SEC Announces Two Charges for Anti-Money-Laundering Violations

Last week, the Securities and Exchange Commission (SEC) announced two enforcement actions related to the failed implementation of anti-money-laundering (AML) procedures. These charges reflect the SEC’s continued focus on financial institutions’ compliance with AML program requirements under the Bank Secrecy Act (BSA), as well as other institutions’ voluntary implementation of AML procedures. 

On Jan. 14, 2025, the SEC announced charges against Connecticut-based investment adviser Navy Capital Green Management LLC for making misrepresentations related to its AML procedures and for compliance failures. To settle the claims, Navy Capital agreed to pay a $150,000 civil penalty.

The SEC’s order alleged that Navy Capital violated Section 206(4) and Rule 206(4)-8 of the Advisers Act, which make it illegal for an investment adviser to make untrue statements of a material fact or engage in fraudulent business with respect to investors. The SEC charged that, from 2018 to 2022, Navy Capital made representations to investors that it was voluntarily committed to protecting against money laundering and represented that it conducted AML due diligence on prospective and existing investors. Although investment advisers were not at the time subject to the BSA’s AML requirements, Navy Capital misrepresented that it was voluntarily incorporating certain requirements imposed under the act, including the requirement to confirm the identity of investors and their principal beneficial owners.^[1]

The order further alleges that Navy Capital failed to follow its represented AML due diligence procedures and failed to adopt written compliance policies, resulting in violations of Section 206(4) and Rule 206(4)-7 of the Advisers Act. The SEC charged that Navy Capital accepted investments from multiple investors without obtaining any documents identifying their beneficial owners or the sources of their funds. As a result, Navy Capital allegedly missed red flags about a foreign investor engaged in money laundering and only collected the required AML documentation after the investor was sanctioned. Navy Capital is further alleged to have failed to adopt written compliance policies and procedures designed to prevent violations of the Advisers Act.

On Jan. 17, 2025, the SEC announced charges against broker-dealer and investment adviser LPL Financial LLC for multiple alleged failures related to its AML program. LPL agreed to pay a civil penalty of $18 million and to implement improvements to its AML policies and procedures to settle the charges.

The order against LPL charged violations of Section 17(a) and Rule 17a-8 of the Exchange Act. Rule 17a-8 requires broker-dealers to comply with reporting, recordkeeping and record retention requirements under the BSA, including the customer identification program rule (CIP Rule)^[2] and the Ongoing CDD^[3] requirements of the AML Program Rule. LPL allegedly failed to remediate known problems with its CIP verification process that resulted in customer access restrictions being removed in error. Additionally, the SEC charged that LPL’s AML policies did not describe what CIP information should be retained and failed to consistently track CIP information, which resulted in CIP recordkeeping failures. Furthermore, LPL failed to close certain higher-risk accounts that its AML policies had deemed prohibited. For instance, LPL allowed numerous cannabis-related accounts to be opened despite a policy prohibiting doing business with any person or entity involved with cannabis production or distribution. The SEC’s order also requires LPL to continue to engage with a compliance consultant to monitor and advise on changes to the firm’s AML policies and procedures.

These enforcement actions reflect the SEC’s continued emphasis on compliance with AML programs.^[4] The SEC’s Examination Priorities for 2025 explain that the Division of Examinations “will continue to focus on AML programs and review whether broker-dealers and certain [regulated investment companies] are: (1) appropriately tailoring their AML program to their business model and associated AML risks; (2) conducting independent testing; (3) establishing an adequate customer identification program, including for beneficial owners of legal entity customers; and (4) meeting their SAR filing obligations.”^[5]

^[1]_{At the moment, registered investment advisers like Navy Capital are not required to comply with the standards for AML that financial institutions are subject to under the BSA. A proposed rule, which if adopted would be effective as of Jan. 1, 2026, would add certain investment advisers to the definition of “financial institutions” under the BSA.}

^[2]_{Under the CIP Rule, a broker-dealer must collect basic information about each of its customers, including their name, date of birth, address and identification number. The broker-dealer’s CIP must include procedures for verifying the identity of each customer to enable the broker-dealer to form a reasonable belief that it knows the customer’s true identity.}

^[3]_{Under the CDD requirements, broker-dealers must adopt procedures for conducting ongoing customer due diligence.}

^[4]_{In November 2024, the SEC charged three broker-dealers with violating the Exchange Act for filing deficient suspicious activity reports (SARs). Federal law requires broker-dealers to file SARs to report transactions that they suspect involve funds derived from illegal activity.}

^[5]_{Other reported investigations of AML violations are ongoing. For example, the SEC and Department of Justice are investigating financial services company Block, which operates Square and Cash App. The investigations began in 2023 after the Hindenburg Research firm published a report accusing Block of strategically disregarding AML rules. Earlier this month, a securities class action was filed in the Northern District of California alleging that Block failed to implement basic AML procedures despite positive assurances to shareholders.}