1/7/19 - Promontory Currents: SEC, DOJ Getting Tougher on AML Obligations
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1/7/19 - Promontory Currents: SEC, DOJ Getting Tougher on AML Obligations

By Conway Dodge, Christine Livingston, and Elizabeth Bethoney

On Dec. 19, the U.S. Department of Justice took a significant step in its enforcement of anti-money-laundering obligations of broker-dealers by filing the first criminal charges under the Bank Secrecy Act, against a Kansas-based broker-dealer for failing to file suspicious-activity reports. In a related action, the Securities and Exchange Commission filed civil charges against the broker-dealer for its AML failures associated with the criminal misconduct. The actions follow a recent enforcement trend we discussed in October. Since November 2017, the SEC, the Financial Industry Regulatory Authority, and the Financial Crimes Enforcement Network have fined a number of securities firms for not complying with their obligations to file SARs. The SEC’s recent exam priorities suggest this trend will not subside any time soon. These priorities, which the SEC published the day after the enforcement action involving the Kansas-based broker-dealer, note that the SEC’s upcoming examinations of firms will include an inspection of broker-dealers’ AML programs for compliance with regulatory obligations, including SAR-filing obligations.

Promontory previously published articles discussing this risk to securities firms and hedge funds, which is by no means new. In fact, former SEC Director of Enforcement Andrew Ceresney foreshadowed an enforcement streak in 2015, when he said in a speech that the agency would begin targeting firms that file no SARs or a disproportionately low number of SARs. He also said the commission would focus on the substantive quality of SARs in an effort to identify — and hold accountable — firms filing SARs that offer little or no value to law enforcement.

The SEC’s recent enforcement actions and the DOJ’s criminal charges demonstrate how critical SAR filings are to a securities firm’s overall compliance with its AML obligations. Inadequate or ineffective SAR filings can also reveal broader deficiencies in a firm’s BSA/AML program. The spate of SAR-related enforcement actions outlined in the table below explain some previously identified deficiencies, which are highly likely to be scrutinized by examiners in future exams, including:

  • Programs insufficiently designed to cover all broker-dealer activity or to trigger the reporting of suspicious activity
  • Inappropriate reliance on AML programs of other parties (e.g., introducing brokers, parent companies, and affiliates)
  • Poor communication from senior management about SARs

Recent Enforcement Actions and Settlements

Date Firm Type Fine/Settlement SAR-related Issues

December 2018


$10 million (FINRA fine)

Failed to include relevant transactional data in its transaction-monitoring system, including foreign-currency transfers; did not dedicate sufficient resources to review transaction-monitoring alerts; and inadequately monitored penny-stock trades for suspicious activity.

December 2018


$400,000 penalty to the DOJ pursuant to a deferred prosecution agreement and first criminal charge against a broker-dealer under the BSA. An SEC action including a cease and desist order, censure, and the establishment of an independent compliance consultant.

Failed to follow its own customer-identification procedures before opening accounts for companies created under tribal laws but operated by an individual who had been convicted of fraud and had negative news. Firm planned to subject accounts to enhanced monitoring but instead failed to monitor transactions that generated 103 alerts.

December 2018

Bank-affiliated broker-dealer

$24.5 million (combined total of SEC, FINRA, and FinCEN fines)

Failed to file SARs on suspicious activity of non-resident aliens that should have triggered red flags related to shell companies and cross-border funds movement. Orders also found the firm’s program was not reasonably designed to address risks, especially those related to its securities accounts.

September 2018

Clearing firm

$800,000 and exit of penny-stock clearing business (settlement with the SEC)

Failed to file SARs on transactions involving customers introduced by another broker that raised multiple red flags.

September 2018

Retail broker-dealer

$500,000 (settlement with the SEC)

Failed to file SARs relating to certain terminated investment advisers, due to having failed to consistently and appropriately refer terminated advisers and their potentially suspicious transactions to the firm’s AML department.

July 2018

Retail broker-dealer

$2.8 million (settlement with the SEC)

Failed to file SARs related to the activity of independent advisers who were terminated from the firm’s custodial platform, when the firm knew, suspected, or had reason to suspect the transactions required SAR filing.

May 2018

Bank-affiliated broker-dealer

$6.16 million (combined total of SEC and FINRA fines)

Failed to file SARs on transactions involving customers introduced by another broker-dealer; lacked an AML program that adequately covered a new product used by customers of the introducer.

March 2018

Retail broker-dealer

$1.3 million (combined total of SEC and FINRA fines)

Failed to file SARs on activity involving low-priced securities products that should have raised red flags.

December 2017

Bank-affiliated broker-dealer

$26 million (combined total of SEC and FINRA fines)

Failed to file SARs because the broker-dealer used affiliated bank’s BSA/AML monitoring systems inappropriately and excluded certain account types from monitoring, as the firm considered the accounts low-risk.

November 2017

Retail broker-dealer

$3.5 million (settlement with the SEC)

Failed to file continuing-activity SARs on international customers in U.S., in part due to confusing and inaccurate communication from AML leadership.

Firms can gauge the appropriateness of their SAR filing by first comparing the quantity of the firm’s SAR filing against the characteristics and business practices Ceresney highlighted in his 2015 speech as more likely to cause increased filing: “the number of registered representatives associated with the firms; the number of customer accounts; whether the firm retailed microcap securities or was dually registered as an investment advisor; the number of regulatory, civil, or criminal disclosures related to the firms; and the number of times the firm was involved in transactions that the [SEC’s enforcement division] has investigated in the past.” Next, they can review a sample of SARs filed and consider how effectively they articulate the suspicious nature of the activity and whether the information provided is actionable for law enforcement. Comprehensive reviews will also determine whether the firm’s AML risk assessment adequately measures both longstanding and emerging risks — and whether the firm’s transaction-monitoring efforts, internal referral processes, and responses to external inquiries (e.g., requests related to USA Patriot Act Sections 314(a) and 314(b) and subpoenas) drive effective SAR filing.

Firms will further benefit by reviewing the comprehensiveness and effectiveness of their program designs and considering whether they cover the types of activities regulators scrutinize — suspicious activities such as those involving microcap/penny stocks, delivery or receipt versus payment, securities-based lending, and other products mentioned in SEC and FINRA enforcement actions and guidance. Firms can also evaluate whether their programs comprehensively cover activity involving securities products and transactions occurring by, at, or through the firm, as well as the activity of introducing firms and their customers. Compliance teams should also ensure that any reliance on affiliates for program components is reasonable. Firms should also review the strength of their risk assessments and monitoring and escalation efforts and consider whether these efforts adequately and effectively lead to the identification and reporting of suspicious activity.

Forward-thinking firms will also review the strength of training programs across three lines of defense and senior leadership, confirm that line staff can identify potentially suspicious activity, and tailor training to meet the specific risks and red flags each business line faces. Risks and red flags change often, and training should evolve accordingly — particularly in response to relevant enforcement actions and government investigations.

In sum, broker-dealers’ senior leaders should understand and emphasize the importance of SAR-filing obligations, as well as the need to have programs and training that cause the identification, escalation, and reporting of suspicious activity.

Promontory is republishing this issue of Currents to add commentary on the first criminal charges against a broker-dealer for failing to report suspicious transactions.


Conway Dodge is a managing director in Promontory’s Washington office.

Christine Livingston is a principal in Promontory’s Washington office.

Elizabeth Bethoney is vice president of AML operations at Promontory Risk Review.