The Financial Industry Regulatory Authority (Finra) announced today that it has fined Penson Financial Services, a Dallas-based securities clearing firm, $450,000 for failing to establish and implement an adequate anti-money laundering (AML) program to detect and trigger reporting of suspicious transactions, as required by the Bank Secrecy Act and Finra rules and other violations.
In a similar matter, FINRA has censured and fined Pinnacle Capital Markets of Raleigh, NC, $300,000 for failing to implement AML procedures reasonably designed to detect and cause the reporting of suspicious activity as well as to verify the identity of customers.
"Firms must tailor their AML programs to fit their business models and must consider the technological environment in which they operate and the nature of their client base," said Susan L. Merrill, FINRA Executive Vice President and Chief of Enforcement. "They also must adopt adequate procedures for an AML compliance program, be vigilant in monitoring for suspicious transactions, and allocate adequate resources to their AML compliance efforts. Penson and Pinnacle failed to do so."
A firm's AML procedures must address a number of areas, including monitoring transactions to detect and determine whether to report suspicious activity where appropriate. For example, when potentially suspicious activity that warrants further investigation is identified, including higher-risk penny stock deposits and liquidations or suspicious activity involving customers from high-risk foreign jurisdictions, a firm must initiate a review of that activity promptly and complete its review within a reasonable period of time. FINRA has advised firms that in designing their AML programs, they should consider factors such as their size, location, business activities, the types of accounts they maintain and the types of transactions in which their customers engage. FINRA also has instructed clearing firms to consider conducting computerized surveillance of account activity to detect suspicious transaction.
Penson Financial Services
FINRA found that from Oct. 1, 2003, through May 31, 2008, Penson failed to adequately establish and implement its AML compliance program. FINRA found that one or two individuals were responsible for reviewing certain AML exception reports for suspicious activity, reports that were sometimes thousands of pages in length. Because the firm failed to allocate sufficient resources to its AML compliance program, these exception reports were not consistently reviewed. FINRA also found that Penson failed to regularly review penny stock deposits and liquidations, which can present a higher risk for fraud and money laundering. The firm also permitted customers to disburse funds out of certain accounts with check writing features without adequate AML review until December 2007, even though firm employees had identified this as a compliance concern internally as early as January 2004 and the firm had identified the concern through two subsequent internal audits.
FINRA found that even after implementing enhancements to its AML program in December 2007 - including a sophisticated automated system to help identify suspicious trading activity - Penson still failed to conduct timely investigations of activity identified by the automated system as potentially suspicious because of continued inadequate staffing. Specifically, FINRA found that the firm failed to promptly commence a review of approximately 129 instances in which suspicious activity had been flagged for review by the firm's automated system.
FINRA also found that Penson's AML training program and written AML procedures were deficient, and that the firm failed to adequately assess the money-laundering risks presented by certain of the firm's correspondent clearing accounts for foreign financial institutions. Additionally, FINRA found that Penson failed to comply with FINRA reporting requirements for clearing firms, failed to keep accurate books and records regarding the ages and actual amounts of unsecured deficits in the accounts of its correspondent firms, and failed to provide the ages and/or the actual amounts of certain unsecured deficits to its correspondent firms.
Pinnacle Capital Markets
Pinnacle operates as an online business providing primarily foreign customers direct access to the U.S. securities markets. Direct online access allows customers to electronically execute trades with virtually no intervention by the firm. Nearly all of the firm's customers, including foreign financial institutions, reside in overseas jurisdictions known for a high degree of money-laundering risk, as classified by the U.S. Department of State. These foreign financial institutions opened sub-accounts for foreign customers who could then direct activity without fully disclosing their identity. From January 2006 to September 2009, Pinnacle failed to adopt risk-based procedures to verify the identity of sub-account holders, even though these customers lived overseas in high-risk jurisdictions and could freely execute trades for their own profit.
Pinnacle also failed to adopt effective procedures for detecting suspicious activity. Instead, the firm used a "manual" system, which involved a daily review of its trade blotter. This approach failed to uncover highly suspicious trading patterns, including abrupt and inexplicable changes in investment strategy, the rapid accumulation and liquidation of penny stocks for profit, and other indications of potential market manipulation. In one particularly egregious case, the firm failed to detect irregular trading patterns in customer accounts used as part of an international online "pump-and-dump" scheme involving a Latvian bank. That pump-and-dump scheme became the target of a March 2007 Securities and Exchange Commission enforcement action. The firm itself was named as a defendant in that action.
In concluding these settlements, Pinnacle and Penson neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
Investors can obtain more information about, and the disciplinary record of, any FINRA-registered broker or brokerage firm by using FINRA's BrokerCheck. FINRA makes BrokerCheck available at no charge.