AML Compliance: Is Your Independent Test Really Independent?

I recently had the opportunity to participate on a broker-dealer anti-money laundering compliance panel with both regulators and private sector practitioners at the 16^th Annual FIBA AML Compliance Conference. Given today’s dynamic regulatory environment, it was no surprise there was a record turnout, with more than 1,350 participants from more than 40 countries.

Our panel touched on the ever-increasing regulation to a brokerage model and the AML challenges unique to the brokerage industry. Regulators from FINRA and the SEC shed light on their current AML examination priorities, and we discussed two cases regarding suspicious activities relating to micro-cap securities and wire transmittals.

Of all the topics we discussed, AML independent testing was the hottest issue.

In its 2016 examination priority letter, the SEC stated that it will review independent tests to assess whether they adequately address the broker-dealer’s AML risk. The SEC reiterated that focus during the panel discussion, emphasizing independent tests must be robust. Both the SEC and FINRA reminded the audience that the test must be completed by an independent individual or third-party consultant with adequate BSA/AML knowledge.

FINRA Rule 3310 requires that the professional conducting the broker-dealer’s AML test must have working knowledge of applicable requirements under the Bank Secrecy Act and its implementing regulations. In addition, he or she must be independent.

Independent testing may NOT be conducted by any of the following persons:

1. Someone who performs the functions being tested
2. The designated anti-money laundering compliance person at the firm
3. Someone who reports to a person described in either (1) or (2) above.

Management has the responsibility to confirm that the person conducting the test is both knowledgeable and independent. As such, broker-dealers should consider the credentials of the person conducting the test and determine whether he or she performs any AML functions that will be tested.

Kaufman Rossin reminds broker-dealers to consider the potential conflict of interest when they hire the same outside consultant who wrote the firm’s AML policies to conduct the independent test. The firm should focus on whether such hire is compliant with the independent testing requirement pursuant to FINRA Rule 3310.

With regulators increasingly focused on broker-dealer’s AML tests, broker-dealers should assess their relationships with their third-party consultants and ensure that they are qualified and free of conflicts. If conflicts do exist, objectivity of the independent test may be questioned or impaired, calling into question the integrity and quality of independent testing of compliance; this could result in non-compliance with the independent testing requirements of FINRA Rule 3310.