Defending Against Securities-Based AML and Fraud Schemes

Transcription

1 Defending Against Securities-Based AML and Fraud Schemes Monday, April 3 4:50 PM Moderator: Ryan Schwoebel, CFE, CAMS, Anti-money Laundering (AML) Officer, ProEquities Speakers: Elizabeth Bethoney, CAMS-FCI, Vice President of AML Operations, Promontory Risk Review, an IBM Company John Davidson, Senior Vice President and Global Head of AML, E*TRADE Financial Milan R. Kosanovich, Supervisory Special Agent, Complex Financial Crimes Unit, Federal Bureau of Investigation Kristin Milchanowski, Executive Director, Advisory, EY

2 Defending Against Securities- Based AML & Fraud Schemes Note: the opinions expressed in this presentation are those of the panelists, and may not represent the opinions of their employing organization. 2

3 Panelist Introductions 3

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5 Agenda *Please hold all questions for the end of the panel presentation to ensure all panelists have sufficient time for their portion of the presentation. Thank you! 5

6 Securities AML Concerns From Brokerage Firm s Perspective (John): 6

7 AML & Fraud Considerations for Securities Firms: Cash Managed Accounts: The SEC & FINRA addressed the use of brokerage accounts that offer cash management features (check writing, journaling among accounts, debit card/atm access, credit cards, ACH transfers, wire transfers). These allow customers to use a brokerage account like a bank checking account, and engage in non-securities transactions that present multiple avenues for potential money laundering. Direct Market Access and Master/Sub Account Relationships: FINRA & SEC exam priorities identified as a focus area trading firms that have entity customers with underlying customers that can directly access U.S. markets from higher risk jurisdictions. The SAR filing obligation includes reporting suspicious activity based on transactions conducted by, at, or through the firm (including direct market access activity). In a master/sub account structure- a company opens a brokerage/master account, through which numerous individuals or other entities trade as sub account holders. The Elderly: FinCEN & FINRA issued guidance regarding the reporting of financial abuse of the elderly. SARs may be used to report the financial exploitation of elders. 7

8 FinCEN Cyber Guidance: Issued 10/25/16- mandatory SAR filing for cyber event impacting transactions. Cyber-related event: An attempt to compromise or gain unauthorized electronic access to electronic systems, services, resources, or information. Includes actual events and attempted events if you conclude the attempt was to impact transactions. Includes voluntary SAR filing guidance for cyber incidents that do not impact transactions. Includes requirements to provide cyber related information in SARs (ex: IP addresses, time stamps, device identifiers). 8

9 Question for the Audience #1: Do you work for a financial institution within the securities industry? (Y/N) 9

10 Hedge Fund AML Issues (Elizabeth): 10

11 Some Important Stats (just kidding) 11

12 *2015 SARs Not Keeping Pace with Growth of the Hedge Fund Sector Hedge Fund Launches % of Mgrs Noting a Change in Capital (2015) HNW Indiv Wealth Mgr Family Office Retail Clients *Not Complete 12 Months of Data Source: Preqin Source: Preqin Increase No Change Decrease Number of SARs Filed (U.S.) - Securities 15,000 10,000 5,000 0 Source: FinCEN, Feb Hedge Mutual All Other Sec Elizabeth A. Bethoney 12

13 Shifting Regulatory/Investigative Climate FinCEN Proposed Rule for Registered Investment Advisers (IAs) Would Require AML Programs, including Filing SARs Initiation of Law Enforcement Investigative Efforts FBI: National Real Estate Attorneys & Hedge Funds Initiative FATF Priority Recommended Action for US: Apply AML/CFT Obligations to IAs Lack of AML/CFT Obligations a Supporting Factor in PC/LC Rating on 9 of 40 FATF Recs Moderate Rating on IOs 3 (Supervision) & 4 (Preventive Measures) (FATF-defined key goals of an effective AML/CFT program) Ireland s Central Bank Rates Funds Sector Medium-High Risk 40% of Global Hedge Fund Assets Same Rating as Attorneys, Trust & Company Service Providers Strong Rhetoric from Regulators Investment advisers are on the front lines of a multi-trillion dollar sector of our financial system. If a client is trying to move or stash dirty money, we need investment advisers to be vigilant in protecting the integrity of their sector. Jennifer Shasky Calvery, Former FinCEN Director AML will remain a critical area of focus for both the industry and regulators... Susan Axelrod, EVP/FINRA Regulatory Operations the number of firms that filed zero SARs or one SAR per year was disturbingly large I find it hard to believe the industry as a whole is fulfilling its obligations. Andrew Ceresney, Former Director/SEC Enforcement Division Elizabeth A. Bethoney 13

14 Spotting Suspicious Activity: Know Your Customers & Intermediaries Investors & Intermediaries - Primary Sources of Money Laundering Risk to a Hedge Fund Fund Managers Should Have a Thorough Understanding of Each Investor Source of Wealth Expected Activity & Each Intermediary Jurisdictional Risks Strength of Regulatory Supervision Reputation Particular Emphasis on Intermediaries that Provide Access to the Fund Introduce Investors Who Otherwise Would Not Have Access Often Risky High Net Worth Individuals 1 st FCPA Fine against a Hedge Fund (Och Ziff $412m) Hinged on Actions of Intermediaries/Placement Agents Elizabeth A. Bethoney 14

15 And Your Risks & Red Flags Key Inherent Risks Offshore Jurisdictions, Tax & Money Laundering Havens High Net Worth Individuals Relatively Short Lockup Period High Investment Requirement Private Placement No Specific AML Regulation Specific Red Flags Investor Not Concerned with High Fees, Penalties Investor Not Inquiring about &/or Not Concerned with Fund s Risk/Return Profile Investor Subscriptions, Redemptions Out of Cycle &/or Unexpected Investor Requests Funds Be Sent to Unexpected Third Party Investor Uncooperative or Refuses to Provide Required Documentation Investor Inquires about Regulatory Reporting Requirements Investor Unable to Adequately Describe Profession, Business Generating SOW Elizabeth A. Bethoney 15

16 Question for the Audience #2 Are you aware of the BrokerCheck website and what information it provides? (Y/N) * 16

17 Securities AML Concerns From Consultant s Perspective (Kristin): 17

18 AML Securities Current Topics: 18

19 Emerging Compliance Risks: 19

20 Red-flags: 20

21 Case Studies: 1. A FINRA examination found an investment banking and securities firm lacked an adequate AML program designed to monitor and detect suspicious penny stock transactions. The firm also failed to investigate these transactions, even after such activity was brought to the firm s attention. The firm s AML program also did not satisfy SAR filing requirements, and lacked an adequate supervisory system to prevent transactions involving unregistered securities. 2. A clearing and settlement division of an exchange organization used an omnibus account at a US financial institution to hold securities on behalf of the Central Bank of Iran. The division lacked the ability to uncover beneficial ownership and therefore facilitated payments on behalf of entities subject to sanctions. 3. An investment bank failed to implement a reasonably designed AML program. The bank also displayed a failure to implement adequate supervisory controls, as well as conduct due diligence on foreign financial institutions. 21

22 Question for the Audience #3 How sufficient do you believe your annual continuing education/training (personal or organization s) is related to securities-based AML and fraud schemes? 1. Excellent- including training on current cases 2. Decent- lacking, but better than nothing 3. Poor or none 22

23 Securities Fraud/AML Concerns From Federal LE s Perspective (Milan): 23

24 Securities Fraud/AML Concerns From Federal LE s Perspective: Mirror Trading Red flags: Consistent trades between the same entities without much profit or loss for either party, especially from overseas customers Binary Options Red Flags: Any credit card charges with the word binary in the name 24

25 Securities Fraud/AML Concerns From Federal LE s Perspective: Unlicensed Money Service Businesses - Bitcoin Red flags: Daily, in-branch deposits from across the country in even-dollar amounts Penny Stocks Red Flags: Trades that represent a high-volume of the overall trading in that security for a specified time-period 25

26 Key Takeaways: Securities brokerage accounts share many similar AML risk as other Fis, but also many unique ones (ex: penny stocks, market manipulation, etc.) Hedge funds present a unique AML risk due to issues related to source of funds and KYC. Assumed low-risk nature of securities clients can sucker-punch firms with illicit funds. Emerging AML risks in the securities industry include mirror trading, binary options, and unlicensed MSBs in digital currency. 26

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