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FINRA Enforcement Chief Warns BDs to Beef Up AML Policies

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While the Financial Industry Regulatory Authority has always required broker-dealers to have strong anti-money laundering policies, the nature of money laundering schemes is changing, the self-regulator’s enforcement chief said Tuesday, so it’s imperative that BDs maintain compliance programs that respond to these challenges and adequately address risks to their firms.

Brad Bennett, FINRA’s executive vice president of enforcement, said during the Securities Industry and Financial Markets Association’s anti-money laundering and financial crimes conference that when considering whether to levy an enforcement action against BDs’ chief compliance and AML officers, FINRA considers the following five factors:

  • recidivism;
  • extent the individual was involved in the wrongdoing;
  • whether the individual has taken corrective measures;
  • the extent of underlying conduct and degree of investor harm; and
  • willful blindness or intentional participation in the violations.

Having policies to detect AML risk has been included in FINRA’s annual regulatory priorities letter over the past 11 years, Bennett said. He noted the importance of tailoring AML policies to firm’s risk parameters and business model and highlighted two trends FINRA is noticing on the enforcement side.

First, he said, centers on the adequacy of firms’ systems for monitoring for suspicious activity.

“I can’t stress enough the importance of ensuring that the systems your firm uses to monitor customer accounts and activity are properly tested and calibrated, and are continuously modified to tailor them to the risks inherent in your business models,” Bennett said.

He told BDs to think about the various types of high-risk activity flowing through their firms — “are those transactions — including all relevant steps — being adequately captured in your systems? Are the thresholds in those systems appropriate?”

BDs’ systems, he continued, “should reflect a careful consideration of your risks. And, if you’re delegating the monitoring of suspicious trading to someone outside of AML, which I know is a common industry practice, be sure it’s an appropriate delegation — and that you have an open line of communication back to the AML function.”

Bennett also noted the increasing suspicious trading that’s occurring in microcap securities.

He told BDs that if they “accept this business, you must be able to establish that the deposits of large blocks of microcap securities are in compliance with or exempt from SEC registration requirements.” BDs must have processes in place “to identify suspicious trading activity — in particular those with ‘red flags’ of pump-and-dump schemes — and you must independently verify key facts around the deposit and liquidation of microcap stocks, rather than rely blindly on opinions or statements from customers or issuers that are almost always self-serving.”

These are factors that FINRA examiners will be watching for, he said.

“You need to know your customers,” Bennett said. “You need to conduct due diligence on the securities you’re selling. You need to tailor your program to the risks inherent in your business model. You need to test your program. And, make updates as your business changes or expands. You need to be sure your employees are trained — especially when you have new business lines. You need to make sure you have good supervisory systems when you do high-risk business like micro-caps.”

In the AML space, the SEC’s AML rule is focused on recordkeeping and reporting while FINRA focuses on a firm’s compliance with AML rules under FINRA Rule 3310, which sets forth minimum standards for a firm’s written AML compliance program.

However, Bennett noted that FINRA does coordinate AML efforts with the SEC as well as Treasury’s Financial Crimes Enforcement Network (FinCEN).

Indeed, adequate AML policies are particularly important given the revelations in the recent Panama Papers report released Sunday alleging that politicians, criminals and even celebrities are hiding their wealth in offshore shell companies. The exposé prompted Americans for Financial Reform and nine other groups to pressure the U.S. Treasury Department to finalize its anti-money laundering rule for investment advisors.

— Check out Panama Papers Show Advisors Need Treasury’s AML Rule, Groups Argue on ThinkAdvisor.