SEC cracks down on lax AML implementation

Yesterday the SEC ordered E*Trade to comply with the AML rules which requires brokers to know the identity of their clients. The order found that E*Trade did not verify the identities of 65,442 secondary accountholders. While this is a major breach of the AML rules, it also shows that the SEC is continuing to be vigilant in this time of economic uncertainty and market turmoil.

The full text can be found below and at: http://www.sec.gov/news/press/2008/2008-156.htm

SEC Orders E*Trade Brokerage Firms to Comply With Anti-Money Laundering Rule

FOR IMMEDIATE RELEASE
2008-156

Washington, D.C., July 30, 2008 — The Securities and Exchange Commission today charged E*Trade Clearing LLC and E*Trade Securities LLC (collectively, E*Trade) for failing to comply with an anti-money laundering rule that requires broker-dealers to verify the identities of their customers and document their procedures for doing so.


The SEC’s order finds that E*Trade failed to accurately document certain Customer Identification Program (CIP) practices and verify the identities of more than 65,000 of its customers as required by the USA PATRIOT Act and SEC rules. E*Trade agreed to settle the SEC’s enforcement action without admitting or denying the allegations, and will pay $1 million in financial penalties.

“E*Trade is one of the largest online brokerage firms in the world, and a compliance lapse of this type has the potential to undermine the nation’s anti-terrorism and anti-money laundering efforts,” said Linda Chatman Thomsen, Director of the SEC’s Division of Enforcement. “The penalty and undertakings imposed in today’s enforcement action reflect the critical nature of anti-money laundering rules, and will provide greater assurance that future compliance will be seriously and continuously monitored.”

Cheryl Scarboro, Associate Director in the SEC’s Division of Enforcement, added, “On several occasions, E*Trade personnel discovered and rediscovered its CIP deficiency. However, E*Trade did not initiate any corrective action until the problem resurfaced almost two years after the compliance deadline. E*Trade’s 20-month period of noncompliance clearly resulted from a disjunctive organizational structure and inadequate management of its CIP responsibilities.”

The SEC’s order finds that E*Trade established, documented and maintained a CIP that specified that it would verify all accountholders in a joint account. However, during a 20-month period, E*Trade failed to follow the verification procedures set forth in its CIP. The order finds that E*Trade did not verify the identities of secondary accountholders in newly opened joint accounts. Consequently, the order finds that E*Trade’s documented procedures differed materially from its actual procedures.

The SEC’s order specifically finds that, from October 2003 to June 2005, E*Trade did not verify the identities of 65,442 secondary accountholders in joint accounts as required by the CIP rule and its own procedures. The SEC’s order further finds that E*Trade’s compliance failure was systemic, resulting from lack of a cohesive organizational structure, lack of adequate management oversight, and miscommunications among personnel in several E*Trade business groups.

E*Trade consented to the issuance of an order instituting administrative and cease and desist proceedings for violations of Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8 thereunder. In addition to the financial penalties, E*Trade agreed to a censure and to retain a qualified independent compliance consultant to verify the adequacy of its CIP rule compliance program.

In advance of settling this matter, E*Trade stated that it submitted the secondary accountholder information on joint accounts originally missed to its third-party vendor for verification. According to E*Trade, the verification process did not identify any joint accounts that should not have been opened.

1 thought on “SEC cracks down on lax AML implementation

  1. Pingback: Hedge Funds and Anti-Money Laundering (AML) Requirements — Hedge Fund Law Blog

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