A broker-dealer settled FINRA charges of failing to establish and implement a reasonable AML program after the firm's surveillance system generated inaccurate and incomplete reports.

In a Letter of Acceptance, Waiver, and Consent, FINRA found that the broker-dealer relied on proprietary reports that lacked key information or were improperly calibrated, causing the firm to fail to identify and review potentially suspicious activity. Specifically, FINRA found that the broker-dealer's reports:

  • automatically labeled all incoming transactions as first-party and required analysts to manually change the transaction to third-party, causing transactions to be mischaracterized routinely;

  • did not capture funds transfers denominated in currencies other than U.S. dollars; and

  • did not detect banking-type account activity, including transactions involving checks, debit cards, ATMs or journal transfers.

FINRA also found that the broker-dealer did not tailor its AML procedures to wires denominated in foreign currency, despite such activity constituting a significant portion of the broker-dealer's wire activity. In addition, the broker-dealer failed to implement its own AML procedures with respect to (i) conducting enhanced due diligence on accounts belonging to senior foreign political figures, (ii) investigating questions its clearing firm raised regarding potentially suspicious activity, (iii) independent testing of its AML program and (iv) obtaining annual CEO compliance and supervision certifications for 2015 and 2017.

As a result of its conduct, the broker-dealer was charged with violating FINRA Rules 2010 ("Standards of Commercial Honor and Principles of Trade"), 3310 ("Anti-Money Laundering Compliance Program") and 3130 ("Annual Certification of Compliance and Supervisory Processes").

To settle the charges, the broker-dealer agreed to (i) a censure, (ii) a $150,000 fine and (iii) an undertaking to establish and implement policies, procedures and internal controls to remediate the violations.

Commentary

This enforcement action is notable for FINRA's focus on the ability of a broker-dealer's manual reports to identify suspicious activity. Here, FINRA examines 1) the sources of data that feed into three types of reports, 2) the parameters and processes the broker-dealer uses to evaluate the data in each report, 3) each report's outputs, and 4) whether the outputs make sense in light of other information available about the activity the report monitors. Broker-dealers and persons conducting independent testing of broker-dealer AML compliance may wish to conduct a similar examination of the reports and system rules used for trade surveillance and transaction monitoring.