Firm Settles FINRA Charges for AML Failures Involving Low-Priced Securities
A firm settled FINRA charges for failing to develop and implement an anti-money laundering ("AML") program reasonably designed to detect and report suspicious transactions involving low-priced securities, and for failing to establish an adequate due diligence program for correspondent accounts of the firm's affiliated foreign financial institutions.
According to the AWC, the firm failed to implement an AML program reasonably designed to detect and report suspicious activity involving low-priced securities transactions that were conducted through two affiliated foreign financial institutions ("FFIs"). Operating exclusively through delivery-versus-payment/receive-versus-payment ("DVP/RVP") accounts and without retail customers, the firm facilitated at least 332 low-priced securities transactions on behalf of the FFIs, totaling approximately $27.5 million. FINRA found that from at least August 2021 through September 2024, the firm’s surveillance systems were "not reasonably designed to detect and cause the reporting of suspicious low-priced securities transactions," and that the firm "did not reasonably tailor its program to its business model, including with respect to transactions made by its affiliated FFIs."
Among other things, the firm "relied on daily exception reports generated by its clearing firm to monitor low-priced securities transactions, but all the default parameters provided by the clearing firm for the reports excluded all of the firm's trading in low-priced securities." Such reports excluded DVP/RVP accounts, "which constituted the entirety of [the firm's] trading activity." Furthermore, when the firm implemented two new daily reports in April 2022, such reports "did not contain sufficient information for the firm to assess whether suspicious activity involving low-priced securities occurred, such as the customer's trading across accounts or over multiple days (i.e., on a rolling basis)." Even when potential red flags were identified, the firm did not adequately investigate them—for example, in one instance, the firm accepted a customer’s explanation for a low-priced securities transaction without further scrutiny. FINRA noted that the firm halted all trading in September 2024.
FINRA also found that the firm failed to establish and implement an adequate due diligence program for its correspondent accounts held by affiliated FFIs. The firm did not "conduct periodic reviews of account activity" or "obtain sufficient information [regarding] the FFIs’ business [operations] and ... anticipated trading." Although aware that the FFIs could trade either on a principal basis or on behalf of underlying customers, the firm lacked an understanding of how the accounts were actually being used. Despite these gaps, the firm permitted the FFIs to route orders directly into its systems for execution and failed to apply appropriate risk-based controls to this activity.
FINRA concluded that the firm violated FINRA Rules 3310 ("Anti-Money Laundering Compliance Program") and 2010 ("Standards of Commercial Honor and Principles of Trade").
The firm agreed to a censure and a $100,000 fine.