Keeping the industry safe

Anti-money laundering (AML)

The anti-money laundering rules we know of, come from the Bank Secrecy Act (BSA). Actually it comes from the Bank Secrecy Act as amended by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act, better known as The USA PATRIOT Act. The purpose of the act, as clear demonstrated by its timing after September 11, 2001, was to find and stop terrorists, and terroristic threats. Since most terrorism requires money, the parts of the act we are most concerned about, focus on anti-money laundering; helping prevent criminals from using our financial system.

Office of Foreign Asset Control (OFAC)

An office of the treasury that administers and enforces certain economic and trade sanctions against specified nations, entities, individuals, or similar. In normal world parlance, these are referred to as “sanctions”. North Korea is sanctioned, and on the list that OFAC enforces.

Specifically Designated Nationals and blocked persons (SDN)

The list that OFAC creates of persons and organizations, that US citizens and persons are prohibited from doing business with.

AML reports

When we refer to “cash” with AML, we are referring to cash, or direct cash equivalents. Money orders, travelers checks, and cashier’s checks. It does not include a bank check from another bank, as any AML requirements needed, that other financial company would have dealt with.

There are 3 primary monetary values of concern in AML procedures;

• $3,000 - For wire transfers of at least $3,000, the firm must keep on its files, information about the transfer, including the sender and recipient. If they are not customers, they must be verified to not be on OFACs SDN list.
• $5,000 - A Suspicious Activity Report (SAR) has to be filed for “suspicious” transactions of $5,000 or more. They will be rather specific, but if clients don’t care about risk, don’t care about your advice, make trades with seeming no concern for mounting commission costs, and things like that; things that aren’t normal for an investor, but might be normal for a criminal trying to cover the origins of the transactions, by doing so many so fast. It is illegal to inform the client that it is being filed.
• $10,000 - For transactions over $10,000 (not at least but over $10k), a Currency Transaction Report (CTR) must be filed. This form must be filed within 15 days. Unlike a suspicious activity report, which itself is not a crime, or even a signifier of a crime, CTRs are definitely even less “it must be a crime” type thing. It simply is reporting, an inflow or outflow, of more than $10,000 in cash, in a single business day. Consistently depositing cash just below this, would definitely be another suspicious act a client could do.

$10,000 appears in other aspects of financial rules, including the International Transportation of Currency and Monetary Instruments Report (CMIR). If you have ever traveled internationally and remember being asked at customs “do you have over $10,000 in cash”, that is this. Originally, this law was made to help prevent people with bad intentions of trying to come to our country and take all our money out of the country so we would fail. That was a very long time ago, but as you know, sometimes laws are created, and just never go away, even if the reason, isn’t really a problem anymore.

AML compliance program

All firms must establish a written anti-money laundering compliance program and policies to verify. Minimally, the program must include;

• Ongoing employee training, often through links on the company’s employee portal.
• Independent audits to verify compliance with the program, and compliance all rules and regulations around it.
• Policies and procedures to deter money laundering activities, and to find them if any are attempted.
• A compliance officer is designated as being responsible for the firm’s AML program.

The Customer Identification Program (CIP)

As part of the regulations created under the USA PATRIOT Act, we must have proper identification fo the client, and verify they are not on OFAC’s SDN list of people we are prohibited from doing business with. To comply with this provision, we must see, and make a copy, of a non-expired government issued photographic ID. Typical examples would be driver licenses, non-drivers photo ID, passport, or military ID.

Anyone who refuses to provide a non-expired government issued id needed to verify identity, the account will be refused. Clients must provide this information. You will even see this now when people create new crypto wallets.

For corporate accounts, there is no photo-id, but copies of all required corporate documents are required. This would include corporate charter, partnership agreement, and a list of authorized traders.

Tax-payer IDs are required for most accounts, but the firm can wave them provided they have evidence one has been applied for. The application for the tax-payer ID must had been filed, and the firm will keep a copy of the application, until the final ID comes in.

Numbered accounts are a weird thing, where a client is actually listed as a number, not by their name. In many cases, students who are not prepared, cannot imagine that those are legal to do in the US. In the Swiss banks in movies, sure, but not in the US. Actually, it is perfectly legal in the US, with 1 major caveat; the clients actual name, the identified person, is listed as owning that specified number account, in at least one location at the firm. They cannot be truly anonymous. The person opening the account, still provides ID, but as you go around the office, clients will see you are placing orders for client 24601, whoever that might be, and aren’t harassing you to meet Russel Crowe, who actually happens to be client 24601.

Violations

Violating AML rules are costly. Registered representatives found guilty of facilitating or in any way assisting/not reporting money laundering could face both serious criminal and civil penalties. Criminal penalties include up to 20 years in jail. Civil penalties include up to $500,000 per transaction, or 2 times the amount of funds involved in the money laundering.

Most modern firms don’t take cash, and if you aren’t taking cash, then there really isn’t a lot of ways clients can launder money through your firm.

Securities Investor Protection Corporation (SIPC)

Formed under the Securities Investor Protection Act of 1970. SIPC is effectively an insurance company for broker dealers, so if they go out of business, have some other severe issue, the investors have a certain amount of protection from the firm seizing their assets as they go down in bankruptcy.

One of the key things to recognize is how securities can be registered. They can be registered in the name of the customer, held by the customer, a safety deposit box, or similar secure location, or it can be held in street name. When held in street name is the only time SIPC will ever matter, as being held in street name, means they are now registered to the broker dealer in case of the customer, not to the customer. Meaning they are effectively owned by the broker dealer, so if they go under, that is how they might be able to take customers assets with them.

If the securities are held in street name, SIPC doesn’t effect it. Those securities can’t be taken by the firm, meaning they effectively have total protection, 100% will be kept, even if the phrase is often that SIPC doesn’t cover them. It doesn’t need to, 100% is owned by the customer, they can’t lose anything no matter what happens to the broker dealer.

Theoretically, you could have a brokerage account and purchase mutual funds, and treasuries within the brokerage account. More likely, the client previously owned the mutual funds individually, and to keep accounts for the client easy, you as the representative move the mutual funds into the brokerage account. In that case, they could be held in street name and therefore covered by SIPC. No one in their right mind should ever open a brokerage account to purchase mutual funds. No one really buys mutual funds in brokerage accounts; if you’re paying for a brokerage account, you would invest in ETFs over mutual funds.

The most common securities that area always held in street name are government treasuries, and mutual funds. They must be registered in the name of the client, meaning no matter how much investments a client has in government bonds or mutual funds, if their broker dealer goes bankrupt, they will get to keep all of what they had.

Securities that can be registered in street name are a different story. Most securities these days are held in street name, it just makes it easier to buy and sell. You don’t need to personally sign certificates, if they aren’t directly registered to you.

SIPC primarily covers cash accounts, those accounts that are 100% owned, along with the 100% ownership of margin accounts, which we know as equity. Everything in a cash account can be covered, up to the maximum, but only the equity of the margin account gets added in. No commodities, futures, or accounts like that.

The rule of SIPC is up to $500,000 per covered account at the firm. Customers could have multiple accounts, each $500,000 at different brokerages, and each would have the full $500,000 coverage. There are reasons we give bonuses and extra perks for clients to invest 7 figures plus with us. Per covered account is by exact registration. Jamie is married to Quinn. Jamie’s cash account, Quinn’s cash account, and the Jamie and Quinn joint account would each be separate covered accounts. Jamie custodian for Robin would also be a separate account.

Of that $500,000, only $250,000 can be in cash. Most of the time in modern cash accounts, there is a feature called a sweep money market. The idea being, if you have uninvested cash in your account, it occasionally takes all that cash and “sweeps” it into a money market, which is a security. In the modern world, that cash would be the received dividends, interest, or other distributions, along with sales proceeds before invested. In test world, they might talk about someone having a cash account with $500,000 in it, $200,000 in securities, and $300,000 in cash. If that was the case, that account would only have SIPC protection of $450,000. SIPC will only cover $250,000 of the $300,000 in cash, and the $200,000 less doesn’t put us over the $500,000 limit; therefore we can cover all of it. $250,000 and $200,000 is the $450,000 coverage that the account has.