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SEC Warns Broker-Dealers of Insufficient AML Due Diligence on Omnibus Accounts

Christian.Larson@cwt.com's picture
Commentary by Christian Larson

The SEC Division of Trading and Markets (the "Division") warned that broker-dealers are not conducting adequate due diligence on omnibus accounts. The Division cautioned broker-dealers that omnibus accounts held by foreign financial institutions and used to transact in low-price securities pose a high risk for illicit activities, including money laundering.

In a Staff Bulletin, the Division described the AML obligations of broker-dealers under the Bank Secrecy Act, SEA Rule 17a-8 ("Financial Recordkeeping and Reporting of Currency and Foreign Transactions"), and FINRA Rule 3310 ("AML Compliance Program"). The Division stated that:

  • it is concerned that broker-dealers are conducting insufficient due diligence on omnibus accounts held for foreign financial institutions;
  • a U.S. broker-dealer's reliance upon another financial institution, including an affiliate, to conduct due diligence on a foreign omnibus account may be unreasonable; and
  • U.S. broker-dealers may be ignoring red flags that FINRA has published.

The Division stated that a broker-dealer's assessment of the risks associated with a foreign omnibus account should include an assessment of the foreign financial institution's underlying customers. There are situations, the Division wrote, in which a broker-dealer should request information on the underlying ultimate beneficial owners of the securities being traded in an omnibus account. The Division noted circumstances in which (i) it is difficult to obtain information about a foreign financial institution's underlying customers, and (ii) obtaining due diligence certifications from the foreign financial institution is insufficient to mitigate the risks associated with low-priced securities. The Division advised that in these circumstances, the broker-dealer should refuse the omnibus account, reject certain transactions, and/or file a suspicious activity report.

Commentary

SEC Chair Jay Clayton's public statement about this bulletin frames the Division's concern in terms of preventing penny stock fraud that harms U.S. retail investors. Staff notes that, often, broker-dealers are limited in their ability to identify market manipulation and other penny stock fraud because no single U.S. broker-dealer has complete visibility into penny stock ownership and trading.

To increase broker-dealer scrutiny of penny stocks, the Division is warning broker-dealers, in a 17-page, highly detailed bulletin, to more robustly implement their AML obligations. Doing so will require broker-dealers to rely less on certifications for AML purposes, to gather more detailed information about ultimate beneficial owners, and to turn down business from foreign financial institutions that are unwilling or unable to provide that information.

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