Recent AML Issues.

Emily P. Gordy, Vice President, NASD Regional Enforcement, participated in a panel discussion on "Recent AML Issues" at the NASD Fall Securities Conference which recently was held at Rancho Mirage, California. While all of the speakers were well informed and provided valuable insight into current issues related to anti-money laundering programs, Ms. Gordy had a number of useful comments and observations, which are directly related to the violations being cited as a part of the NASD exam program, and the current statistics related to SARs filing.

Most Frequent Violations.

With respect to the NASD exam program, the following sets forth the most frequent violations which are currently being cited by NASD examiners:

Failure to have the firm's AML Program approved in writing by senior management. This is a specific rule requirement, and one that the NASD believes to be reasonable in that it reflects a commitment from the firm with respect to its AML program. In addition to being initially adopted by senior management, it was noted that the AML program also needs to be re-approved by senior management at any time there is a material change in the program (such as when the final CIP rule was implemented in October 2003).

OFAC Verification. The failure to check the OFAC list so as to verify that new customers are not listed persons or entities is also a commonly cited violation.

FinCEN - Evidence of Monitoring. A number of member firms are not maintaining the FinCEN notifications, and or documenting that the firm has compared the notification against its customer list.

Customer Identification Procedures. It was noted by Ms. Gordy that there appears to be confusion as to when you have to utilize the customer identification procedures on "existing" customers. Under current regulations, a firm does not have to use the customer identification procedures, and verify the identity of a customer, if the account was opened before the effective date of the rule (October 2003), so long as the firm has a reasonable belief that it knows the customer's true identity. Notwithstanding that, member firms need to be mindful that under the books and records rule [SEC Rule 17(a)(3)], there is an obligation to gather specific customer information within three years, and that obligation is separate from the requirements related to customer identification procedures for AML purposes.

Independent Testing. Ms. Gordy also noted that there has been some confusion on how often the program needs to be tested (i.e. annually). However, the NASD is clear with respect to its audit program, and to the extent a firm has not tested its AML program by this time, it would be deemed a violation of the rule by the NASD.

SARs Reporting. Firms are failing to document why an SAR is not being filed when a red flag or suspicious activity occurs.

Foreign Correspondent Banks. For those member firms with relationships with foreign banks, failing to get certifications that the foreign banks are not shell banks is also a common violation, in-spite of the fact that the certification is easy to obtain as it is self reporting by the foreign bank customer.

SARs Statistics.

Additionally, Ms. Gordy noted that as of December 31, 2003, there had been 4267 SAR-SF's filed with the Treasury Department. Of the SARs filed, the breakdown of the types of suspicious activities reported include: money laundering & structuring (17.6% of the filings), check fraud (12.1% of the filings), embezzlement & theft (10.2% of the filings), significant wire and/or other transactions, without economic purpose (8.9% of the filings), identity theft (8.2% of the filings), securities fraud, which included insider trading, market manipulation, pre-arraigned trading, and wash or fictitious trading (6.51%), and suspicious documents or identification presented, including altered documents (3.2% of the filings).