FinCEN, SEC, and FINRA Impose $15 Million Penalties and Fines on UBS Financial Services, UBS Securities for 13+-Year Failure to Implement Adequate AML Program

On December 17, in a coordinated set of announcements, the U.S. Financial Crimes Enforcement Network (FinCEN), Securities and Exchange Commission (SEC), and FINRA imposed civil penalties and fines totaling $15 million on broker-dealer UBS Financial Services Inc. (UBSFS) and UBS Securities LLC (UBSS) for willful violations of the Bank Secrecy Act (BSA).

FinCEN stated that

[a]s described in the assessment, UBSFS failed to develop and implement an appropriate, risk-based anti-money laundering (AML) program that adequately addressed the risks associated with accounts that included both traditional brokerage and banking-like services.  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.

As a full-service broker-dealer subject to the BSA and FinCEN regulations, UBSFS is required to establish and implement an AML program, and to perform periodic reviews of its correspondent accounts for foreign financial institutions.  FinCEN, however, “determined that from 2004 to 2017, UBSFS failed to implement an adequate AML program and failed to implement an adequate due diligence program for foreign correspondent accounts.”

FinCEN also stated that “UBSFS failed to provide sufficient resources to ensure day-to-day AML compliance.  Inadequate staffing led to a significant backlog of alerts and decreased UBSFS’s ability to timely file suspicious activity reports (SARs).”  Moreover,

[o]ver several years, UBSFS processed through certain of its brokerage accounts hundreds of transactions that exhibited red flags associated with shell company activity.  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.  UBSFS’s AML monitoring system failed to capture critical information about these foreign currency-denominated wires, including sender and recipient information and the country of origin and destination.  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.

The SEC stated in its order that

UBS, in addition to offering its customers the ability to buy and sell securities, offered customers with brokerage accounts various bank-like, money transfer services such as wire transfers, journal-entry transfers, and check writing. . . . [B]y offering these additional money transfer services, UBS was susceptible to risks of money laundering and other illicit financial activity associated with these services.

Although broker-dealers, like other financial institutions, are required to file Suspicious Activity Reports (SARs) for transactions that are suspected to involve fraud or with no apparent lawful purpose., the SEC also stated that “from at least 2011 to 2013, UBS failed to file SARs on certain suspicious movements of funds through its customers’ accounts,” and that “UBS did not properly review suspicious transactions flagged by its internal monitoring systems and failed to detect suspicious transactions involving the movement of funds between certain accounts in suspicious long-term patterns.”

FINRA made two related sets of findings.  First, it found

that, from January 2004 to April 2017, UBSFS processed thousands of foreign currency wires for billions of dollars, without sufficient oversight. UBSFS’s AML surveillance systems failed to reasonably monitor billions of dollars in foreign currency wires flowing through customer accounts, including hundreds of millions of dollars in foreign currency wires to and from countries known to be at high risk for money-laundering. For example, for foreign currency wires to and from certain accounts, UBSFS’s AML surveillance systems did not capture the number and identity of customers, the number and dollar value of the transfers, whether the transfers involved third parties and whether the transfers involved countries known for money-laundering risk. UBSFS’s failure to monitor these high-risk transactions went undetected for more than eight years until discovered in 2012, and the firm failed to implement a reasonable system until April 2017.

Second, it found with respect to UBSS that

from January 2013 to June 2017, the firm failed to reasonably monitor penny stock transactions that its Swiss parent routed to UBSS for execution through an omnibus account. During this time, UBSS facilitated the purchase or sale of more than 30 billion shares of penny stocks valued at over $545 million through the omnibus account for undisclosed customers.

The three sets of penalties and fines, in effect, were equally divided between the three agencies:

  • SEC: UBSFS agreed to pay a $5 million civil penalty to resolve the SEC’s charges.
  • FINRA: FINRA fined UBSFS $4.5 million in relation to high-risk transactions including foreign currency and UBSS $500,000 in relation to high-risk transactions in penny stocks.
  • FinCEN: FinCEN stated that it imposed a total penalty of $14.5 million on UBSFS, but specified that $5 million of that total would be paid to the U.S. Department of the Treasury and the remainder “will be concurrent with” the penalties and fines to be paid to the SEC and FINRA.

Note: What is most remarkable about this multiagency resolution is not the total amount of the financial penalties, which is quite moderate compared to other AML enforcement actions this year, but the fact that UBSFS failed, for more than 13 years, to develop and implement an appropriate AML program.  Regrettably, the agencies’ public statements give no indication of how it was that senior management at HBSFS, UBSS, and UBS Holding Company evidently paid no meaningful attention to, and provided no effective support of, a key financial-crimes program for well over a decade.

FinCEN included in its release an acknowledgement

that UBSFS has made significant investments in BSA/AML staffing and technology, demonstrating its commitment and ability to correct the issues listed in the assessment through significant remedial efforts, including an upgraded AML surveillance monitoring system, enhanced oversight of its AML monitoring, enhanced training for AML compliance staff, and the implementation of a new quality assurance system.

That acknowledgement indicates that current UBS management appears to have put AML compliance on the right track.  In any event, financial-institution compliance officers should make use of the collective agency statements and actions in this case to benchmark their own AML programs – and to remind their own senior management about the potential consequences of persistent neglect of financial crimes compliance.

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