FINRA Fines Firm and Former Chief Compliance and AML Officer For Failing to Register Foreign Finders and Failure to Comply with Anti-Money Laundering Obligations

by Goodwin
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On January 28, 2014, the Financial Industry Regulatory Authority, Inc. (“FINRA”) accepted a Letter of Acceptance, Waiver and Consent (the “AWC”) from a member firm, Banorte-Ixe Securities International, Ltd. (the “Firm”), and Brian Anthony Simmons, the Firm’s former chief compliance officer and anti-money laundering (“AML”) officer (the “CCO”), regarding alleged failures to (i) register approximately 200 to 400 foreign finders who interacted with the Firm’s Mexican clients, and (ii) comply with FINRA’s AML rule, during the period between January 1, 2008 and May 9, 2013 (the “Relevant Period”).  This article summarizes FINRA’s findings, which the Firm and the CCO neither admitted nor denied in connection with executing the AWC.

Background

The Firm’s primary business is providing services to Mexican nationals seeking to invest in U.S. and global securities.  The Firm is part of an affiliated group of companies that includes a Mexican broker-dealer and a large Mexican bank.  The Firm has been a member of FINRA since 1996.  The CCO has been involved in the securities industry since 2000, and served as the chief compliance officer and AML officer of the Firm between April 10, 2006 and August 20, 2010.

During the Relevant Period, the foreign finders employed by its Mexican affiliates (the “Finders”) acted as the Firm’s primary point of contact with customers, discussing investments, placing orders,  responding to inquiries and, in some instances, obtaining limited trading authority over customer accounts. Among other things, the Finders entered mutual fund orders directly into the Firm’s trading platform and, for other securities, entered orders into a system subject to the approval of the Firm’s trading desk.  At all times during the Relevant Period, the Firm maintained ultimate control over the Finders’ activities with respect to accounts held by the Firm.  Prior to July 2006, the Firm had registered the Finders as “foreign associates”; however, the Firm did not maintain those registrations after that date.

NASD Rule 1031 requires that all persons engaged in the investment banking or securities business of a member who function as representatives register with the member. Moreover, NASD Rule 1031 defines a representative of a member as any person associated with the member engaged in the investment banking or securities business, including functions of supervision, solicitation or conduct of business in securities or who are engaged in the training of persons associated with a member for any of these functions.  However, under NASD Rule 1060(b), foreign finders are not required to be registered if they limit their activities to the initial referral of non-U.S. customers to the firm and adhere to certain other conditions.  Foreign finders who do not limit their activities to the initial referral of non-U.S. customers to the firm and, by virtue of their activities, are considered “associated persons” of the firm, are required to register as foreign associates pursuant to NASD Rule 1100, or in another appropriate registration category.

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 conduct a risk-based investigation of customer activity.

The Violations

Failure to Register Foreign Finders

FINRA found that, during the Relevant Period, the Firm and the CCO violated NASD Rules 1031 and 2110 and FINRA Rule 2010 by failing to register the Finders.  Specifically, FINRA found that the Finders did not limit their activities to the initial referral of non-U.S. customers to the Firm and, by virtue of their activities, were associated persons of the Firm, required to be registered as foreign associates pursuant to NASD Rule 1100, or in another appropriate registration category.  FINRA found that instead of limiting their activities to the referral of customers, the Finders maintained the primary relationship with the Firm’s customers.  Among other things, the Finders: (i) had access to the automated order platform operated by the Firm’s clearing firm; (ii) took orders to buy or sell securities and processed requests for wire transfers by sending such requests to the CCO for review and approval; (iii) prepared letters of authorization for customer signature, subject to review and signature verification by the CCO; (iv) gathered and transmitted new account information and documents identifying customers, as well as requests to change customer information, to the Firm; and (v) in some cases, entered into limited trading authority agreements with customers that allowed the Finders, with the approval of the customers, to place orders with the Firm to buy and sell various instruments, including stocks, mutual funds, fixed income products, options, and foreign currency.

Additionally, FINRA found that the Firm controlled the Finders during the Relevant Period by, among other things: (a) providing access to the automated order entry platform; (b) issuing them representative identification numbers which became associated with customer transactions; and (c) taking parting in directing the activities of the Finders through (1) information disseminated on an intranet system shared by the Firm and its foreign affiliates, (2) twice-monthly mandatory conference calls attended by a principal of the Firm and (3) frequent meetings between the top-producing Finders and a senior Firm manager. 

FINRA noted that the revenue generated by the Finders accounted for more than 90 percent of the Firm’s gross revenues during the Relevant Period, and that a substantial portion of the Firm’s revenues was returned to a foreign affiliate. 

FINRA also noted that before July of 2006, the Firm had registered its foreign finders as foreign associates, but beginning in July 2006 the Firm failed to maintain such registrations, and starting in February 2009, the Firm intentionally began terminating the registrations of those Finders who had been previously registered.  FINRA noted these changes in registration practices were not precipitated by any related modification or reduction in the responsibilities of the Finders.

Inadequacies in AML Policies and Procedures

FINRA found that, during the Relevant Period, the Firm and the CCO violated NASD Rules 3011(a) and (b) and 2110, and FINRA Rules 3310(a) and (b) and 2010 for failing to tailor the Firm’s AML program to its business model and failing to enforce its AML program as written, and violated NASD Rules 3011(a) and 2110, and FINRA Rules 3310(a) and 2010 for failing to monitor for, detect, and investigate certain suspicious activity.

  • Failure to Tailor Its AML Program to its Business Model.  Noting that that NASD Rule 3011 and FINRA Rule 3310 require each broker-dealer to tailor its AML program to its business, considering such factors as its size, location, business activities, types of accounts it maintains, the types of transactions it effects, and its technological environment, FINRA found that the Firm’s business model required it to have a robust AML program.  FINRA stated that approximately 95 % of the Firm’s business involved servicing high net worth Mexican nationals who had banking and brokerage relationships with the Firm’s foreign affiliates, noting that Mexico has been identified as a high-risk environment for money laundering.  FINRA stated that, in designing its AML program, the Firm was obliged to consider the high-risk nature of its business, as well as its reliance on the Finders as the primary point of contact with customers.  FINRA found that, notwithstanding the high-risk and complex nature of its business, the Firm purchased from a third party vendor generic off-the-shelf Written Supervisory Procedures (the “WSPs”), which included an AML program, and issued them without modification.  As a result, the AML program did not address the compliance challenges the Firm faced in its business.  Additionally, FINRA noted that certain sections in the AML program requiring input from the Firm remained blank or had not been modified to address specific factors related to the Firm. For example, the section identifying “red flags” for suspicious activity was generic and included no red flags related to the unique risks of the Firm’s business.

    The CCO was responsible for tailoring the WSPs, including the AML program, to the Firm’s business and failed to do so.  Additionally, FINRA found that between January 1, 2008 and March 2, 2011, the CCO (and other members of senior management) did not conduct a review of all areas of the Firm’s business to identity potential money laundering risks as required by the WSPs.  Moreover, FINRA stated that the reviews conducted in 2011 and 2012 were inadequate because they did not sufficiently address risks inherent in operating in Mexico or relying on the Finders. 
  • Failure to Enforce Its AML Program.  FINRA found that the Firm did not take certain actions required either by law or the WSPs with respect to the Firm’s suspicious activity detection program and Customer Identification Program (“CIP”).

    FINRA found that the Firm did not comply with elements of its AML program that (i) required the CCO to work with the Firm’s clearing firm to ensure that all appropriate exception reports were made available to the Firm in order to monitor for suspicious activity, and to request additional reports as necessary, (ii) required the Firm to maintain documentation concerning the use of exception reports, including dates, initials of the individuals involved in the review and any findings or follow-up matters.  FINRA faulted the Firm for failing to use the exception reports generated by the clearing firm to detect suspicious activity and failing to work with the clearing firm to modify or customize existing reports, create additional reports or otherwise monitor activity in a manner reasonably designed to detect suspicious activity.  In this regard, FINRA noted that the Firm did not use any of the exception reports provided by the clearing firm to detect suspicious activity despite the fact that the clearing firm’s AML rules engine identified thousands of possible AML exceptions between January 2009 and December 2011.

    FINRA noted that BSA implementing regulations require member firms to establish risk-based CIP programs, tailored to the firm’s business and customer base and require the firm to collect customer information and establish a process for verifying customers’ identities.  FINRA found that, notwithstanding requirements in the CIP contained in the WSPs that registered persons should obtain more than one type of documentary verification of a customer’s identification, the Firm relied on the Finders to collect and submit customer’s documentary verification and as a result (i) were unable to independently verify the identity of customers, and (ii) in many cases received only one type of documentary verification.
  • Failure to Detect and Investigate Suspicious Activity.  NASD Rule 3011 (a) and FINRA Rule 3310 require members to establish and implement policies and procedures reasonably designed to detect and cause the reporting of suspicious activity and transactions under the BSA, which must include provisions for monitoring for, detecting, and responding to “red flags.”  BSA implementing regulations require brokers to file with the Financial Crimes Enforcement Network reports of certain suspicious activity.  FINRA found that, during the Relevant Period, the Firm lacked an adequate system to identify and investigate suspicious activity, and that the Firm and the CCO failed to adequately investigate and, as necessary, report suspicious activity in three customer accounts, as detailed in the AWC.

Sanctions

The Firm consented to a censure and a fine in the amount of $451 million.  The CCO consented to a 30 calendar day suspension from association with any FINRA member in any principal capacity.

Corrective Actions

The Firm also undertook to establish, within 90 days of acceptance of the AWC, systems and procedures reasonably designed to achieve compliance with its AML and registration obligations, including but not limited to remediating the deficiencies identified in the AWC. 

Banorte-Ixe Securities International, Ltd., Letter of Acceptance, Waiver and Consent No. 2010025241301 (Jan. 28, 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.

 

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