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Speech by SEC Staff:
Money Laundering: It's on the SEC's Radar Screen

Remarks by

Lori A. Richards

Director, Office of Compliance Inspections and Examinations
U.S. Securities & Exchange Commission

Conference on Anti-Money Laundering Compliance for Broker-Dealers
Securities Industry Association

May 8, 2001

The SEC, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or the staff of the Commission.


Good morning. I am pleased to be here today to participate in the Securities Industry Association's conference on money laundering. Before I go any further, let me begin with the usual SEC disclaimer – that the views I express today are mine, and do not necessarily represent those of the Securities and Exchange Commission or my fellow colleagues at the SEC.

At the outset, I would like to recognize the SIA's constructive role in organizing this conference – as well as for its efforts more generally in promoting industry-wide education relating to money laundering. I also would like to commend those of you here today from the securities industry, who – by your very presence – are demonstrating the industry's concern regarding money laundering. I welcome the opportunity today to listen and learn from you. You are the experts: each day you confront the challenge of monitoring literally thousands of securities transactions as part of your firms' compliance programs.

Today, I'd like to share with you our plans for a new SEC examination initiative designed to focus attention on money laundering compliance by broker-dealers and my thoughts about why money laundering should be a key part of your compliance efforts. I also wish to share with you some ideas to consider as you develop or enhance your anti-money laundering compliance program.

Money Laundering – Why is the SEC Involved?

Money laundering is a crime that deserves serious attention by securities firms. While all firms in the securities industry are not yet required to report suspicious activity relating to potential money laundering (so-called SAR reporting), all securities firms are subject to significant compliance obligations under the Bank Secrecy Act (BSA) and to criminal money laundering provisions. Securities firms need to be aware – if they are not already – of the grave risks firms face if they allow others to launder money through their firms.

Although the SEC has had a longstanding interest in money laundering prevention, we've decided to take a fresh look at our broker-dealer examination efforts in the money laundering area, and put money laundering compliance front and center on our examination "radar screen." It's in the Commission's interests to learn how well firms have integrated anti-money laundering efforts into their overall compliance efforts, and what risks for money laundering exist in the securities industry. As you know, a number of depository institutions have faced close scrutiny from their regulators and from Congress because of gaps in their compliance programs to combat money laundering. It makes sense for us to address risks in the securities industry now, before these money launderers migrate, affecting firms or affecting the market.

Some of you may ask: Why should the SEC care about money laundering? The securities business is not, for the most part, a cash business readily susceptible to money laundering abuses.

Why? Let's look at the big picture. Trillions of dollars flow through the securities industry each year. Securities firms are major global financial institutions. The use of the U.S. financial system by criminals to facilitate fraud could well taint our vibrant capital markets – which fuel our economy and hold the savings of our nation's investors. Moreover, as you know, securities firms face potential civil and criminal exposure when their firms are used to launder profits derived from illegal activities. The large monetary fines and forfeiture provisions that are part and parcel of the existing money laundering laws could seriously impact the financial stability of a securities firm, affecting all those who do business with that firm.

That's why money laundering is on the SEC's "radar screen." We think that, as a matter of best practice, firms should protect themselves from being inadvertently drawn into charges of assisting money laundering. From the perspective of a firm's "bottom line," this means protection against significant monetary penalties as well as avoiding the reputational risk to a firm associated with a criminal element. Firms also have a long-term interest in preserving the integrity of our securities markets. As securities regulators, we share that interest, and during the upcoming months, we plan to work with you in the industry to focus attention on combating money laundering.

But, the SEC's interest in combating money laundering is certainly not a new one.

The Bank Secrecy Act requirements have long applied to broker-dealers. In the 1980's, the SEC conducted a number of special examination sweeps that focused on broker-dealer compliance with the BSA. Following those sweeps, and again in the early 1990s, the SEC brought a series of enforcement actions against securities firms and their employees for violations of the BSA's currency transaction reporting requirements.

In addition, over the last decade, the SEC has actively participated in a variety of groups, both domestic and international, that promote anti-money laundering initiatives. For example, SEC staff meets regularly with staff from Treasury's Financial Crimes Enforcement Network (FinCEN), as well as with groups such as the Money Laundering Working Group, the Financial Action Task Force, and the Bank Fraud Working Group. Moreover, working with the Commodity Futures Trading Commission, the SEC initiated efforts through IOSCO to raise awareness among foreign securities regulators regarding money laundering.

By refocusing our examination attention on money laundering, we have two goals. First, we hope to ensure that all firms in the securities industry institute policies and procedures to combat money laundering. Second, we hope that our interest will spur those firms who already have anti-money laundering programs to ensure that they are top-notch and are being implemented effectively. We've already begun this effort. During the past few months, staff from the Office of Compliance Inspections and Examinations (OCIE) have undertaken a number of fact-finding examinations of broker-dealers to learn about their existing money laundering compliance programs. We know from these visits that many firms already have in place – or are in the process of implementing – sophisticated anti-money laundering compliance programs. We've also begun meeting with industry groups, such as the SIA, to obtain their ideas. With what we've learned, we are working in conjunction with the New York Stock Exchange, Inc. (NYSE) and the National Association of Securities Dealers, Inc. (NASD) to develop a new joint examination module for money laundering. Together with the NYSE and the NASD, we plan to conduct a joint training program for SEC and self-regulatory organization (SRO) examiners in anti-money laundering. And, we plan to conduct a joint "sweep" of broker-dealers later this year that will help us assess what steps need to be taken to improve anti-money laundering compliance efforts and to help identify firms that are at risk.

Securities Firms and Anti-Money Laundering Laws

How do anti-money laundering laws apply to securities firms? Let's begin with a quick summary of the existing framework for anti-money laundering compliance.

  • Under the Bank Secrecy Act:
    • Broker-dealers are required to file Currency Transaction Reports for cash transactions generally above $10,000.
    • Broker-dealers also must report regarding the transportation of currency into and out of the U.S., and regarding foreign financial accounts.
    • The BSA is a reporting and record keeping statute. Provisions applicable to broker-dealers have also been incorporated into Rule 17a-8 under the Securities Exchange Act of 1934.
    • The SEC is assigned the responsibility for examining broker-dealers to determine their compliance with the BSA. In addition to the SEC's own examiners, the SROs also examine broker-dealers for compliance with the BSA.
  • Under SAR Reporting Requirements:
    • Banks have been required to file SARs to report suspicious transactions relating to possible money laundering since 1996. This obligation is imposed on banks through two different statutory regimes: the BSA and banking law. Broker-dealers that are affiliated with banks are covered by the banking regulatory requirement, but not by the BSA requirement.
    • Under the BSA, the Treasury Department is also authorized to impose SAR reporting requirements on broker-dealers.
      • In recent years, the SEC staff has worked with FinCEN on its formulation of a rule requiring securities firms to file SARs. There also has been recent Congressional interest in the extension of SAR reporting to broker-dealers, and a recently-issued GAO report studied the impact of the Gramm-Leach-Bliley Act on SAR reporting. We understand that a proposal for a broker-dealer SAR reporting requirement is on the horizon at FinCEN.
      • We know that for several years, a number of broker-dealers have developed ways to identify suspicious activity, and have voluntarily filed SAR reports with FinCEN.
  • Under Title 18 of the U.S. Code:
    • Securities firms may be prosecuted by the Department of Justice under Sections 1956 and 1957 of Title 18 for assisting or participating in money laundering by their customers.
    • Violations can subject a securities firm to criminal penalties, including fines up to $500,000 per violation. Individual employees may also be imprisoned.
    • Customer funds (including funds which securities firms may be holding as collateral for loans) may be seized by the government in forfeiture actions.
      • The SROs have cautioned their members regarding their potential criminal exposure under Title 18, and have advised firms to establish procedures to detect transactions by money launderers.
      • In at least one instance, the NYSE has disciplined a member – Adler Coleman – for failing to have procedures to detect and report suspicious activity.

SEC and SRO Rules Aid in the Detection of Money Laundering

Existing SEC and SRO rules and interpretations already aid in anti-money laundering efforts. For example:

  • Securities firms obtain a significant amount of information about their customers. For example, firms typically obtain information about a customer's employment, income, investment objectives and investment history in order to "know their customers" under NYSE rules and to fulfill suitability obligations.
  • Broker-dealers must maintain records that identify beneficial owners of cash and margin accounts.
  • Employees are screened for criminal or other disciplinary history, including the fingerprinting of most employees.
  • NASD and NYSE rules require member firms to develop compliance and supervisory programs appropriate for their business. Similarly, securities firms are subject to comprehensive supervisory obligations under SEC and SRO rules, and may be subject to stiff sanctions in the event of a failure to supervise.

What Can You Expect?

What can you expect if your firm is visited by a securities regulator for a money-laundering exam?

We expect a primary focus of these exams to be on the firm's policies, procedures, and internal controls relating to money laundering. We'll be looking at whether the firm has a system of monitoring for potential money laundering activities that is appropriate to its business.

What will we expect a broker-dealer's procedures to look like? There is no one-size-fits-all template. The best practice would be for a firm to conduct a risk assessment of its own business and customers in order to develop an overall strategy appropriate for its business. We expect that a firm's policies, procedures and internal controls will vary depending on the kind of firm involved, its customers, and its business. A firm should consider the nature and extent of its activities, who its customers are, the types of accounts maintained for its customers, and the types of transactions its customers engage in. Although firms obviously should exercise some flexibility in crafting procedures that are appropriate for their particular firm, we would expect that a firm would have written policies and procedures that contain the basic elements of the firm's anti-money laundering program.

What about monitoring and risk indicators? The best practice would be for a broker-dealer's policy to contain appropriate parameters and methods of monitoring so that suspicious customer activity can be detected and appropriate action can be taken. We understand that monitoring transactions can be a complex and costly process. We also understand that not every transaction can be monitored, and that, for the most part, transactions cannot be monitored on a real-time basis. However, we believe that the best practice is for firms to have systems in place that would reveal patterns of unusual activity.

In tandem with developing norms and patterns, broker-dealers need to be alert to indicators of suspicious activity – of abnormal customer or account activity – that are suggestive of potential money laundering activity. Customer risk indicators include suspicious activity that relates to a customer's identity or the nature of the customer's account. As you know, broker-dealers have existing obligations that have long been imposed by SRO rules and the federal anti-fraud provisions to identify beneficial owners of accounts, and to obtain and know the essential facts relative to every customer. A variety of information about customers is thus available during the account opening process and on an ongoing basis. This information can be used in your compliance efforts. Here are a few examples of "common sense" risk indicators that may be used to trigger additional scrutiny:

Risk Indicators During the Account Opening Process:

  • The customer wishes to engage in transactions that lack business sense, apparent investment strategy, or are inconsistent with the customer's stated business/strategy.
  • The customer exhibits unusual concern for secrecy, particularly with respect to his identity, type of business, assets or dealings with firms.
  • Upon request, the customer refuses to identify or fails to indicate a legitimate source for his funds and other assets.
  • Here's a favorite: the customer exhibits a lack of concern regarding risks, commissions, or other transaction costs.
  • The customer appears to operate as an agent for an undisclosed principal, but is reluctant to provide information regarding that entity.
  • The customer has difficulty describing the nature of his business.
  • The customer lacks general knowledge of his industry.
  • For no apparent reason, the customer has multiple accounts under a single name or multiple names, with a large number of inter-account or third party transfers.
  • The customer is from, or has accounts in, a country identified as a haven for money laundering.
  • The customer, or a person publicly associated with the customer, has a questionable background including prior criminal convictions.

Risk Indicators as Part of Customer Account Activity:

  • The customer account has unexplained or sudden extensive wire activity, especially in accounts that had little or no previous activity.
  • The customer's account shows numerous currency or cashiers check transactions aggregating to significant sums.
  • The customer's account has a large number of wire transfers to unrelated third parties.
  • The customer's account has wire transfers to or from a bank secrecy haven country or country identified as a money laundering risk.
  • The customer's account indicates large or frequent wire transfers, immediately withdrawn by check or debit card.
  • The customer's account shows a high level of account activity with very low levels of securities transactions.
Clearly, this is not an exhaustive list of risk indicators. Also note that identifying risk indicators is a fluid undertaking, as money launderers will change techniques to avoid detection. These indicators are, however, suggestive of the types of patterns that may warrant further investigation to determine how the firm should respond.

What are the other elements of a money laundering program that securities examiners will look at? Expect to be asked some fundamental questions:

  • How do you determine what is unusual or suspicious activity?
  • What steps do you take once an unusual activity is identified?
  • Do you provide anti-money laundering training for employees?
  • How is the anti-money laundering program audited or tested?

If your firm is a clearing firm, or a firm that specializes in online brokerage activity, we will probably be asking you some additional or different questions.

Clearing brokers.  We understand that, traditionally, it is the introducing firm that is responsible for knowing the customer, and has the relationship with the customer. But, the introducing firm does not have all the transaction data that the clearing firm has. We will look to see if the exception reports made available to introducing brokers assist the introducing broker in monitoring for money laundering activity, and what steps the clearing firm is taking to review the information it has obtained. The introducing/clearing relationship should not create a gap in the industry's monitoring for money laundering purposes.

Online Brokers.  The use of the Internet, and electronic signature technology, also raises new questions for money laundering compliance. The online brokerage firm administers accounts in a setting that promotes real-time account opening, with the broker-dealer never seeing or speaking with the customer. In this environment, we will ask firms – what customer information are you obtaining before accepting a customer account and executing customer transactions? When do you use databases and other publicly available information – such as credit reporting bureaus – to confirm customer information and verify customer identity? Under what circumstances do you contact the customer by phone to verify information or seek information about transactions?

What Should Firms Do?

What can firms do to prepare for a visit from securities regulators? Here are some basic steps that securities firms can take now – if they haven't already – to combat money laundering.

First, designate a compliance officer.  A firm should designate a person (or committee) as responsible for the firm's entire money laundering program. Vest this person (or committee) with full responsibility and authority to make and enforce the firm's policies and procedures relating to money laundering.

Second, develop written policies and procedures.  A firm should clearly set forth its anti-money laundering policy, and procedures to implement the policy should be set forth in the firm's compliance manual. At a minimum, procedures should include controls and systems designed to identify and capture the information required by anti-money laundering laws, the BSA, and suspicious activity reporting.

Third, ensure management support.  A firm's management – at the most senior level – should be "on board" and very supportive of the firm's anti-money laundering efforts. This needs to be made clear to all employees.

Fourth, cover all aspects of the firm's business.  A firm's money laundering detection function should include a variety of different employees and departments that have contact with customers – retail and institutional brokers, margin and credit departments, and new accounts, for example. If a firm does a multi-service business, all aspects of the firm's business should be covered as well.

Fifth, train employees.  A firm should train its staff regarding its anti-money laundering efforts. Each segment of a firm's staff should be trained to recognize possible signs of money laundering that could arise during the course of their duties, and know what to do once the risk is identified. Employees need to know their role in the firm's detection efforts, and be trained to knowledgeably perform their roles.

Sixth, audit the program.  A firm should have its anti-money laundering program audited by its internal audit department or a suitable third party. Policies and procedures need to be reviewed and tested to ensure that they are actually being implemented, and that they are working as intended.

Really, implementing an anti-money laundering program using these steps is just like implementing any other broker-dealer compliance program.


Money laundering compliance is on the SEC's radar screen, and I know that because you are here today, it's on your firm's radar as well. Even without additional regulation, existing anti-money laundering statutes impose significant obligations on broker-dealers that should be reflected in firm compliance programs. I know that many securities firms have implemented anti-money laundering compliance programs. We hope to focus the industry's attention on this issue and to encourage all firms to develop anti-money laundering compliance programs, and to encourage firms to ensure that existing programs are being implemented effectively.

How then, can you prepare for an examination in this area? If you do not have a program, start working on one. If you do have a program, evaluate its effectiveness, think about strengthening it, and redouble your efforts to ensure firm compliance. We recognize that you are not full-time policemen – your job is running a business. We appreciate that this requires an investment of time and resources. Nevertheless, we all need to do our part. We should participate in the fight against money laundering as good public citizens. However, you must participate in this fight to protect your reputation, to avoid criminal liability, and to ensure the soundness of our financial markets.

The fight against money laundering is a huge challenge: it needs the active cooperation of all of us working together. Promoting strong and fair markets is in our mutual interest, and we look forward to working with you. Thank you.


Modified: 05/08/2001