FINRA Enforcement Focus 2017: 6 Common Broker-Dealer AML Program Deficiencies


As the Financial Industry Regulatory Authority (FINRA) continues to crack down on broker-dealers with anti-money laundering program (AML)-related deficiencies, broker-dealers and AML compliance officers (AMLCOs) should take note of the most common AML program compliance deficiencies mentioned in recent FINRA enforcement actions. These top six areas of deficiency are the most likely focus areas of FINRA enforcement going into 2017.

1. Ignoring Risks of Low-Priced Securities

The greatest number of FINRA AML-related enforcement actions in the past year revolved around failures to prevent and detect violations involving large volume sales of low-priced securities. FINRA sanctioned firms for failing to supervise new registered representatives bringing in penny stock business and failing to document and/or investigate high-risk activities involving lump penny stock deposits followed by rapid liquidation and proceeds distribution.

With the high volume of these FINRA enforcement actions, proper supervision of penny stock business and responding to red flags will be a crucial area of compliance in 2017.

2. Failing to Verify Surveillance Program Data Source Accuracy

The 2016 FINRA Regulatory and Examination Priorities Letter stated that “FINRA has observed problems with firms’ automated AML surveillance systems not capturing complete and accurate data, which can result in missed or poor quality alerts.”

This mention should alert firms that FINRA will focus enforcement efforts on automated AML surveillance systems, making certain that firms are conducting routine testing and taking measures to verify data source accuracy.

3. Failing to File Appropriate SARs

FINRA often compares the number of suspicious activity report (SAR) filings between firms and may target firms that file fewer SARs than expected (the expected number of SAR filings based on customer and/or transaction numbers).

FINRA may also sanction firms for SARs that lack detail or contain mere minimum information. Filing detailed SARs any time suspicious activity is noted can help prevent raising a red flag for noncompliance.

4. Lacking Adequate Resources to Address Risks

FINRA is examining AMLCOs for background experience and access to adequate resources. FINRA sanctioned firms for inadequate risk management staff numbers, assigning supervisors who were “inadequately trained and grossly understaffed,” and assigning employees to risk management who “lacked a fundamental understanding of multiple forms of manipulative trading.”

FINRA  also sanctioned firms that manually reviewed high-volume trading rather than using automated reviews. Is will be important to ensure that your staff are educated and provided with adequate resources to follow quality risk management protocol.

5. Failing to Conduct Thorough, Independent Annual Testing

Another area of FINRA focus in AML compliance concerns FINRA Rule 3310(c), requiring that member personnel or a qualified outside party conduct annual, independent AML program testing to examine the efficiency of AML program compliance. Several FINRA enforcement actions sanctioned firms for inadequate AML program testing regarding either a lack of independent testing or testing superficiality.

Remember to consider any potential conflict of interest when bring in an “independent” consultant and ensure that testing is thorough and detailed.

6. Failing to Tailor AML Programs to Business-Specific Risks

Finally, cookie cutter AML policies and procedures aren’t cutting it. FINRA sanctioned several firms in 2016 for using FINRA-provided template AML policies and procedures rather than designing their policies and procedures around the specific risks posed by their business, tailored to their “specific customers, products, services, geographic locations, or methods of customer interface.”

As FINRA continues to ramp up its efforts to prevent money laundering activities, the above six areas accounted for a vast majority of FINRA AML-related disciplinary actions last year.

Broker-dealers and AML compliance officers who take the time to evaluate each of these six points in their AML programs can rest a bit easier knowing that FINRA should find their AML program strong, effective and compliant. You may find additional compliance guidance on FINRA’s AML page or contact the securities enforcement and litigation attorneys at Herskovits PLLC with questions about your firm’s AML program.  212.897.5410 or Report Online

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