Learning the Hard Way -- Inadequate Anti-Money Laundering Program Costs Scottrade $600,000
The Financial Industry Regulatory Authority (FINRA) is teaching brokerage firms a great deal these days and imposing fines in the process.
This time, Scottrade is in the hot seat and will pay a $600,000 fine for its alleged failure to "establish and implement an adequate anti-money laundering (AML) program to detect and trigger reporting of suspicious transactions, as required by the Bank Secrecy Act and FINRA rules."
FINRA instructs by Scottrade's example that the trading environment for each firm must be taken into account in establishing and maintaining appropriate programs for the detection of money laundering. Monitoring suspicious trading alone just doesn't cut it. Among other things, that's what got Scottrade in trouble.
The firm did not establish automated surveillance of transactions until 2005 and once it did it "focused only on suspicious trading that was accompanied by suspicious money movement," noted Susan L. Merrill, FINRA's Executive Vice President and Chief of Enforcement.
FINRA informs the industry that is not sufficient. Its rules require brokerage firms to establish policies and implement procedures that are "reasonably designed" to detect and ultimately to report suspicious transactions. But that does not necessarily mean that only suspicious transactions are to be watched and/or reported. More is required, as Scottrade has learned.
In Scottrade's case, the agency found that between April 2003 and April 2008, the firm did not establish or maintain an AML program that was appropriately targeted for its business model of on-line trading. The increased volume over a period of years of its on-line trading volume, brought with it such risks as identity theft and the use of customer accounts to launder funds by hiding behind securities transaction for illegal activity and other securities violations.
One major problem for the firm was its failure to adequately staff the monitoring function. For some period of time there was only one AML compliance officer at the firm. Eventually, a risk management analyst was hired to assist. But FINRA determined that the volume of trading called for more than two individuals. Another problem for the firm was its reliance for several years on a manual system for monitoring suspicious activities, relying on internal personnel and branch and other employees to identify and report suspicious activities.
Despite Scottrade's eventual implementation of proprietary automated systems to monitor suspicious trading activity, FINRA found that this too was not sufficient. Suspicious activity generated an alert, but that alone would not detect various other techniques used by those seeking to launder funds such as through account intrusions and the use of bona fide accounts for laundering purposes.
Scottrade was also found to have provided inadequate written guidance to employees on the detection and review of transactions that might be used for money laundering.
Related Web Resources
To learn more about AML requirements, visit www.FINRA.org where you will find resources for industry professionals and investors.
