Representative Fined for Not Spotting AML Red Flags
Commentary by Steven Lofchie
A registered representative reached a settlement with the SEC regarding his failure to report red flags to his firm's AML group in connection with a wire transfer from a customer's account to the account of a relative of that customer.
In an Order, the SEC stated that the representative effected a $50,000 wire transfer to a relative of the customer. The SEC said that the relative was a close family member of an executive of a company which was about to be acquired. The transaction took place three days before the acquisition announcement. The acquisition announcement led to a 30 percent increase in the stock price. The SEC further found additional transactions from brokerage accounts the relative controlled in the names of two immediate family members, "which were unusual in the context of the Customer's account history."
The SEC found that the representative failed to report the "unusual" activity to his firm's AML group, which prevented the firm from filing a Suspicious Activity Report ("SAR") in a timely manner. The SEC concluded that the representative violated Exchange Act Section 17(a) ("Records and Reports") and Rule 17a-8 ("Financial recordkeeping and reporting of currency and foreign transactions") thereunder.
To settle his potential liability with the SEC, the representative agreed to (i) cease and desist from further regulatory violations and (ii) pay a civil money penalty of $20,000.
Statement
SEC Commissioners Hester M. Peirce and Mark T. Uyeda disagreed with the SEC's findings that the transactions processed by the representative presented red flags that warranted an SAR, arguing that the Order fails to explain how a loan and its subsequent repayment between family members is suspicious. The Commissioners criticized the Order for encouraging representatives to "view all flags as various shades of red that require internal reporting." They warned that the resulting impact could be compliance departments filing unnecessary SARs which will create "unhelpful clutter to the reporting data" and impose additional costs for firms.
Commentary
In a jury trial, a unanimous verdict is required. Perhaps there ought to be some similar concept of "not guilty" when the SEC brings charges. If not all the Commissioners are convinced that the relevant facts constituted a "red flag," it seems pretty unfair to hold some representative liable, particularly in a case where the representative was not profiting in any way by his conduct.