FINRA Reminds Broker-Dealers on Importance of Compliance with New AML Rules

Michael Volkov
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The Volkov Law Group

The new Anti-Money Laundering laws and regulations continue to roll out with new risks, liabilities and compliance requirements.  There is a coming AML enforcement storm, fueled by a new AML whistleblower program that will operate in a manner similar to the SEC’s successful whistleblower program.  The AML Act of 2020 increased penalties for AML offenses, adopted investigative improvements to expand the reach of AML investigations and subpoenas, allocated additional resources, and set the table for a new and more aggressive AML/CFT enforcement regime. 

In June 2021, the Financial Crimes Enforcement Network (“FinCEN”) issued the first memorandum outlining expectations and priorities for AML and countering the financing of terrorism policy.  FinCEN also released guidance for non-bank financial institutions (“NBIFs”), including broker-dealers.

Following up on FinCEN’s Guidance, FINRA released its own Regulatory Statement to encourage broker-dealers to incorporate the new AML requirements and priorities into their own AML compliance programs.

The AML priorities focus on threats to the U.S. financial system and national security, including: (1) corruption; (2) cybercrime, including relevant cybersecurity and virtual currency considerations; (3) foreign and domestic terrorist financing; (4) fraud (including securities and investment fraud and internet-enabled fraud); (5) transnational criminal organization activity; (6) drug trafficking organization activity; (7) human trafficking and human smuggling; and (8) proliferation financing.

The Bank Secrecy Act, as amended by the AML Act, requires financial institutions to incorporate these priorities as appropriate to a risk-based AML program.  For financial institutions, FinCEN emphasized that these priorities should be included as a measure on which a financial institution is supervised and examined for compliance.

With respect to NBIFs, such as broker-dealers, FinCEN clarified that the change in BSA requirements did not alter the BSA requirements on supervisor expectations for covered broker-dealers.  However, FinCEN explained that it would impose certain requirements on broker-dealers as part of new regulations 180 days after it adopts new regulations implementing the AML Act. FinCEN noted that broker-dealers may not be required to incorporate all of the listed AML Act priorities into their own AML risk-based programs.

FinCEN has encouraged broker-dealers to begin the risk assessment process to determine how much, if any, relevance thew priorities will have.  To this end, covered NBFIs should assess the potential risks associated with the products and services they offer, the customers they serve and the geographic areas in which they operate.

Building on this FinCEN direction, FINRA Rule 3310 requires every member firm to develop and implement a written AML program reasonably designed to achieve and monitor for compliance with the requirements of the BSA.  While FinCEN noted that NBIFs were not required to update their compliance priorities in response to the AML Act and revised AML/CFT Priorities, FINRA has encouraged member firms to begin to evaluate how they will incorporate and document the new Priorities into their respective risk-based AML/CFT programs.  s.

Member firms that are beginning to evaluate how they will do so may wish to begin considering potential updates to the red flags that they have incorporated into their risk-based AML compliance programs in light of the risks presented by factors such as their business activities, size, the geographic locations in which they operate, the types of accounts they maintain, and the types of transactions in which they and their customers engage.

Broker-dealers should also focus on technological changes that may be needed to update their AML programs, particularly with respect to monitoring and investigating suspicious activities.  AML compliance has moved light years into the future based on automated solutions and enhanced computer capabilities.  Broker-dealers need to review these advances and upgrade their existing operations.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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