[box type=”note” style=”rounded”]Section of the report focusing on priorities for AML[/box]
Anti-Money Laundering (AML)
In 2014, FINRA will focus on AML issues associated with institutional business. An emerging trend is the utilization of executing broker-dealers by certain DVP/RVP (Delivery versus Payment/Receipt versus Payment) customers to liquidate large volumes of low-priced securities. Due to the nature of the DVP/RVP customer relationship with the executing broker, the source of the lowpriced securities is often masked unless the executing broker makes reasonable inquiry. Depending on the volume of shares and specific securities liquidated as well as the customer engaging in the activity, this business can raise red flags for AML- and Section 5 of the Securities Act of 1933-related concerns. Executing brokers should consider this type of activity when establishing and implementing a program to detect and report suspicious activity.
We have also noted a misconception among some executing brokers that Customer Identification Program (CIP) requirements do not apply to DVP/RVP customers (who are not otherwise exempt) or that the prime broker is responsible for CIP on those customers. DVP/RVP customers meet the definition of an “account” for CIP purposes,8 and, absent a formal reliance agreement with the prime broker, the executing broker is responsible for implementing CIP for these customers. Depending on the nature of the account and the risks associated with it, firms may conduct additional due diligence on this type of account and obtain information on the individuals with authority or control over the account.9 It is important that all firms, regardless of business model, develop a risk-based AML program designed to address the risk of money laundering specific to their firm. Firms that have high-risk customer bases should tailor their programs around the specific risks of those customers, including the types of customers, where its customers are located and the types of services they offer to those customers.
Link to the detailed FINRA report: click here