U.S.-based Credit Suisse Securities LLC agreed Monday to pay $16.5 million to the Financial Industry Regulatory Authority for anti-money laundering violations involving microcap stock transactions.
According to FINRA’s action, Credit Suisse’s suspicious activity monitoring program was deficient on two fronts.
Credit Suisse primarily relied on its registered reps to identify and escalate potentially suspicious trading, including in microcap stock transactions, but “high-risk activity was not always escalated and investigated as required,” FINRA states.
Also, the firm’s automated surveillance system to monitor for potentially suspicious money movements was not properly implemented, according to FINRA.
“A significant portion of the data feeds into the system were missing information or had other issues that compromised the system’s effectiveness,” the FINRA action states.
“The firm also chose not to utilize certain available scenarios designed to identify common suspicious patterns and activities, and it failed to adequately investigate activity identified by the scenarios that the firm did utilize.”
AML violations were the third top FINRA enforcement issue for 2016 measured by total fines assessed, coming in at $18.6 million in fines (18 cases), according to recent research by the law firm Sutherland Asbill & Brennan.
“It’s critical that firms have effective AML systems in place so that they can comply with their obligations to review and report suspicious transactions, including those involving trading in microcap securities or potentially suspicious money transfers,” said Brad Bennett, FINRA’s executive vice president and chief of enforcement, in announcing the fine.
FINRA found that from January 2011 through September 2013, Credit Suisse failed to effectively review trading for AML reporting purposes.
The firm relied on its registered reps, who were the primary contact with the customers, to identify and report to its AML compliance department activity or transactions that were unusual or suspicious based on “red flags” described in Credit Suisse’s AML policies, FINRA states.
Credit Suisse’s AML compliance department was then required to investigate the potentially suspicious activity, document its findings and file Suspicious Activity Reports where appropriate.
“However, the systems and procedures the firm used to monitor trading for other purposes were not designed to detect potentially suspicious activity in order to cause the filing of a SAR, where appropriate, and the other departments and branches of the firm did not effectively assume responsibility for reviewing trading for AML reporting purposes,” according to the FINRA action.
For example, FINRA cites the trading of one of Credit Suisse’s customers, a New York-based hedge fund, which followed patterns commonly associated with microcap fraud, such as depositing and then quickly selling, with the proceeds being wired out of the account shortly thereafter. However, no one at Credit Suisse reviewed the activity in the account for AML purposes.
The action also found that Credit Suisse’s reliance on reps to escalate potentially suspicious trading failed to account for the fact that most orders it received from its foreign affiliates came in to the firm electronically and thus were not seen by the firm’s sales traders.
From January 2011 through December 2015, Credit Suisse also failed to effectively review potentially suspicious money transfers. “The firm used an automated surveillance system to identify red flags of potentially suspicious activity,” according to FINRA.
Further, FINRA found that Credit Suisse’s procedures were deficient as it relates to compliance with the prohibition of the sale of unregistered securities.
“Certain Credit Suisse customers deposited and sold microcap shares through the firm, which should have raised red flags indicating that the shares were potentially part of an illegal distribution. The firm’s procedures failed to instruct its representatives, prior to executing trades in microcap securities, how to determine whether those securities were registered or subject to an exemption from registration,” the action states.
These failures, FINRA continued, “extended to potentially suspicious trades made in omnibus accounts of the firm’s foreign affiliates. As a result, FINRA found that from 2011 to 2013, the firm facilitated the illegal distribution of at least 55 million unregistered shares of securities. The firm subsequently implemented additional procedures limiting the trading of microcap securities.”
FINRA’s AML Investigative Unit identified the violations during an examination of the firm. The investigation was conducted by the Department of Enforcement.
In settling the matter, Credit Suisse neither admitted nor denied the charges but consented to the entry of FINRA’s findings.
— Check out Deutsche Bank to Pay $9.5M SEC Fine on Research Report Failures on ThinkAdvisor.