* SEC clears up concern on anti-money laundering reports
* FINRA can ask brokerages to report suspicious transactions
* Brokerages had worried about possible criminal penalties
By Suzanne Barlyn
Feb 17 (Reuters) - Informing regulators about efforts to curb possible money laundering should be a simple process for brokerages. Instead, it has, in the past, led to tricky situations in which brokerage-compliance professionals feared breaking the law by sharing those details.
A recent letter to the brokerage industry from the U.S. Securities and Exchange Commission has eased that concern. The agency clarified that brokerages can share copies of reports about suspected money laundering to their privately-funded regulator, the Financial Industry Regulatory Authority (FINRA).
FINRA says its ability to get that information directly from brokerages will help examiners better assess whether a brokerage is adequately complying with anti-money laundering rules. The requirements include monitoring for and reporting fraudulent trading activity.
Federal law has long required financial companies that suspect money laundering or fraud by customers to file so-called “suspicious activity reports”, or SARs, with the U.S. Treasury Department. But secrecy laws have made it tricky to easily share that information with private self-regulatory organizations.
In a letter to the industry on Jan. 26, the SEC said that FINRA can now request the reports directly from brokerages during examinations and investigations, instead of having to take the extra steps of requesting them from the SEC or the Financial Crimes Enforcement Network, (FinCEN), the Treasury Department bureau that handles the reports.
Financial companies must file a report with FinCEN within 30 days of a suspicious transaction. The reports and certain related details are subject to federal secrecy restrictions.
The SEC’s letter ended a peculiar period that began in early 2011, when the Treasury Department changed its rules in an effort to enhance confidentiality protection for SARs.
For roughly the past year, FINRA could not ask brokerages for certain reports about suspicious transactions, and brokerages could not hand them over.
But Treasury’s new confidentiality rules were so restrictive that not even industry-funded self regulatory organizations, such as FINRA, that are overseen by government agencies were allowed to ask financial companies for such reports.
Instead, FINRA had to request them from either the SEC or FinCEN, adding extra steps and time to examinations and investigations.
Agencies, such as the SEC, had to authorize the self-regulatory groups to request the reports. It isn’t clear why the process took so long, but the delay was not surprising, said insiders, because of numerous rulemakings and other tasks the agency must tend to under the Dodd-Frank financial reform law.
The SEC’s recent letter from Carlo diFlorio, who heads its Office of Compliance Inspections and Examinations, finally gave that authorization.
“It very significantly changes the status quo,” said Emily Gordy, a senior vice president of enforcement for FINRA.
Brokerage industry compliance professionals are also relieved. They have long questioned the circumstances under which they could give suspicious-activity reports to FINRA, even before the Treasury Department changed its rules.
“FINRA would ask for (the report) and no one knew what they could give,” said Betty Santangelo, a white-collar criminal defense lawyer at Schulte Roth & Zabel LLP in New York.
Those worries were justified, said Aaron Kahler, a principal at C&A Consulting in New York, who advises companies on anti-money laundering compliance issues.
Federal law allows compliance officers to share the reports with other employees in the compliance department or with certain members of a company’s board of directors. But employees who tell others beyond those circles about a report, even if they work at the same company, can be arrested, he said.
“People are very careful about this,” said Kahler.
Some brokerages, prior to last year’s rule change, tried to get around the issue by showing examiners copies of the reports but not letting FINRA keep them, Santangelo said. But that strategy has become less practical, since FINRA is conducting more of its examinations by analyzing information remotely, instead of at a brokerage office, Santangelo said.
She is concerned, however, about FINRA’s own policies and procedures for protecting the reports and hopes the regulator will eventually make at least some of those details public. FINRA has such policies in place to ensure compliance with federal rules, Gordy said in an emailed statement. She declined to provide specifics.
The regulator’s new clear and direct access to more of the industry’s anti-money laundering information should enhance FINRA’s productivity in the anti-money-laundering area.
Alma Angotti, a director at Navigant Consulting, Inc. who advises companies on anti-money-laundering issues, is familiar with those challenges. She was a senior enforcement lawyer in FINRA’s anti-money-laundering compliance unit for seven years, until June.
The past year has been fraught with obstacles, she said. “It was not easy for FINRA to get their work done.”