To avoid an anti-money laundering ("AML") investigation before it arises, it is important to be aware of the priorities of regulators. In May 2019, FINRA issued detailed guidance on suspicious AML activity that broker-dealers should monitor for and report. This article provides an overview of FINRA Regulatory Notice 19-18, issued on May 6, 2019.
In the Notice, FINRA provides specific examples of red flags that firms should monitor for, investigate, and file Suspicious Activity Reports ("SARs") on as part their AML program. FINRA places the red flags into the following categories:
- Potential Red Flags in Customer Due Diligence and Interactions with Customers
- Potential Red Flags in Deposits of Securities
- Potential Red Flags in Securities Trading
- Potential Red Flags in Money Movements
- Potential Red Flags in Insurance Products
- Other Potential Red Flags
The Notice identifies dozens of specific AML red flags. FINRA advises that the list is not exhaustive and is neither a guarantee of regulatory compliance nor a safe harbor. Despite that, FINRA states that the Notice does not create any new requirements or expectations. Also, FINRA cautions broker-dealers to "be aware of emerging areas of risk, such as risks associated with activity in digital assets," regardless of whether such assets are securities.
Suspicious AML Activity to Monitor, Investigate, and Potentially Report
Below are examples of red flags that may trigger a broker-dealer's obligation to file a SAR.
- The customer has been rejected or has had its relationship terminated as a customer by other financial services firms.
- The customer maintains multiple accounts, or maintains accounts in the names of family members or corporate entities, with no apparent business or other purpose.
- A customer opens a new account and deposits physical certificates, or delivers in shares electronically, representing a large block of thinly traded or low-priced securities.
- Seemingly unrelated clients open accounts on or at about the same time, deposit the same low-priced security, and subsequently liquidate the security in a manner that suggests coordination.
- A customer engages in transactions suspected to be associated with cyber breaches of customer accounts, including potentially unauthorized disbursements of funds or trades.
- Wire transfers are made to or from financial secret havens, tax havens, high-risk geographic locations, or conflict zones, including those with an established presence of terrorism.
What Broker-Dealers Should Do in Response to the Notice
FINRA issued the Notice as guidance to member firms of red flags that they should consider incorporating into their AML programs. Broker-dealers should carefully review the Notice and determine how their business and customers require modifications and improvements to their AML program.
Goodell DeVries handles nationwide litigation and arbitration involving, among others, broker-dealers and registered representatives. If you are facing FINRA challenges, contact the author, Matthew Kohel, today for assistance. If you would like one of our experienced FINRA litigation attorneys to speak at your organization's event, contact Gina Eliadis to schedule a presentation.