FINRA Investigators Offer Anti-Fraud Advice
Commentary by Steven Lofchie
Directors of FINRA's Special Investigations Unit ("SIU") described the inner workings of the special financial crimes detection program designed to "identify and mitigate threats related to money laundering and other frauds."
On an episode of FINRA Unscripted, Gargi Sharma, Senior Director of the SIU, and investigative directors Kayla Le, David Byrne and Peter Gonzalez, described how financial crimes are becoming harder to distinguish, as bad actors increasingly leverage trading techniques and account manipulation methods to launder funds. To combat evolving tactics, FINRA's SIU divided its efforts across two primary units: the Anti-Money Laundering Investigative Unit, which focuses on the movement of illicit funds through methods like ACH and wire transfers, and the Anti-Fraud Investigative Unit, which targets direct fraud against investors, such as Ponzi schemes and market manipulation.
The SIU members urged firms to adopt the following practices to combat fraud:
- Transaction Monitoring. Ensure systems detect patterns of suspicious trading or coordinated actions across multiple accounts, focusing on behavior that lacks economic rationale.
- Customer Due Diligence. Verify customer information rigorously for new accounts including checking for common identifiers like email, phone and IP addresses.
- Enhanced ACH and ACATS Protocols. Implement multi-factor authentication and set holding periods for ACH and ACATS transfers to prevent fraudsters from moving funds immediately.
- Proactive Monitoring for Social Media Influence. Educate clients about the risks of following unvetted advice on social media and include guidance on safe investment practices. (The Directors reported that many of the frauds target young investors that do not take advice from regulated intermediaries.)
Commentary
The advice to broker-dealers that they should caution young investors not to rely on unvetted advice is somewhat ironic.
When Regulation Best Interest was adopted, we raised concern that the effect might be the opposite of what was intended. That is, by making it impractical for broker-dealers to provide recommendations to clients with less net worth, the result would be that these investors would be forced to seek advice from wholly unregulated intermediaries, and the end result would be bad for investors. See e.g. Choose One-Best Interest or Full Service ("there is the view that we should accept that broker-dealers may be less than fiduciaries and that many investors will be much better served if broker-dealers are able to present them with recommendations that do not bear all of the regulatory risk and litigation risk of being deemed a fiduciary"). See also, Regulators Should Focus Less on Solving the Problem; More on Improving the Situation ("although many retail investors are financially unsophisticated, the regulatory system has likely served to encourage them to obtain information from non-traditional (largely unregulated sources) like the Reddit.com subreddit wallstreetbets ["WSB"], because it does not provide a way for regulated broker-dealers to serve these clients profitably, either through the production of research or conversations with a registered representative").
In short, the regulators should not be surprised that small investors follow unvetted advice from unregulated entities, because their regulations have made this result inevitable by making it unprofitable for broker-dealers to risk providing small investors with recommendations. Perfect is the enemy of good.