This week the Security and Exchange Commission (SEC) announced that E.S. Financial Services, a Miami based brokerage firm, settled what could have been a major criminal case with an agreed $ 1 million penalty payment to settle the charges and possibly avoid criminal prosecution.
The SEC issued a press release which suggested that the E.S. Financial, now known as Brickell Global Markets, Inc., committed acts that substantially violate anti-money laundering statutes and related rules. The agreed allegations are that the brokerage firm allowed non-U.S. individuals to sell and buy securities without revealing the people who are the beneficial owners.
The SEC’s continued investigation led to their issuance of an order, which instituted a settled administrative proceeding, in lieu of a criminal indictment. And while no fraud occurred in this case, the SEC investigation concluded that there were significant “holes” or shortcomings in the framework and implementation of the firm’s customer identification program (CIP), which required brokers to, “…at a minimum…, implement reasonable procedures to verify the identity of any person seeking to open an account.”
According to the SEC’s order, E.S. Financial maintained a brokerage account for a bank from Central America that was trading for its own benefit. It went on to say that 13 non-United States entities, involving 23 non-U.S. citizens, were the beneficial owners of the securities involved and that more than $23 million of securities transactions were involved in the allegations. These actions were in violation of Section 17(a) of the Securities Exchange Act of 1934. Specifically:
- Rule 17a-3, which requires exchange members, brokers, and dealers to make and keep certain all books and records relating to its business.
- Rule 17a-4, which requires exchange members, brokers, and dealers to preserve such required records for a prescribed period of time.
- Rule 17a-8, which requires every broker to comply with the reporting, record keeping, and record retention requirements in regulations implemented under the Bank Secrecy Act, including the requirements in the CIP rule applicable to broker-dealers.
The anti-money laundering statutes require that non-U.S. citizens who buy, sell or beneficially own securities in the U.S. must reveal and verify their names. This applies to any individual who is the beneficial owner or ultimate person who will own the securities.
The SEC identified that in examining the books and records of the firm, there was a failure to provide and produce the records identifying the foreign customers the firm was soliciting and or providing financial advice.
Under the SEC rules cited above, financial institutions must maintain records which adequately identify their customers. To ensure that money launderings statutes are followed, FINRA published the Know Your Customer Rule (FINRA Rule 2090), which requires regulated brokerage firms to know with whom they are dealing. The “Know Your Customer” Rule imposed upon financial institutions is intended to eliminate or reduce money laundering.
As part of the agreed settlement, E.S. Financial Services agreed and confirmed to the SEC that a complete review of their internal policies, practices and procedures over the next two years would be undertaken, which is in addition to the $1 million fine they agreed to pay.