Broker-Dealers Settle Charges Over Deficient Suspicious Activity Reports
Broker-Dealers
AML
December 31, 2024
The Case
On November 22, the SEC announced (here) that broker-dealers Webull Financial LLC, Lightspeed Financial Services Group LLC, and Paulson Investment Company, LLC agreed to settle charges that they filed with law enforcement SARs that failed to include required information. The three broker-dealers agreed to pay $275,000 combined in civil penalties to settle the SEC’s charges. According to the SEC orders, each of the three broker-dealers filed multiple deficient SARs over a four-year period beginning in 2018.
The Bank Secrecy Act (“BSA”) and implementing regulations promulgated by the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) require that broker-dealers file a suspicious activity report (SAR”) with FinCEN to report a transaction (or a pattern of transactions) conducted or attempted by, at, or through the broker-dealer involving or aggregating to at least $5,000 that the broker-dealer knows, suspects, or has reason to suspect: (1) involves funds derived from illegal activity or is intended or conducted to disguise funds derived from illegal activities; (2) is designed to evade any requirement of the BSA; (3) has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the broker-dealer knows of no reasonable explanation of the transaction after examining the available facts, including the background and possible purpose of the transaction; or (4) involves use of the broker-dealer to facilitate criminal activity.
Broker-dealers are required to file a SAR no later than thirty (30) calendar days after the date of the initial detection of facts that may constitute a basis for filing a SAR under the SAR Rule. In cases where the broker-dealer cannot identify a suspect on the date of initial detection, it must file the SAR within sixty (60) calendar days of the initial detection of facts that may constitute a basis for filing a SAR.
Regulatory Implications
This enforcement action emphasizes the importance of filing complete and accurate SARs. Key takeaways include:
Critical Role of SARs: SARs provide law enforcement and regulatory agencies with valuable intelligence.
Compliance Obligations: Broker-dealers must strictly adhere to BSA requirements, including timely reporting and the inclusion of the five essential elements in SAR narratives.
Enhanced Monitoring: Firms should periodically review and enhance their anti-money laundering (AML) programs to address gaps in SAR reporting and other compliance areas.
Practical Guidance for Firms
To reduce the risk of similar enforcement actions, broker-dealers should consider these steps:
Conduct Compliance Reviews
Perform regular reviews of SAR filings to verify that narratives meet regulatory requirements.Train Staff
Provide targeted training to compliance teams on preparing SAR narratives that include all required elements.Engage External Consultants
Seek third-party expertise to review and strengthen AML programs, particularly in areas like SAR preparation and filing.Document Monitoring Efforts
Maintain detailed records of monitoring processes and rationale for decisions regarding SAR filings.
InnReg offers expert AML compliance services to broker-dealers, including independent reviews of SAR processes and comprehensive training programs. Our team helps firms identify deficiencies, implement effective controls, and maintain regulatory compliance.
RIAs
The SEC recently brought settled enforcement actions against two registered investment advisers for failing to establish, maintain, and enforce written policies and procedures reasonably designed to prevent the misuse of material nonpublic information (MNPI), in violation of Section 204A of the Investment Advisers Act of 1940 (Advisers Act) and the Compliance Rule.
RIAs
On Sep. 4, 2024, FinCEN published a final rule (Final Rule) adding certain RIAs and ERAs (collectively, Covered Advisers) to the definition of “financial institution” under the regulations implementing the BSA, and imposing on Covered Advisers broad AML and CFT program requirements, as well as other BSA recordkeeping and reporting requirements.
NFA IBs
At the heart of the statutory and regulatory framework governing transactions in derivatives in the United States is a customer asset protection regime that requires futures commission merchants (FCM) and derivatives clearing organizations (DCO) to hold customer funds in segregation.
