A decision by the Financial Industry Regulation Authority to fine Lek Securities Corporation, a registered broker-dealer, US $100,000 for failing to establish and implement adequate anti-money laundering procedures was upheld by the National Adjudicatory Council – a FINRA committee that reviews initial decisions from disciplinary and membership proceedings. A FINRA panel found after a hearing in 2014, that from January 1, 2008, through October 31, 2010, Lek Securities’s AML procedures were inadequate because they “contained little guidance with regard to manipulative trading that might require the filing of a suspicious activity report.” Instead, its AML procedures predominantly focused on money movement issues. Moreover, during one-half of the relevant time, said the NAC in affirming the FINRA panel’s decision, Lek Securities “had no specific automated exception report for potentially manipulative trading.” Instead, noted the NAC, the majority owner of Lek Securities, Samuel Lek, expected that most serious issues would be identified by the firm’s small staff (approximately 20) and brought to his attention. According to Mr. Lek’s testimony, “[t]he written supervisory procedures are not a description of exactly what in a 20-man firm everybody should do other than call Sam. That’s – that’s the general thing, let Sam know.” As a result, the NAC upheld the FINRA panel’s conclusion that Lek Securities’s AML policies were not reasonably designed for their purpose and that the firm improperly delegated some of its AML obligations to an introducing firm. The NAC also assessed Lek Securities approximately $16,500 in costs for the appeal.
Compliance Weeds: Applicable law and rules of the Financial Crimes Enforcement Network of the US Department of Treasury require broker-dealers and other covered financial institutions (banks, Commodity Futures Trading Commission-registered future commission merchants and introducing brokers and SEC-registered mutual funds) to file a suspicious activities report (SAR) with FinCEN in response to transactions or patterns of transactions involving at least US $5,000 which a covered entity “knows, suspects, or has reason to suspect” involve funds derived from illegal activity; have no business or apparent lawful purpose; are designed to evade applicable law; or utilize the institution for criminal activity. In spring 2016, Albert Fried & Company, LLC, a registered broker-dealer, agreed to pay a fine of US $300,000 to resolve charges by the Securities and Exchange Commission that, from August 2010 through October 2015, it failed to file SARs by customers with FinCEN, as required by law. (Click here for details in the article, “Broker-Dealer Sanctioned by SEC for Anti-Money Laundering Breakdowns” in the June 5, 2016 edition of Bridging the Week.) Previously, FINRA fined Brown Brothers Harriman & Co. US $8 million for failing to file SARs in connection with similar activity involving penny stocks. In that matter, FINRA also fined and suspended the firm’s global anti-money laundering compliance officer for his alleged role in the firm’s alleged misconduct. (Click here for details in the article, “FINRA Says Brown Brothers Harriman Had an Unsatisfactory Anti-Money Laundering Program; Sanctions Firm and Former Global AML Compliance Officer,” in the February 10, 2014 edition of Bridging the Week.) Covered entities should continually monitor transactions they effectuate and ensure they maintain written procedures they follow to identify and evaluate red flags of suspicious activities and file required SARs with FinCEN when appropriate. (Click here for a discussion of another FINRA disciplinary action against a member for alleged widespread AML breakdowns in the article, “Two Related Broker-Dealers To Pay US $17 Million for Widespread AML Compliance Failures; Former AML Compliance Officer Also Sanctioned” in the May 22, 2016 edition of Bridging the Week.)
Culture and Ethics: Sam tried to keep it simple. And perhaps, in a former day, his method of supervision might have been more appreciated. Unfortunately, today, it is unlikely that just a few surveillance systems, an astute and observant small staff, and just calling Sam are sufficient to meet minimum regulatory expectations for reasonable supervision particularly, as in the case of Lek Securities, where the client base generated 500 trades/minutes. However, Sam tried to keep it simple, and focusing employees on a few high level objectives in addition to the myriad of rules that likely govern their business, is very important to ensuring that a strong compliance culture is ingrained within the DNA of an organization. These days, however, employees need to abide by both high level objectives and detailed rules (memorialized in robust written procedures and training), and have strong automated surveillance systems tailored to a firm's precise business for a registered entity to satisfy the minimum expectations of regulators. (Click here for a recent presentation I made to students considering careers on Wall Street on applying the "grandma test" to assess whether proposed conduct is right or wrong.)