The Bank Secrecy Act requires broker-dealers to file suspicious activity reports. Under the SAR Rule (31 C.F.R. § 1023.320(a)(2)), every broker-dealer has to file a report for a transaction of at $5000 that
- Involves funds derived from illegal activity or is intended or conducted in order to hide or disguise funds or assets derived from illegal activity
- Is designed to evade any requirements under the Bank Secrecy Act
- Has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage
- Involves use of the broker-dealer to facilitate criminal activity
That’s all a bit vague. So FINRA has produced a list of more actionable items, most recently compiled in FINRA Regulatory Notice 19-18 (May 2019).
There are vendors who sell software that will monitor transactions and flag those that meet the criteria in the FINRA Notice.
OTS Link used one of those automatic surveillance systems. For the first six months of 2021 the system raised over 1800 alerts for transactions to be reviewed. For those 300 alerts a month, the compliance team at OTS Link only devoted 5 hours a month. No surprise, they failed to investigate any or file any SARs.
In the Order, the SEC says that if OTS Link had properly surveilled transactions it would have spotted:
(a) a large volume of thinly-traded, low-priced securities;
(b) a sudden spike in investor demand for, coupled with a rising or decreasing price in, thinly-traded, low-priced securities;
(c) suspicious manipulative, pre-arranged or wash trading activity;
(d) subscribers who were publicly known to be the subject of criminal, civil or regulatory actions for crime, corruption, or misuse of public funds.
In response to the SEC exam, OTS Link added two people to its AML compliance team and hired a third-party compliance consultant to review the program.
The SEC order mandates additional reporting and levied a $1.19 million fine. You either pay for compliance or you PAY for compliance failure.
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