Alert May 19, 2009

FinCEN Semi-Annual SAR Review Discusses the Securities and Futures Industries

The current issue of the Financial Crimes Enforcement Network’s (“FinCEN”) semi-annual SAR Activity Review (the “Review”) focuses specifically on the securities and futures industries and includes a number of articles pertaining to SAR filings by securities broker-dealers, futures commission merchants, and introducing brokers in commodities.  

Not surprisingly, the Review point outs that the number of SAR filings from the securities and futures industries has increased every year.  According to the Review, in calendar year 2008, the securities and futures industries filed more than 15,000 SARs to address a broad range of suspicious activity, including structuring activities (designed to evade tax, Bank Secrecy Act, and other reporting requirements), the use of securities and commodities trading accounts for purposes other than investments, and the alleged use of charitable organizations for possible terrorist financing activities. 

The Review includes articles authored by the staffs of the SEC and the Financial Industry Regulatory Authority (“FINRA”).  Of particular note, the two staffs collaborated on a useful piece describing examination expectations and providing guidance for enhancing the effectiveness of broker-dealer anti-money laundering (“AML”) programs and SAR-filing approaches.  The article points out that examiners generally focus on four key items:

  • Whether AML policies and procedures are adequately designed to meet the risks posed by a firm’s business, size, customers, and products.
  • Whether written policies and procedures are, in fact, being implemented; that is, whether firms are actually following what is written.
  • Whether transaction monitoring is reasonably designed to identify potentially suspicious activity.
  • Whether a firm’s SAR decision-making processes are adequate to ensure accurate, timely, complete, and confidential SAR filings.
The article then notes some common examination findings.  The SEC and FINRA staffs specifically note that many firms fail to identify and report potentially suspicious transactions involving so-called “penny stocks.”  As the article notes, transactions in such very low-priced and thinly traded securities can, in certain circumstances, be red flags for fraud and market manipulation and require thorough investigation.