FINRA Identifies “Red Flags” for AML Compliance


FINRA recently entered into a settlement with Gar Wood Securities LLC (the “AWC”) concerning allegations that Gar Wood facilitated the sale of restricted securities in violation of the Section 5 of the 1933 Act, and the Firm failed to identify “suspicious” activity in a customer’s account that should have warranted the filing of a Form SAR-SF. The customer, identified as ICG, was apparently in business of issuing loans secured by low-priced stock. Over a two-year period, ICG supposedly deposited penny stocks into its Gar Wood brokerage account and immediately liquidated the positions and wire transferred the proceeds. ICG’s activity caught the attention of FINRA, which identified the following “red flags” that Gar Wood apparently failed to act upon:

  • ICG opened a new account and delivered physical certificates representing a large block of thinly traded or low priced securities; • ICG had a pattern of depositing physical share certificates, immediately selling the shares and then wiring out the proceeds of the sale; • ICG deposited share certificates that were recently issued or represented a large percentage of the float for the security; • The lack of a restrictive legend on deposited shares seemed inconsistent with the date the customer acquired the securities or the nature of the transaction in which the securities were acquired; • ICG had limited assets but received an electronic transfer or journal transaction of large amounts of low priced unlisted securities; • Issuers’ SEC filings were not current, were incomplete or nonexistent; and ” Some of the company stocks deposited and sold in the ICG account involved shell companies that issued shares; and • JP Morgan, the original clearing firm for the ICG account, closed the ICG account after JP Morgan identified several red flags related to ICG’s operations.

The AWC is worthwhile reading for attorneys who counsel broker-dealers on anti-money laundering compliance.

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