By Brian Monroe
November 10, 2016
The complexity of the securities sector with its intricate sales, ownership and product structures can create stumbling blocks for compliance officers when seeking assistance from outside banks that have received assets from a fraudulent trade or illicit liquidation.
In some cases, compliance professionals at securities firms have been rebuffed or left stuck in a holding pattern when requesting a bank freeze an account or investigate a wire transfer initiated by a fraudster because the bank contact lacks an understanding of the securities industry – for example, they can’t clearly understand why the name of the compliance officer’s securities firm is different than that of the customer.
Any delay in understanding, responses or action by the bank – which can take weeks or even months in some cases – gives fraudsters the time to move illegally obtained funds to other banks in more obscure regions of the world and pull them out in cash. This can make it nearly impossible to make victimized customers whole again, said Becki LaPorte, a former compliance trainer for the Financial Industry Regulatory Authority (Finra), the trading sector’s chief self-regulatory body.
Overall, banks and other entities covered under the overarching category of “financial institution” have broad protections to share information on suspected instances of money laundering, terrorist financing, and their precursor specified unlawful activities such as fraud, under Patriot Act Section 314(b).
But while many banks are familiar with their industry’s products and account structures, and some large banks even have trading arms, the individuals designated to respond to 314(b) requests may be less well versed on how customer and trading relationships work in the securities sector, causing unnecessary delays or denials for help and allowing criminal groups to continue their schemes.
“There is a lot of value in having bank staff who work in this area trained to know how operations other than banks work” when it comes to fraud and financial crime so they can know what questions to ask to quickly get the information needed, LaPorte said.
She will be discussing these and other issues in an ACFCS webinar on Wednesday. To register for the webinar, please click here.
For example, in the “broker dealer world, everything is about joint customers” which can be confusing for the uninitiated, said LaPorte, now vice president, anti-money laundering (AML) compliance officer for the Advisor Group, one of the largest networks of independent broker-dealers in the United States.
That means that in a typical scenario, an advisor at one firm could sell a product in the name of another company. At the same time, the actual individuals trading as securities broker-dealers could have different names, tasks and responsibilities based on if they work for a large company that handles everything, or only pieces of the transactions, such as an introducing broker, clearing broker and the like.
Sharing barriers can aid crooks
In one recent case where a fraudster moved money to a large U.S. bank, LaPorte asked the large bank for help looking for funds, and was not given immediate assistance, but told to send a formal request via email.
She inquired again when the bank, and another large U.S. bank, received fraudulent funds, “and the response was crickets.” She later found out the case has not been assigned to an analyst.
In other cases, certain 314(b) intake staff didn’t realize that the safe harbor covered securities fraud because it was a precursor crime for money laundering, LaPorte said.
“I tried to explain that it was fraud at the firm I am representing but when the funds got to your bank, it was money laundering,” she said, adding that at some banks the staff helping with assistance requests don’t have the authority to freeze the funds or realize they can do a “hold harmless” agreement which indemnifies the bank if the suspected fraudulent customer is innocent.
Fraud can happen in the securities sector “across many areas, from affinity fraud to insider trading, market manipulation, and pump and dump schemes,” according to the U.S. National Money Laundering Risk Assessment released last year.
Organized crime groups are attempting to layer illicit proceeds through broker-dealers, according to the report, with most identified cases in the sector tied to securities fraud, identity theft and embezzlement.
Citing nearly 700 actions, the SEC garnered more than $3.4 billion in disgorgement of ill-gotten profits and penalties, according to the assessment.
More authority for 314(b) intake staff
It’s critical that bank staff working on assistance requests tied to securities realize the “money is probably moving right now as we are on the phone,” LaPorte said, adding that decisions to freeze an account should ideally be made in a day or two, rather than the full 30-day deadline for enough information to create a suspicious activity report.
Critical to the solution to improving outcomes is giving intake staff the “autonomy to freeze an account and stop the money” so that can at least give the bank time to get more senior financial crime compliance analysts or officials involved without the funds disappearing, she said. “Empowering a bank’s 314(b) team, along with training on how securities transactions work, might be part of the answer.”
An October 2009 report by the Paris-based Financial Action Task Force stated that “some of the features that have long characterized the industry, including its speed in executing transactions, its global reach, and its adaptability, can make it attractive to those who would abuse it for illicit purposes, including money laundering and terrorist financing.”
Moreover, the “securities sector is perhaps unique among industries in that it can be used both to launder illicit funds obtained elsewhere, and to generate illicit funds within the industry itself through fraudulent activities.”
But when bank officers and securities firm compliance teams understand each other, the results can be powerful, and actually recoup some of the pilfered funds, LaPorte said.
In one case, working with an intake officer at a large U.S. bank, the pair were able to find the original date, time and dollar amount of the illicit wire and account, even though the fraudster had attempted to change the name of the parties involved.
The details provided by LaPorte were so thorough, it actually became the foundation of a bank investigation that gave critical intelligence to law enforcement.
Working together with the bank, she was able to recover “hundreds of thousands of dollars that went out the door” by being able to quickly secure a hold harmless agreement and a speedy response from a 314(b) intake officer at the institution, she said.