FINRA Fines Firm and Former AML Compliance Officer For Failures to Comply with Anti-Money Laundering Obligations

by Goodwin
Contact

On February 4, 2014, the Financial Industry Regulatory Authority, Inc. (“FINRA”) accepted a Letter of Acceptance, Waiver and Consent (the “AWC”) from a member firm (the “Firm”) and its former anti-money laundering (“AML”) compliance officer (the “AML Compliance Officer”) regarding alleged failures to comply with FINRA’s AML rule.  FINRA found that from January 1, 2009 through June 30, 2013 (the “Relevant Period”) the Firm and the AML Compliance Officer failed to have an adequate AML program in place to monitor and detect suspicious activity in low-priced securities (“penny stocks”).  FINRA also found that the Firm failed to (i) sufficiently investigate potentially suspicious penny stock activity, (ii) establish an adequate supervisory system to prevent the distribution of unregistered securities and (iii) conduct adequate AML testing and training.  This article summarizes FINRA’s findings, which the Firm and the AML Compliance Officer neither admitted nor denied in connection with executing the AWC.

Background

The Firm’s primary business is as a custodian bank.  The Firm operates pursuant to an exclusion from broker-dealer registration but was a member of the New York Stock Exchange and became a FINRA member in 2008. 

FINRA Rule 3310 requires member firms to develop and implement a written AML program reasonably designed to achieve and monitor the member’s compliance with the requirements of the Bank Secrecy Act (the “BSA”) and the regulations thereunder.  This Rule also requires that AML programs include, at a minimum, (i) policies and procedures that can be reasonably expected to detect and cause the reporting of transactions required under the BSA, (ii) policies, procedures and internal controls reasonably designed to achieve compliance with the BSA and the regulations thereunder, (iii) annual testing for compliance, (iv) designation of an individual or individuals responsible for overseeing the AML program and (v) ongoing training for appropriate personnel.  In addition, the BSA obligates financial institutions, such as the Firm, to investigate customer activity on a risk basis.

During the Relevant Period, the Firm directly executed sales or, as custodian, delivered the securities underlying the sale of at least six billion shares of penny stocks.  In addition, the Firm conducted penny stock transactions on behalf of certain customers in known bank secrecy havens.  FINRA asserted that omnibus accounts transacting in higher-risk activities, such as suspicious penny stock transactions, merited additional scrutiny, particularly such transactions that involved customers in known bank secrecy havens.

The Violations

Set forth below is a summary of FINRA’s findings with respect to the specific violations:

  • Failure to Establish and Implement AML Policies and Procedures.  FINRA found that, during the Relevant Period, the Firm and the AML Compliance Officer violated FINRA Rule 3310(a)(and its predecessor, NASD Conduct Rule 3011(a)) and FINRA Rule 2010 by failing to establish and implement policies and procedures that were reasonably designed to detect and cause the reporting of potentially suspicious activity.  Specifically, FINRA found that the Firm’s AML program failed to adequately monitor and detect, and sufficiently investigate, potentially suspicious penny stock activities and transactions that were brought to the Firm’s attention.  Although the Firm had a compliance program that included suspicious activity surveillance, FINRA also found that the Firm and the AML Compliance Officer failed to establish an adequate surveillance system to review penny stock transactions conducted through the Firm and to tailor the Firm’s AML procedures to adequately detect, investigate and report suspicious activity, particularly patterns of suspicious penny stock activity, or red flags related to penny stock transactions.  In making these findings, FINRA asserted that the Firm and the AML Compliance Officer were aware of the heightened risks associated with penny stock activity and the Firm’s severely limited ability, when it was dealing with financial institutions in bank secrecy havens, to obtain information about beneficial owners of those stocks or the circumstances under which the shares were acquired.  In addition, the Firm failed to meet its SAR reporting and updating requirements.
  • Failure to Adequately Supervise Activity in Foreign Financial Institution Accounts.  FINRA found that, during the Relevant Period, the Firm violated FINRA Rule 3310(b) and FINRA Rule 2010 by failing to establish and implement policies, procedures and internal controls reasonably designed to achieve compliance with the BSA, which, among other things, requires all financial institutions to conduct risk-based due diligence on correspondent accounts for foreign financial institution customers (“FFIs”).  Specifically, FINRA found that the Firm did not adequately conduct periodic activity reviews of the accounts for FFIs to determine whether securities activity was consistent with the information provided by the account holder at the account’s inception, including the type, purpose and anticipated activity, and whether accounts were being used for higher risk activity than originally forecast by the customer.
  • Failure to Conduct Adequate AML Testing.  FINRA found that, during the Relevant Period, the Firm failed to conduct adequate AML testing.  FINRA Rule 3310(c) requires member firms to arrange independent testing for compliance with its AML program.  Although the Firm conducted such tests, FINRA found that the tests failed to address the primary risks associated with the Firm’s brokerage business involving penny stocks, including the identification of any of the shortcomings in the trade monitoring and asset movement monitoring related to penny stocks.  FINRA also found that, during certain years of the Relevant Period, the tests failed to address penny stock activity despite such activity involving high risk transactions for the Firm’s customers.
  • Failure to Conduct Adequate AML Training.  FINRA found that, during the Relevant Period, the Firm failed to conduct adequate AML training.  FINRA Rule 3310(e) requires that member firms provide ongoing training for appropriate personnel.  FINRA found that the Firm failed to adequately train its AML staff to understand the purpose of alerts relating to penny stock activity generated by the Firm’s automated AML surveillance systems and to understand the risks involved with penny stock activity, noting the Firm did not provide its AML staff with adequate materials regarding the risks and red flags associated with penny stock activity or adequate training for AML staff on how to accurately review and detect suspicious activity related to penny stocks.
  • Failure to Establish, Maintain and Enforce a Supervisory System to Achieve Compliance with Section 5 of the Securities Act of 1933. FINRA found that the Firm violated NASD Conduct Rule 3010 by failing to establish, maintain and enforce a supervisory system that is reasonably designed to achieve compliance with applicable securities laws and regulations and NASD Rules.  In connection with the sale of a security, Section 5 of the Securities Act of 1933 requires that a registration statement be in effect for such security or the security be exempt from registration.  FINRA found that the Firm was aware that customers were depositing and selling large blocks of penny stocks and, contrary to its obligations under NASD Conduct Rule 3010 and FINRA regulatory guidance, failed to ensure that adequate supervisory reviews were performed to determine whether the securities sold were registered or being sold subject to an exemption.  Specifically, FINRA found that the Firm failed, prior to the sale of penny stocks, to take appropriate steps to conduct a searching inquiry in two situations.  First, in connection with the sale of securities deposited without a Rule 144 restrictive legend, the procedures failed to instruct Firm employees to inquire, in the face of red flags, as to whether the penny stocks were actually subject to a restriction.  FINRA cited examples of customer transactions involving the deposit and immediate sale of large blocks of securities and news sources indicating that such securities were subjects of “pump and dump” schemes.  Second, in connection with the sale of securities deposited with a restrictive legend, the Firm failed to establish and implement adequate written supervisory procedures to fulfill its obligations to conduct a searching inquiry to determine whether the securities were eligible for immediate resale to the public.  According to FINRA, the Firm primarily relied on attorneys and transfer agents selected by the penny stock issuer to lift the restrictive legends, in direct contravention of regulatory guidance.

Sanctions

The Firm consented to a censure and a fine of $8 million.  The AML Compliance Officer consented to a one-month suspension from association with any FINRA member in any capacity and a fine in the amount of $25,000.

Corrective Actions

In addition to consenting to a censure and a fine of $8 million, the Firm took certain corrective actions, which included ceasing sales of penny stocks, conducting an internal audit review of trade surveillance, enhancing employee training and periodic reviews of certain accounts and adopting additional policies and procedures to enhance compliance with its obligations under Section 5 of the 1933 Act.  Based on a strategic business review, the Firm stated in an accompanying Corrective Action Statement that it had decided to close its equity brokerage business effective June 2014, which the Firm asserted would eliminate the risks associated with executing transactions in penny stocks.

Brown Brothers Harriman & Co., Letter of Acceptance, Waiver and Consent No. 2013035821401 (Feb. 4, 2014).

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

 

Written by:

Goodwin
Contact
more
less

Goodwin on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.