In a continuing effort to expand the coverage of suspicious activity reporting to all potentiallyvulnerable sectors of the financial services industry, today the Financial Crimes EnforcementNetwork (FinCEN) announced a new rule requiring brokers and dealers in securities to reportsuspicious activity. These firms will be obligated to report suspicious transactions that areconducted or attempted by, at, or through a broker-dealer and involve or aggregate at least $5,000 infunds or other assets. The rule will be published in the Federal Register on July 1, 2002.Specifically, the final rule requires brokers and dealers in securities to report to FinCEN atransaction if the broker-dealer knows, suspects, or has reason to suspect that it falls within one offour classes:
- transactions involving funds derived from illegal activity or intended or conducted in order to hide or disguise funds derived from illegal activity;
- transactions designed, whether through structuring or other means, to evade the requirements of the Bank Secrecy Act;
- transactions that appear to serve no business or apparent lawful purpose or are not the sort of transactions in which the particular customer would be expected to engage, and for which the broker dealer knows of no reasonable explanation after examining the available facts; or
- transactions intended to further a criminal purpose, but apparently involving legally-derived funds. (This category involves the use of the broker-dealer to facilitate criminal activity, including terrorism).
The final rule, which was drafted in consultation with the SEC, becomes effective on January 1,2003. Broker-dealers already are required to establish anti-money laundering programs that, amongother things, are designed to detect suspicious transactions, under recently promulgated selfregulatory organization (SRO) rules. The SEC has the authority to examine broker-dealers forcompliance with the rule, and it is expected that the SROs will also be reviewing compliance as partof the enforcement of their rules.“The SEC and the SROs have taken important steps to address money laundering concerns atbroker-dealers,” said James F. Sloan, Director of FinCEN. “It was critical that we all work togetherto strike the appropriate balance and I believe in drafting the final rule we have benefited from their efforts in this area. We look forward to our continued dialogue as we move forward towardimplementation of the rule.”The USA Patriot Act addresses the issue of suspicious transaction reporting by broker-dealers insection 356 of Title III. Both the proposed rule, which was published on December 31, 2001 andthe final rule, to be published July 1, 2002, have met the deadlines specified by the USA PatriotAct.Depository institutions have been required to report suspicious activity since April 1, 1996. Brokerdealersthat are affiliates of banks or bank holding companies have also been required to reportsuspicious activity since that time. Certain money services business fell under SAR requirementsbeginning January 1, 2002. In addition, FinCEN has proposed a SAR rule for casinos and cardclubs.A copy of the final rule may be found on FinCEN’s website under “What’s New” at www.fincen.gov