with “special measures” imposed by the Secretary of the Treasury to address particular AML concerns.

Source Document:

• USA PATRIOT Act: Title 3 of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Pub. L. No. 107-56, 115 Stat. 296 (2001). The text is available at:
   
  http://www.sec.gov/about/offices/ocie/aml/patriotact2001.pdf

3. AML Compliance Programs

Section 352 of the USA PATRIOT ACT amended the BSA to require financial institutions, including broker-dealers, to establish AML programs. Broker-dealers can satisfy this requirement by implementing and maintaining an AML compliance program that complies with SRO rule requirements. In September 2009, the SEC approved FINRA's new AML compliance rule, FINRA Rule 3310. FINRA's new rule adopts NASD Rule 3011 and most of NASD IM-3011-1 and deletes NYSE Rule 445 as duplicative. As with NASD Rule 3011 and NYSE Rule 445, FINRA Rule 3310 will require member organizations to establish risk-based AML compliance programs. Please note, however, that FINRA Rule 3310 will not contain the exception in NASD IM-3011-1 to the independent testing requirement. FINRA Rule 3310 is effective on January 1, 2010.

An AML program must be in writing and include, at a minimum:

• policies, procedures, and internal controls reasonably designed to achieve compliance with the BSA and its implementing rules;
   
• policies and procedures that can be reasonably expected to detect and cause the reporting of transactions under 31 U.S.C. 5318(g) and the implementing regulations thereunder;
   
• the designation of an AML compliance officer (AML Officer), including notification to the SROs;
   
• ongoing AML employee training; and
   
• an independent test of the firm’s AML program, annually for most firms.

Source Documents:

• AML Program Rule: 31 C.F.R. § 103.120.
   
• Final Rule Release: 67 Fed. Reg. 21110 (April 29, 2002).
   
• SEC Order Approving FINRA AML Compliance Program Rule: Exchange Act Release No. 60645 (September 10, 2009). See also 74 Fed. Reg. 47630 (September 16, 2009).
   
• Historical Source Documents: Please note that the NYSE and NASD rules noted below have now been incorporated into a new FINRA Rule 3310 (see above). The information below is provided for historical purposes, and may still contain useful guidance.
   
• SEC Order Approving Initial NASD and NYSE AML Compliance Program Rules:
   
• Exchange Act Release No. 45798 (April 22, 2002). See also 67 Fed. Reg. 20854 (April 26, 2002).
   
• NYSE AML Compliance Program Rules and Related Guidance:
   
  
  • NYSE Rule 445: Anti-Money Laundering Compliance Program.
     
  • SEC Release Approving NYSE Amendment to Rule 445: Exchange Act Release No. 53176 (January 25, 2006). See also 71 Fed. Reg. 5392 (February 1, 2006). (The rule amendments refine AML compliance program requirements relating to independence, testing, and AML Officer notifications.)
     
  • Other Related NYSE Guidance:
     
  • IM-02-16: Anti-Money Laundering Compliance Requirements (April 12, 2002).
     
  • IM 02-21: Approval of New Rule 445 — Anti-Money Laundering Compliance Program (May 6, 2002).
     
  • IM 03-48: Rule 445 — Initial Anti-Money Laundering Audit (October 23, 2003).
     
  • IM 06-04: Amendments to Rule 445 (February 3, 2006).
     
• NASD AML Compliance Program Rules and Related Guidance
  • NASD Rule 3011: Anti-Money Laundering Compliance Program.
     
  • IM-3011-1: Independent Testing Requirements.
     
  • IM-3011-2: Review of Anti-Money Laundering Compliance Person Information.
     
  • SEC Release Approving NASD Amendment to Rule 3011: Exchange Act Release No. 53030 (December 28, 2005). See also 71 Fed. Reg. 632 (January 5, 2006). (The rule amendments refine AML compliance program requirements relating to independence, testing, and AML Officer notifications).
     
  • Other Related NASD Guidance:
     
  • NTM 02-21: NASD Provides Guidance to Member Firms Concerning Anti-Money Laundering Compliance Programs Required by Federal Law (April 2002).²
     
  • NTM 02-78: NASD Adopts Amendments to Rule 3011 to Require Members to Provide to NASD Contact Information for an Anti-Money Laundering Compliance Person(s) (November 2002).
     
  • NTM 06-07: SEC Approves Amendments to Anti-Money Laundering Compliance Program Rule and Adoption of Interpretative Material (February 2006).
     
  • FINRA Small Firm Template: The template provides model language for AML program compliance and supervisory procedures and is available on the FINRA website at:
     
    http://www.finra.org/RulesRegulation/IssueCenter/Anti-MoneyLaundering/p006340.
     
  • FINRA AML Frequently Asked Questions: The Qs and As are available on the FINRA website at:
     
    http://answers.atgnow.com/finra/
    categoryBrowse.do?category=/Topics/Securities%20Firms/
    Anti-Money%20Laundering

4. Customer Identification Programs

Section 326 of the USA PATRIOT Act amended the BSA to require financial institutions, including broker-dealers, to establish written customer identification programs (CIP). Treasury’s implementing rule requires a broker-dealer’s CIP to include, at a minimum, procedures for:

• obtaining customer identifying information from each customer prior to account opening;
   
• verifying the identity of each customer, to the extent reasonable and practicable, within a reasonable time before or after account opening;
   
• making and maintaining a record of information obtained relating to identity verification;
   
• determining whether a customer appears on any list of known or suspected terrorist organizations designated by Treasury within a reasonable time after account opening or earlier;³ and
   
• providing each customer with adequate notice, prior to opening an account, that information is being requested to verify the customer’s identity.

The CIP rule provides that, under certain defined circumstances, broker-dealers may rely on the performance of another financial institution to fulfill some or all of the requirements of the broker-dealer's CIP. For example, in order for a broker-dealer to rely on the other financial institution the reliance must be reasonable. The other financial institution also must be subject to an AML compliance program rule and be regulated by a federal functional regulator. The broker-dealer and other financial institution must enter into a contract and the other financial institution must certify annually to the broker-dealer that it has implemented an AML program. The other financial institution must also certify to the broker-dealer that the financial institution will perform the specified requirements of the broker-dealer's CIP.

Source Documents:

• Customer Identification Program Rule: 31 C.F.R. § 103.122.
   
• Final Rule Release: Exchange Act Release No. 47752 (April 29, 2003). See also 68 Fed. Reg. 25113 (May 9, 2003).
   
• Other Related Documents:
   
• Proposed Rule: Exchange Act Release No. 46192 (July 12, 2002). See also 67 Fed. Reg. 48306 (July 23, 2002).
   
• Treasury Department Provides Guidance on Compliance with Section 326 of the USA PATRIOT ACT: PO-3530 (October 11, 2002).⁴
   
• Withdrawal of the Notice of Proposed Rulemaking; Anti-Money Laundering Programs for Investment Advisers: 73 Fed. Reg. 65568 (October 30, 2008).
   
• FinCEN Guidance:
   
  
  • Guidance: Customer Identification Program Rule No-Action Position Respecting Broker-Dealers Operating Under Fully Disclosed Clearing Agreements According to Certain Functional Allocations (FIN-2008-G002; March 4, 2008)
     
  • Ruling: Bank Secrecy Act Obligations of a U.S. Clearing Broker-Dealer Establishing a Fully Disclosed Clearing Relationship with a Foreign Financial Institution (FIN-2008-R008; June 3, 2008)
     
• SEC Staff Guidance:
   
  
  • Staff Q&A Regarding the Broker-Dealer Customer Identification Program Rule (October 1, 2003). (The Q&A provides staff guidance regarding when a broker-dealer maintaining an “omnibus account” for a financial intermediary may treat the financial intermediary as the “customer” for CIP purposes.)
     
  • No-Action Letters to the Securities Industry Association (“SIA”) (February 12, 2004; February 10, 2005; July 11, 2006; January 10, 2008; and January 11, 2010). (The letters provide staff guidance regarding the extent to which a broker-dealer may rely on an investment adviser to conduct the required elements of the CIP rule, prior to such adviser being subject to an AML rule.)
     
  • Staff Q&A Regarding Broker-Dealer CIP Rule Responsibilities under the Agency Lending Disclosure Initiative (April 26, 2006). (The Q&A provides staff guidance on the application of the CIP rule to the Agency Lending Disclosure Initiative.)
     
• NYSE Guidance:
   
• IM 02-46: Compliance with Section 326 (“Verification of Identification”) of the USA Patriot Act (October 31, 2002).
   
• IM 03-32: Customer Identification Programs For Broker-Dealers (July 14, 2003).
   
• NASD Guidance:
   
• NTM 02-50: Treasury and SEC Request Comment on Proposed Regulation Regarding Broker/Dealer Anti-Money Laundering Customer Identification Requirements (August 2002).
   
• NTM 03-34: Treasury and SEC Issue Final Rule Regarding Customer Identification Programs for Broker/Dealers (June 2003).
   
• NASD Customer Identification Program Notice (2003).
   
• NASD Comparison of the AML Customer Identification Rule and the SEC’s Books & Records Customer Account Records Rule (2003).

5. Correspondent Accounts: Prohibition on Foreign Shell Banks and Due Diligence Programs

Overview: Sections 312, 313, and 319 of the USA PATRIOT Act, which amended the BSA, are inter-related provisions involving accounts called “correspondent accounts.” These inter-related provisions include prohibitions on certain types of correspondent accounts (those maintained for foreign “shell” banks) as well as requirements for risk-based due diligence of foreign correspondent accounts more generally.

A “correspondent account” is defined as: “any formal relationship established for a foreign financial institution to provide regular services to effect transactions in securities.”

A “foreign financial institution” includes: (i) a foreign bank (including a foreign branch or office of a U.S. bank); (ii) a foreign branch or office of a securities broker-dealer, futures commission merchant, introducing broker in commodities, or mutual fund; (iii) a business organized under foreign law (other than a branch or office of such business in the U.S.) that if it were located in the U.S. would be a securities broker-dealer, futures commission merchant, introducing broker in commodities, or a mutual fund; and (iv) a money transmitter or currency exchange organized under foreign law (other than a branch or office of such entity in the U.S.).

In addition, Treasury has clarified that, for a broker-dealer, a “correspondent account” includes:

• accounts to purchase, sell, lend, or otherwise hold securities, including securities repurchase arrangements;
   
• prime brokerage accounts that clear and settle securities transactions for clients;
   
• accounts for trading foreign currency;
   
• custody accounts for holding securities or other assets in connection with securities transactions as collateral; and
   
• over-the-counter derivatives contracts.

Prohibitions on Foreign Shell Banks: A broker-dealer is prohibited from establishing, maintaining, administering, or managing “correspondent accounts” in the U.S. for, or on behalf of, foreign “shell” banks (i.e., foreign banks with no physical presence in any country). Broker-dealers also must take steps to ensure that they are not indirectly providing correspondent banking services to foreign shell banks through foreign banks with which they maintain correspondent relationships. In order to assist institutions in complying with the prohibitions on providing correspondent accounts to foreign shell banks, Treasury has provided a model certification that can be used to obtain information from foreign bank correspondents. In addition, broker-dealers must obtain records in the United States of foreign bank owners and agents for service of process (Sections 313 and 319 of the USA PATRIOT Act).

Source Documents:

• Shell Bank Prohibition: 31 C.F.R. § 103.177. See also 31 C.F.R. § 103.175 (definitions).
   
• Final Rule Release: 67 Fed. Reg. 60562 (September 26, 2002).
   
• Extension of Implementation Date: 67 Fed. Reg. 78383 (December 24, 2002).
   
• Other Rule-Related Documents:
   
• Interim Guidance: 66 Fed. Reg. 59342 (November 27, 2001).
   
• Proposed Rule: 66 Fed. Reg. 67460 (December 28, 2001).
   
• FinCEN Guidance:
   
• FIN-2006-G003: Frequently Asked Questions: Foreign Bank Recertifications under 31 C.F.R. § 103.77 (February 3, 2006).
   
• FIN-2008-G001: Application of Correspondent Account Rules to the Presentation of Negotiable Instruments Received by a Covered Financial Institution for Payment (January 30, 2008).
   
• Ruling: Bank Secrecy Act Obligations of a U.S. Clearing Broker-Dealer Establishing a Fully Disclosed Clearing Relationship with a Foreign Financial Institution (FIN-2008-R008; June 3, 2008)

Due Diligence Regarding Foreign Correspondent Accounts: A broker-dealer is required to establish a risk-based due diligence program (that is part of its AML compliance program) for any “correspondent accounts” maintained for foreign financial institutions. The due diligence program, which is required to be a part of the broker-dealer’s overall AML compliance program, must include appropriate, specific, risk-based policies, procedures, and controls reasonably designed to enable the broker-dealer to detect and report, on an ongoing basis, any known or suspected money laundering conducted through or involving any foreign correspondent account (Section 312 of the PATRIOT Act).

Treasury has finalized a related rule that states when enhanced due diligence on foreign financial institutions is required.

Source Documents:

• Correspondent Account Due Diligence Rule: 31 C.F.R. § 103.176. See also 31 C.F.R. § 103.175 (definitions).
   
• Final Rule Release: 71 Fed. Reg. 496 (January 4, 2006).
   
• Extension of Applicability Date: 71 Fed. Reg. 16040 (March 30, 2006).
   
• Enhanced Due Diligence Final Rule: 72 Fed. Reg. 44768 (August 9, 2007).

• Other Rule-Related Documents:
   
• Enhanced Due Diligence Re-Proposed Rule: 71 Fed. Reg. 516 (January 4, 2006).

• Proposed Rule: 67 Fed. Reg. 37736 (May 30, 2002).
   
• Interim Final Rule: 67 Fed. Reg. 48348 (July 23, 2002).
   
• FinCEN Guidance:
   
• Fact Sheet: Section 312 of the USA PATRIOT Act (December 2005).
   
• FIN-2006-G009: Application of the Regulations Requiring Special Due Diligence Programs for Certain Foreign Accounts to the Securities and Futures Industries (May 10, 2006).
   
• FIN-2008-A002: Guidance to Financial Institutions on the Continuing Money Laundering Threat Involving Illicit Iranian Activity (March 20, 2008).
   
• FIN-2008-A003: Guidance to Financial Institutions on the Money Laundering Threat Involving the Turkish Cypriot Administered Area of Cyprus (March 20, 2008).
   
• FIN-2008-A004: Guidance to Financial Institutions on the Money Laundering Threat Involving the Republic of Uzbekistan (March 20, 2008).
   
• NYSE Guidance:
   
• IM 02-34: Special Due Diligence for Correspondent Accounts and Private Banking Accounts (August 1, 2002).
   
• IM 06-50: Effective Dates for Section 312 of the USA PATRIOT Act (July 3, 2006).

6. Due Diligence Programs for Private Banking Accounts

Section 312 of the USA PATRIOT Act amended the BSA to require financial institutions, including broker-dealers, to establish and maintain a risk-based due diligence program for accounts defined as “private banking accounts,” and to provide enhanced scrutiny to any such accounts provided to “senior foreign political figures.”

A “private banking account” is defined as an account that: (a) requires a minimum deposit of assets of at least $1,000,000; (b) is established or maintained on behalf of one or more non-U.S. persons who are direct or beneficial owners of the account; and (c) has an employee assigned to the account who is a liaison between the broker-dealer and the non-U.S. person.

The definition of “senior foreign political figure” extends to any member of the political figure’s immediate family, and any person widely and publicly known to be a close associate of the foreign political figure as well as any entities formed for the benefit of such persons (such persons are commonly referred to as PEPs, or Politically Exposed Persons).

Broker-dealers providing private banking accounts must take reasonable steps to:

• determine the identity of all nominal and beneficial owners of the private banking accounts;
   
• determine whether any such owner is a “senior foreign political figure” and therefore subject to enhanced scrutiny that is reasonably designed to detect transactions that may involve the proceeds of foreign corruption;
   
• determine the source of funds deposited into the private banking account and the purpose and use of such account;
   
• review the activity of the account as needed to guard against money laundering; and
   
• report any suspicious activity, including transactions involving senior foreign political figures that may involve proceeds of foreign corruption.

Source Documents:

• Private Banking Due Diligence Rule: 31 C.F.R. § 103.178. See also: 31 C.F.R. § 103.175 (definitions).
   
• Final Rule Release: 71 Fed. Reg. 496 (January 4, 2006).
   
• Extension of Applicability Date: 71 Fed. Reg. 16040 (March 30, 2006).
   
• Other Rule-Related Documents:
   
• Proposed Rule: 67 Fed. Reg. 37736 (May 30, 2002).
   
• Interim Final Rule: 67 Fed. Reg. 48348 (July 23, 2002).
   
• FinCEN Guidance:
   
• Fact Sheet: Section 312 of the USA PATRIOT Act (December 2005).
   
• FIN-2006-G009: Application of the Regulations Requiring Special Due Diligence Programs for Certain Foreign Accounts to the Securities and Futures Industries (May 10, 2006).
   
• NYSE Guidance:
   
• IM 02-34: Special Due Diligence for Correspondent Accounts and Private Banking Accounts (August 1, 2002).
   
• IM 06-50: Effective Dates for Section 312 of the USA PATRIOT Act (July 3, 2006).
   

7. Suspicious Activity Monitoring and Reporting

Section 356 of the USA PATRIOT Act amended the BSA to require broker-dealers to monitor for, and report, suspicious activity (so-called SAR reporting).

Under Treasury's SAR rule, a broker-dealer is required to file a suspicious activity report if: (i) a transaction is conducted or attempted to be conducted by, at, or through a broker-dealer; (ii) the transaction involves or aggregates funds or other assets of at least $5000; and (iii) the broker-dealer knows, suspects, or has reason to suspect that the transaction: (a) involves funds or is intended to disguise funds derived from illegal activity, (b) is designed to evade requirements of the BSA, (c) has no business or apparent lawful purpose, and the broker-dealer knows of no reasonable explanation for the transaction after examining the available facts, or (d) involves the use of the broker-dealer to facilitate criminal activity.

Broker-dealers must report the suspicious activity using a form Treasury has issued for the securities and futures industry, the SAR-SF (also referred to as FinCEN Form 101). The form, which is confidential, includes instructions.

Broker-dealers must maintain a copy of any SAR-SF filed and supporting documentation for a period of five years from the date of filing the SAR-SF.

In situations that require immediate attention, such as terrorist financing or ongoing money laundering schemes, broker-dealers should immediately notify law enforcement in addition to filing a SAR-SF. In addition, if a firm wishes to report suspicious transactions that may relate to terrorist activity, in addition to filing a SAR-SF, the firm may call FinCEN's Hotline at 1-866-556-3974. ⁵

Source Documents:

• SAR Rule: 31 C.F.R. § 103.19.
   
• Final Rule Release: 67 Fed. Reg. 44048 (July 1, 2002).
   
• Other Rule Related Documents
   
• Proposed Rule: 66 Fed. Reg. 67670 (December 31, 2001).
   
• SAR-SF: FinCEN Form 101.
   
• http://www.fincen.gov/forms/fin101_sar-sf.pdf
   
• FinCEN has delayed implementation of their new revised version of this form:
   
  FinCEN Delays Implementation of Revised Suspicious Activity Report (SAR) Forms (April 26, 2007)
   
• FinCEN Guidance:
   
• SAR Bulletin Issue No. 4 - Aspects of Financial Transactions Indicative of Terrorist Funding (January 2002).
   
• Unauthorized Disclosure of Suspicious Activity Reports (August 18, 2004).
   
• Interpretative Release No. 2004-02 — Unitary Filing of Suspicious Activity and Blocking Reports 69 Fed. Reg. 76847 (December 23, 2004).
   
• Guidance on Sharing of Suspicious Activity Reports by Securities Broker-Dealers, Futures Commission Merchants, and Introducing Brokers in Commodities (January 20, 2006).⁶
   
• FIN-2006-G014: Potential Money Laundering Risks Related to Shell Companies (November 9, 2006).
   
• FIN-2007-G003: Suspicious Activity Report Supporting Documentation (June 13, 2007).
   
• FIN-2007-G002: Requests by Law Enforcement for Financial Institutions to Maintain Accounts (June 13, 2007).
   
• Suggestions for Addressing Common Errors Noted in Suspicious Activity Reporting (October 10, 2007).
   
• Guidance to Financial Institutions on Filing Suspicious Activity Reports regarding the Proceeds of Foreign Corruption (April 17, 2008).
   
• FinCEN to Expand Financial Institutions’ Ability to Share Information Internally on Suspicious Activity (March 3, 2009)
   
• SAR Narrative Guidance Package: This three-part package includes guidance on preparing Suspicious Activity Reports and is available on FinCEN’s website at:
   
  http://www.fincen.gov/statutes_regs/guidance/pdf/
  narrativeguidance_webintro.pdf
   
• SAR Activity Reviews: These are available on FinCEN’s website at:
   
  www.fincen.gov⁷
   
• NYSE Guidance:
   
• IM 02-64: USA PATRIOT Act Updates: Section 356 Requirement to Report Suspicious Transactions; Deadline Extension for Sections 313 and 319 (December 24, 2002).
   
• NASD Guidance:
   
• NTM 02-47: Treasury Issues Final Suspicious Activity Reporting Rule for Broker/Dealers (August 2002).
   
• NTM 02-21: NASD Provides Guidance to Member Firms concerning Anti-Money Laundering Compliance Programs Required by Federal Law (April 2002). (This includes a list of “red flags” that may be useful in identifying possible money laundering.)⁸
   

8. Other BSA Reports

Broker-dealers have other reporting obligations imposed by the BSA. They include:

Currency Transaction Reports (CTRs): Broker-dealers are required to file with FinCEN a CTR for any transaction over $10,000 in currency, including multiple transactions occurring during the course of the same day. A CTR filing is made using a Currency Transaction Report, FinCEN Form 104 (formerly IRS Form 4789).

Reports of Foreign Bank and Financial Accounts (FBARs): Broker-dealers are required to file reports of foreign bank and financial accounts if the aggregate value of the accounts exceeds $10,000. FBARs are filed with Treasury using Form TD F 90-22.1.

Reports of Currency or Monetary Instruments (CMIRs): Broker-dealers must report any transportation of more than $10,000 in currency or monetary instruments into or outside of the U.S. on a Report of International Transportation of Currency or Monetary Instruments, FinCEN Form 105 (formerly Customs Form 4790). CMIRs are filed with the Commissioner of Customs.

Source Documents:

• CTR: 31 C.F.R. §§ 103.22, 103.27-28.
   
• FinCEN Form 104.
   
• FBAR: 31 C.F.R. §§103.24, 103.27.
   
• Form TD F 90-22.1.
   
• CMIR: 31 C.F.R. §§ 103.23, 103.27.
   
• FinCEN Form 105.
   
• FinCEN Guidance:
   
• FinCEN Ruling 2003-1: Regarding the Aggregation of Currency Transactions Pursuant to 31 CFR Section 103.22 (October 3, 2002).
   
• Guidance on Interpreting Financial Institution Policies in Relation to Recordkeeping Requirements under 31 C.F.R. 103.29 (November 2002).
   
• FinCEN Ruling 2005-6: Suspicious Activity Reporting (Structuring) (July 15, 2005).
   
• NYSE Guidance:
   
• IM 86-2: Revised Currency Transaction Report (January 29, 1986).
   
• IM 89-5: Reporting of Suspicious Transactions Under the Money Laundering Control Act of 1986 (January 20, 1989).
   
• IM 89-14: Amendments to Bank Secrecy Act Regulations Relating to Currency Transactions (March 22, 1989).
   

9. Records of Funds Transfers

Under the “joint rule” and “travel rule,” broker-dealers must keep records of funds transfers of $3000 or more (such as wire transfers), including certain related information (such as name, address, account number of client, date and amount of wire, payment instructions, name of recipient institution, and name and account information of wire payment recipient).

Source Documents:

• Joint Rule: 31 C.F.R. § 103.33(f).
   
• Travel Rule: 31 C.F.R § 103.33(g).
   
• Other Rule-Related Documents:
   
• Advance Notice of Proposed Rulemaking: 71 Fed. Reg. 35564 (June 21, 2006).
   
• FinCEN Guidance:
  • FinCEN Advisory: Funds Transfers: Questions & Answers (June 1996).⁹

  • FinCEN Advisory: Funds “Travel” Regulations: Questions & Answers (January 1997).¹⁰

10. Information Sharing with Law Enforcement and Financial Institutions

Two provisions relating to information sharing were added to the BSA by the USA PATRIOT Act. One provision requires broker-dealers to respond to mandatory requests for information made by FinCEN on behalf of federal law enforcement agencies. The other provides a safe harbor to permit and facilitate voluntary information sharing among financial institutions.

Mandatory Information Sharing: Section 314(a) Requests: Broker-dealers are required to respond to requests for information made by federal law enforcement agencies. FinCEN, on behalf of a requesting Federal law enforcement agency, may require broker-dealers to search their records to determine whether they have accounts for, or have engaged in transactions with, any specified individual, entity, or organization. These requests are often referred to as “Section 314(a) information requests.” Broker-dealers must report to FinCEN if they have any account or transaction matching the information listed on the information request. Broker-dealers must also designate a contact person (typically the firm’s AML compliance officer) to receive the requests and must maintain the confidentiality of any request and any responsive reports to FinCEN.

Source Documents:

• Section 314(a) Rule: 31 C.F.R. § 103.100. See also 31 C.F.R. § 103.90 (definitions).
   
• Rule Release: 67 Fed. Reg. 60579 (September 26, 2002).
   
• Proposed Rule Release: 74 Fed. Reg. 58926 (November 16, 2009).
   
• FinCEN Guidance:
   
• Treasury Issues Moratorium on Section 314(a) Information Requests (November 26, 2002).
   
• FinCEN to Reinstate USA PATRIOT Act Section 314(a) Information Requests (February 6, 2003).
   
• Implementation of Web-based 314(a) Secure Communication System (February 4, 2005).
   
• Changing your Point-of-Contact for 314(a) (October 17, 2006).
   
• FinCEN 314(a) Fact Sheet (January 12, 2010).
   
• NYSE Guidance:
   
• IM 02-58: Temporary Moratorium on Information Requests Under Section 314 of the USA Patriot Act (December 26, 2002).
   
• IM 03-3: Lifting of the Temporary Moratorium on Information Requests Under Section 314 of the USA Patriot Act (February 20, 2003).
   
• NASD Guidance:
   
• NTM 02-80: Development Regarding Treasury Information Requests Under Section 314 of the PATRIOT Act (December 2002).
   

Voluntary Information Sharing Among Financial Institutions: Section 314(b): A separate safe harbor provision encourages and facilitates voluntary information sharing among participating financial institutions. The safe harbor provision, added to the BSA by Section 314(b) of the USA PATRIOT Act, protects participating institutions, including broker-dealers, from certain civil liabilities in connection with the information sharing. To qualify, a broker-dealer must file an annual notice with FinCEN, maintain procedures to protect the security and confidentiality of the information, and take reasonable steps to verify that the other financial institution with which it intends to share information has filed a notice with FinCEN. This may be done by checking a list that FinCEN makes available. A notification form and instructions for submitting a notification form (initial or renewal) are available on FinCEN's website.

Source Documents:

• Section 314(b) Rule: 31 C.F.R. § 110. See also 31 C.F.R. § 103.90 (definitions).
   
• Final Rule Release: 67 Fed. Reg. 60579 (September 26, 2002).
   
• Rule-Related Documents:
   
• Interim Final Rule: 67 Fed. Reg. 9874 (March 4, 2002).
   
• 314(b) Notice Form: (http://www.fincen.gov/314b.pdf).
   
• FinCEN Guidance:
   
• Guidance on the Scope of Permissible Information Sharing Covered by Section 314(b) Safe Harbor of the USA PATRIOT Act (June 16, 2009).

11. Special Measures Imposed by the Secretary of the Treasury

Section 311 of the USA PATRIOT Act amended the BSA to authorize the Secretary of the Treasury to require broker-dealers to take “special measures” intended to address particular money laundering concerns. The Secretary of the Treasury may impose special measures on foreign jurisdictions, financial institutions, or transactions or types of accounts found to be of “primary money laundering concern.” There are five “special measures” including prohibiting U.S. financial institutions from opening or maintaining certain correspondent accounts.

Source Documents:

• Section 311 Information: Information about Section 311 is generally available at:
   
  www.fincen.gov.
   
• NYSE Guidance:
   
• IM 07-34: NASD and NYSE Joint Release Regarding Special Measures against Specified Banks Pursuant to Section 311 of the USA Patriot Act (April 18, 2007).
   
• IM 06-58: NYSE and NASD Joint Release Regarding Special Measures Against Specified Banks Pursuant to Section 311 of the USA Patriot Act (August 14, 2006).
   
• NASD Guidance:
   
• NTM 07-17: NYSE and NASD Joint Release Regarding Special Measures Against Specified Banks Pursuant to Section 311 of the USA Patriot Act (April 2007).
   
• NTM 06-41: NASD and NYSE Joint Release on Section 311 of the USA PATRIOT Act (August 2006).
   

12. OFAC Sanctions Programs and Other Lists

OFAC is an office within Treasury that administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries, terrorism sponsoring organizations, international narcotics traffickers, and those engaged in activities related to the proliferation of weapons of mass destruction. OFAC acts under Presidential wartime and national emergency powers, as well as authority granted by specific legislation, to impose controls on transactions and freeze foreign assets under U.S. jurisdiction.

OFAC’s sanctions programs are separate and distinct from, and in addition to, the AML requirements imposed on broker-dealers under the BSA.

As a tool in administering sanctions, OFAC publishes lists of sanctioned countries and persons that are continually being updated. Its list of Specially Designated Nationals and Blocked Persons (SDNs) lists individuals and entities from all over the world whose property is subject to blocking and with whom U.S. persons cannot conduct business. OFAC also administers country-based sanctions that are broader in scope than the “list-based” programs.

In general, OFAC regulations require broker-dealers to:

• block accounts and other property or property interests of entities and individuals that appear on the SDN list;
   
• block accounts and other property or property interests of entities and individuals subject to blocking under OFAC country-based programs; and
   
• block or reject unlicensed trade and financial transactions with OFAC-specified countries, entities, and individuals.

Broker-dealers must report all blockings and rejections of prohibited transactions to OFAC within 10 days of being identified and annually. OFAC has the authority to impose substantial civil penalties administratively. To guard against engaging in OFAC prohibited transactions, one best practice that has emerged entails “screening against the OFAC list.” OFAC has stated that it will take into account the adequacy of a firm’s OFAC compliance program when it evaluates whether to impose a penalty if an OFAC violation has occurred. Firms should be aware of other lists, such as the Financial Action Task Force (“FATF”) list of non-compliant countries (the “NCCT list”). If transactions originate from or are routed to any FATF-identified countries, it might be an indication of suspicious activity.¹¹

Source Documents:

• OFAC Guidance:
   
• Program information, including the SDN list and countries subject to OFAC sanctions, is available on the OFAC website at:
   
  www.treas.gov/ofac
   
• Foreign Assets Control Regulations for the Securities Industry (April 29, 2004).
   
• Economic Sanctions Enforcement Guidelines (73 FR 51933; September 2, 2008)
   
• Opening Securities and Futures Accounts from an OFAC Perspective (November 5, 2008)
   
• Risk Factors for OFAC Compliance in the Securities Industry (November 5, 2008)
   
• Economic Sanctions Enforcement Guidelines (November 9, 2009)
   
• OFAC Frequently Asked Questions, available on the OFAC website at:
   
  http://www.treas.gov/offices/enforcement/ofac/faq/index.shtml¹²
   
• FinCEN Guidance:
   
• Interpretive Release No. 2004-02-Unitary Filing of Suspicious Activity and Blocking Reports. See also 69 Fed. Reg. 76847 (December 23, 2004).
   
• NASD Guidance:
   
• NTM 01-67: Executive Order Targeting Terrorists (October 2001).
   
• OFAC Search Tool: This tool is available as a hyperlink, called OFAC's SDN List, and is available on the FINRA website.
   
• NYSE Guidance:
   
• IM 95-45: Department of Treasury List of Specifically Designated Narcotics Traffickers (October 25, 1995).
   
• IM 96-11: Updated Listing of The Department of Treasury “Specially Designated Nationals and Blocked Persons” (April 1, 1996).
   
• IM 97-10: Updated Listing of the Department of Treasury “Specially Designated Nationals and Blocked Persons” (February 7, 1997).
   
• IM 97-28: Updated Listing of the Department of Treasury “Specially Designated Nationals and Blocked Persons” (May 20, 1997).
   
• IM 01-26: Terrorism Executive Order and Updated Listing of the Department Of Treasury “Specially Designated Nationals and Blocked Persons” (September 24, 2001).
   
• IM 01-35: Updated Listing of the Department of Treasury Specially Designated Nationals and Blocked Persons (October 19, 2001).
   
• IM 01-39: Updated Listing of the Department of Treasury “Specifically Designated Nationals and Blocked Persons” (November 21, 2001).
   
• Other Lists:
   
  Other lists of countries supporting international terrorism may be available at:
   
  
  • U.S. State Dept.: www.state.gov/s/ct
     
  • FATF: www.fatf-gafi.org.
     
  • FinCEN High Intensity Financial Crimes Areas Designation is at: http://www.fincen.gov/le_hifcadesign.html.

13. Selected Additional AML Resources

• SEC Staff Materials:
   
• Richards, Lori, “Money Laundering; It’s on the SEC’s Radar Screen,” Remarks before the Securities Industry Association Conference on Anti-Money Laundering Compliance (May 8, 2001).
   
• Richards, Lori, “Life After the Patriot Act,” Remarks before the Securities Industry Association Conference on Anti-Money Laundering Compliance (May 2, 2002).
   
• Richards, Lori, “The Next Phase: Implementing the Patriot Act,” Remarks before the Securities Industry Association Conference on Anti-Money Laundering Compliance (March 27, 2003).
   
• Richards, Lori, “Anti-Money Laundering in 2006: It’s the Total Mix,” Remarks before the Securities Industry Association Conference on Anti-Money Laundering Compliance (March 29, 2006).
   
• FinCEN Materials:
   
  
  • Remarks of James H. Freis, Jr., Director, FinCEN, before the SIFMA Anti-Money Laundering Compliance Conference (March 5, 2008).
     
• FATF Materials:
   
  
  • Money Laundering and Terrorist Financing in the Securities Sector (October 2009)
     
• Selected AML Enforcement Cases:
   
• Scottrade Fined $600,000 for Inadequate Anti-Money Laundering Program (October 26, 2009).
   
• FINRA: Letter of Acceptance, Waiver and Consent: Scottrade, Inc. (October 26, 2009).
   
• FINRA Fines Three Firms Over $1.25 Million for Failing to Detect, Investigate and Report Suspicious Transactions in Penny Stocks (June 4, 2009).
   
• FINRA: Letter of Acceptance, Waiver and Consent: Legent Clearing LLC (June 4, 2009).
   
• FINRA: Letter of Acceptance, Waiver and Consent: J.P. Turner & Co., LLC; S. Cheryl Bauman; Robert S. Meyer (June 4, 2009).
   
• FINRA: Letter of Acceptance, Waiver and Consent: Park Financial Group, Inc., Gordon Charles Cantley, David Farber (June 4, 2009).
   
• In the Matter of Ferris, Baker Watts, Inc., Exchange Act Release No. 59372 (February 10, 2009).
   
• E*Trade Units Fined $1 Million for Inadequate Anti-Money Laundering Program (January 2, 2009).
   
• FINRA Expels Barron Moore and Takes Disciplinary Actions Against Seven Individuals for Illegal Sales of Unregistered Penny Stocks (September 3, 2008).
   
• In the Matter of E*Trade Clearing LLC and E*Trade Securities LLC, Exchange Act Release No. 58250 (July 30, 2008).
   
• FINRA: Letter of Acceptance, Waiver and Consent: Southwest Securities, Inc. (July 18, 2008).
   
• FINRA: Letter of Acceptance, Waiver and Consent: Citigroup Global Markets Inc. (June 5, 2008).
   
• FINRA: Letter of Acceptance, Waiver and Consent: James I. Black (May 9, 2008).
   
• In the Matter of Park Financial Group, Inc. and Gordon C. Cantley, Exchange Act Release No. 55614 (April 11, 2007) and Exchange Act Release No. 56902. (December 5, 2007).
   
• FINRA Expels Franklin Ross, Inc. for Systemic Violations of Anti-Money Laundering Rules (November 5, 2007).
   
• RBC Dain Rauscher, New York Stock Exchange Hearing Panel Decision 07-44 (March 23, 2007).
   
• NASD vs. NevWest Securities Corporation, Sergey Rumyantsev, and Anthony M. Santos (March 13, 2007).
   
• NASD Fines Bank of America Investment Services, Inc. $3 Million for Failing to Comply with Anti-Money Laundering Rules in Connection with High Risk Accounts (January 29, 2007).
   
• John Pettus, New York Stock Exchange Hearing Panel Decision 06-082 (August 9, 2006).
   
• In the Matter of Crowell, Weedon & Co., Exchange Act Release No. 53847 (May 22, 2006).
   
• Oppenheimer & Co. Inc., New York Stock Exchange Hearing Panel Decision 05-181 (December 29, 2005). See also In the Matter of Oppenheimer & Company, New York, New York, United States of America Department of the Treasury Financial Crimes Enforcement Network No. 2005-4 (December 29, 2005).
   
• Bear Stearns & Co. Inc., New York Stock Exchange Hearing Panel Decision 05-163 (December 22, 2005).
   
• In the Matter of Hartsfield Capital Securities, Inc., United States of America Department of the Treasury Financial Crimes Enforcement Network No. 2003-05 (November 24, 2003).
   
• FFIEC AML Examination Manual — August 2007,¹³ available at:
   
  http://www.ffiec.gov/bsa_aml_infobase/pages_manual/manual_online.htm
   

14. Useful Contact Information

¹ The following OCIE staff contributed significantly to this compilation: Karen Buck Burgess, Laury Cornell, Katrina Carroll, Sarah Green, Nancy Hansbrough, Lisa Byington, Cathy Black, and Joe McHale. Significant contributions also were made by the following staff in the Division of Trading and Markets: Lourdes Gonzalez, David Blass, Ignacio Sandoval and Haimera Workie. OCIE staff also would like to acknowledge the contributions made to this project by Michael Rufino, Sheila Haney, and Alma Angotti (FINRA), Mary Ellen Walker, Susan Lang, Eileen O'Neill and Kendal McManus (FinCEN) and Lorraine Lawlor (OFAC).

² Note that, since NTM 02-21 was issued, there have been a number of changes to AML requirements. For example, the NASD revised its AML program rule. See NASD NTM 06-07. FinCEN also adopted a number of AML requirements, including the requirement to file suspicious activity reports. See 67 Fed.Reg. 44048 (July 1, 2002).

³ As of the date of this guide, there are no designated government lists to verify specifically for CIP purposes. Customer comparisons to lists issued by OFAC involve separate and distinct requirements.

⁴ FinCEN and the federal banking agencies have issued guidance applicable to banks regarding the CIP rule that may be of interest to securities firms. See Interagency FAQs: Final CIP Rule (January 2004) and Interagency Interpretive Guidance on Customer Identification Program Requirements under Section 326 of the USA PATRIOT Act (April 28, 2005).

⁵ Broker-dealers may also, but are not required to, contact the SEC to report situations that may require immediate attention by the SEC. The SEC SAR Alert Message Line number [202-551-SARS (7277)] should only be used in cases where a broker-dealer has filed a SAR that may require immediate attention by the SEC and wants to alert the SEC about the filing. Calling the SEC SAR Alert Message Line does not alleviate the broker-dealer's obligation to file a SAR or notify an appropriate law enforcement authority.

⁶ The federal banking agencies have issued guidance applicable to banks regarding SAR reporting that may be of interest to securities firms. See Interagency Guidance on Sharing Suspicious Activity Reports with Head Offices and Controlling Companies (January 20, 2006) and Suspicious Activity Report Filing Requirements for Nonbank Subsidiaries of Bank Holding Companies and State Member Banks, Federal Reserve Board (December 24, 2002).

⁷ SAR Activity Reviews include two separate publications: SAR Activity Review Trends, Tips & Issues and SAR Activity Review By the Numbers. They are published on a regular basis under the auspices of the Bank Secrecy Act Advisory Group. These publications include: statistics regarding SAR filings and trends; an industry forum highlighting compliance issues and practices prepared by private sector members of the Advisory Group; and guidance regarding practical issues relevant to SAR filing and reporting. Guidance contained in these publications may be of interest and useful to securities firms. For example, see the following discussions contained in issues of The SAR Activity Review – Trends, Tips, and Issues: (i) “National Security Letters and Suspicious Activity Reporting,” Issue 8 (April 2005); (ii) “Providing SARs to Appropriate Law Enforcement,” Issue 9 ( October 2005); (iii) “Should a Financial Institution Document its Decision Not to File a Suspicious Activity Report ” Issue 10 (May 2006); and (iv) “When Does the 30 Day Time Period in which to File a Suspicious Activity Report Begin?” Issue 10 (May 2006). In addition, the May 2009 publication of the SAR Activity Review Trends, Tips & Issues focuses on the securities industry.

⁸ Note that, since NTM 02-21 was issued, there have been a number of changes to AML requirements. For example, the NASD revised its AML program rule. See NASD NTM 06-07). FinCEN also has adopted a number of AML requirements, including the requirement to file SARs. See 67 Fed. Reg. 44048 (July 1, 2002).

⁹ FinCEN staff have indicated that the responses to Questions 17 and 18 in this Advisory are no longer completely accurate due to the expiration on July 1, 2004, of an exception relating to coded names and pseudonyms, at which time FinCEN confirmed the prohibition of the use of coded names and pseudonyms, but determined that the Travel Rule should be read to allow the use of mailing addresses. See 68 Fed. Reg. 66708 (November 28, 2003).

¹⁰ FinCEN staff have indicated that the responses to Questions 2 and 16 in this Advisory are no longer completely accurate due to the expiration on July 1, 2004 of an exception relating to coded names and pseudonyms, at which time FinCEN confirmed the prohibition of the use of coded names and pseudonyms, but determined that the Travel Rule should be read to allow the use of mailing addresses. See 68 Fed. Reg. 66708 (November 28, 2003).

¹¹ As of the date of this guide, there are no countries listed on the NCCT list.

¹² Guidance issued to banking institutions regarding their OFAC obligations may be useful to securities firms. See Federal Financial Institution Examination Council Bank Secrecy Act Anti-Money Laundering Examination Manual (August 2007), at pp. 7, 137-148.

¹³ This examination manual, issued by the federal banking regulators regarding the AML requirements applicable to banks, contains guidance that may be of interest to securities firms.

http://www.sec.gov/about/offices/ocie/amlsourcetool.htm