FINRA Rule 3310 provides broker-dealer guidance on how to design, test, and enforce a firm’s Anti-Money Laundering Program (“AML”). One main element of AML is to “establish and implement policies and procedures that can be reasonably expected to detect and cause the reporting of transactions required under 31 U.S.C. 5318(g) and the implementing regulations thereunder.” FINRA Notice to Members 19-10 identified a key list of red flags that may be used to help identify suspicious activity in trading, money movements, insurance, and securities.
Amid the current COVID-19 pandemic, many employees of broker-dealers are now under a “Shelter in Place Order” which requires any non-essential personnel to work from home. This presents several new challenges for compliance professionals in the broker-dealer landscape. This is especially true for firms that operate under a more traditional brick-and-mortar environment where everyone works in a central location.
The necessary shift towards a teleworking environment has created several key considerations related to the monitoring of account activities for AML and suitability considerations. While the broker-dealer is trying to franticly adust to its “new normal,” many thieves and fraudsters can seize these moments when they feel the business is distracted. Below are a few key areas and recommendations on how to manage this change.
Updates to Client Profile
Use your exception-based reports to be on the lookout for updates to client information. This includes changes to address, phone numbers, email address, and financial or investment information. It’s important to pay particular attention to changes for senior clients and clients with whom you may not have a personal relationship. When in doubt, reach out to the client using the phone number on file to confirm these instructions. Often, fraudsters will make “innocent” changes to the information and then follow through with money movement or trading requests to compromise the account.
Money Movement Patterns
Exception reports or other surveillance systems are tools that can look for patterns of abnormal activity within an account. Abnormal activity can include rapid money in and out, structuring, movements to unknown third parties, or penny stock schemes. Fraudsters may attempt schemes during a time when they believe a broker-dealer has their guard down and/or might be under the belief that the activity is normal due to a crisis environment. Contacting the client by the phone number on file is a key deterrent for this type of activity. Also, asking about the activity to determine the level of risk can go a long way in establishing and documenting any necessary next steps.
Review of Personal Trading
Even though employees and Representatives are out of the office, employee trading continues. This is an area that may be prone to misuse during this time. Frequently targeted reviews of your employee’s trading activities can help the Firm be proactive on any trade-related red flags that may occur between the Representative and their clients.
Suitability
Client-based suitability considerations under FINRA Rule 2111 notes that the products recommended must be reasonable in line with the client’s investment, financial, and risk goals. During the past few weeks, the markets have been on a roller coaster. Ensuring that your Representatives continue to abide by the client’s suitability profile is paramount. Further issues, including customer complaints or enforcement actions, will likely rise when trading and recommendations are made against the profile set.
If you would like to learn more about our expert consulting in this and other areas of AML and Suitability, please contact us.
For additional considerations for firms during these unprecedented times, check out our previous blog posts related to COVID-19.