FINRA recently released a podcast AML Update: The Latest Trends and Effective Practices . This podcast provides a great update on the current AML and fraud trends and best practices from Jason Foye, Senior Director of the National Cause and Finance Crimes Detection Program’s Special Investigative Unit .
A few highlights from the AML update podcast:
Financial Crimes Enforcement Network (FinCEN) Priorities
On June 30, 2021, FinCEN posted a bulletin that set out eight priorities, focused on threats to the U.S. financial system and national security. These priorities include corruption, cybercrime (including relevant cybersecurity and virtual currency considerations), foreign and domestic terrorist financing, fraud (including securities and investment fraud as well as internet-enabled fraud), transnational criminal organizations, drug trafficking organizations, and human trafficking, and human smuggling and proliferation finance.
As the industry awaits the final regulation that FinCEN is currently working on through the rulemaking process, firms should review these areas and consider how they would apply to their risk based AML program based on their product, service and client base. FinCEN provides great details on specific red flags surrounding each area to help Firm’s determine what changes need to be made in their current program to be able to address these risks.
2022 Report on FINRA’s Exam and Risk Monitoring Program: Cybersecurity
Regulators are focused on the increase in new account fraud and account takeover fraud. New account fraud, occurs when bad actors are using stolen or synthetic identification material to open accounts at firms that they then use to generate or launder illicit proceeds. Regulators noted a post pandemic rise in online account opening. These activities make it particularly difficult, because the identities are stolen so even with a SARS filed the true identity of the bad actor is generally never known.
Another example that has been seen recently is taking over an existing account and then opening another account at another firm to conduct a fraudulent options trading scheme. For example, a bad actor has an account at one broker dealer and they take over an account at another broker dealer and they buy an out of the money option in their own account, and then they sell it at a much higher price to the account they control as the other broker dealer. So, generating big gains for themselves and big losses for the investor that as that account that has been taken over.
For more information , see the report here.
FinCEN Alert: Potential Russian Sanctions Evasion Attempts
FinCEN put out an alert on this on March 7th, where they cover some of the risks that they see in terms of sanctions evasion including how sanctioned entities may be nesting within the accounts of foreign financial institutions, non-sanctioned banks, for example, in Russia or Belarus, as well as certain financial institutions in third countries. Firms need to review their client base and specifically for certain foreign financial institutions and look at activity post sanctions for indications of potential red flags. What is important is that the Firm has a risk based AML approach to document the actions and decisions taken by the firm when a potential red flag is uncovered.
Exam Finding Trends
Mr. Foye noted that many of these findings at their core are re-occurring even though situations and the actors may change. He noted that some of the common themes include not using AML reports or systems that accurately or reasonably capture potential suspicious activity and are free of data integrity issues. One item noted was the use of sophisticated software for AML detection where FINRA found that the system wasn’t functioning properly due to data integrity issues. Another item is where firms do not dedicate resources to their AML program which leads to a lack of or insufficient review of AML reports that detect suspicious activity. Finally, FINRA noted trends in the lack of communication between other departments and the AML department where the AML department is not notified of activity that would warrant a further review or investigation of red flags.
MasterCompliance provides expert consulting in AML best practices and support in creating a risk based AML program. If you would like to explore additional assistance or services, please contact us.