FSC Securities Corporation, a Securities and Exchange Commission-registered broker-dealer, agreed to pay a fine of US $200,000 to resolve a disciplinary action brought by the Financial Industry Regulatory Authority claiming that it failed to maintain adequate supervisory controls related to the payment of customers funds to non-approved third parties. Specifically, FINRA alleged that, from March 2009 through April 2010, FSC authorized payments to a bank account controlled by PFG, LLC, an investment fund created by a former employee of FSC. A then-current employee of FSC recommended the PFG fund to his clients, even though it was not approved by FSC and he received a percentage of the management fees generated by the fund. Ultimately, the PFG fund lost “millions of dollars” and the customers who invested in the fund suffered “significant losses,” said FINRA. FINRA claimed that FSC did not have systems or controls to monitor for patterns of payment from multiple clients to a single third party. Unrelatedly, as has now occurred on multiple recent prior occasions, the HK Securities and Futures Commission resolved a disciplinary action against a licensed HK brokerage firm for failure to have adequate safeguards to prevent the risks of money laundering associated with third-party deposits and transfers. (Click here for background on prior similar enforcement actions by the SFC in the article “Another Broker Sanctioned by HK SFC for AML Violations Related to Money Transfers Between Clients and Third Parties” in the April 9, 2017 edition of Bridging The Week.) In this action, SFC claimed that iSTAR International Futures Co. Limited accepted third-party deposits on behalf of clients without appropriate documentation and, in one instance, permitted a payment from a client’s account to the account of one of iSTAR’s own officers. iSTAR agreed to pay a fine of HK $3 million (approximately US $386,000) to resolve this matter.
Compliance Weeds: These unrelated enforcement actions on different sides of the Pacific Ocean remind me how important it is for regulated institutions to maintain something equivalent to a ledger of all problems of any kind that can be readily reviewed to better detect multiple red flags associated with any customer or other person. Too often firms operate in disparate pillars, where problems seen by one division are not associated with problems seen by another, or regulatory issues considered by one control group (e.g., Anti-Money Laundering) are not considered by another control group (e.g., Compliance) for independent regulatory implications. Additionally, sometimes a firm’s monitoring systems are designed to look at multiple problems by single clients, but are not set up to review common problems by multiple clients associated with a single third party or other person (e.g., an internal employee). Enhancements may be in order! (Click here for my related Compliance Weeds associated with the article “Clearing Firm’s Failure to File Suspicious Activity Reports in Response to Red Flags Charged as Violation of FINRA Requirements” in the March 26, 2017 edition of Bridging the Week.)