lessons learned from recent aml enforcement … of the securities industry and financial markets...

© 2017 Financial Industry Regulatory Authority, Inc. All rights reserved. 1

Lessons Learned From Recent AML Enforcement Actions (AML) Thursday, May 18 9:00 a.m. – 10:00 a.m.

Does your AML program meet evolving expectations and address emerging money laundering risks? Join FINRA staff and industry experts as they review legal cases and enforcement actions impacting AML programs. Panelists cover critical regulatory concerns, potential vulnerabilities, and how you can address any pitfalls in your AML program. Moderator: Laura Leigh Blackston Senior Regional Counsel FINRA Enforcement Panelists: Elizabeth Paige Baumann Senior Vice President, Chief Anti-Money Laundering Officer Fidelity Investments Emily Gordy Executive Vice President, Deputy General Counsel LPL Financial LLC Jeffery Horowitz Managing Director and Chief Compliance Officer Pershing LLC


Lessons Learned From Recent AML Enforcement Actions (AML) Panelist Bios: Moderator: Laura Leigh Blackston is Senior Regional Counsel with FINRA’s Enforcement Department. Ms. Blackston joined FINRA as an attorney in 2002. Prior to joining FINRA, she was an associate and partner with the General Litigation group of the law firm Jones Walker. As Senior Regional Counsel, Ms. Blackston has handled key enforcement actions regarding anti-money laundering and has co-taught Anti-Money Laundering Regulation at FINRA’s Institute at Wharton. Ms. Blackston graduated from the University of Mississippi in 1988 with honors and received her J.D. Degree from Washington and Lee University with honors in 1992. She is also a member of FINRA’s Anti-Money Laundering Regulatory Expert Group and is Certified Anti-Money Laundering Specialist (CAMS). Panelists: Elizabeth Paige Baumann has been the Senior Vice President and Chief Anti-Money Laundering Officer at Fidelity Investments since June 1, 2012. Ms. Baumann has oversight responsibility for the AML programs of Fidelity’s non-U.S. entities. She actively represents Fidelity from an AML perspective in various industry groups, including the Securities Industry and Financial Markets Association (SIFMA) and the Investment Company Institute (ICI). She has been a member of Fidelity's Enterprise Compliance Department since September 1999. Her first role was to support National Financial Services LLC's clearing business on a variety of compliance issues. Ms. Baumann has played a key role in the AML programs of all of Fidelity's U.S. financial institutions covered under the Bank Secrecy Act of 1970, as amended, and related regulations (collectively, the "BSA") since April of 2002. Ms. Baumann served as the co-chair of SIFMA's AML and Financial Crimes Committee January 2011 through December 2013. She also represented the ICI on several sub-committees of the Bank Secrecy Act Advisory Group (BSAAG), which consists of representatives from federal regulatory and law enforcement agencies, financial institutions, and trade groups with members subject to the BSA. Prior to Fidelity, Ms. Baumann worked at Charles Schwab in San Francisco for 6 years. She earned her J.D. from the Tulane School of Law and her B.A. from Trinity College in Hartford, Connecticut. Ms. Baumann is a member of both the California and Massachusetts bars. Emily P. Gordy is Executive Vice President, Deputy General Counsel at LPL Financial, with responsibility for regulatory affairs (Regulatory Investigations & Counseling and the Special Investigations Unit). Prior to joining LPL, Ms. Gordy was a partner at the law firm of Shulman Rogers. Ms. Gordy was a financial regulator for 27 years. As an SVP in FINRA’s Enforcement Department, she held a variety of positions, including Deputy/Home Office Enforcement and Head of Regional Enforcement. Prior to joining Enforcement, she advised the District Offices on legal and policy issues impacting the examination program. Prior to joining FINRA, Ms. Gordy spent 13 years with the SEC, primarily with Enforcement, Office of Chief Counsel. At the time of her departure, she was serving as Deputy Chief Counsel. Ms. Gordy is a graduate of the Washington College of Law / American University and Gettysburg College. She was selected as one of The National Law Journal’s 2015 Regulatory & Compliance Trailblazer honorees. Jeffrey Horowitz is Managing Director and Chief Compliance Officer for Pershing LLC, a BNY Mellon company, and is a member of BNY Mellon’s Risk and Compliance Operating Committee. Mr. Horowitz previously served as the Chief Anti-Money Laundering (AML) and OFAC Officer for Pershing, where he was responsible for the development and implementation of the firm’s global AML Program across the Pershing enterprise. Mr. Horowitz has represented Pershing as a securities industry representative to the U.S. Treasury Department’s Bank Secrecy Act Advisory Group (BSAAG) and was also a past co-chair of the Securities Industry and Financial Markets Association (SIFMA) Anti-Money Laundering Committee. He has also served as the BSAAG co-chair of the Securities and Futures Subcommittee. Mr. Horowitz is an active member of the International Council of Securities Association group on AML and the Foreign Account Tax Compliance Act (FATCA), and serves on the Florida International Bankers Association AML Compliance Conference Advisory Committee as well the Association of Certified Anti- Money Laundering Specialists Annual AML & Financial Crime Conference Task Force. Mr. Horowitz currently represents Pershing on SIFMA’s Compliance and Regulatory Policy Committee. Prior to joining Pershing, Mr. Horowitz was a director and Head of AML Compliance for Citigroup’s Corporate and Investment Banking Division in North America. His responsibilities included the


Institutional Sales and Trading Departments of Citigroup Global Markets Inc., Investment Banking, Global Relationship Banking and Global Transaction Services. Prior to joining Citigroup, Mr. Horowitz held several senior compliance roles at Lehman Brothers, Goldman Sachs and Salomon Brothers Inc. He began his career at the Federal Deposit Insurance Corporation (FDIC) in the Division of Resolutions. Mr. Horowitz earned a bachelor’s degree in economics from Trenton State College. He has also completed the Securities Industry Institute® program, sponsored by the Securities Industry and Financial Markets Association, at the Wharton School of the University of Pennsylvania.

FINRA Annual ConferenceMay 16-18, 2017 • Washington, DC

Lessons Learned From Recent AML Enforcement Actions (AML)

FINRA Annual Conference © 2017 FINRA. All rights reserved.

Moderator Laura Leigh Blackston, Senior Regional Counsel, FINRA

Enforcement

Panelists Elizabeth Paige Baumann, Senior Vice President, Chief Anti-Money

Laundering Officer, Fidelity Investments

Emily Gordy, Executive Vice President, Deputy General Counsel, LPL Financial LLC

Jeffery Horowitz, Managing Director and Chief Compliance Officer, Pershing LLC

1

Panelists


Under the “Schedule” icon on the home screen,

Select the day,

Choose the Lessons Learned From Recent AML Enforcement Actions session,

Click on the polling icon:

2

To Access Polling


Systems Inadequate for Microcap Risks

Technology Flawed

Inadequate Resources Devoted to AML

Foreign Financial Institution Accounts not Properly Monitored

3

Four Common Themes in Recent Enforcement Actions


Definition of “penny stock” in 17 CFR §240.3a51-1

Generally, not listed on an exchange (over-the-counter)

Under $5 a share

Should include foreign low-priced stocks as well Relevant Link

Definition of “penny stock” in 17 CFR §240.3a51-1, www.sec.gov/rules/final/34-51983.pdf

4

Microcap Stocks

http://www.sec.gov/rules/final/34-51983.pdf


1. Does your firm handle microcap transactions?a. Yes, routinely

b. Yes, but only as an accommodation to long-term customer

c. Yes, but only if the microcaps were ACAT’d in as part of larger account transfer

d. No, we do not handle microcap transactions

5

Polling Question 1


Does Your System Adequately Address the Risks?Shell Companies as IssuersNominees or Intermediaries as CustomerPump and Dump SchemesSale of Restricted Shares Prior to Expiration of Holding

PeriodSelf-serving Statements from Issuer, Customer, or

AttorneysFFI’s Enabling U.S. Citizen Tax-Evasion

6

Microcaps


Promotional Activity for Life-Cycle of Transaction

Negative News

Percentage of Daily Trading Volume

Percentage of Customer Ownership of Total Outstanding Shares

Price Spikes

All Types of Deposits Followed by Immediate Liquidation

Communication Between Sect. 5 Review Group and AML Group

Avoid Overreliance on Broker Opening Account

7

Monitoring Microcap Business for Suspicious Activity


$300,000 fineHundreds of Billions of Shares of penny stocks obtained from

convertible debentures – substantial percentage of daily market volumes in securities coupled with other red flags

No SARs filedWritten Procedures were reasonable overall, but not followed Extraordinary Level of CooperationCorrective Measures that were prompt and complete Relevant Link In re Albert Fried & Company, LLC, SEC Administrative Proceeding 3-17270

(June 1, 2016), https://www.sec.gov/litigation/admin/2016/34-77971.pdf

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In re Albert Fried & Company

https://www.sec.gov/litigation/admin/2016/34-77971.pdf


Separate Sect. 5 Due Diligence

Exemption in Face of Sect. 5 Red Flags (RN 09-05) Requires Searching Inquiry

Filing a SAR does not Relieve Firm of Section 5 Obligation

Rejecting Deposit does not Relieve Firm of SAR Determination

Relevant Link FINRA Regulatory Notice, RN 09-05, http://www.finra.org/industry/notices/09-05

9

Overlap Between AML and Sect. 5 Responsibilities

http://www.finra.org/industry/notices/09-05


Common Data Failures Failure of Reports to reflect data from related accounts

collectively Time Period of Reports too short to detect activity Deposit and Liquidation not tracked (only purchase and

liquidation) Alerts Closed as “unremarkable” or “in-line with expected activity”Missing Data for Calculating Risk Ranking Calibrating Thresholds too High Not using Available Scenarios

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Question Your Assumptions – Data Integrity


Importance of Testing

Unified System as Opposed to Patchwork

Work with System Provider to Calibrate System

Look for Gaps of Data Collection

Documented Reasons for non-use of Available Scenarios

11

Avoiding Data and System Failures


Define Scope of Problem

Document Corrective Action

Determine whether to Conduct Retroactive Review

File any Necessary SARs

Determine whether Regulators Should be Notified

12

Data Failure – Next Steps


Citi International Financial Services, LLC, 2013036434501 (AWC Dec. 20, 2016), http://disciplinaryactions.finra.org/Search/ViewDocument/67044

Convergex Execution Solutions, LLC , 2014040667001 (FINRA AWC Dec. 7, 2016),http://disciplinaryactions.finra.org/Search/ViewDocument/66965

Credit Suisse Securities (USA) LLC, 2013038726101 (FINRA AWC Dec. 5, 2016), http://disciplinaryactions.finra.org/Search/ViewDocument/66950

Raymond James & Associates, Inc., 2014043592001 (AWC May 18, 2016), http://disciplinaryactions.finra.org/Search/ViewDocument/66157

13

Recent Enforcement Actions re: Data Failures

http://disciplinaryactions.finra.org/Search/ViewDocument/67044





2. Do you have enough resources, in particular, adequate headcount, to support your firm’s AML program?

a. Yesb. Yes, and we have capacity to absorb even more AML-related

work (e.g., increased volumes of hits)c. No, but my firm is committing more resources, including adds

to staffd. No, and I am concerned that my firm’s AML program will be

negatively impacted as a resulte. I don’t know

14

Resources – Polling Question 2


Separate Finding in one Recent Case that Firm Failed to Devote Sufficient Resources to AML

Overreliance on Traders, RR’s Opening the account, or Affiliate to Conduct Due Diligence

Manual Processes Require More Staff – Staff and Processes Insufficient

Automated Systems Require Staff to Review and to Calibrate Systems – Determine Reasonable Load for Staff

15

Findings of Recent Matters Regarding Resources


Important to Identify New Risks

Determine Methods of Monitoring and Staff Needed

Schedule Reevaluation of Needs after first 6 months

Considerations for Microcap Business

Correspondent Accounts for FFIs

16

Effect of New Business on Firm’s AML Resources


Sharing Negative News Tracked by one Dept. with AML Dept.

Sharing Regulatory Inquiries Regarding Customers with AML Dept.

Clearing Firm Inquiries

Subpoenas regarding Customers or Issuers

Red Flags by Sec. 5 Review Team or Freezing of Trading

17

Communication Enhances Resources


3. As Part of Onboarding an FFI, Do you review the Firm’s website?

a. Yes, we want to know what services the FFI claims to offer

b. No, it would all be puffery anyway

c. No, we don’t have FFIs as clients

d. I have no idea

18

Foreign Financial Institutions – Polling Question 3


Rainbow Bright FinancialFAQsWhat is a nominee Officer or Director?

An appointed person who will act as an officer or director on your behalf, giving you an extra level of confidentiality as your name will not show up as an officer or director on your IBC.

19

Actual language from Belize FFI website


Correspondent Account receives deposits or makes payments for the FFI

Perform a risk assessment that addresses five specific factors

Conduct periodic review

20

FFI Correspondent Accounts – Monitoring


Nominees – Don’t Know Who Beneficial Owner is

Could be Complicit in Tax Evasion by U.S. Customers

Popular Method for Liquidating Dubious Penny Stocks

Issues with Currency Conversion

Less Stringent AML Regimes in Home Jurisdiction

21

Risks Associated with FFI Accounts


Know and follow your Procedures

Pattern of Depositing Penny Stocks followed by Immediate Liquidation Suspicious

If W8-BEN filed – need to monitor for U.S. Customer acct. use

Monitor for Firm Acting as Unregistered Broker

22

Oppenheimer Lessons re: FFI Business


Citi International Financial Services, LLC, 2013036434501 (AWC Dec. 20, 2016), relevant to data failures, inadequate resources or new business – $5.75 million fine and certification http://disciplinaryactions.finra.org/Search/ViewDocument/67044

Convergex Execution Solutions, LLC, , 2014040667001 (FINRA AWC Dec. 7, 2016), relevant to microcaps, data failures, foreign financial institutions – $3 million fine http://disciplinaryactions.finra.org/Search/ViewDocument/66965

ACAP Financial Inc., 2012030459101, (FINRA OFR, Dec. 6, 2016), relevant to microcaps, inadequate resources or new business – firm expelled http://disciplinaryactions.finra.org/Search/ViewDocument/66971

Credit Suisse Securities (USA) LLC, 2013038726101 (FINRA AWC Dec. 5, 2016), relevant to microcaps, data failures, inadequate resources or new business, and foreign financial institutions –$16.5 million fine and supervisory certification http://disciplinaryactions.finra.org/Search/ViewDocument/66950

23

Appendix – Recent Enforcement Matters






In re Albert Fried & Company, LLC, SEC Administrative Proceeding 3-17270 (June 1, 2016), relevant to microcaps – $300,000 fine, https://www.sec.gov/litigation/admin/2016/34-77971.pdf

Raymond James & Associates, Inc., 2014043592001 (AWC May 18, 2016), relevant to microcaps, data failures, inadequate resources or new business, foreign financial institutions – $17 million fine, supervisory certification, AMLCO suspended 3 months and fined $25,000, http://disciplinaryactions.finra.org/Search/ViewDocument/66157

Cantor Fitzgerald & Co., 2012034964301 (FINRA AWC Dec. 21, 2015), relevant to microcaps, lack of resources or new business – fine of $7.3 million monetary penalty, Sect. 5 principal suspended 3 months and fined $35,000, trader suspended 2 months and fined $25,000 http://disciplinaryactions.finra.org/Search/ViewDocument/63881

In re Oppenheimer & Co., Inc., SEC Administrative Proceeding 3-16361 (Jan. 27, 2015), relevant to microcaps and foreign financial institutions, $10 million monetary penalty and independent consultant www.sec.gov/litigation/admin/2015/33-9711.pdf

24

Appendix -- Continued

https://www.sec.gov/litigation/admin/2016/34-77971.pdf



http://www.sec.gov/litigation/admin/2015/33-9711.pdf


Lessons Learned From Recent AML Enforcement Actions (AML) Thursday, May 18 9:00 a.m. – 10:00 a.m. Resources FINRA Notices

• FINRA Regulatory Notice 09-05 Unregistered Resales of Restricted Securities: FINRA Reminds Firms of Their Obligations to Determine Whether Securities are Eligible for Public Sale (January 2009) www.finra.org/sites/default/files/NoticeDocument/p117716.pdf

FINRA Disciplinary Actions

• FINRA Disciplinary Actions Online Search Page (Search on the case number to find / download document)

http://disciplinaryactions.finra.org/

• Citi International Financial Services, LLC, Case Number: 2013036434501 (AWC Dec. 20, 2016),

relevant to data failures, inadequate resources or new business – $5.75 million fine and certification

• Convergex Execution Solutions, LLC, Case Number: 2014040667001 (FINRA AWC Dec. 7, 2016),

relevant to microcaps, data failures, foreign financial institutions – $3 million fine

• ACAP Financial Inc., Case Number: 2012030459101, (FINRA OFR, Dec. 6, 2016), relevant to microcaps, inadequate resources or new business – firm expelled

• Credit Suisse Securities (USA) LLC, Case Number: 2013038726101 (FINRA AWC Dec. 5, 2016),

relevant to microcaps, data failures, inadequate resources or new business, and foreign financial institutions – $16.5 million fine and supervisory certification

• Raymond James & Associates, Inc., Case Number: 2014043592001 (AWC May 18, 2016), relevant

to microcaps, data failures, inadequate resources or new business, foreign financial institutions – $17 million fine, supervisory certification, AMLCO suspended 3 months and fined $25,000

• Cantor Fitzgerald & Co., Case Number: 2012034964301 (FINRA AWC Dec. 21, 2015), relevant to

microcaps, lack of resources or new business – fine of $7.3 million monetary penalty, Sect. 5 principal suspended 3 months and fined $35,000, trader suspended 2 months and fined $25,000

http://www.finra.org/sites/default/files/NoticeDocument/p117716.pdf

http://disciplinaryactions.finra.org/


SEC Resources

• In re Oppenheimer & Co., Inc., SEC Administrative Proceeding 3-16361 (Jan. 27, 2015), relevant to microcaps and foreign financial institutions, $10 million monetary penalty and independent consultant

www.sec.gov/litigation/admin/2015/33-9711.pdf

• In re Albert Fried & Company, LLC, SEC Administrative Proceeding 3-17270 (June 1, 2016),

relevant to microcaps -- $300,000 fine

www.sec.gov/litigation/admin/2016/34-77971.pdf

• Definition of “penny stock” in 17 CFR §240.3a51-1 www.sec.gov/rules/final/34-51983.pdf



http://www.sec.gov/rules/final/34-51983.pdf

lessons learned from recent aml enforcement … of the securities industry and financial markets...

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