finra

Testimony of Elisse B. Walter
Executive Vice President

Regulatory Policy and Programs

Before the Senate Committee on Banking, Housing and Urban Affairs
Hearing on Money Laundering

October 3, 2002

 

Introduction

 

On behalf of NASD, I would like to thank Chairman Sarbanes, Ranking Member Gramm, and the members of the Senate Banking Committee for this opportunity to testify.

 

I am here today to tell you about measures NASD has taken to assist in the implementation of the International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001, which is Title III of the USA PATRIOT Act.

 

My appearance comes almost a year after the enactment of the PATRIOT Act – a year during which NASD has worked closely with the Securities and Exchange Commission, the Treasury Department, other regulators, and members of the securities industry to begin implementation of those aspects of the PATRIOT Act that apply to broker/dealers.

 

Overview

 

Let me begin with a brief overview of NASD – because knowing our mission and how we operate will help you understand NASD's role under the PATRIOT Act. As the world's largest self-regulatory organization (SRO), NASD has been helping to bring integrity to the markets for more than 60 years. Investor protection and market integrity are at the core of NASD's mission and are the foundation of the success of U.S. financial markets.

 

Under federal law, every securities firm doing business with the American public is required to be a member of NASD. Currently, roughly 5,500 brokerage firms, 90,000 branch offices, and over 670,000 registered securities representatives come under NASD's jurisdiction.

 

NASD writes rules that govern the behavior of securities firms. These rules become final upon approval by the SEC. NASD examines firms for compliance with these rules (as well as for compliance with SEC rules and the federal securities laws), investigates possible violations of securities laws and regulations, and disciplines members and their employees when violations occur. NASD also is responsible for professional training, licensing and registration, dispute resolution and investor education.

 

While our regulatory jurisdiction is limited to our broker/dealer member firms and their associated persons, our examinations, surveillance, and regulatory intelligence alert us to illegal conduct outside of our jurisdiction. We routinely refer such findings to the SEC, the states and criminal prosecutors for their action. We provide technical assistance to Federal, State and local prosecutors and agents throughout the country on matters within our regulatory expertise. More than 200 defendants have been convicted of felonies in cases where we assisted criminal authorities. These matters have included not just "traditional" securities fraud, but also cases involving organized crime, money laundering, and most recently terrorist financing.

 

Money Laundering and the Securities Industry

 

Prior to the passage of the PATRIOT Act, NASD had some experience overseeing the securities industry's compliance with anti-money laundering regulations. Broker/dealers have long been subject to the reporting requirements of the Bank Secrecy Act.

 

For example, in July 2001, NASD Enforcement filed a complaint against a registered representative who worked with a securities firm affiliated with a large U.S. banking company, alleging that she, among other things, had structured currency transactions to evade federal reporting requirements and had caused her employer (an NASD member firm) to fail to file a currency transaction report, as required by the Bank Secrecy Act.

 

In that case, the firm had a policy of prohibiting representatives from accepting cash from customers. The firm, however, also had anti-money laundering policies and procedures in place to ensure compliance with the Bank Secrecy Act, including the filing of currency transaction reports, in the event that a cash transaction occurred. Despite the firm's prohibition, the registered representative agreed to accept $50,000 in cash from a customer. When the customer insisted that the representative not report the transaction, the representative agreed to structure the deposits into an account in the name of the customer's mother through cashier's checks in increments below the threshold for reporting.

 

In August of this year, NASD's Office of Hearing Officers issued a decision in the case, finding the registered representative liable for structuring and for causing her firm to fail to file a currency transaction report. NASD barred this representative from being associated with any NASD member firm in any capacity. (See Press Release.) NASD was able to enforce the Bank Secrecy Act regulations under NASD Rule 2110, which obliges firms and associated persons to "observe high standards of commercial honor and just and equitable principles of trade."

 

Nonetheless, prior to passage of the PATRIOT Act, the securities industry had limited experience with anti-money laundering regulations. While subject to Bank Secrecy Act reporting requirements, most securities firms, as a matter of policy, prohibit cash transactions. Many broker/dealers, therefore, do not have the experience of filing currency transaction reports. And, although NASD, since as early as 1989, has recommended that all broker/dealers file suspicious activity reports (SARs) with the Treasury Department's Financial Crimes Enforcement Network (FinCEN), only broker/dealers that were subsidiaries of banks or bank holding companies were required to do so by federal law.

 

Before the tragedy of September 11, NASD participated in a significant collaborative effort with the New York Stock Exchange (NYSE) and the SEC to conduct joint examinations of a group of broker/dealers to determine the scope and effectiveness of their anti-money laundering compliance programs. We learned that, although many of the larger broker/dealers had implemented comprehensive anti-money laundering procedures voluntarily, most broker/dealers had not implemented programs that went beyond the reporting requirements of the Bank Secrecy Act.

 

NASD Rulemaking Under the PATRIOT Act

 

The PATRIOT Act imposes a number of new anti-money laundering requirements on the securities industry. This is uncharted territory for many broker/dealers. NASD has worked over the last year to use our regulatory tools and resources to educate broker/dealers about and monitor compliance with these new requirements under the PATRIOT Act.

 

To that end, NASD proposed a new rule, Rule 3011, to establish the minimum standards for broker/dealers' anti-money laundering compliance programs, which Section 352 of the PATRIOT Act required all broker/dealers to develop and implement by April 24, 2002. On April 22, 2002, the SEC approved NASD Rule 3011 and the NYSE's substantially similar rule, Rule 445.

 

NASD Rule 3011 requires firms to develop and implement a written anti-money laundering compliance program that is approved in writing by a member of senior management and, at a minimum, 

  1. establishes and implements policies and procedures that can be reasonably expected to detect and cause the reporting of transactions required under 31 USC §5318(g) (which governs SARs) and the implementing regulations thereunder;

  2. establishes and implements policies, procedures and internal controls reasonably designed to achieve compliance with the Bank Secrecy Act and implementing regulations thereunder;

  3. provides for independent testing for compliance to be conducted by member personnel or by a qualified outside party;
     
  4. designates an individual or individuals responsible for implementing and monitoring the day-to-day operations and internal controls of the program; and

  5. provides ongoing training for appropriate personnel.

After the SEC approved NASD Rule 3011, the Treasury Department stated that broker/dealers would be deemed in compliance with the PATRIOT Act requirement to implement an anti-money laundering compliance program if they were in compliance with NASD Rule 3011 and NYSE Rule 445.

 

NASD Rule 3011 allows NASD to examine and enforce compliance with anti-money laundering program requirements. We began that effort as soon as the rule went into effect earlier this year. Through our examinations, we determine whether firms have the required compliance programs and assess deficiencies in firms' programs. On a firm-by-firm basis, we determine what action to take after each examination. In addition, the information we gather through our examinations enables us to determine areas of common misunderstanding so that we can develop new guidance for firms to help them comply. We are coordinating with the NYSE by sharing examination procedures to ensure that, as regulators, we are following a consistent approach and to make certain that our procedures are as comprehensive as possible. In addition, where examinations involve firms that are members of both NASD and the NYSE, we are coordinating our reviews for compliance with the anti-money laundering compliance program requirements.

 

According to our most recent examination results, approximately 94% of firms had developed and implemented anti-money laundering compliance programs. Our goal, of course, is 100% compliance, but the examination results show that firms recognize their responsibilities and have taken the necessary steps to meet their obligations under the Act. Those firms that NASD examiners found to be deficient in this area received a Letter of Caution and, pursuant to the terms of the Letter of Caution, were required to demonstrate to NASD examiners that necessary procedures were in place, and deficiencies corrected, within 30 days. Firms that continue to disregard their obligations to develop and implement anti-money laundering compliance programs that contain all the necessary procedures will face NASD Enforcement actions that could lead to substantial fines, suspensions and even expulsion from the industry.

 

While examining to determine whether firms have proper anti-money laundering procedures, NASD examiners, at times, have confronted situations where firms had evidence of suspicious activity but did not file a SAR. For example, in one instance, an examiner conducting a routine examination noted signs of suspicious structuring transactions. The customer, over a period of time and on numerous occasions, had deposited a total of over $10,000 in money orders into an account. None of the money orders was for more than $700. The customer then wired thousands of dollars to a bank located in a foreign country. The firm had not voluntarily filed a SAR. NASD staff referred the matter to an appropriate government agency for review.

 

As noted, while the SAR reporting requirements do not become effective until the end of this year, NASD has suggested that firms make voluntary SAR filings, when warranted. We will continue to be vigilant during our examinations of our firms and, where appropriate, refer instances of suspicious activity to the appropriate federal authorities.

 

Additional NASD Anti-Money Laundering Initiatives

 

NASD has also launched a variety of other anti-money laundering initiatives to assist firms in developing and implementing their anti-money laundering compliance programs and in complying with other aspects of the PATRIOT Act.

 

Notices to Members. NASD has published the following "Notices to Members" (copies of which are attached):

 

Notice to Members 01-67, Terrorist Activity (October 2001). This Notice informed members of President Bush's Executive Order freezing the property of, and prohibiting transactions with, certain individuals. It explained how members could access the Treasury Department's Office of Foreign Assets Control (OFAC) Web Site and recommended that firms establish compliance programs to avoid violations and possible enforcement actions.

 

Notice to Members 02-21, Guidance to Member Firms Concerning Anti-Money Laundering Compliance Programs (April 2001). This Notice explained in detail the requirements that the PATRIOT Act and NASD Rule 3011 impose on broker/dealers and provided guidance to assist broker/dealers in developing anti-money laundering compliance programs that fit their business models and needs.

 

Notice to Members 02-47, Treasury Issues Final Suspicious Activity Reporting Rule for Broker/Dealers (August 2002). When the Treasury Department issued its final rule governing SARs, NASD issued this Notice to Members to explain the requirements of the rule and to notify members of the deadline for comments on the proposed SAR form for broker/dealers.

 

Notice to Members 02-50, Treasury and SEC Request Comment on Proposed Regulation Regarding Broker/Dealer Anti-Money Laundering Customer Identification Requirements (August 2002). This Notice explained to members the proposed regulations regarding customer identification and verification and notified them of the deadline for submitting comments on the proposed rule.

 

AML Template. Many smaller securities firms did not have the extensive experience with anti-money laundering regulations of the large, bank-affiliated firms, and were uncertain about how the various PATRIOT Act requirements would apply to them. To assist them, NASD developed a detailed template that firms can use in fulfilling their responsibilities to establish an anti-money laundering compliance program. (A copy of the template is attached.)

 

Congress wisely made the anti-money laundering program requirement flexible enough so that each firm could tailor its program to the firm's size, business activities and customer base. The template, which firms can download from our Web Site, www.nasd.com, provides language that firms can tailor to address their particular situations. Our template urges firms to develop procedures even for those activities, such as cash transactions, that the firm prohibits. That way, the firm will have procedures to detect when the policy has been breached and, if breached, to ensure that the firm complies with any applicable anti-money laundering regulations.

 

In addition to giving detailed explanations of the many regulations and how they would apply to various business relationships and financial products, the template contains instructions and links to other resources that are useful for developing an anti-money laundering compliance program. The NASD template has had over 7,600 visits since going live in July of this year.

 

Workshops. NASD also conducted two phone-in workshops for member firms concerning the PATRIOT Act and anti-money laundering compliance. We held these workshops on April 19 and May 21 of this year and over 1,000 participants called in to join them. We plan to conduct another workshop this month to address the customer identification and verification requirements, which firms will have to implement by October 26. In addition to the workshops for member firms, NASD has hosted two anti-money laundering workshops for our examiners.

 

OFAC Search Tool. NASD has created a search tool, which is accessible through NASD's anti-money laundering Web Site and enables firms to electronically search OFAC's "Specially Designated Nationals and Blocked Persons" list. There have been over 17,000 visits to our OFAC search tool since its launch in June.

 

Web Site Information and Online Training. In addition to our Notices to Members, our template and our OFAC search tool, our Web Page provides links to all of the reporting forms that firms will need for anti-money laundering compliance, as well as to various other sources of anti-money laundering information. NASD attorneys have also participated in numerous speaking engagements to discuss anti-money laundering issues and to answer firms' questions, and they will continue to do so at our upcoming Fall Conference in San Diego and at the NASD Institute in Baltimore.

 

We have also developed an online anti-money laundering training course, which firms can use to meet their statutory obligations under the PATRIOT Act and NASD Rule 3011 to develop an on-going anti-money laundering training program for employees. As of August 31, over 6,000 people had registered for our online training course.

 

Coordination Between NASD and Government

 

Coordination and communication with the Treasury Department and the SEC have been indispensable in this area. Throughout this process, the Treasury Department and the SEC have provided us with information that we have needed to develop anti-money laundering initiatives to assist broker/dealers, and they have provided helpful and timely comments on our template and the various publications that we have issued. This has enabled NASD to work efficiently, to present consistent interpretations and instructions to the industry and to define our expectations for firms under the regulations.

 

Continued coordination among regulators will remain critical in the future. Significant issues remain concerning how this regulatory regime that has historically applied to depository institutions will apply to the securities industry. We are pleased that the Treasury Department was receptive to hearing about how the application of these proposed regulations might affect the various participants in the securities industry, and we look forward to continuing our dialogue with Treasury on these and similar issues in this very important area.

 

Conclusion

 

I am pleased to have this opportunity to share with the Committee NASD's part of the extensive efforts that have been made over the course of the last year to ensure compliance with the anti-money laundering provisions of the PATRIOT Act. NASD pledges to continue to work with Congress, Treasury, the SEC and other regulators in implementing and enforcing this important law.