ANTI-MONEY LAUNDERING REGULATION OF US BROKER-DEALERS

© 2007 PROSKAUER ROSE LLP®

ANTI-MONEY LAUNDERINGREGULATION OFUS BROKER-DEALERS

Presented by:

Kathy H. [email protected]

2© 2007 PROSKAUER ROSE LLP®

TOPICS Background

Bank Secrecy Act

USA PATRIOT Act

AML Compliance Programs

Customer Identification and Verification Programs

Correspondent Accounts for Foreign Financial Institutions

Private Banking Accounts for Non-US Persons/Senior Foreign Political Figures

Suspicious Transactions

Other BSA Reports

Funds Transfer Rules

Information Sharing

Special Measures

Office of Foreign Asset Control Sanctions and Other Lists


Background

Proceeds from illegal activities frequently have to be laundered before they can migrate from the underground economy into the mainstream

Banks, broker-dealers and other financial institutions are attractive vehicles for laundering such funds

As a result, federal regulation has attempted to prevent the use of these institutions for money laundering

Money laundering is generally understood to mean engaging in acts designed to conceal or disguise the existence or origins of criminally derived proceeds in order to make them appear legitimate

Money laundering can take many forms and has proven difficult to detect and regulate as money laundering techniques become more sophisticated

U.S. laws criminalize not just the laundering of proceeds by the participants in the underlying crime, but also the facilitating of money laundering by financial institutions


Bank Secrecy Act (BSA)

Adopted in 1970, the BSA authorizes the Secretary of the Treasury to issue regulations requiring financial institutions to keep records and file reports on financial transactions; those reports are used by the federal government to investigate and prosecute money laundering and other financial crimes

Financial Crimes Enforcement Network (FinCEN) was created by the Treasury Department to monitor money laundering activities; it acts as a central depository for reports by financial institutions and coordinates enforcement activities with other agencies

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


USA PATRIOT Act

The USA PATRIOT Act of 2001, adopted following the September 11 attack, included the International Money Laundering and Anti-Terror Financing Act, which amended and strengthened the BSA

The PATRIOT Act imposed significant new AML requirements on financial institutions, including:— AML compliance programs— customer identification programs— monitoring, detecting and filing reports of

suspicious activity— due diligence on correspondent accounts for foreign

financial institutions, including a prohibition on transactions with foreign shell banks

— due diligence on private banking accounts for non-US persons

— mandatory information sharing with federal law enforcement agencies

— compliance with Treasury special measures


AML Compliance Programs

The PATRIOT Act amended the BSA to require financial institutions, including broker-dealers, to establish AML programs

NASD Rule 3011 and NYSE Rule 445 require their member organizations to establish risk-based AML compliance programs

Programs must be in writing and include:— policies and procedures reasonably expected to

detect and cause the reporting of specified transactions

— policies, procedures and internal controls reasonably designed to achieve compliance with the BSA and its implementing rules

— annual independent testing of the firm’s AML program

— designation of an AML compliance officer— ongoing AML training for employees


Customer Identification Programs (CIP)

Broker-dealers must establish a written CIP with 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, to enable the broker-dealer to form a reasonable belief that it knows the true identity of each customer

— making and maintaining a record of all information obtained to verify a customer’s identity

— determining whether a customer appears on any list of known or suspected terrorists or terrorist organizations designated by Treasury

— providing customers with adequate notice that information is being requested to verify their identities


Correspondent Accounts: Due Diligence and Prohibitions on Foreign Shell Banks

The PATRIOT Act requires financial institutions that establish correspondent accounts in the US for foreign financial institutions to develop risk-based due diligence procedures reasonably designed to detect and report instances of money laundering through those accounts

Correspondent accounts generally are accounts established by US financial institutions to receive deposits from, make payments on behalf of or handle other financial transactions for foreign financial institutions, including accounts to buy, sell, lend or hold securities, securities custody accounts, prime brokerage accounts, accounts for trading foreign currency, OTC derivatives accounts and futures and commodities accounts


Correspondent Accounts: (con’t)

Prohibitions on Foreign Shell Banks: — Broker-dealers are prohibited from establishing,

maintaining, administering, or managing correspondent accounts in the US 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

— 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 US of foreign bank owners and agents for service of process


Due Diligence Programs for Private Banking Accounts

Financial institutions, including broker-dealers, must establish risk-based due diligence programs for private banking accounts and provide enhanced scrutiny to any such accounts provided to senior foreign political figures (SFPFs)

A private banking account is an account that requires a minimum deposit of $1,000,000, is established or maintained for a non-US person and is managed by an employee of a financial institution acting as a liaison between the financial institution and the account owner

A SFPF is a current or former senior official in the executive, legislative, administrative, military or judicial branches of a foreign government, a senior official of a major foreign political party or a senior executive of a foreign government-owned commercial enterprise, or an immediate family member or person publicly known to be a close associate of the SFPF


Private Banking Accounts (con’t)

Broker-dealers providing private banking accounts must take reasonable steps to: — determine the identity of all nominal and

beneficial owners of private banking accounts— determine the source of funds deposited— determine whether any such owner is a SFPF subject

to enhanced scrutiny to detect the proceeds of foreign corruption

— review the activity of the account as needed to guard against money laundering

— identify and report any suspicious activity


Suspicious Transactions Financial institutions, including broker-dealers, must

monitor for and report suspicious transactions to FinCEN as a means of detecting money laundering and terrorist financing (SAR reporting)

The Treasury’s SAR rule for broker-dealers requires reporting of a transaction: (i) conducted or attempted to be conducted by, at or through a broker-dealer; (ii) involving at least $5000; and (iii) in which the broker-dealer knows, suspects, or has reason to suspect that the transaction involves funds from an illegal activity, is designed to evade requirements of the BSA, 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 involves use of the broker-dealer to facilitate criminal activity

A broker-dealer must report a suspicious transaction within 30 days of becoming aware of it on form SAR-SF

Financial institutions, including broker-dealers, filing SARs are prohibited from disclosing the reporting to anyone involved in the transaction


Other BSA Reports

Currency Transaction Reports (CTRs): Broker-dealers must file with FinCEN a CTR for any transaction over $10,000 in currency, including multiple transactions occurring the same day

Foreign Bank and Financial Accounts Reports (FBARs): Broker-dealers must file with FinCEN an FBAR for any foreign bank, securities or other account with an aggregate value of more than $10,000

Currency and Monetary Instruments Transportation Reports (CMIRs): Broker-dealers must report any transportation of more than $10,000 in currency or monetary instruments into or outside of the US on a CMIR


Funds Transfer Rules

Under the Joint Rule, broker-dealers must record and retain certain identifying information on funds transmittals of $3000 or more

Identifying information includes transmitter's name and address, amount of transfer, date, payment instructions, name of recipient institution and account information for transmittal recipient

Under the Travel Rule, most of the information required by the Joint Rule must be included in and travel with the transmittal through the transmittal process


Information Sharing With Law Enforcement and Financial Institutions

The USA PATRIOT Act added two information sharing provisions to the BSA— One requires financial institutions, including 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 for the purpose of identifying and reporting activities involving terrorist acts or money laundering activities

Mandatory Information Sharing: — Financial institutions 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


Information Sharing (con’t)

— 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 (e.g., the AML compliance officer) to receive such requests and maintain the confidentiality of all requests and responsive reports to FinCEN

Voluntary Information Sharing: — The safe harbor protects a financial institution

from certain civil liabilities in connection with information sharing

— It permits information sharing among financial institutions regarding individuals, entities, organizations and countries suspected of engaging in money laundering or terrorist financing


Information Sharing (con’t)

— A financial institution intending to share information 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 also filed a notice with FinCEN


Special Measures

The Secretary of the Treasury can adopt special measures for US financial institutions to address particular money laundering concerns relating primarily to non-US jurisdictions

These measures include additional recordkeeping and reporting of financial transactions, obtaining additional information on beneficial ownership or on transactions and prohibiting US financial institutions from opening or maintaining certain correspondent accounts

Currently, there are final rules instituting special measures against (i) Burma, (ii) Myanmar Mayflower Bank, (iii) Asia Wealth Bank, (iv) Commercial Bank of Syria, (v) VEF Bank and (vi) Banco Delta Asia


OFAC Sanctions and Other Lists

Financial institutions, including broker-dealers, are also subject to programs administered by OFAC

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’s sanctions programs are separate and distinct from, and in addition to, the AML requirements imposed on financial institutions


OFAC Sanctions (con’t)

OFAC publishes a list of Specially Designated Nationals and Blocked Persons (SDNs), who are individuals and entities whose property is subject to blocking and with whom US persons cannot conduct business

OFAC also administers country-based sanctions that are broader in scope than the list-based programs

Prior to conducing a transaction, broker-dealers generally check identification information concerning the transaction against OFAC’s lists of individuals and countries subject to sanctions

Depending on the applicable sanction program, if the transaction is prohibited, a broker-dealer may be obligated either to:— reject the transaction, or — freeze the funds or securities and establish a

blocked account to hold the frozen assets


OFAC Sanctions (con’t)

A broker-dealer must report all blockings and rejections of prohibited transactions to OFAC within 10 days of being identified and annually

There are other relevant 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 may be an indication of suspicious activity

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ANTI-MONEY LAUNDERING REGULATION OF US BROKER-DEALERS

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