On May 16, 2018, the Financial Industry Regulatory Authority (FINRA) announced a $5.3 million fine on a financial services company (ICBCFS) for alleged systemic anti-money laundering (AML) compliance failures, including an alleged failure to have a reasonable AML program in place to monitor and detect suspicious transactions, and alleged financial, recordkeeping, and operational violations involving penny stock shares. FINRA Fines ICBCFS $5.3 Million for Anti-Money Laundering Compliance Deficiencies and Other Violations, May 16, 2018, https://www.finra.org/newsroom/2018/finra-fines-icbcfs-53-million-anti-money-laundering-compliance-deficiencies-and-other. ICBCFS consented to entry of FINRA’s findings without admitting or denying the charges against it. In a separate but related matter, the U.S. Securities and Exchange Commission (SEC) announced settled charges against a broker-dealer (CCM)—a correspondent of ICBCFS—and ICBCFS for allegedly failing to file Suspicious Activity Reports (SARs) when CCM sold more than $12.5 billion penny stock shares between 2013 and 2014. In the Matter of ICBCFS, Admin. Proc. No. 3-18488 (May 16, 2018). The SEC also settled charges against ICBCF for failing to promptly produce documents missing from its productions to the Commission during its investigation, despite repeated requests for the records. Id. Without admitting or denying the SEC’s findings, ICBCFS agreed to pay the SEC a civil penalty of $860,000, CCM agreed to pay a fine of $1 million, and CCM's anti-money laundering officer, who allegedly aided and abetted the violations, agreed to pay $15,000. Id.; In the Matter of CCM, Admin. Proc. No. 3-18486 (May 16, 2018); In the Matter of JB, Admin. Proc. No. 3-18487 (May 16, 2018).
Both ICBCFS and CCM are required to file a SAR when they know or have reason to suspect that a transaction of $5,000 or more involves funds derived from illegal activity, is designed to evade any requirement of the Bank Secrecy Act, has no business or lawful purpose, or involves the use of the broker-dealer to facilitate criminal activity. 31 C.F.R. § 1023.320. According to the SEC, from October 2013 to June 2014 CCM liquidated over $12.5 billion in penny stock shares for seven different customers and ICBCFS cleared the transactions on the customers’ behalf, but CCM failed to file any SARs even after its policies identified numerous “red flags.”
According to FINRA, ICBCFS did not have surveillance reports to monitor potentially suspicious penny stock liquidations, nor did it require its employees to review or document their review of any other surveillance reports ICBCFS did have in place. FINRA further claimed that the bank lacked adequate systems or procedures to monitor certain unusual business activities, despite the fact that it had written AML procedures in place, and that ICBCFS’s failure to detect and alert authorities to suspicious transactions run through the firm was the direct result of these weaknesses.
The actions by FINRA and the SEC are the latest in a series of regulatory probes or fines by U.S. regulators over anti money-laundering and know-your-customer controls. The SEC action is also noteworthy for its decision to hold an individual CCO accountable for failure to file SARs. Such actions should prompt firms to be particularly cautious with respect to processing penny stock transactions, which remains a consistent focus for regulators.