FINRA continues to discipline broker-dealers that fail to detect and investigate so-called “red flags” of suspicious account activity. Yesterday, FINRA announced a $1 million fine against COR Clearing LLC (the “Firm”) – formerly Legent Clearing LLC – citing its failure to implement procedures designed to detect suspicious account activity and to report that activity once detected.
In its settlement order, FINRA found a wide range of violations, but its emphasis was on anti-money laundering activity.
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FINRA found that while the Firm identified those names of individuals and entities associated with high risk accounts by using a “tagged identifier list,” that list was only effective when cross-checked against a separate system – called a “demographic AML” or “DAML” – which was populated with customer identification information gathered by the Firm and maintained by a third-party vendor. The DAML database, however, was not consistently populated by the Firm’s introducing brokers, and the Firm therefore relied on an incomplete database to check if customers had prior accounts with potential red flags and suspicious activities.
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FINRA also cited the Firm for failing to ensure that its employees were aware of the criteria for identifying red flags that indicated suspicious activity. Specifically, while the Firm’s procedures required the filing of a Suspicious Activity Report for suspicious transactions where the transaction amount exceeded $5,000, the Firm identified transactions only where the account valuewas in excess of $5,000. Thus, suspicious transactions in excess of $5,000 were not reported if the account value was less than $5,000, leaving a number of suspicious transactions unreported and uninvestigated.
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FINRA also found that the Firm’s AML program did not adequately address the fact that the business model involved services for introducing firms with substantial activity in microcap securities and third party wire activity. The AML program relied on those introducing firms for surveillance of suspicious activity, but the Firm did not review those firms’ AML programs.
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Finally, FINRA found the Firm’s use of manual reports for monitoring of suspicious activity to be inadequate because of the parameters set for those reports and the limited staff and resources devoted to the monitoring.
The settlement order follows several formal disciplinary proceedings brought by FINRA earlier this year addressing similar protocol failures at a number of other broker-dealers, discussed here. This recent case evidences FINRA’s continued commitment to cracking down on firms whose procedures fail to sufficiently detect and report suspicious account transactions, as well as those who rely on others to do their monitoring without ensuring those firms have effective protocols in place.
