FINRA’s recent $8 million fine levied against Brown Brothers Harriman & Co. (“BBH”) for anti-money laundering (“AML”) compliance failures is a reminder that firms need to obtain beneficial ownership information for account holders, particularly for omnibus accounts of foreign financial institutions (“FFIs”). Coupled with the Banorte-Ixe Securities FINRA release in January, this matter serves as a reminder that AML continues to be a major focus area for FINRA and other regulators, particularly when foreign customers or financial institutions are involved.
In that vein, the $8 million fine represents the largest fine ever imposed by FINRA for AML violations. BBH was conducting penny stock transactions on behalf of bank customers residing in known bank secrecy havens.1 BBH provided its FFI customers with custody and brokerage execution services through a single account, which gave the underlying clients anonymous access to U.S. Securities markets. FINRA found that from January 2009 to June 2013, BBH executed transactions or delivered securities involving at least 6 billion shares of penny stocks – many on behalf of the anonymous clients of its FFI customers. FINRA found that BBH lacked basic information such as the penny stock’s beneficial owner, the circumstances under which the stock was obtained, and the seller’s relationship to the issuer. Moreover, BBH failed to determine whether the stocks were part of an illegal unregistered distribution.
Although BBH had an AML compliance program, FINRA found that the system failed to adequately monitor brokerage execution and custodial banking activity involving low-priced securities. BBH’s program failed to comply with FINRA Rule 3301, which requires that each member “develop and implement a written anti-money laundering program reasonably designed to achieve and monitor the member's compliance with the requirements of the Bank Secrecy Act (31 U.S.C. 5311, et seq.).” Adoption and implementation of internal controls, including comprehensive customer due diligence (CDD) policies, procedures, and processes for all customers, particularly those that present a high risk for money laundering or terrorist financing are keys to an effective AML compliance effort.2
FINRA also found that BBH’s AML program failed to ensure that prior Suspicious Activity Report (“SAR”) filings were updated when activity continued through BBH more than 90 days after the previous SAR was filed. Consequently, BBH’s policies and procedures were not reasonably calculated to ensure compliance with this requirement, which might, as an example, be accomplished through the use of an automated system which identifies suspicious transactions for further review by AML compliance staff. See 31 C.F.R. Section 1023.320. Specifically, BBH was executing approximately 7,000 trades per day, approximately 1,500 of which involved penny stocks. FINRA found that “[BBH’s] manual system could not monitor for patterns of potentially suspicious trading and provided no historical basis to assist in assessing suspicious trades.”
In light of this FINRA release, firms dealing with foreign financial institutions should strongly consider AML procedures and policies that would require identification of any subaccount holder(s) with authority to direct transactions through any correspondent account that is a payable-through account, as well as the source and beneficial owner of funds or other assets in a payable-through account. Further, firms must ensure that review systems can adequately handle the volume of trades and identify suspicious activity for further review and action. Failure to identify suspicious activity or collect information about the identities of subaccount holders could result in a finding that the firm’s AML procedures and policies are inadequate under FINRA Rule 3301.