800 Overseas Investors Thank You

Alternate title: Keep those SAR Filings Coming! Terrorist financing down 36%!

Please read FinCEN's 15th Issue of The SAR Activity Review – Trends, Tips & Issues (http://www.fincen.gov/news_room/rp/files/sar_tti_15.pdf). It's a blast.

Seriously, you AML officers out there should read it. It gives you a reason to value all the time you spend worrying about whether or not to file a SAR. You and all your AML brethren are making a difference! The SAR report outlines some cases cracked thanks to your efforts (for instance, a foreign national was busted for leading a scheme involving hedge funds and advisory firms that resulted in $21 million in losses for over 800 foreign investors: that makes you feel good about doing all that AML work, right?). ....(right??)

Here's what examiners want to see from you:

1. Complete written procedures.
2. Implementation of written procedures.
3. Monitoring for susp. activity.
4. Reporting of susp. activity.

Here's what examiners are seeing from you:

1. Failure to document reviews of suspicious activity.
2. Incomplete SAR forms.
3. Crappy SAR's: completed inaccurately; inadequate narrative section (why is it suspicious?); includes supporting docs even though it's not supposed to; filed late.
4. Inadequate due diligence on potentially susp. activity--investigate to determine if you should file!

Recent transactions in the sale of unregistered securities or representing fraud/market manipulation are not being reported as required (such as those involving penny stocks). Read the publication for an example that may be familiar to you.

The report includes sound advice on how to maintain a current and effective SAR program at your firm, for instance, by addressing:

• current events and emerging trends: thanks to our little financial crisis, automated surveillance based on certain profiles and parameters don't work like they should (stock price/volume swings--all that is now normal; and customers with 'top reputations' can't be trusted anymore--those darned institutional short sellers!).
• cyber crime: one-two punch, here--electronic intrusion into online brokerage accounts combined with traditional market manipulation (market-savvy hackers, our worst nightmare).
• trade-based money laundering: no, not that kind of trade, this kind: international trade of goods and services. These Marco-Polo types under- or over-invoice or route invoices through various financial institutions (not just banks), leading to multiple payments for the same goods. Sophistication is growing in the illicit trade finance arena.
• reported suspicious activity: evaluate your firm's reporting history; analyze trends; identify similar schemes, common locales or names, or possible red flags; follow enforcement actions.
• identification and analysis of transaction types: don't just think of securities transactions that involve money: there are far more things to worry about! account transfers, free deliveries and receipts, external withdrawal by transfers and internal journal entry transfers. Your program should be able to detect activity and gaps that occur across the full spectrum of operations--all transactions "by, at or through" your broker dealer.
• identification of detection points: all departments and personnel must be adequately incorporated into escalation workflows. Matters such as ID theft, insiders trading, 314a matches, law enforcement subpoenas, customer tax issues, customer due diligence, credit reviews, back office operations, interaction with other financial institutions, and employee financial crime and prohibited trading... they all should feed into the SAR consideration stream.

(Those aren't my big words, by the way--not all of them. That summary is derived from the aforementioned SAR report.)

If you work for a huge firm with well-staffed internal legal, audit and compliance departments, this improvement to your AML/SAR program should seem reasonable. If you are a micro-firm, with one guy who pretty much wears every supervisory hat, well, my advice is to dedicate your summer in an attempt to achieve this level of AML musculature. Good luck. Take steroids.

You know what I think? That small firms should have an AML clearing house that performs their AML responsibilities for them, collectively. I mean, c'mon, it's crazy to imagine small firms being able to implement the goals expressed above. The whole cybercrime topic makes me scream louder than Danny Gokey: it's hard enough to get Outlook to work correctly, let alone defeat intergalactic cyberfiends. Wouldn't it be cool if the several thousand tiny FINRA BD's could outsource their AML stuff to one place? That place would be super-good at their job: they'd use unemployed MBA's and IT jocks to mastermind the most sophisticated and effective AML tools available on our planet, and they'd give the small firms the comfort of knowing that none of their clients was a foreign national perpetrating fraud on a global basis. They'd manage CIP, OFAC, 314a lists, 314b filings, account monitoring, suspicious activity investigations and reporting--and just think! AML audits would be a thing of the past! Instead, SEC or FINRA could do one big audit of the clearing house (let's call it AML, Inc. (tm) for now) to ensure compliance for the thousands of firms. The tiny firms could go back to doing what they do: helping their clients make money in the markets. Ahhhhh. (Un cafe, s'il vous plait...I think I was just dreaming.)

Anyway, 53,022 SAR's filed by the securities and futures industry through 2008. And exactly 6 cases solved. (Okay, I made that second number up.) Keep at it, folks! Some day a SAR you file will be profiled in a FinCEN report, and you'll be able to share your pride with your grandkids.

Oh, wait, no, you won't.