Brokerage, Investment Firms Focus of Anti-Laundering Law

By Stern, Todd | American Banker, November 9, 2001 | Go to article overview

Brokerage, Investment Firms Focus of Anti-Laundering Law


Stern, Todd, American Banker


For decades federal anti-money-laundering efforts have been focused principally on banks. The tragic events of Sept. 11 have ushered in a new era, however, and broker-dealers and investment companies are now drawing the attention of the U.S. government in its invigorated fight against dirty money.

Indeed, on Oct. 26 President Bush signed into law major anti-money-laundering legislation, the International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001, the result of which will be numerous new compliance requirements not only for banks, but also for brokerage firms and investment companies.

Given the new law and the heightened scrutiny of money laundering in the post-Sept. 11 environment, broker-dealers, and investment companies will need to exercise more vigilance in detecting and preventing money laundering. In short order, firms will need to revisit their policies and procedures to ensure compliance with not only existing anti-money-laundering requirements, but also their regulatory obligations under the new law.

PREEXISTING LAWS

Two main sets of federal anti-money-laundering laws have long applied to broker-dealers and investment companies: the criminal money-laundering statutes and the Bank Secrecy Act of 1970.

Criminal money-laundering prohibitions. The U.S. criminal code makes it illegal for any person or entity to participate "knowingly" in the transfer of funds that are the proceeds of various types of specified unlawful activities (for example, drug trafficking, wire fraud, and mail fraud).

The knowledge standard embodied in the statute can be met if there is evidence of "willful blindness." Accordingly, broker-dealers and investment companies can be convicted of money laundering if they have been willfully blind to, or consciously avoided learning about, the criminal origins of funds.

Violations of these criminal code sections can subject firms and their officers or employees to imprisonment and substantial monetary penalties. Firms also can be prosecuted for the criminal conduct of employees, depending on the particular facts.

To this end, the New York Stock Exchange and the National Association of Securities Dealers have cautioned member firms about potential exposure under the criminal laws, and they have advised firms to establish procedures to detect money-laundering transactions.

The Bank Secrecy Act. This law is essentially a record keeping and reporting statute, the requirements of which may be understood as an effort to make sure that financial institutions and their employees are not "willfully blind" to money-laundering activities but, instead, investigate and report high-risk transactions to the government.

Investment companies and broker-dealers have long been subject to certain Bank Secrecy Act requirements. Under this law, all investment companies and broker-dealers generally must:

File currency transaction reports for cash transactions over $10,000.

Report the transportation of currency or monetary instruments of over $10,000 into or out of the United States.

Report interests in foreign financial accounts.

In addition, under federal banking regulations, investment companies and broker-dealers that are affiliated with banks must file suspicious-activity reports, which are used to alert law enforcement to transactions that raise suspicions of money laundering or other violations of law. Bank-affiliated firms must file these reports if, among other things, they know, suspect, or have reason to suspect that a transaction:

Involves funds or assets derived from illegal activity;

Is designed to evade regulations promulgated under the BSA; or

Serves no business or apparent lawful purpose, and the firm knows of no reasonable explanation for the transaction after examining the available facts. …

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