Morgan Stanley Smith Barney agreed Wednesday to pay $10 million to the Financial Industry Regulatory Authority for failures related to its anti-money laundering program and supervisory failures that spanned a period of more than five years.
FINRA states that the broker-dealer’s AML program failed to meet Bank Secrecy Act requirements in three areas, generally between 2011 and 2015:
- Its automated AML surveillance system did not receive critical data from several systems, undermining the firm’s surveillance of tens of billions of dollars of wire and foreign currency transfers, including transfers to and from countries known for having high money-laundering risk;
- The firm failed to devote sufficient resources to review alerts generated by its automated AML surveillance system, and consequently its analysts often closed alerts without sufficiently conducting and/or documenting their investigations of potentially suspicious wire transfers;
- Its AML department did not reasonably monitor customers’ deposits and trades in penny stock for potentially suspicious activity, despite the fact that its customers deposited approximately 2.7 billion shares of penny stock, which resulted in subsequent sales totaling approximately $164 million during that time period.
“As we stated in our Report on FINRA Examination Findings released earlier this month, FINRA continues to find problems with the adequacy of some firms’ overall AML programs, including allocation of AML monitoring responsibilities, data integrity in AML automated surveillance systems, and firm resources for AML programs,” according to Susan Schroeder, head of FINRA’s enforcement division.
“Firms must ensure that their AML programs are reasonably designed to detect and cause the reporting of potentially suspicious activity,” Schroeder added.
Morgan Stanley also failed to establish and maintain a supervisory system reasonably designed to comply with Section 5 of the Securities Act of 1933, which generally prohibits the offer or sale of unregistered securities, FINRA says.
In particular, the self-regulatory group points out, Morgan Stanley “divided responsibility for vetting its customers’ deposits and sales of penny stock among its branch management and two home office departments without reasonable coordination among them. Instead, the firm primarily relied on its customers’ representations that the penny stock they sought to deposit was not restricted from sale, and the representations of issuers’ counsel that the customers’ sales complied with an exemption from the registration requirements.”
As a result, Morgan Stanley failed to reasonably evaluate the customers’ penny stock transactions for “red flags” indicative of potential Section 5 violations, FINRA states.
Further, Morgan Stanley failed to implement policies, procedures, and controls to ensure that it conducted risk-based reviews on a periodic basis of the correspondent accounts it maintained for certain foreign financial institutions.