Financial firms should see enforcement actions as learning opportunities. The Securities and Exchange Commission (SEC) and other regulatory bodies enforce steep fines and penalties to send a clear message and deter future violations. As a result? They expect firms within the industry to pay attention and adapt their compliance programs accordingly.
With that in mind, we’re continuing our blog series, “what went wrong” in which we’ll cover enforcement actions and what your firm can do to avoid similar enforcement actions.
In our previous blog post, we talked about a $81 million recordkeeping violation. Today, we’re focusing on an enforcement action regarding the SEC’s anti-money laundering (AML) rules and cryptocurrency compliance and what firms can learn from this case of noncompliance.
The Case: A Violation of the SEC’s AML Rule
On Jul. 1, 2024, the SEC announced charges for misleading investors about its AML compliance program. The SEC alleges that the firm and former members of its C-suite leadership misled investors about the strength of its AML compliance program and the monitoring of high-risk cryptocurrency customers.
The SEC alleges:
- The firm’s former CEO and CRO misled investors by stating that the firm had an effective AML compliance program.
- The firm also misled investors by stating that the firm conducted ongoing monitoring of its high-risk cryptocurrency customers.
- The CFO misled investors about the firm’s losses from expected securities following the FTX collapse.
- The CFO violated certain antifraud and books and records provisions in aiding and abetting some of the firm’s violations.
- Overall, the firm misrepresented the firm’s bleak financial condition following the FTX collapse.
- In an earnings release and earnings call, the firm and CFO understated and misrepresented investors’ financial standing as of December 31, 2022.
- In March 2023, the firm announced it would wind down its banking operations, and its stock eventually plummeted to nearly $0.
All parties charged, except the CFO, have agreed to settle the SEC’s charges. Without admitting or denying the allegations, the firm agreed to a final judgment ordering it to pay a $50 million civil penalty. The former CEO and CRO also settled the charges without admitting or denying the penalties and agreed to civil penalties of $1 million and $250,000, respectively.
What Can Your Firm Do to Avoid Violating the SEC’s AML Rule?
Here are some steps your firm can take to avoid making costly mistakes related to the SEC’s AML rules:
- Implement a robust AML compliance program. This includes having clear policies and procedures, employee training, and ongoing monitoring of transactions.
- Conduct thorough due diligence on high-risk customers. For cryptocurrency customers, this might involve additional checks on their source of funds and business activities.
- Maintain accurate and transparent financial records to avoid misleading investors about a firm’s financial health.
- Foster a culture of integrity and accountability, so that employees, including leadership, feel empowered to raise concerns about potential compliance issues.
- Seek legal counsel to help your firm navigate complex regulations and avoid misrepresenting compliance efforts.
- Conduct regular audits and reviews of internal controls to identify and address any weaknesses in the compliance program.
AML Compliance with COMPLY
The recent crackdown by the SEC on AML compliance underscores the need for robust practices, especially in the complex world of cryptocurrency. With COMPLY, you can proactively build an effective and sustainable AML compliance program. Our comprehensive suite of consulting services is designed to help you:
- Conduct thorough risk assessments and tailor your program to your specific needs.
- Design and implement effective customer due diligence procedures, including beneficial ownership identification.
- Develop and test your AML compliance program to ensure its effectiveness.
Don’t wait for the SEC to come knocking. Is your firm doing all it can to avoid an AML violation? Let’s find out, meet with one of our experts.