No-One Is Checking Suspicious Activity At US Securities Firms

by Mike Godfrey, Tax-News.com, New York

25 April 2001

Governmental authorities around the world who are trying to reduce money laundering usually focus their efforts first and foremost on transactions through bank accounts, but many other types of financial transaction can be put to use in the laundering process. One of those is securities transactions: buying and selling operations within brokerage accounts add up to trillions of dollars every day, but little of this is in cash, so that money laundering may be occurring in forms which won't be turned up by straightforward monitoring of cash movements into and out of bank accounts.

Remarkably, in the US at present no-one is monitoring securities transactions for money laundering, or making 'suspicious activity reports' (SARs). How so?

When the 1930's Glass-Steagall legislation which separated banking and securities activity began to break down in the 1980's through the formation of interstate bank holding companies, bank supervisors took it upon themselves under the so-called Bank Secrecy Act of 1970 to monitor banks' subsidiaries as much as the banks themselves, and to require the filing of SARs from the banks' securities divisions. This meant that there was inconsistency between the treatment of bank-held securities firms, and independent ones, which have never been subject to SAR rules since the SEC was never specifically required by the Treasury Department to impose them.

It's estimated that about half of the securities industry is in the hands of banks, while the other half remains outside bank control.

A letter from the US General Accounting Office dated March 22nd to Senator Carl Levin, Ranking Member on the Permanent SubCommittee on Investigations, reveals that since the passage of the Gramm-Leach-Bliley Act 199, which effectively demolished the remains of Glass-Steagall, and imposed a functional regulatory regime on the US financial industry, there is now no SAR-type supervision of the securities industry at all. Banking regulators no longer have a duty to monitor securities subsidiaries for suspicious activity, while the SEC, which now regulates all securities firms, continues as before not to have a responsibility for it.

At least now there is a consistent picture - but it's not one calculated to make the regulators happy!

See the text of the letter at http://www.gao.gov/new.items/d01474.pdf

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