Finra ends historic enforcement year strong with spate of AML actions on penny stocks, shell firms

By Brian Monroe
December 22, 2016

It’s a strong finish to an already historic year of enforcement for the chief self-regulatory body of the US securities sector. In less than a month, the Financial Industry Regulatory Authority (Finra) has brought four actions involving financial crime-related violations totaling nearly $10 million on several high-risk areas, including penny stocks, shell companies and suspicious activity transaction monitoring.

Finra’s actions involve several high-profile, household name companies that will get the attention of the securities sector. The agency already this year has had its largest ever anti-money laundering (AML)-related penalty with $17 million against Raymond James in May, following that up with a $16.6 million action against Credit Suisse earlier this month.

Here is a listing of Finra’s latest enforcement actions with an AML component:

  • ACAP Financial Inc., a Salt Lake City, Utah-based broker dealer, was expelled from Finra membership. Finra stated that the owner, who was also the chief compliance officer and the designated AML officer, had a lax program, missed red flags and actively facilitated the liquidation of unregistered microcap stocks, also referred to as “penny stocks.” The firm also freely dealt with shell companies.
  • Convergex Execution Solutions LLC, a New York-based broker dealer, received a censure and penalty of $3 million for missing red flags tied to the liquidation of tens of billions of shares of penny stocks. The firm also failed to properly risk-assess customers or monitor transactions and realize it was dealing with shell companies.
  • Citi International Financial Services LLC, a Guaynabo, Puerto Rico-based broker-dealer, was censured and penalized $5.8 million for not giving adequate scrutiny to riskier customers and transactions and attempting to screen for suspicious activity manually, rather than using automated systems. The firm also failed to identify and report on higher risk transactions indicative of foreign currency conversions.
  • Allstate Financial Services LLC, a retail broker headquartered in Lincoln, Nebraska, was censured by Finra and had to pay a fine of $1 million. The firm had incomplete ownership records, so couldn’t risk assess customers, and failed in its duties to get accurate identity details to confirm the individuals engaging in certain transactions.

All the current and prior Finra enforcement actions have common themes stretching from the beginning of the AML program to the end, due diligence to filing SARs. Collectively, they tell a story of heightened financial crime compliance expectations for the industry as a whole. Trading firms must engage in thorough due diligence, identify and go further for higher risk customers, properly risk-score all customers, correctly tune the transaction monitoring system and train employees to look for red flags in higher risk areas – whether that employee is an AML analyst or front-line representative dealing directly with customers.