a

GAO

United States General Accounting Office

Report to the Chairman, Permanent 

Subcommittee on Investigations, 

Committee on Governmental Affairs, 

U.S. Senate

October 2001 ANTI-MONEY 

LAUNDERING

Efforts in the 

Securities Industry

GAO-02-111

Page i GAO-02-111 Efforts in the Securities Industry

Contents

Letter 1

Results in Brief 2

Background 6

The Securities Industry Is Viewed as a Potential Target, but the 

Extent of Actual Money Laundering Is Unknown 11

Broker-Dealer and Mutual Fund Firms Are Not Subject to All 

Anti-Money Laundering Regulatory Requirements 16

Some Firms Reported Implementing Anti-Money Laundering 

Measures That Go Beyond Existing Requirements 24

Most Foreign Countries Have Anti-Money Laundering Rules for 

Securities Firms, but the Effectiveness of These Rules Is 

Unclear 37

Conclusions 41

Agency Comments and Our Evaluation 42

Appendixes

Appendix I: Scope and Methodology 46

Determining Potential for Money Laundering and the Extent to 

Which Existing Regulations and Oversight Apply to the Securities 

Industry 46

Determining the Extent to Which Broker-Dealers and Mutual Funds 

Have Implemented Anti-Money Laundering Activities 47

International Anti-Money Laundering Efforts 54

Appendix II: Example of a Data Collection Instrument Used to Survey the 

Securities Industry 55

Appendix III: Demographic Information on the U.S. Securities Industry 62

Appendix IV: Identified Cases of Money Laundering Through the U.S. 

Securities Industry 67

Appendix V: Survey Information on the Average Dollar Size of 

Transactions Processed for Retail Customers 70

Appendix VI: Additional Information on Voluntary Anti-Money Laundering 

Measures From Surveys of Broker-Dealers and Mutual Fund 

Groups 71

Appendix VII: Additional Information on the Caribbean Financial Action 

Task Force 75

Laws Requiring Securities Firms to Report Suspicious Transactions 

in Some CFATF Jurisdictions Were Recently Enacted 75

Implementation Efforts in Other CFATF Jurisdictions Have Been 
Contents

Page ii GAO-02-111 Efforts in the Securities Industry

Criticized 77

Securities Industry Viewed as Less Vulnerable Than Other Sectors of 

Caribbean Economies 78

Appendix VIII: Comments From the Financial Crimes Enforcement 

Network 79

Appendix IX: Comments From the Securities and Exchange Commission 80

Appendix X: GAO Contacts and Staff Acknowledgments 82

GAO Contacts 82

Acknowledgments 82

Related GAO Products 83

Tables Table 1: BSA Reporting Requirements for Broker-Dealers and 

Mutual Fund Service Providers That Accept Customer 

Payments 17

Table 2: Extent of Voluntary Anti-Money Laundering Measures 

Implemented by Broker-Dealers and Direct-Marketed 

Mutual Fund Groups 35

Table 3: Examples of International Anti-Money Laundering 

Recommendations for Financial Institutions 38

Table 4: SARs Filed by Securities Firms in FATF Countries 40

Table 5: Selected Characteristics of the Broker-Dealer 

Population 49

Table 6: Disposition of Broker-Dealer Sample 51

Table 7: Disposition of Mutual Fund Sample 51

Table 8: Disposition of Sample of Securities Subsidiaries of Bank 

Holding Companies 52

Table 9: Identified Criminal Cases in Which Indictments Contained 

Charges of Money Laundering Through Brokerage or 

Mutual Fund Accounts 68

Table 10: Identified Forfeiture Cases That Involved Money 

Laundering Through Brokerage or Mutual Fund

Accounts 69

Table 11: Information on the Average Size of Transactions Processed 

for Retail Customers, by Type and Size of Firm 70

Figures Figure 1: Money Laundering Stages 7

Figure 2: Introducing Broker and Clearing Broker Services 8
Contents

Page iii GAO-02-111 Efforts in the Securities Industry

Figure 3: Activities of Entities Involved in Providing Mutual Fund 

Services 9

Figure 4: Kinds of Payments That Broker-Dealers and 

Direct-Marketed Mutual Fund Groups Accept 

(percentage of survey population) 26

Figure 5: Voluntary Anti-Money Laundering Measures 

Implemented by Introducing Brokers and Clearing 

Brokers 29

Figure 6: Voluntary Anti-Money Laundering Measures 

Implemented by Direct-Marketed Mutual Fund Groups 

and Their Transfer Agents 30

Figure 7: Extent to Which Introducing Brokers Conducted or 

Relied on Their Clearing Brokers to Conduct Voluntary 

Anti-Money Laundering Activities 33

Figure 8: Average Daily Value of Securities Traded on Major U.S. 

Markets From January 1990 to June 1, 2001 62

Figure 9: Average Daily Shares Traded on Major U.S. Markets From 

January 1990 to June 1, 2001 63

Figure 10: Mutual Fund Assets From 1990 to June 1, 2001 64

Figure 11: Growth of On-line Brokerage Accounts From Fourth 

Quarter 1998 to Fourth Quarter 2000 65

Figure 12: Percentage Share of Trading for Markets in 10 Most 

Active Countries During 1999 66

Figure 13: Proportion of Broker-Dealers That Reported 

Implementing Various Types of Voluntary Anti-Money 

Laundering Measures 72

Figure 14: Proportion of Mutual Fund Groups That Reported 

Implementing Various Types of Voluntary Anti-Money 

Laundering Measures 74

Figure 15: CFATF Members Requiring Securities Firms to Report 

Suspicious Transactions 76
Contents

Page iv GAO-02-111 Efforts in the Securities Industry

Abbreviations

BSA Bank Secrecy Act

CFATF Caribbean Financial Action Task Force

FATF Financial Action Task Force

FinCEN Financial Crimes Enforcement Network

GLBA Gramm-Leach Bliley Act

NASD National Association of Securities Dealers

NASDR National Association of Securities Dealers Regulation

NYSE New York Stock Exchange

SAR suspicious activity report

SEC Securities and Exchange Commission

SRO self-regulatory organization
Page 1 GAO-02-111 Efforts in the Securities Industry

United States General Accounting Office

Washington, D.C. 20548

A

October 10, 2001 Letr

The Honorable Carl Levin

Chairman, Permanent Subcommittee on Investigations

Committee on Governmental Affairs

United States Senate

Dear Mr. Chairman:

This report is in response to your request that we conduct a review of 

money laundering issues related to the securities industry. Money 

laundering is criminal activity that occurs when individuals or 

organizations seek to disguise or place illegally obtained funds in the 

stream of legitimate commerce and finance. Money launderers have 

traditionally targeted banks, which accept cash and facilitate domestic and 

international funds transfers. However, the U.S. securities markets, which 

are the largest and most liquid in the world, may also be targeted by 

criminals seeking to hide and obscure illicit funds. In response to one of 

the matters raised in your request, we reported in March 2001 on the status 

of regulatory efforts to oversee the anti-money laundering activities of 

certain broker-dealers affiliated with banks after the passage of the 

Gramm-Leach-Bliley Act (GLBA).1

 

To address the remaining matters contained in your request, this report 

describes (1) government and industry views on the potential for money 

laundering in the securities industry, (2) current legal and regulatory 

requirements relating to anti-money laundering in the securities industry 

and the actions regulators have taken to oversee these requirements, (3) 

the efforts that broker-dealers and mutual funds have undertaken to detect 

and prevent money laundering, and (4) international anti-money laundering 

efforts relating to securities activities and the effectiveness of these efforts. 

1

See Money Laundering: Oversight of Suspicious Activity Reporting of Bank-Affiliated 

Broker-Dealers Ceased (GAO-01-474, Mar. 22, 2001). 
Page 2 GAO-02-111 Efforts in the Securities Industry

In completing our work, we interviewed U.S. and foreign officials from law 

enforcement and regulatory agencies, broker-dealers, mutual fund groups,2

industry associations, and international bodies formed to combat money 

laundering. We also reviewed available documents, including domestic and 

foreign reports on anti-money laundering initiatives, pertinent U.S. laws 

and examination procedures, and proposed drafts of a suspicious activity 

report (SAR) rule for the U.S. securities industry. In addition, we surveyed 

randomly selected samples of the industry and used this information to 

estimate the extent to which firms in 2 key populations—3,015 brokerdealers and 310 direct-marketed, no-load mutual fund groups—had 

implemented measures to detect and prevent money laundering. 3

 We did 

not, however, verify the information that firms reported on their antimoney laundering measures nor did we evaluate the effectiveness of these 

measures, which depends on various factors such as the level of 

management commitment to the area. Appendix I provides more detailed 

information on the scope and methodology of our review, and appendix II 

contains an example of one of the survey instruments we administered. 

We conducted our work between May 2000 and May 2001 in accordance 

with generally accepted government auditing standards. 

Results in Brief Although they acknowledged that the number of documented cases in 

which broker-dealer or mutual fund accounts have been used to launder 

money was limited, law enforcement agencies were concerned that 

criminals may increasingly attempt to use the securities industry to launder 

money. The agencies explained that the securities industry would more 

likely be used in the later stages of money laundering to obscure the origin 

of illegal proceeds rather than in the initial stage when cash is first placed 

into the financial system. Law enforcement officials believed that the large, 

active, and liquid nature of the U.S. securities markets, along with the 

2

Mutual fund groups are firms that operate one or more mutual funds.

3

Our survey population of broker-dealers included firms registered as broker-dealers doing 

business with the public and excluded firms that conduct only proprietary trading. Our 

survey population of mutual fund groups predominantly market no-load mutual fund shares 

directly to investors, and, as such, their transactions would be subject to some anti-money 

laundering requirements. Our broker-dealer and mutual fund group survey populations 

excluded firms that were found to be subsidiaries of depository institutions or financial 

holding companies; survey responses of any firm indicating such an affiliation were 

included in our analysis of a separate survey administered to broker-dealer subsidiaries of 

bank holding companies. 
Page 3 GAO-02-111 Efforts in the Securities Industry

ability to quickly move funds through wire transfers among accounts and to 

other financial institutions worldwide, make the securities industry 

attractive to money launderers. Industry regulators and representatives 

also acknowledged that money launderers may target the securities 

industry. However, the extent to which broker-dealers and mutual funds 

are actually used for money laundering is not clear. In addition, the 

industry’s overall vulnerability is impacted by the extent to which it is 

covered by anti-money laundering requirements, overseen by regulators, 

and mitigated by the anti-money laundering measures implemented by 

broker-dealer and mutual fund firms. 

Currently, most broker-dealers or firms that process customer payments 

for mutual fund groups4

 are subject to all U.S anti-money laundering 

requirements. They are required to adhere to the reporting and 

recordkeeping requirements relating to currency and other transactions 

arising under the Bank Secrecy Act (BSA) that are designed to detect illegal 

financial activity, including the requirement to report cash deposits 

exceeding $10,000. But unlike banks and other depository institutions, 

most of these firms are currently not required to report suspicious 

activities that could be evidence of money laundering. Most of these firms 

are also not subject to related requirements such as developing written 

policies and procedures for monitoring suspicious acitivites and providing 

formal training to help employees identify suspicious activities. The 

Department of the Treasury is in the process of developing a rule requiring 

broker-dealers to report suspicious activities related to money laundering 

and anticipates that such a rule will be issued for public comment by the 

end of 2001. To develop this rule, Treasury is working closely with the 

Securities and Exchange Commission (SEC) to resolve several issues, 

including the appropriate dollar threshold for reporting suspicious 

activities and the types of activities that should be reported. SEC and selfregulatory organizations (SRO), such as the New York Stock Exchange 

(NYSE) and the National Association of Securities Dealers Regulation 

(NASDR), conduct periodic examinations to ensure that the broker-dealers 

that they oversee adhere to these BSA reporting and recordkeeping 

requirements related to currency and other transactions that currently 

apply to broker-dealers.

4

Firms that process customer payments for mutual fund groups include transfer agents that 

maintain records of fund shareholders and distributors that sell mutual fund shares to 

investors.
Page 4 GAO-02-111 Efforts in the Securities Industry

On the basis of the responses to our survey, some of the 3,015 brokerdealers and the 310 direct-marketed mutual fund groups (including the 

firms that process their customer payments)5

 in our survey populations 

reported undertaking voluntary anti-money laundering efforts that go 

beyond applicable BSA reporting and recordkeeping requirements. Our 

survey results showed that more than 90 percent6

 of broker-dealers or 

mutual fund firms never accept cash, thereby reducing their vulnerability 

to the initial stage of money laundering when illicit funds are first placed 

into the financial system. 7

 Many direct-marketed mutual fund groups and 

some broker-dealers accept monetary instruments, such as money orders 

and traveler’s checks. These monetary instruments can be used by money 

launderers as part of attempts to structure deposits to avoid BSA currencyreporting requirements.8

 Beyond currency-related restrictions, we found 

that most firms have yet to implement other types of voluntary anti-money 

laundering measures, including written policies and procedures to identify 

and report suspicious activities. Overall, 17 percent of broker-dealers and 

40 percent9

 of direct-marketed mutual fund groups in our survey 

populations did report implementing such voluntary anti-money laundering 

measures. Larger firms, which hold most of the industry’s assets and 

accounts were more active as an estimated 70 percent of the 111 large 

broker-dealers and the 15 large mutual fund groups10 in our survey 

5

Our survey instructed mutual fund groups to include the anti-money laundering policies 

and procedures of transfer agents or principal underwriters that processed payments for 

fund share purchases or redemptions. These entities, not the mutual funds, are subject to 

BSA reporting and recordkeeping requirements because many are either banks or brokerdealers. Transfer agents that are not either banks or brokers are subject to similar currency 

reporting requirements under the Internal Revenue Code. According to our survey results, 

95 percent of the mutual fund respondents used transfer agents to process payments. Thus, 

the information presented in this report on mutual fund groups and their anti-money 

laundering efforts includes the efforts of their transfer agents as well as their own. 

6

All such estimates are subject to sampling errors, which are less than +10 percentage points 

unless otherwise noted. See appendix I for further explanation of sampling errors. 

7

Unless otherwise stated, survey results presented in this report have been projected to the 

survey population on the basis of firms’ responses.

8

Structuring involves an individual who makes multiple deposits of cash, each of which is 

below the $10,000 threshold that must be reported to regulators but that together total more 

than $10,000. Structuring can also involve multiple deposits in a financial institution 

consisting of monetary instruments, such as money orders, traveler’s checks, or cashier’s 

checks purchased at other financial institutions in increments less than the $10,000 

threshold.

9

The sampling error for this estimate is +11 percentage points.
Page 5 GAO-02-111 Efforts in the Securities Industry

populations reported implementing such voluntary procedures. The 

largest broker-dealers—those with assets exceeding $10 billion—had been 

even more active; specifically, eight of the nine largest broker-dealer 

respondents reported implementing nine or more voluntary anti-money 

laundering measures. However, our survey results also indicated that far 

fewer of the remaining 3,200 small and medium-sized broker-dealer and 

mutual fund firms11 had implemented measures that go beyond the BSA 

requirements applicable to the securities industry or other applicable cash 

transaction reporting requirements.

Various intergovernmental bodies, such as the Financial Action Task Force 

(FATF), have worked internationally to develop recommendations that 

pertain to financial institutions, including securities firms. These 

recommendations call for member countries to take a number of actions to 

combat money laundering through their financial institutions, including 

requiring securities firms to report suspicious activities. Although many 

member countries reported that they have issued all or many of these 

recommended requirements and applied them to their securities firms, 

ascertaining how well the measures are being implemented and enforced is 

difficult. Little information related to anti-money laundering initiatives is 

available from foreign countries—for example, the number of SARs that 

securities firms have filed and the number of money laundering cases 

involving the securities industry. Some countries have issued their antimoney laundering requirements only recently, and it may be too early to 

assess how fully these requirements have been implemented. FATF also 

reported that limited law enforcement tools and resources in certain 

countries may hinder efforts to effectively implement anti-money 

laundering requirements. 

We make no recommendations in this report. We asked Treasury, SEC, and 

the Department of Justice to comment on this report. In general, these 

agencies agreed with the information presented, and we incorporated their 

technical comments as appropriate. 

10For sampling purposes, we defined large broker-dealers as those with assets equal to or 

greater than $230 million and larger mutual fund groups as those whose fund assets 

exceeded $10 billion.

11For sampling purposes, small broker-dealers were defined as having assets equal to or less 

than $1 million. The population of direct-marketed mutual fund groups was divided into 

large and “other” mutual fund groups. The latter represented medium-sized and small fund 

groups with fund assets equal to or less than $10 billion.
Page 6 GAO-02-111 Efforts in the Securities Industry

Background Illicit activities, such as drug trafficking, robbery, fraud, or racketeering, 

produce cash. Money laundering is the process used to transform the 

monetary proceeds derived from such criminal activities into funds and 

assets that appear to have come from legitimate sources. Money 

laundering generally occurs in three stages. As shown in figure 1, in the 

placement stage, cash is converted into monetary instruments, such as 

money orders or traveler’s checks, or deposited into financial institution 

accounts. In the layering stage, these funds are transferred or moved into 

other accounts or other financial institutions to further obscure their illicit 

origin. In the integration stage, the funds are used to purchase assets in the 

legitimate economy or to fund further activities. 
Page 7 GAO-02-111 Efforts in the Securities Industry

Figure 1: Money Laundering Stages

Source: FinCEN Reference Series: An Assessment of Narcotics Related Money Laundering, FinCEN, 

July 1992. 

There is no way to determine the actual amount of money that is being 

laundered in general, let alone through a single industry such as the 

securities industry. However, experts have estimated that money 

laundering in the global financial system is between 2 to 5 percent of the 

world’s gross domestic product. Estimates of the amount of money 

laundered in the United States have been as high as $100 billion. 

Illicit Activity

Cash is generated

by drug trafficking,

fraud, etc.

1 - Placement

Cash is converted to

monetary instruments or

is deposited into financial

institution accounts.

Bank of Anytown

$ Pay to the

Order of

2 - Layering

Funds are moved to

other financial institutions

to obscure origins

Funds are moved through wire transfer,

checks, money orders, etc.

Funds are moved through wire 

transfer, checks, money orders, etc.

Stages

3 - Integration

Funds are used to acquire

legitimate assets or fund

further activities
Page 8 GAO-02-111 Efforts in the Securities Industry

The Securities Industry Has 

Various Participants 

Money launderers can target any of the various types of businesses that 

participate in the U.S. securities industry. Broker-dealers, for instance, 

provide a variety of products and services to retail (usually individual) and 

institutional investors—buying and selling stocks, bonds, and mutual fund 

shares. As shown in figure 2, two types of broker-dealers—introducing 

brokers and clearing brokers—perform different roles that can affect the 

extent of their anti-money laundering responsibilities. 

Figure 2: Introducing Broker and Clearing Broker Services

Source: Henry F. Minnerop, The Role and Regulation of Clearing Brokers, Henry F. Minnerop 48 Bus. 

Law. 841 (1993).

Some broker-dealers regulated as clearing firms may clear only their own 

firms’ transactions and not those of other firms. These firms are known as 

a self-clearing firms. 

Mutual funds are another major participant in the securities markets. 

Mutual funds are investment companies that pool the money of many 

investors and use it to purchase diversified portfolios of securities. The 

administrator of a mutual fund, which in most cases is the fund’s 

Clearing Broker

Perform brokerage services for their own customers

and for introducing brokers, including

• executing securities transactions on exchanges

 or in the over-the-counter markets and

• clearing transactions by paying for securities

 purchased and delivering securities sold.

Introducing

Broker

Provide brokerage services and offer financial advice to customers.

Introducing

Broker

Introducing

Broker

Introducing

Broker
Page 9 GAO-02-111 Efforts in the Securities Industry

investment adviser, contracts with other entities to provide the various 

services needed to operate the fund. Figure 3 shows some of these 

entities, the services they perform, and some of the institutions that usually 

perform them. Depending on the extent to which these entities interact 

with the fund’s customers or accept customer payments, their 

responsibilities for conducting anti-money laundering activities may also 

vary.

Figure 3: Activities of Entities Involved in Providing Mutual Fund Services

Note: In most cases, the distributor for a direct-marketed mutual fund is a broker-dealer affiliate of the 

fund’s administrator.

Source: Mutual Fund Fact Book 2001, Investment Company Institute.

Transfer Agent

Maintains records of fund 

shareholders, including 

opening customer

 accounts and accepting

 payments.

(Broker-dealers, banks, or 

nonfinancial firms)

Investment Adviser

Selects and manages fund 

investments and uses 

subsidiaries or third parties 

to perform other services. 

Money (managers, 

broker-dealers, or banks)

Mutual Fund

Pool of invested assets

Distributor

Sells fund shares, including

 sometimes accepting

customer payments.

(Broker-dealer, bank, or

other financial institution)

Custodian

Acts as a depository 

for fund securities and cash.

(Banks)
Page 10 GAO-02-111 Efforts in the Securities Industry

SEC Is the Primary 

Regulator of Securities 

Activities, but Other 

Organizations Also Provide 

Oversight

SEC has primary responsibility for overseeing the various participants in 

the U.S. securities industry, including broker-dealer and mutual fund firms. 

It promulgates regulations, performs examinations, and initiates 

enforcement actions against alleged violators of the securities laws. Before 

conducting business with the public, broker-dealers are required to register 

with SEC and must also join and submit to oversight by an SRO. These 

SROs, which include NASDR and NYSE, oversee members’ compliance 

with their own rules, rules enacted by SEC, and the securities laws. 

Federal regulators of depository institutions have oversight responsibilities 

for banks, thrifts, and their holding companies.12 Prior to the passage of 

GLBA in 1999, banks conducting securities activities directly were subject 

to regulation and supervision by their respective banking regulators rather 

than SEC. After GLBA is fully implemented, banks and thrifts conducting 

certain securities activities will have to do so in entities registered as 

broker-dealers subject to oversight by SEC and securities industry SROs.13

The role of the depository institution regulators, with regard to the 

securities activities of the entities that they regulate, now involves sharing 

information with SEC, although under certain circumstances these 

regulators may conduct examinations of the subsidiaries.14

Under current legislation governing money laundering, the Secretary of the 

Treasury has a variety of responsibilities. These include issuing anti-money 

laundering regulations applicable to financial institutions and other 

organizations, such as banks, broker-dealers, casinos, and money 

transmitters. Within Treasury, the authority to issue and administer these 

regulations has been delegated to the Director of the Financial Crimes 

Enforcement Network (FinCEN). FinCEN was established in 1990 to 

12The Federal Reserve has supervisory responsibility for state-chartered banks that are 

members of the Federal Reserve System and bank holding companies. The Office of the 

Comptroller of the Currency is the primary regulator for nationally chartered banks 

(national banks). The Office of Thrift Supervision is the primary regulator of all federal and 

many state-chartered thrift institutions, including savings banks, savings and loan 

associations, and thrift holding companies. The Federal Deposit Insurance Corporation is 

the primary federal regulator of state-chartered banks that have federally insured deposits 

and are not members of the Federal Reserve System.

13The effective date under GLBA for depository institutions to conduct securities activities 

within a registered broker-dealer was May 12, 2001, but an SEC order extended this date to 

May 12, 2002. SEC’s order will also require thrifts conducting certain securities activities to 

conduct such activities in a registered broker-dealer.

14See GAO-01-474.
Page 11 GAO-02-111 Efforts in the Securities Industry

support law enforcement agencies by collecting, analyzing, and 

coordinating financial intelligence information to combat money 

laundering. 

The Securities Industry 

Is Viewed as a 

Potential Target, but 

the Extent of Actual 

Money Laundering Is 

Unknown

Although the extent to which broker-dealers and mutual funds are being 

used to launder money is not known, law enforcement officials were 

concerned that the securities industry would increasingly be a target for 

potential money launderers. All financial sectors, and even commercial 

businesses, could be targeted by money launderers. The securities industry 

has characteristics similar to other financial sectors but also has some 

significant differences. Criminals seeking to convert their illegal proceeds 

to legitimate assets have targeted banks, which take cash for deposit, as a 

means to initially introduce illicit income into the financial system. 

Law enforcement and securities industry officials said that because 

securities activities generally do not involve cash, broker-dealers and 

mutual funds are not as vulnerable as banks during the initial placement 

stage of the money laundering process. However, some structuring 

schemes used in the placement stage involve monetary instruments such as 

money orders, and money launderers could attempt to use broker-dealers 

and mutual funds that accept these forms of payment. 

According to law enforcement officials, money launderers would more 

likely attempt to use brokerage or mutual fund accounts in the layering and 

integration stages of money laundering, rather than for the placement 

stage. Similar to their use of banks, money launderers could use brokerage 

or mutual fund accounts to layer their funds by, for example, sending and 

receiving money and wiring it quickly through several accounts and 

multiple institutions. The securities industry could also be targeted for 

integrating illicit income into legitimate assets. In one case, illicit proceeds 

from food stamp fraud were used to open brokerage accounts and invest in 

stocks through an ongoing stream of deposits that ranged from less than 

$1,000 to almost $10,000.
Page 12 GAO-02-111 Efforts in the Securities Industry

Law enforcement officials were concerned that various characteristics of 

the securities industry and securities transactions were particularly 

attractive to money launderers. For example, the U.S. national money 

laundering strategy for 2000,15 issued by the Secretary of the Treasury and 

the U.S. Attorney General, notes that the general nature of the securities 

industry provides criminals with opportunities to move and thus obscure 

funds. The report suggests that money launderers may target the industry 

because funds can be efficiently transferred among accounts and to other 

financial institutions, both domestically and internationally. For example, 

like some banking organizations, several large broker-dealers have offices 

located throughout the United States and in many foreign countries. Some 

law enforcement officials noted that wire transfers, specifically those that 

involve offshore accounts, can be particularly vulnerable to money 

laundering. The national strategy report also suggests that money 

launderers may be attracted to the industry because of the high degree of 

liquidity in securities products, which can be readily bought and sold. 

Some law enforcement officials pointed to the high volume, large-dollar 

amounts, and potentially profitable nature of securities transactions. On a 

typical day, for example, an estimated 3 billion shares of stock worth over 

$85 billion are traded on the main U.S. markets—a dramatic increase from 

about $20 billion in 1995. (Appendix III provides additional information on 

the size and growth of the U.S. securities industry.) Officials noted that the 

rapid growth of the securities markets and increasing popularity of 

investing in stocks and mutual funds may also have raised the industry’s 

profile with money launderers, who are becoming increasingly 

sophisticated and are attempting to find as many avenues as possible to 

launder funds. 

Law enforcement and securities industry officials also identified several 

specific financial activities that securities firms conduct and that they 

viewed to be more at risk for potential money laundering. For example, 

law enforcement officials expressed concern that on-line brokerage 

accounts were vulnerable to use by money launderers, and such accounts 

have grown substantially in the last few years, jumping from an estimated 7 

million in 1998 to almost 20 million in 2000. On-line brokerage services 

provide little opportunity for face-to-face contact with customers or for 

verifying the identity of those logging into accounts—a safeguard that is 

15The National Money Laundering Strategy for 2000 issued by the Secretary of the 

Treasury and the U.S. Attorney General, Mar. 2000. 
Page 13 GAO-02-111 Efforts in the Securities Industry

important to anti-fraud as well as anti-money laundering initiatives. 

Although the industry already conducts much of its customer contacts 

solely by telephone, securities regulators and industry officials 

acknowledged that on-line activities pose particular challenges from a 

money laundering perspective. Law enforcement officials also noted that 

some large broker-dealers are offering private banking services (broadly 

defined as financial and related services provided to wealthy clients) that 

are deemed vulnerable to money laundering. These services generally 

attempt to offer considerable confidentiality as part of the client 

relationship, routinely involve large-dollar transactions, and sometimes 

offer the use of offshore accounts. 

Some law enforcement officials maintained that the securities industry 

lacks adequate anti-money laundering requirements and thus represents a 

weak link in the U.S. regulatory regime that can be exploited by money 

launderers in their search for new ways to hide their funds. These officials 

described the securities sector as a “money laundering loophole” within the 

financial services industry that should be closed, particularly as other 

financial sectors are being required to improve their defenses against 

money laundering. For example, Treasury issued rules for banks in 1996 

and for money services businesses in 2000 requiring these firms to report 

suspicious activities, including potential money laundering. However, 

similar requirements do not yet apply to all broker-dealers and mutual fund 

firms, and law enforcement officials saw this fact as a reason that criminals 

may seek to use such firms to facilitate money laundering. Some law 

enforcement officials also suggested that as financial institutions continue 

to merge in response to GLBA,16 the need for consistent and adequate antimoney laundering requirements in all financial sectors is becoming even 

more pronounced.

Securities industry officials acknowledged that money launderers could 

potentially target their industry. SEC staff have noted that the large volume 

of money generated by illegal activities creates a risk for broker-dealers as 

well as other financial institutions. In a May 2001 speech, an SEC official 

stated that firms in the securities industry face great risks if they allow 

themselves to be used for money laundering. The official noted that 

16Among other things, GLBA permits eligible bank holding companies to form affiliations 

that engage in securities and insurance activities through a financial holding company. 12 

U.S.C. § 1843 (Supp. 2000). 
Page 14 GAO-02-111 Efforts in the Securities Industry

trillions of dollars flow through the industry each year, and criminal activity 

within the industry could taint important U.S. capital markets. 

The Number of Identified 

Cases in Which Money Has 

Been Laundered Through 

Securities Accounts Is 

Limited 

Despite concerns regarding potential money laundering in the securities 

industry, the extent to which money launderers are actually using brokerdealers and mutual fund firms is not known. According to law enforcement 

officials, no organization currently collects information in a way that lends 

itself to readily identifying cases in which funds generated by illegal activity 

outside of the securities industry were laundered through brokerage or 

mutual fund accounts. Legal searches of cases primarily identify money 

laundering cases in which broker-dealers or others committed securities 

law violations, such as insider trading, market manipulation, or the sale of 

fraudulent securities, and then laundered the proceeds from their illegal 

activities through banks or other financial institutions. 

Law enforcement and securities industry officials acknowledged that a 

limited number of cases involving money laundering through broker-dealer 

or mutual fund accounts could be readily identified to date. At our request, 

the Internal Revenue Service and the Executive Office for U.S. Attorneys 

collected information from some of their field staff that identified about 15 

criminal or civil forfeiture cases17 since 1997 involving money laundering 

through brokerage and mutual fund accounts. The laundered funds in 

these cases came from a number of activities, including drug trafficking, 

illegal gambling, and food stamp fraud, and the estimated amounts of 

laundered funds varied widely, ranging from $25,000 to $25 million per 

case.18 In contrast, during 1999 alone, the United States reported having 996 

money laundering convictions, most of which involved funds that were 

laundered through banks or other means. SEC and industry officials also 

pointed out that the industry has not had a history of money laundering 

cases. 

17A civil forfeiture case involves civil proceedings for the seizure of personal property, 

including money, negotiable instruments, securities, or other things of value that have been 

used or were intended to be used to facilitate any violation of the law or that have resulted 

from such illegal activity.

18Appendix IV provides a summary of cases that included allegations of money laundering 

through brokerage and mutual fund accounts.
Page 15 GAO-02-111 Efforts in the Securities Industry

Law enforcement officials suggested that several factors could have 

contributed to the limited number of known cases involving money 

laundered through brokerage or mutual fund accounts. These factors 

include the difficulty of detecting money laundering at the layering and 

integration stages and the lack of adequate systems to detect money 

laundering activities in the securities industry. Specifically, they noted that 

the absence of a SAR rule may be limiting the identification of money 

laundering through broker-dealer and mutual fund accounts.19 A few 

officials also explained that some investigators faced with time constraints 

and multiple leads may choose to trace illegal funds through bank rather 

than brokerage or mutual fund accounts because banks are subject to SAR 

rules and thus are expected to have SAR-related procedures and 

documentation needed for investigations. 

Law enforcement officials anticipated that more cases may surface in the 

future as criminals continue to search for new ways to launder their funds 

and turn to the securities industry. One U.S. attorney stated that although, 

historically, money laundering through the securities industry has not been 

an apparent problem, some pending investigations involving the movement 

of Russian funds through various types of financial accounts, including 

brokerage accounts, indicate that activity in the area may be increasing. 

Other law enforcement agencies were also attempting to identify and 

develop additional cases in which brokerage and mutual funds accounts 

were used to launder money. For example, staff at one agency was in the 

process of analyzing whether money orders made payable to brokerdealers, mutual funds, and other financial institutions were being used for 

money laundering.

19The extent to which broker-dealer and mutual fund transactions are covered by antimoney laundering requirements is discussed in the next section of this report.
Page 16 GAO-02-111 Efforts in the Securities Industry

Broker-Dealer and 

Mutual Fund Firms Are 

Not Subject to All AntiMoney Laundering 

Regulatory 

Requirements

Broker-dealers and the firms that receive and process customer payments 

on behalf of mutual fund groups (hereinafter referred to as mutual fund 

service providers)20 can be held criminally liable if they are found to be 

involved in money laundering. They are also subject to certain reporting 

and recordkeeping requirements. However, unless a broker-dealer is a 

subsidiary of a depository institution or of a depository institution’s holding 

company, or a mutual fund service provider is itself a depository institution 

(as are some transfer agents), it is not subject to regulations requiring it to 

file SARs for transaction that could involve money laundering. SEC and the 

SROs monitor the industry’s compliance with the currency and related 

reporting and recordkeeping requirements during examinations and, 

according to SEC officials, are planning to conduct more extensive reviews 

of firms’ anti-money laundering efforts starting in the fall of 2001. 

Broker-Dealer and Mutual 

Fund Firms Can Be 

Prosecuted for Aiding 

Money Launderers and Are 

Subject to Certain BSA 

Requirements

Broker-dealers and mutual fund service providers that accept customer 

funds are subject to the Money Laundering Control Act of 1986,21 which is a 

statute that applies broadly to all U.S. citizens. This act makes knowingly 

engaging in financial transactions that involve profits from certain illegal 

activities a criminal offense. As a result, individuals and companies 

conducting financial transactions on behalf of customers can be 

prosecuted if they are found to have conducted transactions involving 

money from illegal activities. Broker-dealers and mutual fund service 

providers can also be prosecuted if they knew or were willfully blind to the 

fact that a transaction involved illegal profits. Penalties under the Money 

Laundering Control Act include imprisonment, fines, and forfeiture.22

20Various entities may be involved with opening customer accounts or accepting and 

processing customer payments. Most funds use transfer agents or their distributor (which 

are usually broker-dealers) to perform these services, but the fund’s principal underwriter 

could also be involved in interacting with fund customers. In addition, the fund group or its 

transfer agent may use a bank to perform cash management services, which would be 

subject to any currency and other related anti-money laundering requirements. 

2118 U.S.C. §§ 1956 & 1957 (1994 & Supp. 2000).

22The maximum criminal penalty for a violation under 18 U.S.C. § 1956 is imprisonment for 

20 years; a fine of $500,000 or twice the value of the funds laundered, whichever is greater; 

or both penalties. Under section 1957, the maximum criminal penalty can be 10 years in 

prison and a fine of twice the value of the criminally derived property. Section 1957 

contains no civil penalty provision. 
Page 17 GAO-02-111 Efforts in the Securities Industry

Like other financial institutions, broker-dealers and those mutual fund 

service providers that accept customer funds23 are required to comply with 

various BSA or similar reporting and recordkeeping requirements. Such 

requirements are designed to be useful in tax, regulatory, or criminal 

investigations, including those relating to money laundering. As shown in 

table 1, firms subject to these requirements are to identify and report 

currency transactions exceeding $10,000 with FinCEN, file reports on 

foreign bank and financial institution accounts with FinCEN, and report 

the transportation of currency or monetary instruments into or out of the 

United States with the U.S. Customs Service. 

Table 1: BSA Reporting Requirements for Broker-Dealers and Mutual Fund Service 

Providers That Accept Customer Payments

a

These reports are to be sent to the Internal Revenue Service’s Detroit Computing Center, which 

processes them for FinCEN.

b

BSA regulations define monetary instruments as including checks, promissory notes, traveler’s 

checks, money orders, or securities in bearer form or otherwise when title passes on delivery. 31 CFR 

103.11(u). 

Source: BSA regulations.

23Firms that accept customer payments for mutual funds are usually either the distributing 

broker-dealer or the fund’s transfer agent. Many mutual fund transfer agents are banks or 

broker-dealers that are also subject to BSA recordkeeping and reporting requirements. 

Transfer agents that are not financial institutions must comply with similar currency 

reporting requirements contained in the Internal Revenue Code. 

Type of report Reporting responsibilities Report to be filed with:

Currency Transaction 

Report 

Must report all receipts or transfers of 

U.S.currency over $10,000.

Must report all known receipts or 

transfers by one entity that exceed 

$10,000 in 1 day.

FinCENa

Report of International 

Transportation of 

Currency or Monetary 

Instrumentsb

Must report transactions involving the 

movement of currency or monetary 

instruments over $10,000 into or out 

of the United States.

Commissioner of 

Customs

Report on Foreign 

Bank and Financial 

Accounts 

Must report a financial interest in or 

signature authority over financial 

accounts in a foreign country if the 

aggregate value of the accounts 

exceeds $10,000.

FinCENa
Page 18 GAO-02-111 Efforts in the Securities Industry

In addition to imposing reporting requirements, the BSA requires brokerdealers and mutual fund service providers to maintain certain records. For 

example, broker-dealers and other financial institutions conducting 

transmittals of funds of $3,000 or more (including wire transfers) are 

required to obtain and keep information on both the sender and recipient 

and to record such information on the transmittal order. Broker-dealers 

also are required to have compliance programs in place for ensuring 

adherence to the federal securities laws, including the applicable BSA 

requirements.

Regulations under the BSA also require that banks report suspicious 

transactions of $5,000 or more relating to possible violations of law, but 

these requirements do not currently apply to all broker-dealers and mutual 

fund service providers. Amendments to the BSA adopted in 1992 gave 

Treasury the authority to require financial institutions to report any 

suspicious transaction relevant to a possible violation of a law. In 1996, 

Treasury issued a rule requiring banks to report suspicious activities 

involving possible money laundering to FinCEN using a SAR form.24 In 

1996, the depository institution regulators promulgated regulations that 

require broker-dealer subsidiaries of bank holding companies, national 

banks, and federal thrifts to file SARs if the subsidiaries identify potential 

money laundering or violations of the BSA involving transactions of $5,000 

or more. Until Treasury promulgates SAR rules for broker-dealers, only 

broker-dealers that are subsidiaries of depository institutions or of their 

holding companies are subject to SAR requirements. Depository institution 

regulators have also issued regulations that require banks to have BSA 

compliance programs in place, including (1) developing internal policies, 

procedures, and controls; (2) independently testing for compliance; (3) 

designating an individual responsible for coordinating and monitoring 

compliance; and (4) conducting training for personnel.

Efforts to Develop a 

Securities SAR Rule 

Renewed

Treasury is engaged in renewed efforts to develop a SAR rule for the 

securities industry and anticipates that a proposed rule will be issued for 

public comment before the end of 2001. Working with SEC, Treasury 

24Banks must report transactions involving $5,000 or more that they suspect (1) involve 

funds derived from illegal activity or an attempt to hide or disguise funds or assets derived 

from illegal activity, (2) are designed to evade the requirements of the BSA, or (3) have no 

apparent lawful or business purpose or vary substantially from normal practice. 31 C.F.R. § 

103.18(2000). 
Page 19 GAO-02-111 Efforts in the Securities Industry

initially attempted to develop a SAR rule for the securities industry in 1997. 

Treasury officials explained that this effort was set aside so that the 

Department could focus first on cash-intensive businesses, such as the 

money services businesses and casinos, that are viewed as more vulnerable 

to money laundering at the placement stage. During 2001, Treasury 

resumed working with SEC to develop a SAR rule for the securities 

industry. Key issues being discussed include determining the appropriate 

threshold for reporting suspicious activities, ensuring that the SAR rule will 

not interfere with existing procedures for reporting securities law 

violations that apply to broker-dealers, and providing for compliance 

program requirements. 

One question being debated is whether the $5,000 threshold for reporting 

suspicious activities that applies to banks should also apply to the 

securities industry. Securities industry and regulatory officials explained 

that this reporting threshold reflects the cash-intensive nature of the 

banking industry and its vulnerability to money laundering at the 

placement stage and, as such, should not be applied to securities firms. 

They also noted that the banking threshold does not reflect the typically 

high-dollar amount of securities transactions. Instead, these officials have 

proposed thresholds ranging from $25,000 to $100,000. Officials from a few 

large firms stated that they currently use thresholds ranging from $250,000 

to $1 million in their proprietary systems for monitoring suspicious 

transactions. They explained that $5,000 transactions would be too 

difficult to identify in the accounts of several million customers and too 

burdensome for processing and review purposes. In responding to our 

survey, five broker-dealer subsidiaries of bank holding companies, which 

are required by bank regulators to file SARs, suggested that the threshold 

for the securities SAR rule needed to be raised.25 A few broker-dealer 

subsidiaries said that the thresholds should be the same for both the 

banking and securities industry rules, and the remaining 18 respondents 

did not offer any comment on tailoring the SAR threshold to the securities 

industry. 

Results from our surveys did suggest that the average securities transaction 

tends to be much larger than $5,000. For example, broker-dealers reported 

that the average size of an individual transaction processed for retail 

25Broker-dealer subsidiaries of bank holding companies, subject to the banking SAR rule, 

were asked how a similar rule for the securities industry should be tailored to the business 

of broker-dealers.
Page 20 GAO-02-111 Efforts in the Securities Industry

customers was about $22,000,26 although the size of these transactions 

ranged anywhere from $200 to $150,000. Appendix V provides additional 

survey information on the size of average transaction amounts. 

Securities industry representatives also pointed out that a low SAR 

threshold could result in an inordinate number of SAR filings from the 

industry, undermining the ability of law enforcement agencies to use the 

reports effectively. Federal Reserve officials supported a higher SAR 

threshold for the securities industry, in part because they thought it could 

help justify a higher reporting threshold for the banking industry as well. 

Finally, some law enforcement officials also viewed the reporting threshold 

as too low for the securities industry but did not propose an alternative 

amount. Although they acknowledged that the securities industry appears 

to be engaged in larger dollar transactions than other types of financial 

institutions, a few officials expressed concerns about having different 

reporting thresholds for the banking and securities financial sectors.

Another issue being discussed is the scope of suspicious activities that 

should be reported to FinCEN on the SAR form. Financial regulators, 

industry, and law enforcement officials agree that any rule requiring the 

securities industry to report suspicious activities involving money 

laundering should not replace existing procedures that require brokerdealers to report suspected violations of securities laws. Currently brokerdealers are to report possible securities law violations to SEC, SROs, or a 

U.S. attorney’s office. In turn, SEC and the SROs are to refer criminal 

money laundering offenses that are reported along with suspected 

securities law violations to the appropriate U.S. attorney’s office. To 

minimize any potential confusion on the part of the industry, officials 

emphasized that the language of the SAR rule should be written to ensure 

that firms understand that they are to continue to report potential 

securities violations to the appropriate securities regulators. 

26This average is based on the actual amounts reported in the survey responses. We could 

not develop meaningful estimates for the entire industry because of the low number of firms 

that provided information on the average size of transactions and the wide range of 

responses. 
Page 21 GAO-02-111 Efforts in the Securities Industry

Both securities industry and law enforcement officials recognize the value 

of requiring compliance programs for reporting suspicious activities and 

are discussing whether the SAR rule is the most appropriate mechanism for 

imposing such requirements. Law enforcement officials said that industry 

participants cannot fully implement a suspicious activity reporting regime 

unless they are also required to set up systems to monitor their customers’ 

activities to prevent and detect transactions involving money laundering. 

In addition, securities industry officials said that the SAR rule should 

provide that broker-dealers with systems for reasonably detecting 

suspicious transactions, appropriate procedures for filing SARs, and no 

basis for believing that these procedures are not being followed, have a 

defense against being cited for violating the SAR reporting requirement.27

Such a provision would be an effective incentive for broker-dealers to 

develop and maintain up-to-date programs designed to monitor and report 

suspicious activities that may involve money laundering. 

In addition to issues relating to the SAR rule itself, some unique 

characteristics of the securities industry, including the variety of business 

structures and processes, product lines, and client bases among brokerdealers and mutual funds, will make implementing the rule more 

challenging. Not all firms in the industry perform similar activities and thus 

may have to work with other firms to fulfill their SAR-related 

responsibilities. For example, determining whether particular transactions 

are suspicious may require information from an introducing broker on a 

customer’s identity and business activities or investment patterns and 

information from a clearing broker on the customer’s payment and 

transaction histories. Regulators and others have also noted that 

addressing anti-money laundering considerations will be more challenging 

within the securities industry because firms may not collect the same type 

of information about customers as banks. Broker-dealers are expected to 

collect enough information about their customers to ensure that any 

recommended investments are suitable. However, for some accounts this 

may not include all information, such as the customer’s source of the 

wealth or income, that can be important for assessing whether this 

customer’s activities are suspicious. Further, with the securities industry, 

there is a greater need to focus on the layering and integration stages of 

money laundering. 

27This defense would be modeled after section 15(b)4(E) of the Securities Exchange Act of 

1934.
Page 22 GAO-02-111 Efforts in the Securities Industry

Securities Regulators 

Examine Broker-Dealers 

and Mutual Fund Firms for 

Compliance With Applicable 

Requirements and Plan for 

Broader Reviews

SEC and the securities industry SROs oversee broker-dealers’ compliance 

with BSA reporting and recordkeeping requirements involving currency 

and other related transactions. After Treasury granted SEC the authority to 

examine broker-dealers for compliance with these BSA requirements, SEC 

adopted Rule 17a-8 under the Exchange Act, incorporating these 

requirements into its own rules. As a result, SEC and the SROs have the 

authority to both examine broker-dealers for compliance with these 

requirements and bring action against firms that violate them. 

Along with SEC, the SROs are to perform examinations of broker-dealers, 

including reviews to assess compliance with anti-money laundering 

reporting and recordkeeping requirements. These examinations do not 

routinely include assessing compliance with BSA SAR requirements that do 

not yet apply to the industry. During 2000, NASDR reported that it 

conducted 1,808 broker-dealer examinations, and NYSE reported that it 

conducted 319 examinations. Both SROs found that some broker-dealers 

had deficiencies in supervisory procedures pertaining to the currency 

reporting and recordkeeping requirements under SEC Rule 17a-8. 

Although most broker-dealers are not subject to SAR requirements, 

National Association of Securities Dealers (NASD) and NYSE 

representatives noted that they have reviewed broker-dealers’ procedures 

relating to suspicious activities. In 1989, NASD and NYSE issued guidance 

advising their members that reporting suspicious activities could prevent 

firms from being prosecuted under the Money Laundering Control Act. In 

its issuance, NASD specifically warned its members that failure to report 

suspicious transactions could be construed as aiding and abetting 

violations of the act and could subject the broker to civil and criminal 

charges.28 In its guidance, NYSE cautioned its members to establish 

procedures to detect transactions by money launderers and others who 

seek to hide profits obtained from illegal activity.29 In conducting reviews of 

their members’ procedures relative to such guidance, these SROs cited a 

few firms for deficiencies such as failing to maintain written supervisory 

procedures to identify and record suspicious transactions.

28Reporting Suspicious Currency and Other Questionable Transactions to the 

IRS/Customs Hotline, NASD Notice to Members 89-12 (1989). 

29Reporting of Suspicious Transactions Under the Money Laundering Control 

Act of 1986, NYSE Information Memo 89-5 (July 20, 1989).
Page 23 GAO-02-111 Efforts in the Securities Industry

Although the SROs conduct most examinations of broker-dealers, SEC staff 

also perform them and examinations of certain transfer agents. For 

instance, SEC staff conduct oversight examinations of broker-dealers that 

are designed to test both the firms’ compliance with securities laws and 

SEC rules (such as SEC Rule 17a-8) and the quality of SRO examinations. 

SEC staff also perform “cause examinations” that are initiated in response 

to special concerns related to a firm. These examinations can sometimes 

cover compliance with Rule 17a-8, even though BSA compliance may not 

have been the initial reason for the examination. During 2000, SEC 

completed 422 oversight examinations and 283 cause examinations but 

found no violations of anti-money laundering requirements that had not 

already been identified by the SROs. 

SEC also conducts examinations of mutual funds and their transfer agents 

that address some money laundering issues. Among the firms that act as 

transfer agents for mutual funds are broker-dealers, banks, and 

nonfinancial firms that provide other services to mutual funds. Although 

Rule 17a-8 does not apply to transfer agents that are not broker-dealers, 

SEC staff explained that the examiners also inquire about these firms’ 

policies for detecting transactions that may involve money laundering. 

Most mutual fund shares, however, are sold by broker-dealers or other 

financial intermediaries that have primary responsibility for complying 

with the BSA or other currency reporting requirements (such as those 

contained in the Internal Revenue Code).30

Recognizing the need to strengthen the securities industry’s efforts to 

combat money laundering, and anticipating a SAR rule for the industry, 

SEC and the SROs are in the process of developing a “refocused” approach 

to anti-money laundering examinations. According to SEC officials, this 

enhanced approach will result in a broader review of securities firms than 

the current approach, which focuses on compliance with Rule 17a-8. The 

new approach is intended to assess firms’ overall anti-money laundering 

strategies to determine whether they include policies, procedures, and 

internal control systems for monitoring suspicious activities. SEC officials 

anticipated that the expanded procedures would be used during 

examinations starting in the fall of 2001. They also indicated that once 

30According to research by the Investment Company Institute, which is the primary industry 

organization for mutual funds, 82 percent of new mutual fund share sales were made 

through a third party or intermediary in 1999. These third parties included banks, insurance 

companies, broker-dealers, financial planners, and retirement plans.
Page 24 GAO-02-111 Efforts in the Securities Industry

Treasury adopts a SAR rule for the securities industry, SEC and the SROs 

plan to develop additional examination procedures to review firms for 

compliance with this rule. 

Some Firms Reported 

Implementing AntiMoney Laundering 

Measures That Go 

Beyond Existing 

Requirements 

In responding to our survey, broker-dealers and direct-marketed mutual 

fund groups reported taking steps to combat money laundering that go 

beyond the BSA requirements applicable to the securities industry at large. 

Many firms have gone beyond currency reporting requirements by 

restricting the acceptance of cash and other forms of payment that may be 

used to launder money in the placement stage. Survey results also showed 

that some broker-dealers and direct-marketed mutual fund groups had 

implemented voluntary anti-money laundering measures designed to 

identify and report suspicious activities that may involve money 

laundering, but most have yet to take such steps. Clearing brokers were 

more actively engaged in such voluntary anti-money laundering efforts than 

introducing brokers.31 In some cases, introducing brokers relied on their 

clearing brokers to conduct anti-money laundering activities for them, but 

not all clearing firms performed such activities or subjected introducing 

broker transactions to such measures. The largest broker-dealers and 

direct-marketed mutual fund groups, which represent the majority of 

assets and accounts in the securities industry, were reportedly much more 

actively engaged in such voluntary anti-money laundering efforts than 

small and medium-sized firms, although these represent the majority of 

industry participants. 

31For purposes of our survey analysis, references to clearing firms include those brokerdealers that clear only for their own firms’ transactions (i.e., self-clearing firms), perform 

clearing services for other broker-dealers, or do both. 
Page 25 GAO-02-111 Efforts in the Securities Industry

Most Broker-Dealers and 

Mutual Fund Groups 

Restricted Cash 

Transactions and the Use of 

Some Monetary Instruments 

A vast majority of the broker-dealers and direct-marketed mutual fund 

groups surveyed reported having policies that prohibit the acceptance of 

cash. By prohibiting cash transactions, firms reduce their vulnerability to 

money laundering at the placement stage and the number of instances in 

which they must report certain currency transactions. Our survey showed 

that 95 percent32 of a projected 2,979 broker-dealers among our survey 

population33 and 92 percent of the 310 mutual fund groups never accept 

cash in the normal course of business. The remaining firms accept cash 

only as an exception. For example, these firms might accept small amounts 

(less than $1,000) or conduct cash transactions approved by a legal or 

compliance department. Industry officials explained that most securities 

firms and mutual funds are not set up to handle cash. Conducting 

securities business in cash is generally viewed as too burdensome, and 

many firms have chosen not to develop the needed infrastructure, 

including policies and procedures, storage facilities, and internal controls. 

Furthermore, industry officials note that prohibiting the use of cash is a 

prudent business practice that helps to reduce risks, other than money 

laundering, commonly associated with handling cash, including theft and 

embezzlement. 

Although most broker-dealers and direct-marketed mutual fund groups 

have reduced their vulnerability to money laundering that involves cash 

transactions, many may still be vulnerable to money laundering using other 

forms of payment or deposit, such as traveler’s checks, money orders, and 

cashier’s checks. As shown in figure 4, over 55 percent of direct-marketed 

mutual fund groups reported always accepting money orders. According to 

law enforcement officials, such forms of payment or deposit can be used as 

part of structuring schemes in which cash is converted into monetary 

instruments and deposited in increments of less than the $10,000 reporting 

threshold.34 In addition, a large portion of mutual fund groups and broker32This estimate has a sampling error of +4 percentage points. All other estimates projected 

to a larger survey population are also subject to sampling errors, which are less than +10 

percentage points unless otherwise noted. See appendix I for further explanation of 

sampling errors. 

33About 1 percent of our broker-dealer sample did not respond to the specific survey 

question on accepting cash. For this reason, our estimate of this characteristic for the 

population does not reflect the entire 3,015 in our total survey population. 

34In the absence of a mandated obligation to report potential structuring using such 

monetary instruments, SEC encourages broker-dealers to be cognizant of and report these 

types of suspicious transactions. 
Page 26 GAO-02-111 Efforts in the Securities Industry

dealers also reported accepting cashier’s checks, which can also be used in 

money laundering schemes. A securities industry official pointed out that 

cashier’s checks are a common form of payment that firms tend to monitor 

rather than restrict for money laundering purposes. Personal checks are 

the most widely accepted form of payment but, according to industry 

officials, are viewed with less concern since they can usually be traced to 

accounts at depository institutions that have their own anti-money 

laundering requirements. 

Figure 4: Kinds of Payments That Broker-Dealers and Direct-Marketed Mutual Fund Groups Accept (percentage of survey 

population) 

Note 1: This figure reflects firms that reported always accepting the noted forms of payment. In a few 

cases, we have included firms whose survey responses indicated that they accepted these forms of 

payment if certain obvious criteria were met, such as taking only personal checks drawn on the bank 

account of their customer.

Note 2: This figure excludes respondents that reported never accepting any of the forms of payment 

listed on our survey. 

Note 3: The sampling errors for the estimates of broker-dealers that accept cashier’s checks, brokerdealers that accept money orders, direct-marketed mutual fund groups that accept traveler’s checks, 

0 20 40 60 80 100

Third-party checks

Money orders

Cashier’s checks

Third-party checks

Money orders

Personal/Business checks

Traveler's checks

Personal/Business checks

DIRECT-MARKETED

MUTUAL FUND GROUPS

Traveler's checks

Cashier’s checks

BROKER-DEALERS

Percentage
Page 27 GAO-02-111 Efforts in the Securities Industry

and direct-marketed mutual fund groups that accept money orders are +11, +10, +11, and +12 

percentage points, respectively. 

Source: Analysis of responses to GAO survey. 

Industry representatives also pointed out that although the survey 

responses reflect the proportion of firms that accept certain forms of 

payment, these figures do not likely correspond with the extent to which 

the cited forms of payment are actually used to deposit funds into brokerdealer or mutual fund accounts. For example, officials from a mutual fund 

industry association said that considerable amounts of money are 

deposited into mutual funds through electronic fund transfers from bank 

accounts or through payroll deposits. 

Some Broker-Dealers and 

Direct-Marketed Mutual 

Fund Groups Reported 

Implementing Additional 

Voluntary Anti-Money 

Laundering Measures 

Although not subject to SAR requirements, some broker-dealers and directmarketed mutual fund groups reported having implemented anti-money 

laundering measures designed to identify and report suspicious activities. 

According to our survey, 17 percent of broker-dealers, or an estimated 513 

of 3,015 firms, reported implementing anti-money laundering measures that 

go beyond BSA provisions for the securities industry at large. In our 

survey, we asked firms to identify the type of voluntary anti-money 

laundering measures, if any, they have implemented. We divided these 

types of measures into four broad categories: 35

• written policies and procedures, such as those requiring staff to learn 

more about customers and the nature of the customers’ businesses;

• internal controls, including supervisory reviews to ensure that antimoney laundering policies and procedures are being followed;

• tools and processes, such as an automated transaction monitoring 

program to facilitate the detection of potential money laundering; and

• formal training programs for staff, such as those that provide guidance 

on how to identify suspicious activities that may involve money 

laundering. 

Information presented in this report that is based on our surveys was selfreported by the respondent firms. Although in some cases we attempted to 

obtain additional information or clarification on certain responses, we did 

not systematically verify all responses provided by firms or the extent to 

35These categories were used to determine the general nature of industry efforts and do not 

represent a comprehensive list of anti-money laundering efforts. 
Page 28 GAO-02-111 Efforts in the Securities Industry

which firms that reported implementing anti-money laundering measures 

were actually adhering to them. In addition, the effectiveness of these 

measures at any firm would depend on various factors, including the level 

of a firm’s management commitment to detecting and preventing money 

laundering and the degree to which the employees responsible for 

following anti-money laundering policies and procedures are being 

supervised and held accountable.

Although 17 percent of broker-dealers overall reported implementing at 

least one voluntary anti-money laundering measure, broker-dealers that 

clear trades for themselves and other firms reported being more active in 

the area. According to our survey analysis, 15 percent of introducing 

brokers and 63 percent of clearing brokers reported implementing 

voluntary anti-money laundering measures.36 As shown in figure 5, the 

extent to which introducing brokers reported implementing the various 

voluntary measures identified in our survey ranged from 2 to 10 percent. 

The extent to which clearing brokers reported implementing the various 

voluntary measures identified in our survey ranged from 5 to 53 percent. 

36For purposes of our survey analysis, references to clearing firms include those brokerdealers that clear only for their own firms’ transactions (i.e., self-clearing firms), perform 

clearing services for other broker-dealers, or do both. 
Page 29 GAO-02-111 Efforts in the Securities Industry

Figure 5: Voluntary Anti-Money Laundering Measures Implemented by Introducing Brokers and Clearing Brokers 

Note 1: This figure reflects measures implemented or used specifically for anti-money laundering 

purposes. Some firms may have in place similar measures that were implemented and used for 

purposes other than anti-money laundering considerations, and these were not intended to be 

included in this figure. 

Note 2: This figure does not include institutional broker-dealers, of which approximately 3 percent 

reported implementing voluntary anti-money laundering measures.

0 20 40 60 80 100

Obtaining information on customers' source of wealth

Obtaining information on customers' source of income

Identifying and reporting suspicious activities

Supervisory review of new accounts

Supervisory review of new accounts over threshold

Supervisory review of existing accounts

Compliance officer review of accounts

Internal audit of anti-money laundering program

External audit of anti-money laundering program

Transaction monitoring program

Automated monitoring program

Guidelines for identifying suspicious activities

Centralized process for law enforcement referral

List of high-risk activities

Compliance staff with anti-money laundering expertise

FORMAL TRAINING PROGRAM

Percentage

Introducing brokers

Clearing brokers

WRITTEN POLICIES AND PROCEDURES 

INTERNAL CONTROLS

TOOLS AND PROCESSES
Page 30 GAO-02-111 Efforts in the Securities Industry

Note 3: Sampling errors of estimates made for the clearing brokers range from +6 to +25 percentage 

points. Sampling errors of estimates for the introducing brokers are under +7 percentage points. 

Source: Analysis of responses to GAO survey. 

Our survey results also showed that the transactions processed by 40 

percent37 of direct-marketed mutual fund groups were subject to some type 

of voluntary anti-money laundering measures. Over 30 percent of these 

groups reported that they or their transfer agents had put in place policies 

and many of the tools and processes for identifying and monitoring 

suspicious activities (fig. 6). 

Figure 6: Voluntary Anti-Money Laundering Measures Implemented by Direct-Marketed Mutual Fund Groups and Their Transfer 

Agents

37The sampling error for this estimate is +11 percentage points.

0 20 40 60 80 100

Obtaining information on customers' source of wealth

Obtaining information on customers' source of income

Identifying and reporting suspicious activities

Supervisory review of new accounts

Supervisory review of new accounts over threshold

Supervisory review of existing accounts

Compliance officer review of accounts

Internal audit of anti-money laundering program

External audit of anti-money laundering program

Transaction monitoring program

Automated monitoring program

Guidelines for identifying suspicious activities

Centralized process for law enforcement referral

List of high-risk activities

Compliance staff with anti-money laundering expertise

FORMAL TRAINING PROGRAM

Percentage

WRITTEN POLICIES AND PROCEDURES 

INTERNAL CONTROLS

TOOLS AND PROCESSES
Page 31 GAO-02-111 Efforts in the Securities Industry

Note 1: This figure reflects measures implemented or used specifically for anti-money laundering 

purposes. Some firms may have in place similar measures implemented and used for purposes other 

than anti-money laundering considerations, and these were not intended to be included in this figure. 

Note 2: This figure excludes one mutual fund group that described its business as exclusively 

institutional and indicated it had not implemented any voluntary anti-money laundering measures.

Note 3: Sampling errors for estimates in this figure are all +11 percentage points or less.

Source: Analysis of responses to GAO survey. 

The extent to which firms had implemented multiple anti-money 

laundering measures varied. For example, for broker-dealers that reported 

having implemented voluntary anti-money laundering measures, almost

20 percent38 indicated they had three or fewer of these measures in place. 

Almost 30 percent39 of these broker-dealers reported having implemented 

more than 10 measures. 

Even when firms reported implementing the same measures, the scope of 

their efforts differed. For example, officials at one firm explained that its 

transaction monitoring system, although still in the process of being 

implemented, was specifically designed for anti-money laundering 

purposes and focused on the overall financial activities of its customers, 

including deposits, wire transfers, and transactions involving cash 

equivalents. This firm’s system will eventually use customer profiling 

techniques to identify unusual spikes in account activity and will have the 

ability to make links among related customers to identify any suspicious 

patterns of activity that may involve money laundering. In contrast, 

officials at another firm that reported having a transaction monitoring 

system told us that that their system involved the manual review of 

transactions identified by a reporting system designed to identify fraud to 

determine if the transactions might also involve money laundering. 

Similarly, some firms described having ongoing training programs 

specifically tailored to money laundering issues, including guidance on 

how to identify suspicious activities. A few firms addressed money 

laundering issues only as part of the orientation training provided to new 

employees. 

Industry officials noted that, in general, a firm’s vulnerability to money 

laundering will vary, depending upon such factors as its type of business 

activities, customer base, and company size. They suggested that this 

38The sampling error for this estimate is +18 percentage points.

39The sampling error for this estimate is +18 percentage points.
Page 32 GAO-02-111 Efforts in the Securities Industry

variance in vulnerability among firms may account for some of the 

observed differences in the extent and scope of voluntary anti-money 

laundering measures implemented by broker-dealers and mutual fund 

groups. 

Our survey results also disclosed that a relatively small number of brokerdealers and direct-marketed mutual fund groups filed SARs during calendar 

year 2000, although they were not legally required to do so. Specifically, 12 

of 152 broker-dealer respondents and 6 of 65 mutual fund group 

respondents indicated that they had filed SARs.40 Almost all were larger 

firms. Most indicated that they had submitted 25 or fewer SARs during 

2000, but 1 reported submitting over 200 reports during the year.41 An 

industry association official noted that, rather than filing SARs, some firms 

informally refer suspicious activities that may involve money laundering 

informally to appropriate regulatory or law enforcement authorities. 

Industry officials explained that firms have generally chosen to adopt 

voluntary anti-money laundering measures to protect themselves from 

becoming unwitting participants in money laundering activities. The firms 

hope that implementing such measures will also help to reduce the 

likelihood of prosecution or civil enforcement actions for violations of 

money laundering laws and mitigate sanctions in the event that a violation 

does occur. Industry trade associations encourage voluntary efforts, noting 

that firms are less likely to be subject to a regulatory penalty (or may have a 

penalty reduced) if a violation occurs when an effective compliance 

program is in place. Firms also believe that being associated with criminal 

elements or activities such as money laundering can threaten their 

reputation and have a tremendous impact in terms of lost business and 

costly legal fees. Lastly, firms note that they are taking voluntary actions in 

anticipation of a SAR rule for broker-dealers. 

40Because the number of respondents indicating that they had filed SARs was so low and a 

meaningful estimate of the number of firms these respondents might represent in the entire 

industry could not be developed, we cite only the actual number of responses. 

41Survey responses on SAR filings were corroborated to the extent possible with available 

information from FinCEN.
Page 33 GAO-02-111 Efforts in the Securities Industry

Extent to Which Introducing 

Brokers’ Transactions Were 

Covered by Anti-Money 

Laundering Activities Is 

Unclear

Although a relatively small portion of introducing brokers reported having 

implemented voluntary anti-money laundering measures, many other 

introducing brokers reported relying on their clearing brokers to conduct 

anti-money laundering activities on their behalf. According to our survey, 

more than half of the introducing brokers indicated that they had not 

undertaken such efforts, relying instead on their clearing brokers (fig. 7). 

Almost another third reported that they had no voluntary measures of their 

own and did not rely on their clearing brokers to undertake such measures 

for them. 

Figure 7: Extent to Which Introducing Brokers Conducted or Relied on Their 

Clearing Brokers to Conduct Voluntary Anti-Money Laundering Activities 

Note 1: A few introducing brokers did not indicate whether they relied on their clearing brokers to 

conduct voluntary anti-money laundering measures and are not included in this figure. 

Note 2: Estimates for introducing brokers that had no voluntary measures but relied on clearing 

brokers and for those that neither implemented voluntary measures nor relied on clearing brokers have 

sampling errors of +11 and +10 percentage points, respectively.

Source: Analysis of responses to GAO survey.

Implemented voluntary measures and

did not rely on clearing brokers

Neither implemented voluntary measures

nor relied on clearing brokers

No voluntary measures but relied on

clearing brokers

Implemented voluntary measures and

relied on clearing brokers

31% 55%

10%

4%
Page 34 GAO-02-111 Efforts in the Securities Industry

We found that the allocation of anti-money laundering responsibilities 

between introducing and clearing brokers was not always clear. Of the 

many introducing brokers that reported relying on clearing brokers to 

conduct anti-money laundering activities, most did not know exactly what 

types of anti-money laundering activities the clearing brokers performed. 

Several introducing brokers indicated that they thought their clearing 

brokers monitored customer accounts to identify suspicious activities that 

could involve money laundering and would report such activities to them. 

Few of the introducing brokers indicated that they received regular 

transaction reports from their clearing brokers for anti-money laundering 

purposes. 

In addition, many of the clearing brokers responding to our survey reported 

that they either did not engage in voluntary anti-money laundering 

activities or performed them only for their own firms’ transactions, not for 

those of introducing brokers. As a result, some introducing brokers may 

have been mistaken in assuming that their clearing brokers performed antimoney laundering activities on their behalf. We were not able to determine 

whether any of the introducing brokers in our survey population used the 

clearing brokers that reported performing anti-money laundering 

activities.42 Six of the 29 clearing broker respondents that provided clearing 

services for other broker-dealers reported that they did not engage in any 

type of voluntary anti-money laundering measures.43 While the remaining 

23 clearing broker respondents reported having voluntary anti-money 

laundering measures for their own trades, only about half of these firms 

indicated they applied the same measures to their introducing brokers’ 

transactions. Only a few of the clearing brokers reported that they 

provided other broker-dealers with transaction exception reports for antimoney laundering purposes. SEC officials explained that existing NYSE 

and NASD rules, which require introducing and clearing brokers to clearly 

delineate their respective responsibilities in a written agreement, will 

require them to include any expanded anti-money laundering 

responsibilities that will result from the issuance of a securities SAR rule in 

such agreements. 

42Our sample of broker-dealers was randomly selected, and we did not link introducing 

brokers to their respective clearing brokers. 

43Because the number of respondents indicating that they provided clearing services for 

other broker-dealers was so low, only the actual number of responses is cited here.
Page 35 GAO-02-111 Efforts in the Securities Industry

Large Firms Were More 

Actively Engaged in 

Voluntary Anti-Money 

Laundering Efforts 

Although most broker-dealers and direct-marketed mutual fund groups 

have yet to implement voluntary anti-money laundering measures, larger 

firms reported having done so to a greater degree than had medium-sized 

or small firms. Larger firns also reported having implemented anti-money 

laundering programs that included a broader range of measures. 

Specifically, from the results of our survey, we estimated that 66 percent of 

the 111 large broker-dealers had implemented measures that go beyond 

those required by applicable BSA regulations compared with 14 percent of 

the 1,738 small firms (table 2). An estimated 77 percent of the large directmarketed mutual fund groups had implemented measures beyond those 

required, compared with 38 percent of the other mutual fund groups. 

Appendix VI provides information on the types of voluntary anti-money 

laundering measures implemented by broker-dealers and mutual fund 

groups, by size.

Table 2: Extent of Voluntary Anti-Money Laundering Measures Implemented by 

Broker-Dealers and Direct-Marketed Mutual Fund Groups

Note: Estimates for large broker-dealers, medium-sized broker-dealers, medium-sized and small 

direct-marketed mutual fund groups, and total direct-marketed mutual fund groups have sampling 

errors of +10, +10, +12, and +11 percentage points, respectively. 

Source: Analysis of responses to GAO survey. 

The largest firms have also been the most active in implementing antimoney laundering measures. For example, 18 firms in our broker-dealer 

Firms with voluntary anti-money 

laundering measures

Type and size of 

firms

Survey population for

which our estimates

are made Estimated number

Estimated

percentage

Broker-dealers:

 Large 111 73 66

 Medium 1,166 202 17

 Small 1,738 238 14

 Total 3,015 513 17

Direct-marketed 

mutual fund groups: 

 Large 15 11 77

Medium/Small 295 114 38

 Total 310 125 40
Page 36 GAO-02-111 Efforts in the Securities Industry

population had assets exceeding $10 billion; together, these firms held 

about 80 percent of the industry’s total assets as of year-end 1999. We 

received responses from the nine firms we surveyed in this population. 

According to their responses, eight of these firms had implemented 

voluntary anti-money laundering measures, with each reporting to have 

nine or more measures in place. SEC officials told us that having such 

measures in place at firms like these was particularly important because 

money launderers would likely attempt to blend their activities with those 

of the vast numbers of customers and transactions handled by large brokerdealers.

However, SEC officials as well as industry officials representing some of 

the major broker-dealers and mutual fund groups acknowledged that no 

firms in the industry, including small and medium-sized firms, are immune 

to money laundering schemes. They suggested that small and mediumsized firms also need to protect themselves from being inadvertently drawn 

into charges of assisting with money laundering. But the officials stressed 

that these firms should be allowed to develop anti-money laundering 

programs that are commensurate with their size, available resources, and—

most importantly—any identified risks of vulnerability to money 

laundering. For example, some small firms with an established and limited 

client base may know their customers well enough to be able to monitor 

their business transactions with little need for expensive tracking systems 

or formal training programs.

Certain Bank-Affiliated 

Respondents Also Reported 

Implementing Measures to 

Identify and Report 

Suspicious Activities

All 25 respondents to our survey of securities subsidiaries of bank holding 

companies,44 along with an additional 14 firms identified as securities 

subsidiaries of depository institutions during our other industry surveys,45

reported having implemented anti-money laundering efforts to comply with 

the SAR rules to which they were subject. For example, at least 85 percent 

of these bank-affiliated respondents reported having written procedures 

for identifying and reporting suspicious activities, a formal training 

44Our survey sample for firms subject to the banking SAR requirements was randomly 

selected from a Federal Reserve list of 53 securities subsidiaries of bank holding companies, 

formerly referred to as section 20 subsidiaries. 

45In administering our survey to the overall population of broker-dealers and directmarketed mutual fund groups, we asked firms if they were affiliated with depository 

institutions and subject to the banking SAR requirements. An additional 12 broker-dealers 

and 2 mutual fund groups indicated that they were subject to the banking SAR requirements. 
Page 37 GAO-02-111 Efforts in the Securities Industry

program, and internal audit reviews to ensure compliance with anti-money 

laundering policies and procedures. Most of these firms had also hired 

compliance staff with knowledge of and expertise in money laundering. In 

addition, 12 of 25 respondents that were securities subsidiaries of bank 

holding companies and 3 of 14 respondents that were subsidiaries of 

depository institutions reported having filed SARs during 2000. 

Most Foreign 

Countries Have AntiMoney Laundering 

Rules for Securities 

Firms, but the 

Effectiveness of These 

Rules Is Unclear

U.S. and foreign officials from law enforcement and financial regulatory 

agencies have been working together within various international forums 

to develop anti-money laundering standards. These standards call for 

participating countries to require their financial institutions, including 

securities firms, to take steps to prevent money laundering. Among other 

things, the recommended standards call for firms to identify their 

customers, report suspicious activities, and implement anti-money 

laundering programs. Many foreign countries reported having issued most 

or all of the recommended requirements for their financial institutions, 

including their securities industry, whereas efforts in the United States are 

still under way. However, assessing the effectiveness of the measures other 

countries have taken is difficult because many requirements have only 

recently been issued. In addition, most countries have also yet to report 

many cases involving financial institutions, including securities firms. 

International Forums Have 

Developed Anti-Money 

Laundering Standards 

Money laundering issues are the focus of several internationally active 

forums, including FATF, which is the largest and the most influential 

intergovernmental body seeking to combat money laundering. Established 

in 1989, FATF has 31 members, including the United States.46 Its activities 

include monitoring members’ progress in implementing anti-money 

laundering measures, identifying current trends and techniques in money 

laundering, and promoting the adoption of the organization’s standards. 

Many of these activities are conducted during plenary meetings attended by 

delegations from each member country. Smaller international groups that 

address money laundering issues are also able to attend FATF plenary 

46The members of FATF are Australia, Austria, Belgium, Canada, Denmark, Finland, France, 

Germany, Greece, Hong Kong, Iceland, Ireland, Italy, Japan, Luxembourg, the Netherlands, 

New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, Turkey, the United 

Kingdom, and the United States. Argentina, Brazil, and Mexico became members on June 21, 

2000. Two regional organizations, the European Commission and the Gulf Cooperation 

Council, are also members.
Page 38 GAO-02-111 Efforts in the Securities Industry

meetings. These groups are often regional, like the Caribbean Financial 

Action Task Force (CFATF), which includes 25 countries from the 

Caribbean, Central America, and South America.47 Other regional forums 

include the Asia Pacific Group on Money Laundering and the Financial 

Action Task Force on Money Laundering in South America. 

Some international bodies have recommended countermeasures against 

money laundering to their members. These recommendations cover 

criminal justice and enforcement systems, financial systems, and 

mechanisms for international cooperation. Some recommendations apply 

specifically to financial institutions, including securities firms (table 3).

Table 3: Examples of International Anti-Money Laundering Recommendations for 

Financial Institutions 

Source: The Forty Recommendations of the Financial Action Task Force, FATF, June 28, 1998.

47Additional information about CFATF and its member countries is presented in appendix 

VII.

Area Specific recommendations

Customer 

identification and 

recordkeeping 

--Avoid anonymous accounts.

--Record customers’ identities.

--Obtain proof of incorporation.

--Ensure that individuals acting on behalf of others are authorized 

to do so. 

--Keep records on customer transactions.

Suspicious 

transactions 

--Pay special attention to unusually large transactions that have 

no apparent economic purpose.

--Examine the background and purpose of such transactions.

--Establish findings in writing.

--Report suspicions of transactions involving funds stemming 

from possible criminal activities to competent authorities.

Anti-money 

laundering programs 

--Develop internal policies, procedures, and controls.

--Designate compliance officers at management level.

--Develop adequate screening procedures to ensure high 

standards when hiring employees.

--Develop an ongoing employee training program.

--Use an audit function to test the system. 

High-risk transactions --Give special attention to transactions with persons, companies, 

and financial institutions from countries without adequate antimoney laundering requirements.
Page 39 GAO-02-111 Efforts in the Securities Industry

Many Countries Reported 

Complying With FATF 

Recommendations for 

Financial Institutions

Many of the countries participating in international forums reported being 

in compliance with the FATF recommendations relating to their financial 

institutions, including the securities industry. For example, 24 of the 26 

FATF member countries that participated in a recent self-assessment 

reported having in place most of the key FATF recommendations that apply 

to stockbrokers.48 These included three FATF recommendations suggesting 

that stockbrokers record customers’ identity, pay attention to unusually 

large transactions that have no apparent economic purpose, and report 

suspicious activities to authorities. A fourth recommendation suggested 

that guidelines be issued to assist stockbrokers in detecting suspicious 

activities. Canada, one of the two member countries that had not 

implemented the specific recommendation that stockbrokers be required 

to report suspicious activities to competent authorities at the time of the 

self-assessment, has since published suspicious activity reporting 

regulations that cover the securities industry and are expected to come into 

force in November 2001. In a recent report on the anti-money laundering 

systems of its members,49 FATF observed that countries such as Canada 

and the United States, which have federal systems of government and a 

division of responsibilities for financial institutions sectors, generally take 

longer to implement controls for institutions regulated at the state or 

provincial level. CFATF officials also observed that 8 of the 11 CFATF 

members with organized securities exchanges had enacted legislation or 

adopted regulations requiring their securities firms to report suspicious 

transactions.

The United States has applied some of the FATF recommendations to its 

securities industry. For example, U.S. requirements for currency reporting 

and funds transfers that apply to the securities industry already comply 

with international recommendations. According to U.S. officials, many of 

the existing customer identification requirements for broker-dealers in the 

48Member countries report on their efforts to comply with the FATF recommendations 

through annual self-assessment surveys. These surveys collect, among other things, 

compliance information that applies to nonbank financial institutions, including brokerdealers. In some cases, the reporting country provides aggregated information for its 

nonbank financial institutions and does not provide separate information for its brokerdealers. FATF’s two regional organization members and three newest country members did 

not participate in the 1998-99 self-assessment survey referred to above. To the extent 

possible, the number of countries reporting to be in compliance with the noted 

recommendations was updated on the basis of FATF’s annual report for 2000-01.

49Review of FATF Anti-Money Laundering Systems and Mutual Evaluation 

Procedures 1992-99, FATF XII Plenary, Feb. 16, 2001. 
Page 40 GAO-02-111 Efforts in the Securities Industry

United States also are consistent with FATF recommendations. However, 

the United States has not issued requirements on suspicious activity 

reporting and related anti-money laundering programs for the securities 

industry but, as previously discussed, is in the process of developing a SAR 

rule. 

The Effectiveness of 

Implementing Anti-Money 

Laundering Standards in 

Many Countries Is Unclear

Determining how well international anti-money laundering standards have 

been implemented around the world is difficult because of the limited 

amount of information available. Some countries have only recently issued 

anti-money laundering requirements for their financial institutions, 

including securities firms, and have had little time to fully implement and 

enforce them. In addition, FATF reports that limited law enforcement tools 

and resources in some countries may hinder the effective implementation 

and enforcement of anti-money laundering requirements.

Most FATF countries have only a few years of statistics on suspicious 

activity reporting by banks, and few countries have data on suspicious 

activity reporting by other financial institutions. Only six countries 

provided information to FATF on SARs filed by their securities firms, and 

all six countries showed limited activity in the area. Specifically, securities 

firms filed a relatively small portion of the total SARs filed in these 

countries—from nearly 0 percent to just over 4 percent (table 4).

Table 4: SARs Filed by Securities Firms in FATF Countries

Note: All data are for 1999, except for the Netherlands, which reported 1998 data.

Source: Review of FATF Anti-Money Laundering Systems and Mutual Evaluation Procedures 1992-99,

FATF XII Plenary, Feb. 16, 2001. 

In some countries, suspicious activity reporting requirements for financial 

institutions are relatively new, and it may be too early to judge the 

Country Total SARs filed

SARs filed by

securities firms

Percentage of total

SARs

Belgium 8,030 335 4.17

Finland 271 10 3.69

Netherlands 3,995 1 0.03

Norway 788 2 0.25

Switzerland 160 1 0.63

United Kingdom 14,500 81 0.56
Page 41 GAO-02-111 Efforts in the Securities Industry

effectiveness of implementing these measures. As previously noted, 8 of 11 

CFATF members with organized securities exchanges had implemented 

legislation or regulations requiring firms to report suspicious activities, but 

7 did not enact these laws until 1998 or later. Similarly, FATF’s three 

newest members issued their anti-money laundering laws covering 

suspicious activity reporting requirements in 1997, 1998, and 2000.

Some countries may not have the necessary enforcement tools and 

resources to implement anti-money laundering measures properly. FATF 

reported that while some member countries have sanctions in place for 

firms that fail to report suspicious activities indicative of money 

laundering, other countries do not. In the United Kingdom, for example, we 

were told that officers of firms that do not report suspicious activities can 

be sentenced to up to 15 years in jail. In general, however, FATF reports 

that few members have applied such sanctions. In some member countries 

where the regulatory framework and mechanisms for monitoring 

suspicious activities are in place, the resources fall short of what is needed 

to make full use of these systems. FATF identified limited staff resources as 

a particular problem that has resulted in a backlog of SARs that have not 

been investigated. However, these countries are planning to allocate more 

resources to the units responsible for collecting, analyzing, and 

disseminating suspicious transaction information.

Most countries had not reported many money laundering cases involving 

nonbank financial institutions, and data on securities-specific cases are 

generally not available. Overall, other countries reported having much 

lower rates of enforcement activity related to money laundering than the 

United States. FATF reported that law enforcement statistics showed 

marked differences in the anti-money laundering activities of its member 

countries and in some cases indicated that members had undertaken few 

prosecutions or confiscations of funds. Law enforcement statistics for 

CFATF members also showed limited activity in the area, including few 

money laundering prosecutions and convictions. In contrast, the United 

States has reported relatively large numbers of prosecutions, convictions, 

confiscations, and seizure rates involving money laundering. During 1999, 

for example, the United States had 996 money laundering convictions, the 

highest number reported by any of the FATF member countries.

Conclusions The extent to which money laundering is occurring in the securities 

industry is not known, although law enforcement officials believe that 

various characteristics of the industry may make it a target like other 
Page 42 GAO-02-111 Efforts in the Securities Industry

financial industries. An assessment of the industry’s vulnerability must 

also consider the extent to which the industry is covered by anti-money 

laundering regulatory requirements and the actions broker-dealers and 

mutual fund firms themselves have taken to prevent their use by money 

launderers. Although firms in the securities industry are subject to 

criminal prosecution for facilitating money laundering and must comply 

with certain BSA reporting and recordkeeping requirements, all brokerdealer and mutual fund firms are not yet required to report suspicious 

activities that could be evidence of potential money laundering. As a result, 

the extent to which firms in the industry have taken steps to detect and 

prevent money laundering also varied. We found that many of the larger 

firms, which hold the majority of accounts and assets in the industry, had 

implemented voluntary anti-money laundering measures, but most of the 

small and medium-sized firms that represent the majority of broker-dealer 

and mutual fund firms in the industry had not. Although efforts by 

regulators to develop a SAR rule applicable to the securities industry are 

under way, they are not yet complete. As a result, regulators, brokerdealers, and mutual fund firms have more to do to further reduce the 

securities industry’s overall vulnerability to money laundering. 

Agency Comments and 

Our Evaluation

We received written comments on a draft of this report from Treasury’s 

FinCEN and SEC. FinCEN, whose written comments appear in appendix 

VIII, generally agreed with the draft report. FinCEN noted that the report 

provides information that will be useful in identifying and evaluating the 

operational effects of any future anti-money laundering regulatory 

requirements pertaining to the securities industry. This includes FinCEN’s 

current efforts to promulgate a draft rule that would require registered 

broker-dealers to establish programs to identify and report suspicious 

activities. FinCEN also provided technical comments, which we 

incorporated in this report as appropriate. 

SEC, whose written comments appear in appendix IX, similarly agreed with 

the observations contained in the draft report and noted that the draft 

provided a helpful overview of issues facing the securities industry, 

securities regulators, and law enforcement agencies as they continue their 

efforts to block money laundering. In its view, SEC said that our draft 

report identified two insights that would be particularly helpful to the 

government’s continued fight against money laundering. First, because 

more than 90 percent of broker-dealer and mutual fund firms reported 

never accepting cash, SEC noted that placement of physical currency into 

the financial system is not a significant risk for the securities industry. 
Page 43 GAO-02-111 Efforts in the Securities Industry

Secondly, SEC’s letter highlighted that our survey results indicated that the 

firms responsible for most of the U.S. securities industry’s accounts, 

transactions, and assets have implemented a broad range of voluntary antimoney laundering measures. We agree that the larger firms were more 

likely to report having implemented a variety of anti-money laundering 

measures. We note, however, that we did not attempt to verify the 

information provided by firms responding to our survey. In addition, the 

effectiveness of firms’ anti-money laundering programs also depends on 

such factors as the extent of management support and the level of 

supervision over employees and customer activity. In its letter, SEC also 

noted that the implementation of an effective SAR requirement for brokerdealers—one focused on layering and integration—should help all 

regulators and law enforcement officials address money laundering. SEC 

also provided technical comments, which we incorporated in this report as 

appropriate.

Justice provided us with informal comments in which it generally 

concurred with the substance of the draft report and offered a few 

additional observations. Justice noted, for example, that most of its 

enforcement efforts have focused on the large broker-dealers, leaving a 

significant segment of the securities industry unaddressed. It also 

emphasized that the opportunities for laundering illegal proceeds through 

on-line brokerage accounts require further scrutiny. 

As agreed with your office, unless you publicly release its contents earlier, 

we plan no further distribution of this report until 14 days from its issuance 

date. At that time, we will send copies of this report to interested 

congressional committees and members. We will also send copies to the 

Secretary of the Treasury, the U.S. Attorney General, and the Chairman of 

SEC. Copies will also be made available to others upon request.
Page 44 GAO-02-111 Efforts in the Securities Industry

Key contributors to this report are listed in appendix X. If you have any 

questions, please call me at (202) 512-5431 or Cody Goebel, Assistant 

Director, at (202) 512-7329.

Sincerely yours,

Davi M. D’Agostino

Director, Financial Markets 

 and Community Investment
Page 45 GAO-02-111 Efforts in the Securities Industry
Page 46 GAO-02-111 Efforts in the Securities Industry

Appendix I

Scope and Methodology AAppenednxidxeiIs

Determining Potential 

for Money Laundering 

and the Extent to 

Which Existing 

Regulations and 

Oversight Apply to the 

Securities Industry

To develop information on the potential for money laundering in the U.S. 

securities industry, we obtained the views of securities industry 

representatives and regulatory officials as well as the perspectives of 

several law enforcement agencies. At the Department of the Treasury, we 

spoke with officials from the Financial Crimes Enforcement Network 

(FinCEN), U.S. Customs Service, Internal Revenue Service, U.S. Secret 

Service, Office of Foreign Assets Control, and Office of Enforcement. At 

the Department of Justice, we spoke with officials from the Drug 

Enforcement Administration, Federal Bureau of Investigation, and 

Executive Office for U.S. Attorneys. We reviewed relevant reports, 

including the National Money Laundering Strategy for 2000 issued by 

Treasury and the U.S. Attorney General, International Narcotics Control 

Strategy Report issued by the U.S. Department of State, and Report on 

Money Laundering by the International Organization of Securities 

Commissions. We also conducted an independent legal search of cases 

involving money laundering through the securities industry and reviewed 

indictments, news articles, and other supporting documentation (provided 

primarily by the Internal Revenue Service and the Executive Office for U.S. 

Attorneys) to identify relevant cases.

To describe the anti-money laundering legal framework applicable to the 

U.S. securities industry and related regulatory oversight, we interviewed 

officials at the Securities and Exchange Commission (SEC), New York 

Stock Exchange (NYSE), National Association of Securities Dealers 

(NASD), Federal Reserve Board, Office of the Comptroller of the Currency, 

and Office of Thrift Supervision. We also reviewed U.S. anti-money 

laundering laws, rules, and regulations; accompanying congressional 

records; SEC and self-regulatory organization (SRO) examination 

procedures covering compliance with Bank Secrecy Act (BSA) 

requirements and related anti-money laundering guidance; semiannual 

reports to Treasury summarizing SEC and SRO examination findings 

pertaining to BSA, SEC correspondence on anti-money laundering issues, 

and other relevant documentation.
Appendix I

Scope and Methodology

Page 47 GAO-02-111 Efforts in the Securities Industry

Determining the Extent 

to Which BrokerDealers and Mutual 

Funds Have 

Implemented AntiMoney Laundering 

Activities

To determine the nature of the anti-money laundering efforts of brokerdealers and mutual funds, we interviewed industry officials at their 

respective companies and held roundtable discussions with panels of 

industry officials representing some of the nation’s major broker-dealer and 

mutual fund firms. We also spoke with representatives of industry trade 

associations, such as the Securities Industry Association and Investment 

Company Institute, and reviewed available reports and other documents 

covering money laundering issues relative to the securities industry. 

To determine the extent to which firms were undertaking anti-money 

laundering activities, we also surveyed representative probability samples 

of broker-dealers and mutual funds. For our survey of broker-dealers, our 

target population was all broker-dealers conducting a public business, 

including firms that carry customer accounts, clear trades, or serve as 

introducing brokers. These firms were selected because their activities 

may expose them to potential money laundering, unlike brokers who do 

not conduct transactions for customers. For our survey of mutual fund 

firms, our target population was direct-marketed, no-load mutual fund 

families that sell shares directly to investors and would have some antimoney laundering responsibilities because of their direct contact with 

customers. The majority of other mutual funds are sold by other financial 

institutions, such as broker-dealers, banks, and insurance companies, and 

these entities would have the contact with customers potentially seeking to 

launder money.

Our representative probability samples included three groupings: (1) 

broker-dealers, (2) securities subsidiaries of bank holding companies and 

foreign banking organizations, and (3) mutual funds. For each grouping, 

we used survey data to estimate what types of monetary instruments are 

accepted and what anti-money laundering activities are conducted, 

including voluntary measures such as implementing written anti-money 

laundering procedures to identify noncash suspicious activities, 

establishing related internal controls, providing personnel training, and 

filing suspicious activity reports (SAR). Appendix II is an example of one 

of our survey instruments.

Sample Design Our three statistically valid random samples were drawn so that each 

sampled firm had a known, nonzero probability of being included in our 

survey. In the broker-dealer and mutual fund surveys, the samples were 

allocated across several categories, or strata, defined by the size of the 
Appendix I

Scope and Methodology

Page 48 GAO-02-111 Efforts in the Securities Industry

firm, so that proportionally more of the sample was allocated to the strata 

with larger firms. This makes our estimates of anti-money laundering 

activity, which tends to vary by size of firm, more precise. To produce the 

estimates from this survey, answers from each responding firm were 

weighted in the analysis to account for the different probabilities of 

selection by stratum and to make our results representative of all the 

members of the population, including those that were not selected or did 

not respond to the survey.

For our survey of broker-dealers, our target population was all brokerdealers conducting a public business, including firms that carry customer 

accounts, clear trades, or serve as introducing brokers. Using these 

specifications, we requested year-end 1999 financial and operational 

reports filed with SEC by 5,460 firms. From this list, we eliminated 1,626 

NASD-member firms not conducting a public business and carrying or 

clearing trades, such as those that act as floor brokers on the various 

exchanges or that sell mutual funds, direct participation plans, or units of 

mutual funds, but that nevertheless file broker-dealer reports with SEC. We 

also removed the 53 section 20 subsidiary firms identifiable in the dataset 

at that time, resulting in a population of 3,781 broker-dealers for sampling 

purposes. Table 5 provides additional information on the selected 

characteristics of this broker-dealer population. 
Appendix I

Scope and Methodology

Page 49 GAO-02-111 Efforts in the Securities Industry

Table 5: Selected Characteristics of the Broker-Dealer Population 

Source: GAO analysis of year-end 1999 financial and operational reports filed with SEC.

From these 3,781 firms, we drew a random probability sample of 231 

broker-dealers. We distributed that sample over three size strata defined by 

total assets of the firms. 

For our survey of mutual funds, our target population was direct-marketed 

funds whose shares are sold directly to retail or institutional customers. 

We developed a list of 363 of these direct-marketed mutual fund groups 

from lists of no-load mutual fund families (those fund complexes most 

likely to distribute shares of their funds themselves) from publications 

widely available at the time of our survey.1

 We drew a random sample of 92 

fund families across two strata defined by the year-end 1998 asset size of 

firms.

Selected characteristics Number of broker-dealers

Total assets:

 $10 billion and over 18

 $230 million and under $10 billion 148

 $1 million and under $230 million 1,472

 Under $1 million 2,143

 Average total assets: $395 million

Type of firm:

 Introducing brokers 3,147

 Clearing brokers 634

Designated examining authority:

 NASD 3,538

 NYSE 231

 Chicago Board Options Exchange 6

 Midwest Securities Exchange 6

1

Loads are sales charges paid by purchasers of mutual fund shares used to compensate the 

financial institution sales personnel for marketing those funds. No-load funds do not charge 

such fees because they market their funds themselves.
Appendix I

Scope and Methodology

Page 50 GAO-02-111 Efforts in the Securities Industry

Some broker-dealers and mutual fund groups have been subject to 

additional money laundering regulation because of their affiliation with 

banks or other depository institutions—specifically, as subsidiaries of 

depository institutions or of their holding companies. As a result, we 

attempted to remove this group from our overall survey population of 

broker-dealers and administered a separate survey for such bank-affiliated 

brokers. However, we were unable to develop a survey population that 

included all securities subsidiaries of depository institutions or of their 

holding companies because comprehensive data on the extent and the 

identities of all such subsidiaries were not available. However, the Federal 

Reserve maintained data on the securities subsidiaries of the bank holding 

companies and foreign banking organizations that it oversees.2

 These 

bank-affiliated broker-dealers were subject to banking SAR requirements. 3 

As of December 31, 1999, the Federal Reserve oversaw 53 of these firms, 

and we randomly selected 37 of them for our survey. 

Administration of the 

Surveys

We contacted all sampled firms by telephone to determine their eligibility 

for the survey and to determine who in each firm should receive the 

questionnaire. We sent questionnaires primarily by fax to firms beginning 

in December 2000. We made telephone follow-up contacts to some of the 

firms that did not respond within several weeks, to encourage them to 

return a completed questionnaire or to answer our questions by telephone. 

We stopped collecting completed questionnaires in April 2001. We used 

several variants of the questionnaires tailored to each industry and to 

whether the firm was subject to the banking SAR requirements. Although 

we conducted follow-up work with some of the respondents to clarify their 

responses and obtain additional information, we did not systematically 

verify the accuracy of survey responses or the extent to which firms were 

adhering to reported policies and procedures. 

2

At the time of our survey, a list of securities subsidiaries of bank holding companies 

compiled by the Federal Reserve was the only readily available listing of bank-affiliated 

broker-dealers. Information on the securities subsidiaries of national banks and federal 

thrifts was not available, but efforts have since been made to compile such information. See 

Money Laundering: Oversight of Suspicious Activity Reporting of Bank-Affiliated BrokerDealers Ceased (GAO-01-474, Mar. 22, 2001). 

3

These securities subsidiaries had previously been referred to as section 20 subsidiaries, but 

the passage of the Gramm-Leach-Bliley Act of 1999 repealed sections 20 and 32 of the GlassSteagall Act that had applied to the operations of these securities subsidiaries.
Appendix I

Scope and Methodology

Page 51 GAO-02-111 Efforts in the Securities Industry

Disposition of Samples We received 164 usable broker-dealer responses, 67 mutual fund responses, 

and 25 responses from securities subsidiaries of bank holding companies. 

After adjusting for those sampled firms that were discovered to be 

ineligible for our survey because they were no longer independent entities 

in their respective industries, the number of usable responses resulted in 

final response rates of 87 percent, 83 percent, and 69 percent, respectively 

(tables 6 to 8). Because not all respondents provided an answer to each 

question that they were eligible to answer, the item response rate varies 

and is generally lower than the unit response rate for each industry.

Table 6: Disposition of Broker-Dealer Sample

Table 7: Disposition of Mutual Fund Sample

Disposition

Nonresponse

Stratum, by total assets

Original

population

size

Sample

size Ineligible Refusal

All other

nonresponses

Usable

response

Response

rate

Large:

$230 million or more 166 81 19 4 2 56 90%

Medium:

1 million up to $230 million 1,472 75 11 4 4 56 88

Small:

Up to $1 million 2,143 75 13 7 3 52 84

Total 3,781 231 43 15 9 164 87%

Disposition

Nonresponse

Stratum, by total assets

Original

population

size

Sample

size Ineligible Refusal

All other

nonresponses

Usable

response

Response

rate

Large:

Over $10 billion 17 17 0 1 1 15 88%

Other (medium and small): 

$10 billion and under 346 75 11 6 6 52 81

Total 363 92 11 7 7 67 83%
Appendix I

Scope and Methodology

Page 52 GAO-02-111 Efforts in the Securities Industry

Table 8: Disposition of Sample of Securities Subsidiaries of Bank Holding 

Companies

During the course of administering the surveys of broker-dealers and 

mutual fund groups, we identified 12 broker-dealers and 2 mutual fund 

groups that indicated that they were subject to the banking SAR 

requirements. Responses of these 14 firms were analyzed in conjunction 

with responses of the securities subsidiaries of institutions overseen by the 

Federal Reserve.

Survey Error and Data 

Quality

Point estimates from sample surveys are subject to a number of sources of 

error, which can be grouped into the following categories: sampling error, 

coverage error, nonresponse error, measurement error, and processing 

error. We took a number of steps to limit these errors.

Sampling error exists because our random sample is only one of a large 

number of samples that we might have drawn. Since each sample could 

have produced a different estimate, we express the precision of our 

particular sample's results as a 95-percent confidence interval. This is the 

interval (e.g., ±7 percentage points on either side of the percentage 

estimate) that would contain the actual population value for 95 percent of 

the samples we could have drawn. As a result, we are 95-percent confident 

that each of the confidence intervals cited in this report will include the 

true values in the study population.

Surveys may also be subject to coverage error, which occurs when the 

sampling frame does not fully represent the target population of interest. 

We used the most up-to-date lists that were available to us, and we 

attempted to remove firms that were no longer in the industry of interest. 

For the mutual fund survey, our results are representative only of those 

mutual fund groups that are direct marketed and that offer predominantly 

no-load funds, which we believe is closest to the target population of 

mutual funds that are self-distributing. Also, we discovered a small number 

Disposition

Nonresponse

Original 

population 

size

Sample

size Ineligible Refusal

All other

nonresponses Usable

response

Response

rate

53 37 1 0 11 25 69%
Appendix I

Scope and Methodology

Page 53 GAO-02-111 Efforts in the Securities Industry

of firms in our broker-dealer sample that was affiliated with depository 

institutions and subject to banking SAR requirements. These firms would 

have been excluded from our overall broker-dealer sample frame had we 

known this before conducting our survey; their responses were analyzed 

with those from our sample frame for bank-affiliated securities 

subsidiaries, which represented broker-dealers subject to banking SAR 

requirements.

Measurement errors are defined as differences between the reported and 

true values. Such errors can arise from the way that questions are worded, 

differences in how questions are interpreted by respondents, deficiencies 

in the sources of information available to respondents, or intentional 

misreporting by respondents. To minimize such errors, we asked subject 

matter experts to review our questionnaires before the survey, and 

pretested the questionnaires by telephone with respondents at several 

firms of various sizes and levels of anti-money laundering activity. 

Nonresponse error arises when surveys are unsuccessful in obtaining any 

information from eligible sample elements or fail to get valid answers to 

individual questions on returned questionnaires. To the extent that those 

not providing information would have provided significantly different 

information from those that did respond, bias from nonresponse can also 

result. Because the seriousness of this type of error is often proportional to 

the level of missing data, response rates are commonly used as indirect 

measures of nonresponse error and bias. We took steps to maximize 

response rates, such as sending multiple faxes of the questionnaires and 

making several telephone follow-ups to convert nonrespondents.

Finally, surveys may be subject to processing error in data entry, 

processing, and analysis. We verified the accuracy of a small sample of 

keypunched records by comparing them with their corresponding 

questionnaires, and we corrected any errors found. Less than 1 percent of 

the data items we checked had random keypunch errors that would not 

have been corrected during data processing. Analysis programs were also 

independently verified.

We conducted follow-up work with many of the respondent firms to obtain 

additional information on or clarification of their survey responses. We also 

worked with FinCEN to corroborate survey responses on the extent that 

securities firms have filed SARs using procedures that attempted to 

maintain the confidentiality of the identities of our survey respondents. 
Appendix I

Scope and Methodology

Page 54 GAO-02-111 Efforts in the Securities Industry

International AntiMoney Laundering 

Efforts

To obtain information on international efforts aimed at addressing money 

laundering in the securities industry, we interviewed members of the U.S. 

delegation to the Financial Activities Task Force (FATF), officials of the 

Caribbean Financial Activities Task Force (CFATF), and representatives of 

the U.S. Department of State. We also spoke with foreign officials 

representing the financial supervising authorities, law enforcement or 

financial intelligence units, prosecuting offices, and securities industries in 

Barbados, Germany, Trinidad and Tobago, and the United Kingdom. In 

addition, we interviewed knowledgeable representatives at the U.S. 

embassies located in these jurisdictions. We reviewed FATF and CFATF 

annual reports; summaries of mutual evaluations, self-assessments, and the 

results of plenary meetings; documents provided by countries we visited on 

their anti-money laundering oversight and law enforcement efforts; and 

relevant reports issued by various international working groups and 

committees. Lastly, we researched the Web sites of selected foreign 

financial regulators and reviewed available documentation on their antimoney laundering regulations, policies, and industry guidelines. 

Information on foreign anti-money laundering laws or regulations is based 

on interviews and secondary sources and does not reflect our independent 

legal analysis. 

We conducted our work between May 2000 and May 2001 in accordance 

with generally accepted government auditing standards. 
Page 55 GAO-02-111 Efforts in the Securities Industry

Appendix II

Example of a Data Collection Instrument 

Used to Survey the Securities Industry ApendxiI

	

	




	
	



	 








 



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Appendix II

Example of a Data Collection Instrument 

Used to Survey the Securities Industry

Page 56 GAO-02-111 Efforts in the Securities Industry

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Example of a Data Collection Instrument 

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Page 57 GAO-02-111 Efforts in the Securities Industry

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Example of a Data Collection Instrument 

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Page 58 GAO-02-111 Efforts in the Securities Industry

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Example of a Data Collection Instrument 

Used to Survey the Securities Industry

Page 59 GAO-02-111 Efforts in the Securities Industry

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Example of a Data Collection Instrument 

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Page 60 GAO-02-111 Efforts in the Securities Industry

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Example of a Data Collection Instrument 

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Page 61 GAO-02-111 Efforts in the Securities Industry

		

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Page 62 GAO-02-111 Efforts in the Securities Industry

Appendix III

Demographic Information on the U.S. 

Securities Industry ApendxiI

One of the reasons that the U.S. securities industry is seen as potentially 

attractive to money launderers is the rapid growth in securities activities in 

the United States. As shown in figure 8, the value of securities traded on 

the NYSE and the Nasdaq markets has grown significantly since 1990.

Figure 8: Average Daily Value of Securities Traded on Major U.S. Markets From 

January 1990 to June 1, 2001

a

Value for 2001 reflects data through June 1.

Source: GAO presentation of Securities Industry Association data.

0

10

20

30

40

50

60

70

80

90

100

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

NYSE

Nasdaq

Dollars in billions

a

Year
Appendix III

Demographic Information on the U.S. 

Securities Industry

Page 63 GAO-02-111 Efforts in the Securities Industry

The number of shares traded on these two major U.S. markets has also 

increased during the 1990s (fig. 9). 

Figure 9: Average Daily Shares Traded on Major U.S. Markets From January 1990 to 

June 1, 2001

a

Value for 2001 reflects data through June 1.

Source: GAO presentation of Securities Industry Association data.

In addition to the increase in stock trading, mutual funds have also 

experienced considerable growth in the 1990s. As shown in figure 10, 

assets in mutual funds exceeded $7 trillion in 2001.

0

500

1000

1500

2000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

NYSE

Nasdaq

Shares in millions

a

Year
Appendix III

Demographic Information on the U.S. 

Securities Industry

Page 64 GAO-02-111 Efforts in the Securities Industry

Figure 10: Mutual Fund Assets From 1990 to June 1, 2001

a

Value for 2001 reflects assets as of June 1.

Source: GAO presentation of Investment Company Institute and Securities Industry Association data.

Securities markets are now more accessible to investors with the advent of 

on-line trading accounts that allow investors to open accounts and send 

transaction instructions to broker-dealers using the Internet. As shown in 

figure 11, research staff for one broker-dealer reported that the number of 

on-line brokerage accounts was close to 20 million at the end of 2000. 

0

1000

2000

3000

4000

5000

6000

7000

8000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Dollars in billions

a

Year
Appendix III

Demographic Information on the U.S. 

Securities Industry

Page 65 GAO-02-111 Efforts in the Securities Industry

Figure 11: Growth of On-line Brokerage Accounts From Fourth Quarter 1998 to 

Fourth Quarter 2000

Source: GAO presentation of JP Morgan Securities, Inc., Equity Research data.

Although many countries have active securities markets, trading on 

markets in the United States continues to represent the majority of trading 

on all large markets (fig. 12). 

0

5

10

15

20

25

4th 1st 2nd 3rd 4th 1st 2nd 3rd 4th

Number of brokerage accounts in millions

Quarter and year

1998 1999 2000
Appendix III

Demographic Information on the U.S. 

Securities Industry

Page 66 GAO-02-111 Efforts in the Securities Industry

Figure 12: Percentage Share of Trading for Markets in 10 Most Active Countries 

During 1999

Source: GAO presentation of Standard and Poor’s data from the 2000 SIA Securities Industry 

Factbook.

59.9%

14.4%

6.0%

4.4%

4.4%

3.0%

2.5%

United States

Other

Japan

Germany

United Kingdom

Netherlands

France

1.7% Italy

1.7% Switzerland

1.2% Canada

0.8% Hong Kong
Page 67 GAO-02-111 Efforts in the Securities Industry

Appendix IV

Identified Cases of Money Laundering 

Through the U.S. Securities Industry ApendxIVi

To obtain information on the extent to which the U.S. securities industry 

was used to launder money as well as the vulnerability of the industry to 

money laundering, we contacted various U.S. law enforcement agencies. 

Within Treasury, we contacted the Customs Service, Internal Revenue 

Service’s Criminal Investigation Division, Secret Service, FinCEN, Office of 

Foreign Assets Control, and Office of Enforcement. At Justice, we spoke 

with officials from the Drug Enforcement Administration, Federal Bureau 

of Investigation, and Executive Office for U.S. Attorneys. 

Statistics on the number of cases in which money was laundered through 

brokerage firms and mutual funds were not readily available, but we 

compiled a listing of cases in which illegal funds were laundered through 

brokerage firms or mutual funds from information provided primarily by 

two of the law enforcement agencies we contacted. At our request, the 

Internal Revenue Service and Executive Office for U.S. Attorneys collected 

information from some of its field staff that identified about 15 criminal or 

civil forfeiture cases since 1997 that involved money laundering through 

brokerage and mutual fund accounts. Some cases in which money 

laundering is alleged involved securities fraud or crimes committed by 

securities industry employees who then moved their illegally earned 

proceeds to other institutions or used them to purchase other assets, thus 

violating the anti-money laundering statutes. However, we only included 

such cases if broker-dealer or mutual fund accounts were alleged to have 

been used to launder the money. 

Table 9 provides a list of criminal cases in which proceeds from illegal 

activities were laundered through brokerage or mutual fund accounts. 

Table 10 provides a list of forfeiture cases in which property, including 

assets held in brokerage or mutual fund accounts, obtained from proceeds 

that were traceable to certain criminal offenses were taken by the United 

States to be distributed to the victims of such crimes as restitution. These 

lists contain examples of cases that involve charges of money laundering 

through brokerage or mutual fund accounts and do not represent an 

exhaustive compilation of all such known cases. For example, law 

enforcement officials indicated that they were unable to provide 

information on many relevant pending cases in the area and further 

emphasized that not all field offices and staff had been formally queried. 

Specific case information presented in the tables was extracted from public 

documents provided primarily by the Internal Revenue Service and 

Executive Office for U.S. Attorneys. 
Appendix IV

Identified Cases of Money Laundering 

Through the U.S. Securities Industry

Page 68 GAO-02-111 Efforts in the Securities Industry

Table 9: Identified Criminal Cases in Which Indictments Contained Charges of Money Laundering Through Brokerage or Mutual 

Fund Accounts

a

Funds noted as laundered specifically through brokerage or mutual fund accounts.

b

Time frame was estimated on the basis of available information.

c

Information was not readily available or could not be determined from documentation at hand.

Source: Public documents provided primarily by the Internal Revenue Service and Executive Office for 

U.S. Attorneys.

Date of 

indictment or 

disposition Case

U.S. District 

Court

Brief description, including 

source of illicit funds

Estimated amount of

funds laundered

Case 

outcome or 

status 

2/15/01 

Conviction

United States v. 

Nigel Ramsay

Southern 

District of 

Florida

Proceeds from narcotics (cocaine) 

trafficking activities were laundered 

through brokerage accounts.

$290,000a Convicted at 

trial 

02/12/01

Judgment

United States v. 

Edward Sirhan

Eastern District 

of Tennessee

Proceeds from felony food stamp 

fraud were deposited into brokerage 

accounts.

$460,000a Guilty plea

2000b

Indictment

United States v. 

Anthony C. Wong

Southern 

District of New 

York

Proceeds from wire and mail fraud 

were laundered through securities 

accounts and transferred into 

Cayman Island bank accounts.

$209,700 Guilty plea

11/06/00

Judgment

United States v. 

Rudolph Keszthelyi

Eastern District 

of Tennessee

Indictment charged narcotics 

proceeds were laundered through 

brokerage accounts.

$60,000a Guilty plea

05/18/00

Indictment

United States v. 

Pavel Ivanovich 

Lazarenko

Northern 

District of 

California

Defendant charged with extorting 

stolen property in the Ukraine and 

transferring proceeds into U.S. bank 

and brokerage accounts to disguise 

the origin and owner of the money.

$114 million c

12/18/98

Indictment

United States v. 

Wade Friday

Eastern District 

of Pennsylvania

Proceeds from food stamp fraud 

were deposited into various money 

market and brokerage accounts.

$55,000a Guilty plea 

10/19/98

Judgment

United States v. 

David R. Hasler

Southern 

District of Iowa

Funds embezzled from a securities 

firm were wire transferred into a 

personal trading account.

$460,000 Guilty plea

08/17/98

Plea agreement

United States v. 

Samuel R. Snider

District of 

Alaska

Proceeds from the manufacture and 

sale of marijuana were deposited 

into investment accounts.

$526,000 Guilty plea

08/18/97

Judgment

United States v. 

Jerry Dixon

Middle District 

of Tennessee

Proceeds from illegal gambling were 

deposited into brokerage accounts 

and other financial institutions.

$100,000 Guilty plea
Appendix IV

Identified Cases of Money Laundering 

Through the U.S. Securities Industry

Page 69 GAO-02-111 Efforts in the Securities Industry

Table 10: Identified Forfeiture Cases That Involved Money Laundering Through Brokerage or Mutual Fund Accounts 

a

Funds noted as laundered specifically through brokerage or mutual fund accounts

b

Time frame was estimated on the basis of available information.

c

Forfeiture or some aspect of the criminal case is still pending. Cases in which a defendant has been 

charged but not yet convicted have not been included. 

d

Prime bank schemes involve fraudulent investment recommendations in which investors are induced 

to purchase and trade prime bank financial instruments on overseas markets to generate huge returns. 

However, neither these instruments, nor the markets on which they allegedly trade, exist. 

Source: Public documents provided primarily by the Internal Revenue Service and Executive Office for 

U.S. Attorneys.

Date of 

complaint 

Name of account under 

forfeiture

U.S. District 

Court

Brief description, including source 

of illicit funds

Estimated

amount of

funds

laundereda

Status of 

case

1999b Raoul M. Stetson, et al. Southern 

District of 

New York

Proceeds from drug operations were 

deposited into a brokerage account 

and forfeited in connection with guilty 

plea.

$25,000 Closed

11/23/99 

(second 

amend.)

Proceeds of Drug Trafficking 

Transferred to Certain Domestic 

Bank Accounts 

Southern 

District of 

Alabama

Proceeds from drug trafficking were 

placed into various bank and 

investment accounts. 

$139,000a Closed

12/03/98 Contents of Account Number 

5061-578941 in the Name of 

Andrew D. Rhee, at Refco, Inc. 

Southern 

District of 

New York

Proceeds from fraudulent purchases 

and sales of commodity futures 

contracts were ultimately deposited 

into a brokerage account.

$750,000a Closed

11/15/98 Approximately $25,829,681.80 in 

the Court Registry Investment 

System 

Southern 

District of 

New York

Proceeds of a wire fraud scheme 

were deposited into brokerage 

accounts. Victims were induced to 

wire transfer investment funds into 

brokerage accounts to be traded. 

Defendants instead withdrew the 

money for their own use. 

$25 million Pendingc

07/08/98 Contents of Account No. 594-

07N41 in the Name of Hamilton 

Farrar, L.L.C. at Merrill Lynch, 

Pierce, Fenner & Smith, Inc. 

Southern 

District of 

New York

Proceeds from a “prime bank”

schemed were placed into a brokerage 

account.

$3.7 million Closed

03/18/98 All Funds Held by AMS, L.L.C., 

as Trustee Pursuant to Court 

Order in Dean Witter Account

Southern 

District of 

New York

Proceeds from a prime bank scheme 

were wired into banks across the 

United States, then transferred into 

various brokerage accounts.

$3.46 million Closed

08/29/97 Contents of Dean Witter 

Brokerage Account in the Name 

of Paul W. Eggers

Southern 

District of 

New York

Proceeds from a prime bank scheme 

were placed into a brokerage account 

and money market fund. Brokerage 

account was opened with a cashier’s 

check and received subsequent 

deposits in wire transfers and 

additional cashier’s checks.

$8 million

(approx.)

Pendingc
Page 70 GAO-02-111 Efforts in the Securities Industry

Appendix V

Survey Information on the Average Dollar Size 

of Transactions Processed for Retail 

Customers ApendxVi

The overall average dollar size of individual transactions processed for 

retail customers among firms responding to our survey was $22,000 for 

broker-dealers and $11,000 for mutual funds groups, as shown in table 11. 

The median, or middle value for the full range of responses, was 

substantially lower than the average for each of the two types of firms. The 

combined range of the average transactions varied widely—from $200 to 

$200,000. 

Table 11: Information on the Average Size of Transactions Processed for Retail Customers, by Type and Size of Firm

Legend

N = The total number of respondents. 

Note:This table reflects only the actual amounts reported on the survey. We could not develop 

meaningful estimates for the entire industry because of the low number of firms that provided 

information on the average size of transactions and the wide range of responses. 

Source: Analysis of responses to GAO survey.

Dollar size of average transaction processed for retail customers

Firm, by type and size N Mean Median Mode Range

Broker-dealers:

 Large 29 $26,536 $15,000 $5,000 $500 - $100,000

 Medium 38 24,370 15,000 10,000 200 - 150,000

 Small 42 17,517 10,000 5,000 500 - 100,000

 All broker-dealers 109 $22,306 $12,000 $5,000 $200 - $150,000

Direct-marketed mutual fund groups:

 Large 12 $6,689 $5,665 $15,000 $750 - $15,000

 Medium/Small 47 12,582 5,000 10,000 200 - 200,000

 All mutual fund groups 59 $11,384 $5,000 $10,000 $200 – $200,000
Page 71 GAO-02-111 Efforts in the Securities Industry

Appendix VI

Additional Information on Voluntary AntiMoney Laundering Measures From Surveys of 

Broker-Dealers and Mutual Fund Groups ApendxViI

For those broker-dealers that indicated that they had voluntary anti-money 

laundering measures in place, large broker-dealers tended to implement 

more of the anti-money laundering tools and processes than the mediumsized or small firms, as shown in figure 13. Implementation of the other 

types of voluntary anti-money laundering measures varied.
Appendix VI

Additional Information on Voluntary AntiMoney Laundering Measures From Surveys 

of Broker-Dealers and Mutual Fund Groups

Page 72 GAO-02-111 Efforts in the Securities Industry

Figure 13: Proportion of Broker-Dealers That Reported Implementing Various Types of Voluntary Anti-Money Laundering 

Measures

Note: Due to the small number of firms implementing voluntary measures in each size category, 

differences across size categories are not statistically significant. 

Source: Analysis of responses to GAO surveys. 

0 20 40 60 80 100

WRITTEN POLICIES AND PROCEDURES

INTERNAL CONTROLS

TOOLS AND PROCESSES

FORMAL TRAINING PROGRAM

Percentage

Medium

Small

Identifying and reporting suspicious activities

Obtaining information on customers' source of income

Obtaining information on customers' source of wealth

External audit of anti-money laundering program

Internal audit of anti-money laundering program

Compliance officer review of accounts

Supervisory review of existing accounts

Supervisory review of new accounts over threshold

Supervisory review of new accounts

Compliance staff with anti-money laundering expertise

List of high-risk activities

Centralized process for law enforcement referral

Guidelines for identifying suspicious activities

Automated monitoring program

Transaction monitoring program

Large
Appendix VI

Additional Information on Voluntary AntiMoney Laundering Measures From Surveys 

of Broker-Dealers and Mutual Fund Groups

Page 73 GAO-02-111 Efforts in the Securities Industry

For those mutual fund groups that indicated they had voluntary anti-money 

laundering measures in place, large mutual funds reported implementing 

more of the various voluntary anti-money laundering measures, but 

medium-sized and small funds have also implemented many of the same 

measures (see fig. 14).
Appendix VI

Additional Information on Voluntary AntiMoney Laundering Measures From Surveys 

of Broker-Dealers and Mutual Fund Groups

Page 74 GAO-02-111 Efforts in the Securities Industry

Figure 14: Proportion of Mutual Fund Groups That Reported Implementing Various Types of Voluntary Anti-Money Laundering 

Measures 

Note: Due to the small number of firms implementing voluntary measures in each size category, 

differences across size categories may not be statistically significant.

Source: Analysis of responses to GAO surveys.

0 20 40 60 80 100

WRITTEN POLICIES AND PROCEDURES

INTERNAL CONTROLS

TOOLS AND PROCESSES

FORMAL TRAINING PROGRAM

Percentage

Medium/Small

Large

Identifying and reporting suspicious activities

Obtaining information on customers' source of income

Obtaining information on customers' source of wealth

External audit of anti-money laundering program

Internal audit of anti-money laundering program

Compliance officer review of accounts

Supervisory review of existing accounts

Supervisory review of new accounts over threshold

Supervisory review of new accounts

Compliance staff with anti-money laundering expertise

List of high-risk activities

Centralized process for law enforcement referral

Guidelines for identifying suspicious activities

Automated monitoring program

Transaction monitoring program
Page 75 GAO-02-111 Efforts in the Securities Industry

Appendix VII

Additional Information on the Caribbean 

Financial Action Task Force ApendxiVI

CFATF is the Caribbean basin counterpart of FATF that works to assist 

member governments in implementing anti-money laundering mechanisms. 

Its 25 members are countries and territories from the Caribbean, Central 

America, and South America.1

 CFATF was created as the result of meetings 

held in the early 1990s by representatives of the Western Hemisphere 

countries to develop a common approach to combat the laundering of drug 

trafficking proceeds. In 1992, CFATF developed 19 recommendations on 

the basis of this common approach, which have specific relevance to the 

region and complement the 40 recommendations of FATF. Member 

governments have signed a memorandum of understanding, known as the 

Kingston Declaration on Money Laundering, which confirms their 

agreement to adopt and implement various internationally accepted 

standards and recommendations and CFATF’s 19 regionally focused 

recommendations.2

 The CFATF Secretariat monitors members’ 

implementation of the Kingston Declaration through various mechanisms, 

including self-assessment questionnaires, mutual evaluations of anti-money 

laundering regimes, training technical assistance programs, and plenary 

and Ministerial meetings. 

Laws Requiring 

Securities Firms to 

Report Suspicious 

Transactions in Some 

CFATF Jurisdictions 

Were Recently Enacted

According to CFATF officials, most CFATF jurisdictions that have 

organized securities exchanges require their securities firms to report 

suspicious transactions; however, almost all of these requirements were 

enacted recently. CFATF officials noted that 11 member jurisdictions (i.e., 

the Bahamas, Barbados, Bermuda, the Cayman Islands, Costa Rica, the 

Dominican Republic, Jamaica, Nicaragua, Panama, Trinidad and Tobago, 

and Venezuela) have at least 1 organized securities exchange. Eight of 

these members have enacted legislation requiring their securities firms to 

report suspicious transactions to relevant authorities (fig. 15). 

1

 CFATF members are Anguilla, Antigua and Barbuda, Aruba, the Bahamas, Barbados, 

Belize, Bermuda, the British Virgin Islands, the Cayman Islands, Costa Rica, Dominica, the 

Dominican Republic, Grenada, Jamaica, Montserrat, the Netherlands Antilles, Nicaragua, 

Panama, St. Kitts & Nevis, St. Lucia, St. Vincent and the Grenadines, Suriname, Trinidad and 

Tobago, the Turks and Caicos Islands, and Venezuela.

2

 Spanish-speaking member countries, with the exception of Panama, did not sign the 

declaration because a version was not available in Spanish.
Appendix VII

Additional Information on the Caribbean 

Financial Action Task Force

Page 76 GAO-02-111 Efforts in the Securities Industry

Figure 15: CFATF Members Requiring Securities Firms to Report Suspicious Transactions

Source: CFATF Secretariat.

CFATF officials noted that, with the exception of Panama, which has 

required its securities firms to report suspicious transactions since 1995, 

the remaining seven CFATF members with organized securities exchanges 

The Bahamas

Bermuda

Panama 

Nicaragua

Costa

Rica

Jamaica The Dominican

Republic

Venezuela

Trinidad

and Tobago

Barbados

Cayman 

Islands

All named jurisdictions are CFATF members with one or more organized securities exchange. 

 Reporting required

 Reporting not required

 CFATF officials were unable to determine whether reporting requirements applied to securities firms.
Appendix VII

Additional Information on the Caribbean 

Financial Action Task Force

Page 77 GAO-02-111 Efforts in the Securities Industry

enacted such requirements only since 1998. The Bahamas and Trinidad and 

Tobago, for example, enacted anti-money laundering legislation in 2000 

requiring, among other things, securities firms to report suspicious 

transactions to relevant authorities; Jamaica enacted similar legislation in 

1999. 

Implementation Efforts 

in Other CFATF 

Jurisdictions Have 

Been Criticized

Although CFATF officials indicated that most CFATF jurisdictions require 

their financial institutions to report suspicious transactions, U.S. and 

international anti-money laundering authorities have criticized legislation 

and implementation in some CFATF jurisdictions. Treasury documents 

based on the mutual evaluations of CFATF members’ activities indicate that 

anti-money laundering results in the region are very limited, noting that few 

cases of money laundering have actually been prosecuted or convicted. A 

June 2000 FATF report cited six CFATF jurisdictions as having significant 

deficiencies in their anti-money laundering systems and labeled them as 

“non-cooperative countries and territories.” 3 In addition, during 2000, 

FinCEN issued a series of advisories to U.S. businesses describing 

deficiencies in the anti-money laundering systems of six CFATF 

jurisdictions, including three jurisdictions with organized securities 

exchanges. FinCEN reported in a July 2000 advisory, for example, that the 

Bahamas did not require its financial institutions to report suspicious 

activities and that, although the Cayman Islands did have this reporting 

requirement, it lacked any sanctions for financial institutions that failed to 

comply. FinCEN also criticized the effectiveness of Panama’s suspicious 

transaction reporting procedures that allowed the Office of the President of 

Panama to screen reports before referring them for investigation. However, 

in 2001, FATF removed the Bahamas, the Cayman Islands, and Panama 

from its list of noncooperative countries, noting that they had adequately 

addressed their deficiencies through legislative reforms and 

implementation efforts. FinCEN also retracted its advisories on the basis 

of the improvements made by these jurisdictions.4

 

3

 The report also identified some non-CFATF jurisdictions as having significant deficiencies 

in their anti-money laundering systems and placed them on FATF’s list of noncooperative 

countries. 

4

 In June 2001, FATF also removed non-CFATF jurisdiction from its list of noncooperative 

countries and territories and acknowledged the progress made to address deficiencies 

identified relative to the anti-money laundering systems in several other jurisdictions.
Appendix VII

Additional Information on the Caribbean 

Financial Action Task Force

Page 78 GAO-02-111 Efforts in the Securities Industry

Securities Industry 

Viewed as Less 

Vulnerable Than Other 

Sectors of Caribbean 

Economies 

Securities regulators with whom we spoke in Barbados and Trinidad and 

Tobago believed that the Caribbean securities markets would likely not be 

appealing to money launderers and other criminals because of their small 

size and low trading volumes. For example, compared with over 7,000 

registered broker-dealers in the United States, regulatory officials stated 

that the Barbados stock exchange has only 17 member-brokers and the 

local securities market in Trinidad and Tobago has only 5 participating 

brokers. They also explained that trading activity in these markets is 

limited to 2 days a week in Barbados and 3 days a week in Trinidad and 

Tobago. Finally, regulatory officials believed that the small size of these 

markets would make it relatively easy to detect any unusual or suspicious 

activities.

Law enforcement officials and financial experts in the CFATF jurisdictions 

we visited considered other sectors of Caribbean economies more 

vulnerable to money laundering than the securities industry, citing, as an 

example, the increased use of local commercial businesses to launder 

money. Trinidad and Tobago law enforcement officials, for one, stated that 

they were aware of specific cases in which drug dealers invested in 

legitimate businesses such as supermarkets for the sole purpose of 

laundering illicit funds. Barbados authorities also stated that they were 

aware of money laundering through businesses engaged in the import or 

export of goods, sometimes involving high-volume, cash sales. 
Page 79 GAO-02-111 Efforts in the Securities Industry

Appendix VIII

Comments From the Financial Crimes 

Enforcement Network ApendxiVI
Page 80 GAO-02-111 Efforts in the Securities Industry

Appendix IX

Comments From the Securities and Exchange 

Commission ApendxiIX
Appendix IX

Comments From the Securities and Exchange 

Commission

Page 81 GAO-02-111 Efforts in the Securities Industry
Page 82 GAO-02-111 Efforts in the Securities Industry

Appendix X

GAO Contacts and Staff Acknowledgments ApendxiX

GAO Contacts Davi A. D’Agostino (202) 512-5431

Cody J. Goebel (202) 512-7329

Acknowledgments In addition to those named above, Evelyn E. Aquino, Emily R. Chalmers, 

Bradley D. Dubbs, Tonita W. Gilllich, May M. Lee, Christine J. Kuduk, Carl 

M. Ramirez, and Sindy R. Udell made key contributions to this report.
Page 83 GAO-02-111 Efforts in the Securities Industry

Related GAO Products

Money Laundering: Oversight of Suspicious Activity Reporting at BankAffiliated Broker-Dealers Ceased (GAO-01-474), Mar. 22, 2001.

Suspicious Banking Activities: Possible Money Laundering by U.S. 

Corporations for Russian Entities (GAO-01-120), Oct. 31, 2000.

Money Laundering: Observations on Private Banking and Related 

Oversight of Selected Offshore Jurisdictions (GAO-T-GGD-00-32), Nov. 9, 

1999.

Private Banking: Raul Salinas, Citibank, and Alleged Money Laundering

(GAO/T-OSI-00-3), Nov. 9, 1999.

Private Banking: Raul Salinas, Citibank, and Alleged Money Laundering

(GAO/OSI-99-1), Oct. 30, 1998.

Money Laundering: Regulatory Oversight of Offshore Private Banking 

Activities (GAO/GGD-98-154), June 29, 1998.

Money Laundering: FinCEN’s Law Enforcement Support Role Is Evolving

(GAO/GGD-98-117), June 19, 1998.

Money Laundering: FinCEN Needs to Better Manage Bank Secrecy Act 

Civil Penalties (GAO/GGD-98-108), June 15, 1998.

Money Laundering: FinCEN’s Law Enforcement Support, Regulatory, 

and International Roles (GAO/GGD-98-83), Apr. 1, 1998.

Money Laundering: FinCEN Needs to Better Communicate Regulatory 

Priorities and Timelines (GAO/GGD-98-18), Feb. 6, 1998.

Private Banking: Information on Private Banking and Its Vulnerability 

to Money Laundering (GAO/GGD-98-19R), Oct. 30, 1997.

Money Laundering: A Framework for Understanding U.S. Efforts 

Overseas (GAO/GGD-96-105), May 24, 1996.

Money Laundering: U.S. Efforts to Combat Money Laundering Overseas

(GAO/T-GGD-96-84), Feb. 28, 1996. 

Money Laundering: Stakeholders View Recordkeeping Requirements for 

Cashier’s Checks as Sufficient (GAO/GGD-95-189), July 25, 1995. 

(250021) Letr
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