Anti-Money Laundering
I Don't Handle Customer Funds...Why Do I have to Worry About AML?
By: Danielle Paul
Many broker-dealers act as introducing firm and do not handle customer funds or securities, while others offer non-traditional products in which they do not even have accounts, in the traditional sense. The common question we frequently hear from these firms is “why does my firm have to worry about AML?”
Here are some facts about Money Laundering:
- It is the world’s third largest business globally and it amounts to about $500 billion dollars annually.
- The term originated in the 1930’s when members of the Mafia would run their illegal profits through their legitimate businesses (e.g. laundromats, hence the term “laundering”).
- Over four million Suspicious Activity Reports have been filed since 2003.
- 80% of money laundering activities relate to drug trafficking
Money Laundering has three stages: Placement, Layering, and Integration.
- The placement stage occurs when the “corrupt” money is introduced to a legitimate financial institution.
- The layering stage occurs when the funds are transformed into a different vehicle.
- The integration stage occurs when the money reenters the mainstream economy and may be removed as a legitimate business transaction.
A person or organization that is attempting to launder money is trying to conceal funds from an illegal activity while still maintaining control of the money and then changing the form of the proceeds. The goal of money laundering is to make the source of illegal funds look legal so that they cannot be tied to the illegal activity itself.
The short answer as to “Why Do I have to Worry about AML when I don’t handle customer funds” is that Federal Law requires financial institutions to take steps to prevent and detect money laundering as set forth in the USA Patriot Act and the Bank Secrecy Act. Specific rules relating to broker/dealers were adopted in 2002 and have been revised over the past 6 years to include specific requirements for customer identification and reporting. You also need to keep in mind that Federal law declared “willful blindness” regarding AML to be a criminal offense so it is imperative that the firm and its associated person take AML as a serious responsibility.
The other reason is that money launders are getting more creative. Recently, law enforcement agencies around the world have found that some persons seeking to legitimize their illegal gains have turned to less conventional methods of laundering their money. Some of these include investing in non-traditional investments including buying private companies and then using these companies to launder the proceeds through their regular business or by setting up companies obtaining money from investors through private offerings and then either closing the company and leaving with the investor’s money or using the business on an ongoing basis to launder other funds. Therefore, it is imperative that broker/dealers involved in these types of businesses know the company and people both on the buy and sell side of these transactions.
So what do you need to do. You need to have policies and procedures in place to ensure that you know your customers and that you verify their identity either by documentary or non-documentary means. Further, your firm’s procedures:
- should be risked based in nature;
- specific to your firm’s business and size;
- must set up record keeping procedures to validate the verification existed;
- must set forth an internal reporting procedure to identify suspicious activity;
- require ongoing training for any staff that may have contact with customers or be engaged in transactions;
- should be tested by an outside consultant or a person independent of the plan’s creation or day-to-day AML activities at least annually (unless your firm does not execute transactions for customers, hold customer accounts or act as an introducing broker).