Exclusive: SEC probes
Schwab, Merrill, for anti-money laundering violations -
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[May 22, 2014] By
Emily Flitter and Jed Horowitz
NEW YORK (Reuters) - U.S.
regulators are investigating Charles Schwab Corp and
Bank of America Corp's Merrill Lynch brokerage over
whether they are doing enough to learn about their
clients' identities, sources said, the latest sign a
crackdown on money laundering is expanding.
The U.S. Securities and Exchange Commission is looking into whether
the brokerages missed red flags that could indicate attempts to move
money illicitly or to feed proceeds from drug trafficking and other
crimes into the financial system by failing to know their customers
well enough, the sources said.
Schwab is conducting an internal investigation, one of the sources
Spokesmen for the SEC declined to comment and Merrill declined to
comment. A Schwab spokeswoman said the company does not comment on
regulatory agency investigations but takes its due-diligence
responsibilities regarding clients very seriously.
The investigations are part of the SEC's sweep of the brokerage
industry to make sure brokerages are following anti-money laundering
rules. The sweep was described to Reuters by two former government
officials with knowledge of the agency's thinking.
It was not clear what penalties the SEC would seek or whether it
planned to also charge individuals or any other financial
institutions for any violations. The investigation is not yet
complete and the timing of any cases against the companies could not
Broker-dealers are required to establish, document and maintain
procedures for identifying customers and verifying their identities
under sections of the Bank Secrecy Act. In 2008, the SEC fined
E*Trade Financial Corp $1 million for failing to verify the
identities of more than 65,000 secondary account holders in joint
accounts, resulting in false reporting.
U.S. Treasury Undersecretary for Terrorism and Financial
Intelligence David Cohen began urging regulators two years ago to
make sure financial institutions are identifying the true beneficial
owners of their accounts. Cohen's exhortations came amid concerns
that bad actors, such as drug cartel members and terrorists, are
growing more creative in their attempts to secretly transfer tainted
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The SEC's investigation so far has found Charles Schwab and Merrill
accepted shell companies and individuals with fake addresses as
clients, two sources said.
In both cases, some of the accounts, whose ownership the brokerages
did not adequately investigate, were eventually linked to drug
cartels, they said.
One of Charles Schwab's clients, a rancher in Texas, was found to be
transferring money to a holding company that was revealed to be a
shell company, according to one of the sources.
The source said most of the suspect account holders in the Schwab
case were located near the Mexican border and some were linked to
drug money in Mexico. Some accounts contained hundreds of thousands
of dollars while others held millions, the source said.
(Additional reporting by Brett Wolf; Editing by Grant McCool)
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