FinCEN, Finra, SEC levy nearly $15 million penalty against securities arm of UBS for AML failings
Thursday, December 20, 2018
Posted by: Brian Monroe
By Brian Monroe
December 20, 2018
U.S. banking and securities regulators this week levied a nearly $15 million penalty against the securities arm of Switzerland’s largest bank for more than a decade of lax financial crime compliance, poor oversight of risky correspondent portals and missed filings of suspicious activity.
The Financial Crimes Enforcement Network (FinCEN) in an assessment Monday penalized the securities arm of UBS, UBS Financial Services, Inc. (UBSFS), for “willful violations” of anti-money laundering (AML) rules, chiefly for viewing trading and other transactions only through the lens of potential markets fraud and not by scrutinizing activity for possible money laundering.
UBSFS “failed to develop and implement an appropriate, risk-based” AML program that “adequately addressed the risks associated with accounts that included both traditional brokerage and banking-like services.”
As well, UBSFS “failed to implement appropriate policies and procedures to ensure the detection and reporting of suspicious activity through all accounts—particularly for those accounts that exhibited little to no securities trading. The firm did not adequately structure its AML program to address the use of securities accounts for the purpose of moving funds rather than trading securities.”
FinCEN levied the $14.5 million civil money penalty, of which $5 million will be paid to the U.S. Department of the Treasury and the remainder will be concurrent with penalties for related conduct imposed by the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (Finra), the top cops of the country’s securities’ sector.
To view the FinCEN release, click here.
To view the Finra release, click here.
To view the SEC release, click here.
The penalty is a rare instance of FinCEN tag-teaming with securities regulators on an AML action.
Bank or brokerage account?
Part of that has to do with the hybrid accounts that offered clients greater flexibility and fluidity, going from banking account to brokerage account and moving money internationally and pulling money out of ATMs domestically.
The brokerage accounts that offer banking-like services “allow customers to engage in a wider range of transactions than either traditional brokerage accounts or traditional bank accounts allow, including wire transfers, journal transfers between accounts within the firm, ACAT transfers between accounts at other broker-dealers, ACH transfers, ATM withdrawals, check writing and securities transactions,” according to FinCEN.
The action is also notable for how long the issues persisted.
The enforcement orders stated that for more than a decade, from 2004-2017, UBSFS failed a several areas that are current regulatory focal points and become a familiar refrain in recent actions: a lack resources and expertise leading to a lack of appropriate risk ranking, due diligence and oversight of higher-risk areas, in this case, correspondent banking portals and wires in foreign funds.
“For more than a decade, UBSFS failed to implement sufficient policies and procedures that adequately addressed the risks associated with the products and services it offered,” FinCEN Director Kenneth Blanco said in a statement.
“Although brokerage firms may provide such services to their clients, those doing so need to apply commensurate diligence to ensure that the firm does not become a conduit for movement of illicit funds creating a haven for criminals and other malign actors to benefit from, and to further, their illicit activity.”
At the same time, too few transaction analysts and too many monitoring hits also resulted in a backlog of alerts and missed or late filings of suspicious activity reports (SARs), a vital tool for law enforcement to start or further ongoing investigations.
This isn’t the first time U.S. or foreign regulators have dinged UBS for financial crime failings in its securities operations or main corporate halls.
The operation’s Basel-based Parent, which has nearly $1 trillion in assets, has faced a bevy of investigative and regulatory inquiries, since the mid-2000s paying billions of dollars in penalties to banking and securities authorities in the United States, United Kingdom, Japan, and other regions for a broad spectrum of failings, including sanctions and financial crime failures, rate rigging, tax evasion and toxic securities that contributed to the global economic downtown.
As a full-service broker-dealer, UBSFS offers securities and commodities brokerage services; investment products and advisory services; portfolio management products and services; and execution and clearance services for transactions originated by individual investors.
UBSFS reported total assets of more than $17 billion for the year ending December 31, 2017. UBSFS is a wholly-owned subsidiary of UBS Americas Inc., which is an indirect subsidiary of UBS Group AG.
Missed red flags, transaction details
In the latest action, regulators noted a plethora of compliance breakdowns in many areas considered to be at higher risks for money laundering, including funds flowing in from risky foreign jurisdictions and transactions controlled by political power brokers.
Over many years, UBSFS processed hundreds of transactions through certain of its brokerage accounts that “exhibited red flags associated with shell company activity,” according to penalty documents, with the failures compounded by the AML monitoring system not capturing and analyzing originator and recipient details for foreign-currency denominated wires related to commodities and retail brokerage accounts.
“UBSFS failed to adequately monitor foreign currency-denominated wire transfers—amounting to tens of billions of dollars—that were conducted through its commodities accounts and retail brokerage accounts,” according to regulators.
“As a result, it was unable to identify and investigate potentially suspicious transactions based on the presence of important risk factors, such as jurisdiction and the involvement of politically exposed persons.”
Some of the red flags included transactions with no apparent business or investment purpose.
“For example, one group of related accounts engaged in a pattern of moving money between banks in Taiwan and Singapore through their UBSFS accounts via wire transfers and journal entries,” according to penalty documents. “The accounts were set up as retirement accounts, and there was no apparent business or investment purpose that would account for the volume and frequency of the money movements.”
The AML gaps allowed co-conspirators to move funds into multiple jurisdictions and change currencies with ease – without broad oversight from analysts.
“While UBSFS analysts were able to access sender and recipient information and country of origin on a case-by-case basis through other UBSFS systems, this was not sufficient oversight to monitor large volumes of transactions for suspicious activity in compliance with the BSA,” according to FinCEN.
“The weaknesses in monitoring meant that it was possible for an unknown third-party residing in a country known for money-laundering risk to transfer foreign currency into a customer’s commodities account, and for that customer to then transfer these funds to another party in a country known for money-laundering risk, without the Firm’s surveillance system reviewing these transactions.”
UBSFS has made a range of improvements, however, to correct the issue, including upgrading its AML surveillance monitoring system, boosting oversight of its AML monitoring systems, alerts and ratio to staff, enhancing training for AML compliance staff, and implementing a more rigorous quality assurance system to prevent issues from festering for years without being addressed.