A recent years-long effort by Morgan Stanley to expand its wealth business globally caused it to overlook a significant number of high-risk clients, to the point that one in four of its international accounts were flagged for elevated risks of money laundering, according to a new investigation by the Wall Street Journal.
The news outlet's review of internal documents and employee accounts surrounding the Wall Street giant's wealth business, which represents approximately $6 trillion in client assets, described disfunctions at all levels, with insufficient anti-money-laundering controls and lapses in due diligence procedures.
Regulatory bodies, including the Justice Department and the Securities and Exchange Commission, are reportedly investigating whether the bank adequately vetted clients, particularly those from high-risk regions such as Venezuela and Russia. Federal probes are also examining allegations that Morgan Stanley accounts facilitated money laundering tied to corruption and sanctioned individuals.
The Journal article cited a 2023 internal report highlighting that nearly 24 percent of the bank’s international wealth accounts were classified as “High/High+” risk for potential money laundering. This includes over 25,000 accounts from the firm’s E*Trade platform.
To overcome language barriers, employees reportedly resorted to using basic tools like Google Translate to review client documentation due to resource shortages, while customer names flagged in online searches were sometimes overlooked.
While financial firms are expected to uphold strict money laundering controls and vet international clients thoroughly, that apparently wasn't always the case at Morgan Stanley, with advisors at the bank telling the Journal those processes were upended as expediency took priority. Shortfalls in those areas have made the firm's wealth unit a target of several federal probes, according to an April report by the news outlet.
In a statement, Morgan Stanley emphasized its ongoing efforts to improve compliance measures. “Over the past several years, one of our top priorities at Morgan Stanley has been to make significant investments in people, processes and technology [related to anti-money laundering, vetting and due diligence] to keep pace with the growth of our industry-leading business,” a spokesperson for the firm told the Journal.
Staffing issues compounded the firm’s challenges as it sought to grow its international business, leading to errors in 60 percent of new international account applications in 2022, according to internal reviews.
A former longtime executive the Journal spoke to characterized the firm's global expansion strategy as a double-edged sword: “For Morgan Stanley, the international business is a blessing and a curse. It’s a growth business but the risk is enormous, and they have grown too fast.”
To address these challenges, Morgan Stanley said it has embarked on a massive cleanup effort that includes implementing stricter policies, closing thousands of accounts deemed too risky, and curbing its efforts to expand into certain Latin American wealth markets.
The firm is also leveraging artificial intelligence to help translate documents and hiring new leadership, including Mike Meehan, an ex-Goldman leader who now heads Morgan Sanley's global financial crimes unit.
Despite these measures, the bank faces continued pressure to resolve longstanding concerns about its AML practices, with an effort to move on from its traditional paper-based processes to a digital client vetting system expected to extend into 2025.
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