Broker-dealers warned of money laundering risk surrounding foreign omnibus accounts

Broker-dealers are being urged to improve their due diligence of foreign omnibus accounts due to their increased risk of being used for money laundering.

Under the BSA, broker-dealers are subject to regulation issued by the US Treasury, including the requirement to keep records on financial transactions and file reports with the Financial Crimes Enforcement Network (FinCEN) when suspicious activity is detected.

And while the vast majority are taking their anti-money laundering obligations seriously, the US Securities and Exchange Commission (SEC) has highlighted a vulnerability where foreign omnibus accounts dealing in 'low-priced securities' are concerned.

Omnibus accounts are accounts that combine the transactions/trades of more than one person but only in the name of one, allowing others in the account to remain anonymous.

The anonymity is obviously a big risk in itself, but when this is combined with trading in low-priced securities – which are seen as particularly a high risk because they can be used to move money from high-risk jurisdictions into the US – there is an even greater threat.

For example, imagine a broker, based in a high-risk jurisdiction, that regularly facilitates trading in low-priced securities on behalf of several different investors, via omnibus trading accounts.

This broker uses the execution services of a US-broker dealer. The US broker-dealer does not treat the offshore broker as high-risk, because it is a regulated firm, and therefore, does not conduct AML checks, but instead relies on the regulated offshore broker to do proper due diligence on its own customers.

The US broker-dealer uses a US investment bank to allow the offshore broker to settle their transactions in the US in US dollars. As far as the US side is concerned, it is dealing with a regulated offshore broker.

But, because that offshore broker is using an omnibus account, those benefiting from the transactions are able to remain anonymous. And, if it turns out that those underlying customers are extremely high net worth individuals with links to PEPs and suspicious individuals, that US broker-dealer and investment bank has potentially been laundering dirty money from a high-risk jurisdiction into the US banking system without knowing it.

As you can see from this example, while broker-dealers are able to do their own due diligence on US held accounts, conducting the proper checks on foreign omnibus accounts is much more difficult.

This is because often, as above, the broker-dealer is having to rely upon the foreign financial institutions/brokers to conduct the required due diligence.

So, what is the answer?

The SEC says that it wants broker-dealers to request information on the UBOs of securities being traded in an omnibus account but realizes that this can be problematic.

Firstly, it can be difficult to obtain information from a foreign financial institution about their underlying customers, and secondly, when that information is obtained, it is often insufficient to be able to mitigate the risks.

This illustrates why it is so important that US broker-dealers not only have proper anti-money laundering procedures in place, but also that these procedures are robust enough to be able to properly assess the risk of working with foreign-based omnibus accounts. This means that procedures need to include full and comprehensive checks on individuals and entities in the US and abroad, but also have the capacity to identify ultimate beneficial owners.

And while most broker-dealers do have all the 'required' AML procedures in place, the BSA asks for a 'risk-based approach' and in many cases, the programs they have in place may not go far enough -  especially if there is still a reliance on manual checks.

Those criminals who are looking to clean their dirty cash are clever at covering their tracks and know full well where the vulnerabilities lie. They use everything at their disposal to hide their illicit activities by ensuring that there are multiple layers between what they appear to be doing and what they are actuallydoing. 

If you are a broker-dealer and you work with omnibus accounts and other more complicated financial structures, it is vital that your anti-money laundering program is able to assess that risk by running comprehensive checks on all individuals and entities – including identifying the ultimate beneficial owner – and the continuing to monitor all clients to ensure ongoing compliance.