A current enforcement motion affords a glimpse of the Monetary Trade Regulatory Authority’s (“FINRA”) expectations for corporations conducting anti-money laundering (“AML”) due diligence and transaction monitoring. On July 27, 2020, FINRA settled with broker-dealer JKR & Firm (“JKR”) over allegations that the agency didn’t detect, examine, and report suspicious exercise in 4 buyer accounts in violation of FINRA Guidelines 3310(a) and 2010. JKR agreed to a $50,000 high-quality and a censure to resolve the matter. The settlement is notable in that FINRA utilized transaction monitoring and due diligence expectations frequent within the banking business to a broker-dealer. It additionally serves as a reminder that FINRA expects member corporations to not solely set up written AML insurance policies and procedures, but additionally to place their AML packages into apply with the intention to meet their regulatory obligations.
FINRA Rule 3310(a) requires member corporations set up and implement written insurance policies and procedures moderately anticipated to detect and trigger the reporting of transactions as required beneath the Financial institution Secrecy Act, 31 U.S.C. §5318(g), and its implementing laws, 31 C.F.R. 1023.320. NASD Discover to Members 02-21explains that corporations should tailor their compliance packages to watch for potential cash laundering, examine, and file a suspicious exercise report (“SAR”), the place mandatory.
In line with the FINRA, JKR established written AML procedures however didn’t detect, examine, and report suspicious exercise in 4 buyer accounts. The accounts at concern had been held by clients with high-risk backgrounds and relationships. For instance, an accountholder’s president and management particular person had been barred by the SEC from taking part in penny inventory choices seven months earlier than opening the account, and the company entities behind two of the accounts had been shaped within the Seychelles, a recognized high-risk jurisdiction, solely every week previous to account opening.
Suspicious buying and selling and wire exercise occurred in a few of these accounts. Through the Know Your Buyer (“KYC”) course of, the shoppers had indicated that one account would liquidate its holdings in a penny inventory with the intention to diversify its holdings, whereas the opposite three accounts would commerce conventional securities. Nevertheless, the penny inventory place was by no means totally liquidated, and a buyer concerned within the inventory’s preliminary providing continued to commerce it virtually completely. Proceeds from the penny inventory trades had been then wired to 3rd events, together with an account associated to a different buyer. The surprising exercise served no obvious enterprise goal and raised worth manipulation considerations, however went undetected by JKR.
In line with FINRA, JKR missed different purple flags, together with passport irregularities, funding advisory and energy of legal professional relationships among the many clients, one buyer’s management of three accounts, uncommon transfers and journal entries that served no enterprise goal, and account inactivity that known as into query a buyer’s cause for utilizing the agency’s providers.
In figuring out these particular purple flags, the JKR motion makes clear that FINRA will maintain member corporations to the identical commonplace of buyer due diligence and transaction monitoring related to banks and traditional credit score establishments. Member corporations ought to conduct complete and ongoing KYC (i.e., background checks, unfavourable information and litigation searches for all associated events and accounts, account profile and exercise assessment) and sturdy transaction monitoring (i.e., third occasion transfers, manipulative transactions, and many others.). A member agency that fails to successfully implement and keep its written AML program will run afoul of FINRA Guidelines 3310(a) and 2010. Companies should put their written procedures into apply, together with conducting sufficient buyer due diligence and implementation of efficient transaction monitoring plans appropriately tailor-made to their enterprise mannequin.
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