Securities Law Blog

The Financial Industry Regulation Authority (FINRA) recently issued fines to two financial firms with inadequate anti-money laundering (AML) programs, as required by the Bank Secrecy Act and FINRA Rules. According to the industry regulator, a firm’s AML program must be made to fit their business models, nature of their clients, and take into consideration the technological environment.

Penson Financial Services, a Dallas securities clearing firm, has been fined $450,000 for failing to establish and implement adequate AML procedures. From October 1, 2003 until May 31, 2008, Penson employed two individuals to review thousands of pages of AML reports, which led to reports not being consistently reviewed. Failure to monitor such transactions involving penny stocks and liquidations left the firm at high risk for fraud and money laundering.

As early as January 2004, employees as well as internal audit identified compliance concerns. Through December 2007 customers were allegedly allowed to disburse funds out of certain accounts using check writing features without proper AML review.

According to its findings, FINRA found 129 instances of suspicious activity that had been flagged by Penson’s automated system and that the firm had failed to follow-up with a timely review. Other alleged deficiencies in Penson’s AML program include failure to assess money laundering risks presented by foreign financial institutions, failure to comply with FINRA reporting requirements and failure to keep accurate records of unsecured deficits in the accounts of its correspondent firms.

In a similar case Pinnacle Capital Markets, a Raleigh, N.C. provider of online access to capital markets, is being fined $350,000 for its failure to implement AML procedures to detect suspicious activity and to verify the identity of its customers, according to FINRA’s statement.

Pinnacle functions as an online business providing mainly foreign customers with direct access to U.S. securities markets. Customers of Pinnacle included foreign financial institutions which allegedly opened sub-accounts for foreign customers who were not required to fully disclose their identity. According to FINRA’s report, from January 2006 to September 2009, Pinnacle failed to adopt risk based procedures to verify identity.

The firm used a manual system to conduct daily review of its trade blotter. The highly insufficient system allegedly caused Pinnacle to miss suspicious trading patterns and other indications of market manipulations.

In a 2007 Securities and Exchange Commission (SEC) enforcement action that targeted a “pump-and-dump” scheme involving a Latvian Bank, Pinnacle allegedly failed to detect suspicious trading patterns. The firm however was not named as a defendant in the case.