Securities regulators are getting serious about brokerage anti-money-laundering efforts and the filing of suspicious activity reports, or SARs. In February, NYSE Regulation fined Bear, Stearns & Co. $1.5 million for three infractions, one of which was failing to supervise ten suspicious accounts controlled by a foreign customer. This followed December’s action, in which Oppenheimer & Co. became one of the first securities firms to be slapped with a significant fine -- $2.8 million, imposed jointly by NYSE Regulation and the Treasury Department’s Financial Crimes Enforcement Network, or Fincen -- for failure to create an adequate anti-money-laundering program, failure to file SARs and filing late and incomplete reports.
Broker-dealers have been required under the Bank Secrecy Act to establish anti-money-laundering programs since 2002 and to file SARs since January 2003. But until these recent enforcement actions, only relatively small brokerages had been snared for SAR transgressions -- and the fines imposed had been in the tens of thousands of dollars. Brokerages and futures firms, in fact, filed just 6,936 SARs last year, compared with 522,655 filed by banks.
“Many brokerage executives believed that because they don’t take in as much cash as bankers do, they wouldn’t become regulatory targets,” says Michael Zeldin, a Washington-based principal of management consulting firm Deloitte & Touche.
In light of the recent fines, more and larger ones for broker-dealers are probable, says William Langford Jr., who became director of global anti-money-laundering efforts at J.P. Morgan Chase & Co. at the end of April, after serving as Fincen’s associate director of regulatory policy and programs. He says that regulators don’t second-guess particular trades but instead focus on whether “a firm has the systems and programs necessary to identify suspicious activity and report it.”
Accordingly, institutions are installing sophisticated transaction-monitoring systems to spot potential problems. Dushyant Shahrawat, an analyst with TowerGroup, a Needham, Massachusettsbased financial services consulting firm, estimates that installing and integrating transaction monitoring software at a large, diversified financial company and training employees to use it can cost as much as $50 million. “A system must identify patterns by the same customer across all touch points,” he says, noting that a small retail-oriented broker-dealer might spend $6 million on software and another $8 million to implement it.
An automated system put in place at Charles Schwab & Co. in early 2003 monitors all incoming and outgoing asset movements, highlighting those that indicate possible fraud, says James Freeman, senior vice president of risk management and investigations, who declined to discuss its cost. Developed with Mantas, a Herndon, Virginiabased software firm that devises what it calls behavior detection technology, the Schwab system flags any customer who opens an account, transfers a large sum of money into it and then wires a large amount to a third party. Previously, each of those transactions would have been recorded separately; detecting a pattern would have been “more hit or miss, and dependent on an employee’s recognizing something unusual,” notes Freeman.
Deloitte’s Zeldin says that the complexity of a firm’s transaction monitoring system depends on the services it provides and its clients’ risk profiles: “We advise spending consistent with client risk, without breaking the bank.”
In addition to Mantas, he says, popular anti-money-laundering software providers include New Yorkbased Actimize and Searchspace Corp.; Prime Associates, based in Clark, New Jersey; Wolters Kluwer Financial Services in St. Cloud, Minnesota; and Dublin, Irelandbased Norkom Technologies.
But “if you think technology will solve the problem, forget it,” says Henry Barenholz, who heads sales at NetEconomy, a Dutch provider of risk-monitoring systems based in the Hague. “You need to get your people trained, too.”
