Why it matters
The $20 million civil money penalty assessed by the Financial Crimes Enforcement Network (FinCEN) against Oppenheimer & Co. is intended to send several strong messages to all types of financial services companies subject to the Bank Secrecy Act (BSA). First, FinCEN demonstrated its lack of tolerance for repeat offenders of the BSA’s various requirements, including maintenance of an adequate anti-money laundering (AML) compliance program.
Second, as noted by the FinCEN director, broker-dealers have the same money laundering risks as other types of financial institutions and “by failing to comply with their regulatory responsibilities, our financial system became vulnerable to criminal abuse.” She said “it is clear their compliance culture must change.” Finally, FinCEN demonstrated little tolerance for the failure of the company to comply with Section 311 special measures and conduct required due diligence on and notify certain foreign correspondent institutions “potentially placed the U.S. financial system at risk.”
Oppenheimer, a full-service, self-clearing broker-dealer headquartered in New York, provides brokerage and investment services to customers in the United States and internationally. Almost 10 years ago, it was fined $2.8 million by FinCEN for violations of the BSA.
This time, FinCEN alleged that Oppenheimer willfully violated the BSA over a four-year period in three ways.
First, the firm violated the BSA and its implementing regulations by conducting business without establishing and implementing adequate AML policies, procedures, and internal controls. FinCEN discovered 16 customers—some with multiple accounts—that should have raised “significant red flags” for Oppenheimer.
These customers engaged in patterns of suspicious trading of penny stocks for which no registration statement was in effect for the sale and repeatedly deposited large blocks of securities, many in paper certificate form, sold them shortly after deposit and then almost immediately transferred the proceeds out of the Oppenheimer account, the regulator said.
Other customer activities should also have alerted the firm to potential money laundering, FinCEN said, including customers that opened one or more accounts and immediately deposited large quantities of penny stocks; customers that were the subject of a disciplinary action by the SEC or FINRA as well as news reports suggesting regulatory violations; and incidents where the customer appeared to be acting as an agent for an undisclosed principal.
“Penny stocks are low-priced, generally thinly traded and highly speculative securities. Penny stocks can be highly volatile and vulnerable to manipulation by stock promoters and pump-and-dump schemes,” FinCEN said. “For these reasons, trading in such stocks presents a heightened AML risk.”
Oppenheimer’s customers engaged in activities that further heightened the risk, the regulator said, and the firm “knew, suspected, or had reason to suspect” the actions violated registration requirements and should have caused Oppenheimer to file Suspicious Activity Reports (SARs).
The firm’s compliance structure contributed to its failures by isolating each group of employees responsible for reviewing particular information. For example, the AML Group and the Surveillance Group were both within the Compliance Department, but no mechanism existed for the groups to share information.
“The information silos created by Oppenheimer’s compliance structure prevented the AML Group from receiving the information necessary to understand the full extent of Gibraltar’s activity and contributed to its failure to effectively monitor the account for suspicious activity,” FinCEN said.
Oppenheimer also violated the BSA by failing to conduct the appropriate due diligence on foreign correspondent accounts, the regulator said. Citing one example, FinCEN said the firm “took no steps to assess [Customer’s] risk as a [foreign financial institution] and further failed to conduct adequate due diligence when it opened the account,” despite designating the customer as high-risk.
Finally, the firm ran afoul of Section 311 of the USA PATRIOT Act. FinCEN imposed Special Measures under the Act against three foreign financial institutions relating to money laundering concerns over a one-year period. But Oppenheimer violated the notice requirements of the Special Measures by failing to send the required notice to the firm’s correspondents. Even when informed during a FINRA examination in 2011 of its obligations under the Act, the firm did not fully satisfy its notification requirements until 2014.
“Although no determination has been made that Oppenheimer conducted business with the foreign financial institutions of primary money laundering concern, the firm nonetheless failed to comply with the notice requirement and, in doing so, left the door open for such access to occur,” FinCEN said.
Oppenheimer admitted to the violations and the regulator determined that a $20 million penalty was appropriate, half of which was designated for the Department of the Treasury and half for the SEC, which had conducted a parallel enforcement action.
The SEC ordered Oppenheimer to cease and desist from future violations of federal securities laws and ordered a $10 million payment made up of $5,078,129 in civil penalties, $4,168,400 in disgorgement, and $753,471 in prejudgment interest.
To read FinCEN’s Assessment of Civil Money Penalty in In the Matter of Oppenheimer & Co., click here.
To read the SEC order, click here.