September 10, 2014
Anti-Money Laundering or AML is a hot button issue for Wall Street's compliance professionals. Given the world of terrorism and organized crime that we live in, the goals of AML are important. Consequently, it is understandable that regulators focus on whether registered persons are doing their utmost to detect violations of AML rules and regulations. In a recent case, FINRA alleges that far too many red flags went undetected.
Case In Point
For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Edwin Quinones submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Edwin Quinones, Respondent (AWC 2011025444502, August 13, 2014).
In 1990, Quinones first became registered and from June 2008 to January 25, 2011, he was registered with Wood (Arthur W.) Company. The AWC asserts that he had no prior formal disciplinary history with the Securities and Exchange Commission, any self-regulatory organization or any state securities regulator.
The Potentially And The Alleged
The AWC asserts that during the relevant period from about July 2008 through September 2010, Quinones opened accounts at Wood Company for at least six customers who engaged in what is described as "potentially suspicious activity." According to the AWC, the customers weren't just your run-of-the-mill folks but, to the contrary, "Several of these individuals had criminal backgrounds and alleged ties to organized crime".
SIDE BAR: Oh my, potentially suspicious activity involving criminals with alleged organized crime ties. Don't you just love what happens to the English language when lawyers get their hands on it?
In explaining Quinones' regulatory/compliance shortcomings, the AWC asserts that the customers' activity exhibited the following red flags:
- Often deposited large blocks of shares of the same penny stock at or around the same time;
- Liquidated the penny stock positions and transferred out the proceeds; and
- Sales of the stock occurred over multiple dates with several customers having multiple sales on the same day of 10,000 shares or less blocks
Allegedly, the customers coordinated their activity via email and included Quinones in those communications. By way of example, in a November 3, 2010, email, one customer asked Quinones if it "is it true that you can deposit up to 100,000 shares without scrutiny?"
High And Mighty
The AWC asserts that proceeds were wired out to accounts in the name of the selling customer or transmitted by check to that customer. Further, Quinones allegedly received "high commissions from the sales of these penny stocks."
Summing It Up
FINRA concluded that Quinones failed to implement Wood Company's AML policies because he failed to detect and report red flags indicative of potentially suspicious activity including:
- the deposit and liquidation of penny stocks;
- subsequent wire transfers of sales proceeds without re-investment;
- customers with criminal backgrounds;
- e-mail messages indicating potentially ongoing market manipulative trading activity; and
- no apparent concern regarding fees being charged for the trades at issue.
In accordance with the terms of the AWC, FINRA imposed upon Quinones a $10,000 fine and a 6-month suspension from associating with any FINRA member firm in any capacity.
Bill Singer's Comment
An interesting case and an AWC that offers some helpful guidance. To that extent, compliments to FINRA.
A troubling aspect of this settlement, however, is that the alleged misconduct occurred in 2008 through 2010 -- which means that FINRA required between 4 to 6 years to apparently detect and sanction Quinones. That's a disturbing delay and one that has not been satisfactorily addressed in the AWC. It may well be that ongoing criminal proceedings prevented FINRA from taking more meaningful action earlier. If that's the case, fine, but at least offer some explanation for the regulatory inaction or delay.
The AWC makes much about the "criminal backgrounds" of the customers, and even throws in some references to organized crime. What FINRA doesn't make clear (or clearer) is whether a brokerage firm or stockbroker or compliance officer has a duty to investigate the alleged criminal backgrounds of public customers (which, last I looked, wasn't exactly a standard question on any new account form). The term "criminal background" covers a hosts of sins, from relatively minor misdemeanors up to major felonies. Just exactly what is a FINRA member firm required by law and regulation to ask a customer about his or her "criminal background," and just exactly when are these questions supposed to be asked?
It is a bit odd when a Wall Street cop cites a Wall Street participant for not monitoring the activity of individuals with "criminal backgrounds" but there is no clear-cut definitions of what amounts to "troubling" criminal background that warrants such scrutiny. Since there are statutory disqualifications preventing individuals from becoming registered representatives on Wall Street, why hasn't Congress passed a law that prohibits certain individuals with proscribed "criminal backgrounds" from opening brokerage accounts?
Finally, there is the smell of rank hypocrisy in the air with some of these AML cases involving individual men and women. I mean, you know, how nice that FINRA gets so worked up when the Quinoneses of Wall Street run afoul of AML; on the other hand, the industry's self-regulatory organization seems to pursue a different agenda when some of FINRA's largest member firms enter into criminal settlements involving AML lapses -- historic settlements, settlements involving billions of dollars. Sure, the big boys get hit with fines but when was the last time that FINRA expelled or suspended a firm for much the same conduct as it fined and suspended Quinones?
For example, in recent years, Credit Suisse paid over $500 million to settle allegations involving money laundering. Barclays entered into a settlement of nearly $300 million involving transfers from federally sanctioned nations such as Cuba and Sudan. HSBC agreed to pay nearly $2 billion to settle federal charges involving money laundering allegations involving Iran and Mexican drug cartels. ING agreed to pay over $600 million to settle money laundering charges. JPMorgan Chase agreed to a nearly $2 billion settlement involving money laundering allegations that resulted in a deferred prosecution agreement. Notably missing from all of those settlements was one day of suspended business!
Some of the above cited settling institutions are parents/subsidiaries of FINRA member firms, and, as such, I simply ask, when does a FINRA member firm get expelled or suspended when it comes to AML failures?
To take my point one step farther, when will FINRA expel or suspend its member firms who brought us massive mortgage fraud and rigged the LIBOR and muni markets? When it comes to the too-big-to-fail FINRA member firms, gee, it appears that all of their employees are nice young men and women with college degrees and they're just trying to make a profit for their employer bank or broker-dealer and, you know, if they inadvertently slip up on those pesky AML rules, and, oh well, howsabout we just fine the member firm and let the company continue business as usual? Yeah, I know, the humongous settlements I noted above did not involve a FINRA case but one brought by a prosecutor. Still -- FINRA gets the same newspapers and watches the same television stations that we all do.
Finally, if you don't think that suspending the operations of a major FINRA member firm is such a big deal to those organizations, then do me a favor. Go online. Do a search. Get back to me with all of FINRA's big fish member firms who have had their operations suspended for one day. And I'll make it even easier for you to investigate. Limit the search to the past ten years. Oh, and while you're doing all that research, keep in mind that Respondent Quinones was suspended for six months in addition to being hit with a $10,000 fine. I am NOT shedding tears for Quinones. I am, however, simply asking a question and, hopefully, making a point.