July 12, 2001

A regulation requiring broker-dealer subsidiaries of banks to report suspicious activities to the government has gone unenforced since passage of the Gramm-Leach-Bliley Act, the General Accounting Office reported. As a result, large portions of the financial system are outside the reach of anti-money laundering initiatives.

The regulation, issued by the Treasury Department in 1996, requires depository institutions-including broker-dealer subsidiaries-to file Suspicious Activity Reports, or SARs, whenever criminal activity is suspected.

Prior to Gramm-Leach-Bliley, bank regulators-including the Federal Reserve, the Office of the Comptroller of the Currency and the Office of Thrift Supervision-jointly examined broker-dealer subsidiaries of bank holding companies for SAR compliance. With the passage of Gramm-Leach-Bliley, regulatory oversight of broker-dealer subsidiaries passed to the Securities and Exchange Commission. The Federal Reserve stopped examining 52 broker-dealer subsidiaries in March 2000. The OCC and OTS have similarly curtailed their examinations.

But the SEC claims it can't enforce the SAR rule because it was written for banks, not securities firms. "The SEC has no statutory authority to determine compliance with the rules for depository institution affiliates, such as broker-dealers, adopted by depository regulators," wrote SEC director Annette Nazareth in a response to the GAO's March 2001 report, Oversight of Suspicious Activity Reporting at Bank-Affiliated Broker-Dealers.

According to the Treasury's Financial Crimes Enforcement Network (FinCEN), neither the SEC nor federal bank regulators are authorized to require bank-affiliated securities firms to file SARs. "This highlights the complexity in the post-GLB environment of implementing a suspicious activity regulatory regime for broker-dealers, and coordinating that regime with the reporting regime for depository institutions," wrote William F. Baity, deputy director at FinCEN.

Sen. Carl Levin, D-Mich., at whose insistence the GAO report was prepared, said, "This development is an unfortunate step backwards in the fight against money laundering."

"Bank-affiliated securities firms, which represent a significant portion of securities industry assets, are supposed to file reports on suspicious financial activities that may be related to money laundering," said Levin. "Yet because the regulatory authority over bank-affiliated securities firms has shifted from bank regulators to the SEC, examinations to ensure compliance with this anti-money laundering requirement have been discontinued."

The matter could be resolved if the Treasury Department issues rules expressly subjecting broker-dealers to suspicious activity reporting requirements. Indeed, FinCEN is working on a proposal for a broker-dealer SAR reporting requirement, known as SAR-S.

Meanwhile, SEC officials are preparing the industry for changes on the horizon. "Although the SEC has had a longstanding interest in money laundering prevention, we've decided to take a fresh look at our broker-dealer examination efforts in the money laundering area, and put money laundering compliance front and center on our examination 'radar screen,'" said Lori A. Richards, director of the office of Compliance Inspections and Examinations at the SEC at a May Securities Industry Association conference.

Although anti-money laundering programs often center around cash transactions, the securities industry isn't immune to the problem, as money launderers are notorious for finding ways to work the system to their advantage. "It makes sense for us to address risks in the securities industry now, before these money launderers migrate, affecting firms or affecting the market," said Richards.

Some securities firms have begun to take steps to implement anti-money laundering programs in advance of anticipated rule changes. "Some broker-dealer firms already have some fairly sophisticated programs in place, but we don't know what extent that's true throughout the industry," said Davi D'Agostino, director of financial markets and community investment at the GAO.

The GAO is conducting an extensive survey to determine the extent to which securities firms have instituted anti-money laundering controls in excess of existing regulatory requirements. "We're surveying broker-dealers and mutual fund companies to find out just what they are and aren't doing in terms of anti-money laundering efforts," said D'Agostino. The survey results are slated for release at the end of September.


2001 CMP Media LLC.7/1/01, Issue # 3807, page 8.