In cases involving money laundering, the buck doesn't stop at the compliance department.
Although the Financial Industry Regulatory Authority Inc. doesn't usually seek to charge individual financial advisers in money-laundering cases, they shouldn't take that to mean that they can abdicate their individual responsibilities and due diligence on client accounts, said Sarah Green, the regulator's senior director of enforcement.
Finra most often files cases against the entire firm for failing to have proper supervisory procedures in place, she said.
“We don't normally seek out individuals, the anti-money laundering officer or otherwise, when we are trying to bring enforcement actions, but it's really important that non-AML folks who allow this activity to continue to report it up to AML,” Ms. Green said, speaking at the Securities Industry and Financial Markets Association's AML and Financial Crimes conference in New York.
Brokers need to be careful because an individual's liability can sometimes seem like a “gray area in our industry,” said Eric Kringel who leads the Office of Market Intelligence at the Securities and Exchange Commission.
“Sometimes there are decisions that we think are right, but you could see the regulator taking a different position,” he said. “So you may have to worry about accountability.”
Ms. Green cited several recent cases in which an adviser or branch manager was fined or suspended for failing to report risky or suspicious activity to superiors.
Most involved instances where the adviser was aware of potentially risky activity but failed to pass along the information to superiors.
In one instance, Bank of America Merrill Lynch registered representative Anil Chaturvedi established an offshore trust for an elderly professor in India and named the professor's nephew as the beneficiary.
After the professor died, Mr. Chaturvedi learned that the account was actually being funded by the professor's nephew in an effort to avoid paying taxes in the United States, according to a Finra complaint from November.
The rep failed to report this knowledge and similar “red flags” in other accounts for several years, Finra said.
Mr. Chaturvedi signed an acceptance, waiver and consent form without admitting or denying the accusations. He was fined $60,000 and suspended for 18 months.
“That's a death knell,” said Paul Tyrrell, an attorney with Sidley Austin.
There are other indicators as well that should stick out.
Cases where the client is moving a lot of money in and out of the account but not trading a lot of securities “is a huge red flag and certainly something to look out for,” Ms. Green said.
As the originator of the relationship, the adviser has additional burdens around making sure that they do due diligence on clients, said John Davidson, the global head of anti-money laundering at E*Trade Financial Corp.
“Having a customer due diligence program is absolutely crucial to keeping potential enforcement actions away,” he said. “If you have relationship managers and require relationship managers to collect certain information and they don't do their job, then these cases show that those individuals should be held accountable, including in a monetary sense.”
Another new trend that Ms. Green said could be a trouble area is that as brokers refer more clients to the banking side of the firm for loans and other products, the two divisions should also be coordinating anti-money laundering efforts.
Firms need to make sure that the bank division, for example, is checking with the brokerage side to make sure that their conclusions about risky clients match up, said Milena Reyes, an anti-money laundering compliance executive at Bank of America Merrill Lynch.
“It's helpful to have documentation of the process. Especially when you have a global firm, if there's a decision made by one side of the firm, you want to document why there's an inconsistency in the process,” Ms. Reyes said.
“To the extent that you have introduced a customer with potential market manipulation activity or concerns with wires being sent, it is on you to reach out to your broker to get additional information,” she said.