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Regulation and Compliance > Federal Regulation

FINRA Provides Advice for BDs to Fight Fraud

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What You Need to Know

  • FINRA warned early this month that the regulatory group’s exams this year would focus on BD filings of SARs.
  • Broker-dealer firms should try to bundle together related incidents into one SAR when possible.
  • In some situations, firms should file SARs even in situations that involve small amounts of money.

It is more important than ever for broker-dealers to be watchful for fraud and take the proper steps to combat it, including the filing of suspicious activity reports (SARs) when warranted, according to Greg Ruppert, head of National Cause and Financial Crimes Detection Programs at the Financial Industry Regulatory Authority.

The industry currently faces a “perfect storm where globalization and the increase of technology and data, as well as the rise of the internet globally, have come together to really facilitate criminals and fraudsters from operating against firms and against their clients at a much larger scale than ever before,” he said April 20 during the FINRA podcast “At, By or Through: Fraud in the Broker-Dealer Industry.

Earlier this month, Bill St. Louis, FINRA’s senior vice president of retail and capital markets firms, warned that the regulator’s exams this year would focus on BD filings of SARs, along with technology governance, communications about digital assets and Regulation Best Interest.

In some cases, the amounts of money involved “might be below the current thresholds, depending on what your firm allows for the trading,” Ruppert said April 20.

According to the Securities and Exchange Commission, Section 356 of the USA Patriot Act amended the Bank Secrecy Act (BSA) to require broker-dealers to monitor for, and report, suspicious activity.

Under the Financial Crimes Enforcement Network (FinCEN) SAR rule, the SEC says, a BD is “required to file a suspicious activity report if: (i) a transaction is conducted or attempted to be conducted by, at, or through a broker-dealer; (ii) the transaction involves or aggregates funds or other assets of at least $5,000; and (iii) the broker-dealer knows, suspects, or has reason to suspect that the transaction:

  1. involves funds derived from illegal activity or is intended or conducted to hide or disguise funds or assets derived from illegal activity as part of a plan to violate or evade any federal law or regulation;
  2. is designed to evade any requirements set forth in regulations implementing the BSA;
  3. has no business purpose or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the broker-dealer knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction; or
  4. involves use of the broker-dealer to facilitate criminal activity.”

BDs “must report the suspicious activity using FinCEN SAR Form 111, which is confidential,” the SEC says, noting FinCEN “maintains instructions for filing the form, which detail, among other things, the minimum information requirements for the form.” BDs are required to maintain a copy of any SAR filed and supporting documentation for five years from the date of filing the SAR.

“In situations that require immediate attention, such as terrorist financing or ongoing money laundering schemes, broker-dealers should immediately notify law enforcement in addition to filing a SAR,” according to the SEC.

One way that BDs can make their SARs more effective is to “tie the activity together,” when there is more than one incident that involved the same suspected bad actor, according to Ruppert.

Bundling multiple actions into one SAR “would be probably more impactful, even though in some instances it’s an attempt,” he explained. “We’ve seen some firms can normally refer that account to collection and they don’t consider it necessarily a fraud loss that would, in their minds, trigger the SAR filing.”

However, he went on to say: “Making sure that you revisit that approach, making sure that” anti-money laundering (AML) or “compliance teams are receiving those referrals from the operations teams in these situations” is important “because it’s something that we’re seeing more concerted efforts in terms of rings or organized activity, [if] you could piece together a number of accounts into a single action that would be beneficial for us and for law enforcement to have.”

It is important for FINRA and its member firms to think about fraud broadly, he also told listeners, because “fraud does affect the firm’s bottom line,” he pointed out.

Fraud is an operational loss that he warned can impact a firm’s revenues and also “impacts their relationships with their clients,” he explained. “Foundationally, when I think about expectations of clients or customers, that foundational expectation is they bring their money to a firm and the firm is going to be able to maintain it. They’re not going to lose control of it, lose custody of it. And that’s exactly what is happening in a lot of the fraud scenarios and situations that we’re seeing.”

In at least some cases, successful fraud incidents are “no fault of the firm, but it could be client behaviors that are leading to that fraud,” he also said. And exactly why BDs and their clients are such popular targets among scammers can be chalked up to one simple explanation. It’s the “old adage that I love to keep bringing up from my FBI days” and that is: “Why do people rob banks? Because that’s where the money is,” he said.

After all, if you are in a business that “custodies and or facilitates money or money movement, you’re going to be attractive to criminal enterprises,” he noted.

BDs have also been targeted because they are no longer just buying and selling securities like they used to, he explained. There has been a significant increase in the number of products and services BD firms are offering and there is also connectivity to third-party services, he noted. For example, clients can connect their brokerage accounts to banking and other online payment services including PayPal, Square and Venmo, he said.

It can be tempting to think that, “as long as we’re monitoring our securities purchases and looking for the red flags … required under the BSA or AML requirements we’re covered and we’re doing everything regulatory required of us,” he noted.

But he stressed that it also important to be thinking “one step further” and “really understanding your clients and customers and what they’re doing, not only at your institution, but how those funds are coming to or leaving your institution,” he said. For example, BDs should be on the lookout for clients who seem to be logging in “from a foreign country or odd hours at night,” he suggested.

Mitigation steps taken by BDs “will cause the fraudsters to move to points of lesser resistance,” he went on to say.


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