Exclusive: SEC probes Schwab, Merrill, for anti-money laundering violations - sources

[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 said.

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 be learned.

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 funds.

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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