Finra zeroes in on money-laundering cases

Regulator settled 49 AML-related cases in 2012, up 36%

Jan 6, 2013 @ 12:01 am

By Dan Jamieson

Sylvia Scott
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Sylvia Scott

Brokerage firms are feeling the heat for lax anti-money-laundering procedures.

Last year, the Financial Industry Regulatory Authority Inc. settled 49 cases against broker-dealers and individuals in enforcement actions that included violations of anti-money-laundering rules.

That total represented a 36% increase from the 36 AML-related cases concluded in 2011, according to a review of Finra case records by InvestmentNews.

Legal observers expect that Finra will continue bringing AML charges against firms and individuals.

“This focus on AML issues has been a sustained enforcement effort by Finra,” said Sylvia Scott, a partner at Freeman Freeman & Smiley LLP and a former Finra enforcement attorney. “In my dealings with Finra, I'm encountering numerous inquiries in this area.”

The 2012 case total is partly the result of a continuing Finra sweep begun in 2010 focusing on firms that provide direct market access to large investors, many of them overseas.

FOREIGN FINDERS

“Finra is concerned about firms with customers using master/subaccount relationships where the subaccounts may actually have different beneficial owners,” Ms. Scott said.

Another AML-related enforcement priority last year was foreign finders, she said.

Foreign finders refer clients to U.S. brokerages for a fee and are a particularly risky area for money laundering.

At its annual compliance conference in May, Finra highlighted foreign finders, master/subaccounts, direct-access firms, penny stock transactions and suspicious-activity monitoring among its top priorities for its exams.

All these areas carry risks for money laundering, the regulator said.

But some observers contend that the focus has gone too far.

“In my experience, Finra has been using AML as a "gotcha' and brings that claim whenever it [can],” said Mark Astarita, managing member of Beam & Astarita LLC.

But Mr. Astarita doesn't think Finra is paying more attention to AML violations now than in past years.

The increase in settlements “I think is just [Finra] picking up what should be minor violations and adding them to a complaint,” he said.

Many AML charges are brought in conjunction with other violations, which suggests that AML problems were discovered during routine audits, said Jeffrey Ziesman, an attorney at Bryan Cave LLP and a former deputy regional chief counsel at Finra.

“It appears that both AML and e-mail continue to be areas in which Finra finds ... violations during their exams,” he said.

Since 2002, Finra Rule 3310 has required broker-dealers to have a written anti-money-laundering program reasonably designed to achieve compliance with the Bank Secrecy Act of 1970.

INADEQUATE PROCEDURES

“Firms are required to identify [risks] and account for them in a formal program,” Mr. Ziesman said.

In enforcement cases, Finra often finds that firms don't have adequate procedures to catch suspicious activity, fail to implement or properly supervise an AML program, or fail to file activity reports with the Treasury Department.

With a specific rule on the books since 2002, “the feeling [at Finra is] that it's been long enough ... There's no reason for firms not to [be in compliance],” said Daniel Nathan, a partner at Morrison & Foerster LLP, who formerly was a Finra regional enforcement director.

In addition to having less patience with wayward firms, Finra examiners may have become better at spotting violations, he said.

Finra gave specific warnings in 2008, 2009 and 2010, when it highlighted AML compliance in its exam priority letters for those years.

The increase in cases last year was a bit of a surprise to some observers, as AML violations haven't been an exam priority since 2010.

“The lesson to learn is that just because [AML] is not in the exam priorities letter, it doesn't mean they won't get you for it,” Mr. Ziesman said.

djamieson@investmentnews.com Twitter: @dvjamieson

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