United States

Red flags for customer due diligence compliance


On May 6, 2019, FINRA issued Regulatory Notice 19-18 (Notice) on anti-money laundering (AML) programs. In the Notice, FINRA provides guidance to member firms regarding suspicious activity monitoring and reporting obligations under FINRA Rule 3310 (Anti-Money Laundering Compliance Program), and highlights several money-laundering red flags in the securities industry as well as reminds the member firms of their existing obligations under BSA/AML requirements.

The Notice discusses 19 red flags in customer due diligence and interactions with customers, eight in deposits of securities, 20 in securities trading, 31 in money movements, five in insurance products and nine in other categories.
Example of the red flags are: 

  • An account is opened for a foreign financial institution that is affiliated with a U.S. broker-dealer, bypassing its U.S. affiliate, for no apparent business purpose. An apparent business purpose could include access to products or services the U.S. affiliate does not provide.
  • A customer has a pattern of depositing physical share certificates, or a pattern of delivering in shares electronically, immediately selling the shares and then wiring, or otherwise transferring out the proceeds of the sale(s).
  • A customer accumulates stock in small increments throughout the trading day to increase price.
  • Wire transfers or payments are made to or from unrelated third parties (foreign or domestic), or where the name or account number of the beneficiary or remitter has not been supplied.
  • The customer cancels an annuity product within the free-look period. This could be a red flag if accompanied with suspicious indicators, such as purchasing the annuity with several sequentially numbered money orders or having a history of canceling annuity products during the free look period.
  • There is an unusual use of trust funds in business transactions or other financial activity.

Not too long before the Notice came out, FINRA fined a well-known broker-dealer $10 million for AML program and supervisory failures. Altogether, in second half of 2018 alone, FINRA has brought up at least four enforcement actions with big-dollar penalties against the industry’s well-known players. At the end of 2018, the Report on FINRA Examination Findings summarized the persistent issues related to broker-dealers’ AML compliance. It is no surprise that FINRA is focusing more on member firms’ AML programs and efforts.

Is the industry going to see more enforcement actions related to AML program—certainly? Is the industry expecting to see FINRA holding individuals responsible for AML failures—very much so? In the past, FINRA has successfully brought up enforcement actions against individuals responsible for compliance failures.

Broker-dealers should review their policies and procedures to ensure that an established process has been created to identify and collect required documentation on beneficial owners of legal entity customers in response to the FinCEN’s final rule on Customer Due Diligence; alerted activities on the exception reports are adequately reviewed and dispositioned; control and monitoring have been designed and tested to screen for red flags applicable to the firm’s securities activities. Member firm’s overall AML program should consider the allocation of AML monitoring responsibilities, data integrity in AML automated surveillance systems, firm’s resources for AML programs and independent testing of AML monitoring programs.