FINRA Issues AML Red Flag Guidance

Earlier this month, the Financial Industry Regulatory Authority (FINRA) released Regulatory Notice 19-18, providing guidance to member firms to help identify suspicious activity that may be reportable under FINRA Rule 3310 (Anti-Money Laundering Compliance Program).

FINRA Rule 3310 (Anti-Money Laundering Compliance Program) requires each member firm to develop and implement a written anti-money laundering (AML) program reasonably designed to achieve and monitor the firm’s compliance with the requirements of the Bank Secrecy Act (BSA), and the implementing regulations promulgated thereunder by the Department of the Treasury (Treasury).

In particular, the Notice provides better clarity around the kinds of activity that may trigger additional review or investigation. FINRA was sure to mention that firms should also be aware of emerging areas of risk, such as digital assets, and that regardless of whether such assets are securities, BSA/AML requirements, including SAR filing requirements, apply.

This Notice merits particular attention for several reasons. For starters, this is the first detailed guidance the self-regulatory organization has issued on AML red flags since 2002, when it issued its Notice to Members 02-21. It’s also notable considering the constant surplus of AML violations that have occurred over the years. In fact, for the last three consecutive years, AML has been cited as one of the “top five fine categories” by FINRA. Moreover, this Notice comes exactly one year after FinCEN’s Customer Due Diligence rule took effect last May [For training on FinCEN’s CDD Rule, visit our AML Course Catalog].

The Notice is broken down into six thematic areas, which include: 1.) Potential Red Flags in Customer Due Diligence and Interactions with Customers, 2.) Potential Red Flags in Deposits of Securities, 3.) Potential Red Flags in Securities Trading, 4.) Potential Red Flags in Money Movements, 5.) Potential Red Flags in Insurance Products and 6.) Other Potential Red Flags.

Provided below is an overview of some red flags that are particularly notable for each category.

Potential Red Flags in Customer Due Diligence and Interactions With Customers

1.) The customer provides the firm with unusual or suspicious identification documents that cannot be readily verified or are inconsistent with other statements or documents that the customer has provided. Or, the customer provides information that is inconsistent with other available information about the customer. This indicator may apply to account openings and to interaction subsequent to account opening.

2.) The customer is reluctant or refuses to provide the firm with complete customer due diligence information as required by the firm’s procedures, which may include information regarding the nature and purpose of the customer’s business, prior financial relationships, anticipated account activity, business location and, if applicable, the entity’s officers and directors.

3.) The customer refuses to identify a legitimate source of funds or information is false, misleading or substantially incorrect.

4.) The customer is domiciled in, doing business in or regularly transacting with counterparties in a jurisdiction that is known as a bank secrecy haven, tax shelter, high-risk geographic location (e.g., known as a narcotics producing jurisdiction, known to have ineffective AML/Combating the Financing of Terrorism systems) or conflict zone, including those with an established threat of terrorism.

5.) The customer has difficulty describing the nature of his or her business or lacks general knowledge of his or her industry.

6.) And more! 

 

Potential Red Flags in Deposits of Securities

1.) 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.

2.) A customer has a pattern of depositing physical share certificates, or a pattern of delivering in shares electronically, immediately selling the shares and then wiring, or otherwise transferring out the proceeds of the sale(s).

3.) A customer deposits into an account physical share certificates or electronically deposits or transfers shares that:

  • were recently issued or represent a large percentage of the float for the security;
  • reference a company or customer name that has been changed or that does not
  • match the name on the account;
  • were issued by a shell company;
  • were issued by a company that has no apparent business, revenues or products;
  • were issued by a company whose SEC filings are not current, are incomplete, or nonexistent;
  • were issued by a company that has been through several recent name changes or business combinations or recapitalizations;
  • were issued by a company that has been the subject of a prior trading suspension; or
  • were issued by a company whose officers or insiders have a history of regulatory or criminal violations, or are associated with multiple low-priced stock issuers.

4.) And more! 

Potential Red Flags in Securities Trading

1.) The customer, for no apparent reason or in conjunction with other “red flags,” engages in transactions involving certain types of securities, such as penny stocks, Regulation “S” stocks and bearer bonds, which although legitimate, have been used in connection with fraudulent schemes and money laundering activity. (Such transactions may warrant further due diligence to ensure the legitimacy of the customer’s activity.)

2.) There is a sudden spike in investor demand for, coupled with a rising price in, a thinly traded or low-priced security.

3.) The customer’s activity represents a significant proportion of the daily trading volume in a thinly traded or low-priced security.

4.) A customer buys and sells securities with no discernable purpose or circumstances that appear unusual.

5.) Individuals known throughout the industry to be stock promoters sell securities through the broker-dealer

6.) And more!

Potential Red Flags in Money Movements

1.) The customer attempts or makes frequent or large deposits of currency, insists on dealing only in cash equivalents, or asks for exemptions from the firm’s policies and procedures relating to the deposit of cash and cash equivalents.

2.) The customer “structures” deposits, withdrawals or purchases of monetary instruments below a certain amount to avoid reporting or recordkeeping requirements, and may state directly that they are trying to avoid triggering a reporting obligation or to evade taxing authorities.

3.) The customer seemingly breaks funds transfers into smaller transfers to avoid raising attention to a larger funds transfer. The smaller funds transfers do not appear to be based on payroll cycles, retirement needs, or other legitimate regular deposit and withdrawal strategies.

4.) The customer’s account shows numerous currency, money order (particularly sequentially numbered money orders) or cashier’s check transactions aggregating to significant sums without any apparent business or lawful purpose.

5.) The customer frequently changes bank account details or information for redemption proceeds, in particular when followed by redemption requests.

6.) And more! 

 

Potential Red Flags in Insurance Products

1.) The customer cancels an insurance contract and directs that the funds be sent to a third party.

2.) The customer deposits an insurance annuity check from a cancelled policy and immediately requests a withdrawal or transfer of funds.

3.) The customer cancels an annuity product within the free-look period. This could be a red flag if accompanied with suspicious indicators, such as purchasing the annuity with several sequentially numbered money orders or having a history of cancelling annuity products during the free-look period.

4.) The customer opens and closes accounts with one insurance company, then reopens a new account shortly thereafter with the same insurance company, each time with new ownership information.

5.) The customer purchases an insurance product with no concern for the investment objective or performance.

6.) And more! 

Other Potential Red Flags

1.) The customer is reluctant to provide information needed to file reports to proceed with the transaction.

2.) The customer exhibits unusual concern with the firm’s compliance with government reporting requirements and the firm’s AML policies.

3.) The customer tries to persuade an employee not to file required reports or not to maintain the required records.

4.) Notifications received from the broker-dealer’s clearing firm that the clearing firm had identified potentially suspicious activity in customer accounts. Such notifications can take the form of alerts or other concern regarding negative news, money movements or activity involving certain securities.

5.) Law enforcement has issued subpoenas or freeze letters regarding a customer or account at the securities firm.

6.)  And more!