Broker-dealer Settles FINRA Charges for CIP and AML Program Deficiencies

A broker-dealer settled FINRA charges for failing to establish and maintain adequate customer identification, anti-money laundering ("AML"), and identity theft prevention programs.

According to the AWC, the firm's automated account-opening process approved numerous applications without a reasonable belief of the customers' true identities, including approximately 350 accounts opened with only the last four digits of a Social Security number and accounts with birth dates in the 1930s and 1940s that exhibited other signs of identity fraud. As a result, FINRA found the firm failed to establish and maintain a customer identification program reasonably designed for its size and customer base during the relevant period.

FINRA also determined that the company (i) omitted specific red flags from its AML procedures; (ii) relied on manual reviews to connect account-opening red flags with subsequent transactional activity; (iii) failed to reasonably investigate accounts that its clearing firm had flagged as potentially engaging in "suspicious reverse electronic payment activity" (indicative of attempted securities free riding); and (iv) failed to detect, investigate, and report suspicious activity in roughly 200 accounts opened with common phone numbers and email addresses routed to the same inboxes or temporary domains. As a result, FINRA found the firm failed to develop and implement AML procedures reasonably expected to detect and cause the reporting of suspicious transactions.

In addition, FINRA found that the firm relied mostly on reactive measures (customer complaints and returned mail) rather than proactive monitoring during the account-opening process. As a result, FINRA found that the firm failed to detect, prevent, and mitigate identity theft for its online brokerage accounts. 

FINRA charged the firm with violations of FINRA Rule 3310 ("Anti-Money Laundering Compliance Program") and BSA Rules 1023.220 ("Customer Identification Program for Broker Dealers") and 1023.320 ("Reports by brokers or dealers in securities of suspicious transactions").

FINRA charged the firm with violations of Rule 201 ("Duties regarding the detection, prevention, and mitigation of identity theft") of Regulation S-ID ("Identity Theft Red Flags") under the Securities Exchange Act of 1934.

To settle the matter, the firm consented to a censure and a $450,000 fine.