This year, SIFMA once again hosted an outstanding and well-attended industry conference in New York for anti-money laundering (AML) industry professionals. Speakers and attendees included a strong slate of senior regulatory and SRO representatives, including SEC, FINRA, FinCEN, Financial Institution AML Compliance Executives and their teams, law firms, consulting firms, and a variety of vendors servicing industry needs. Quantexa was proud to be a Diamond-level sponsor.

The two-day agenda delivered a broad selection of topics focused tailored to the unique needs of broker-dealers’ AML and Sanctions Compliance programs. A few highlights from this year include:

1) Low-priced securities remain a hot regulatory topic

As in many past years, the risks and red flags of trading in low-priced securities (LPS) continue to be a topic cited by FINRA as an area of concern, where firms still are not doing enough to comprehensively monitor and detect red flags.

In case you missed Quantexa’s discussion on a panel on Transaction Monitoring with industry leaders from Morgan Stanley and Bank of America, using entity resolution and network analytics that leverages available market data and public information (e.g., OTC Markets Company Data and Compliance Analytics) as part of the detection process remains the single best way to find hidden issuer-driven risk. Using new technologies like Quantexa, firms can broaden their detection approach to automatically identify higher risk securities active on a firm’s trading platform, while simultaneously seeing which customers are trading those securities in patterns that may indicate concern.

Traditional monitoring solutions don’t apply external intelligence upfront during the detection process. By contrast, Quantexa actively leverages available market information to drive effective detection for some of the most difficult typologies. Making use of available information in the marketplace supports a more efficient and effective risk-based approach to combat LPS Risk.

2) The Corporate Transparency Act

Two hot topics were discussed for those focused on Customer Due Diligence or “Know Your Customer” (CDD/KYC) programs.

Firstly, the topic of the U.S. requirements for centralized reporting of Beneficial Ownership Information (BOI), which went into effect for companies in January 2024, garnered much attention. However, little clarity and many questions and concerns were raised when it comes to financial institutions' access to the central registry.

The Corporate Transparency Act (CTA) has three primary rules:

1. Business Reporting Rule

2. Business Registry Access Rule

3. Customer Due Diligence (CDD) Revision Rule

Regarding the Business Access Rule (Dec 2023), a keen area of interest to financial institutions, FinCEN outlined a phased approach for providing access to the critical information captured in the central registry. The approach prioritized a myriad of government agencies within the initial phases and ended the prioritization with financial institutions at the back of the line. FinCEN commented that it is expected that financial institutions will gain access in the Spring of 2025.

It is important to note that financial institutions are not required to access the registry and open questions raised by both law firms and financial institution representatives outlined several concerns about the risks associated with using the permissible access. For example, questions exist on how financial institutions would handle discrepancies identified in the information located in the registry compared to internal records and what obligations that might raise for client outreach. Numerous similar concerns were raised related to client privacy and ‘right to use’ and ‘right to access’ standards that remain ambiguous.

^{Additional information about the Corporate Transparency Act
Beneficial Ownership Information Reporting Final Rule (September 30, 2022)
Beneficial Ownership Information Access and Safeguards Final Rule (December 21, 2023)
For a law firm view of the highlights of CTA comments made at SIFMA, please see here.}

3) CIP for Registered Investment Advisors

several speakers referenced the anticipated changes to the applicability of Customer Identification Program (CIP) rules for Investment Advisors (IAs), a group previously exempt from the AML program rules. This is not a new topic for a SIFMA, but rather new again, as some readers may recall that similar measures were previously tabled in 2015.

As mentioned in the SIFMA Conference’s opening remarks by Andrea Gacki of FinCEN, since 2015 Assets Under Management of Investment Advisors (IAs) have almost doubled and FinCEN has additional concerns about patterns of illicit finance and national security risk associated with this important sector. Ms. Gacki noted that the existing gaps in regulation, “allow illicit investors to “shop around” for an adviser who does not need to inquire into their source of wealth." Impacts of this regulatory gap include incidents where IAs have helped launder corruption proceeds and where private funds (advised by IAs) have been involved in sanctions evasion schemes and used as means for Russian oligarchs to gain access to the U.S. financial system.

Financial institutions will also need to think about how these changes impact their CDD/KYC programs where IAs and/or private funds managed by IAs are clients of the financial institution. It remains to be seen what regulatory guidance and expectations will follow to clarify how, and to what extent, financial institutions will be expected to have a greater understanding of the IA or private fund and the nature of the underlying risks posed by the indirect investor base. This is certainly a space to keep an eye on as we move forward.

Financial institutions need to position to manage these changes, long before BOI access and usage guidance gets fully clarified and Investment Advisor CIP rules take full effect. Financial institutions need to be proactively thinking now about how compliance technology can leverage new data as part of CDD/KYC and Fraud identification programs (e.g., shared information across unrelated customer accounts or common AIs across private funds).

Tools that leverage robust entity resolution technology are essential to a single view of your customer and to finding and addressing anomalies -- even before BOI registry access is available. Firms need to prepare now by addressing long-standing data issues and silos of customer information for a Single View of the Customer, Enhanced Due Diligence and finding hidden risks that can be discerned through advanced technologies leveraging public information.

^{Additional information about the proposed rule on CIP for Investment Advisors
Click these links for a Fact Sheet and language of the proposed rule released on May 13, 2024.
Firms may submit feedback during the comment period on the SEC website, see here.
For a law firm summary and answers to frequently asked questions on the proposed rule, see here.}

Find out more about Quantexa’s comprehensive AML Solutions for CDD/KYC.