FINRA Fine Sends a Warning: Clearing Firms Must Know Their Customers, Uncover Suspicious Activity

A $1 million penalty for anti-money laundering failures against an Omaha, NE, independent clearing firm ratchets up the pressure on similar operations and their introducing broker clients, say compliance professionals.

COR Clearing LLC lacked a written program to monitor transactions for anti-money laundering (AML) red flags, inadequately staffed its compliance effort and failed to review its 86 clearing clients’ AML programs, according to the Financial Industry Regulatory Authority (FINRA).

In addition, many of the clearing firm’s clients had checkered regulatory enforcement histories, but weren’t  properly vetted on account opening nor given adequate ongoing due diligence, according to the FINRA settlement order.

The settlement order and penalty reflect two of FINRA’s stated examination goals: tightening up compliance with the Bank Secrecy Act by member firms and increasing scrutiny on trades of lower-priced securities, also called penny stocks, which are often the province of small broker dealers that rely on independent clearing firms.

The action makes explicit that clearing firms, not just introducing firms – which typically have direct dealings with the customer – are under extra scrutiny by FINRA examiners, particularly with regard to penny stock transactions, said Nick Hartofilis, a director with Kaufman Rossin. who examined the compliance programs of Florida broker-dealers for FINRA.

FINRA has “sent notices to members and brought cases against member firms as well as highlighted this in the 2013 exam priorities letter,” he said.

The violations at COR Clearing were “identified during multiple examinations” between 2009 and 2013, with examiners finding that the firm’s AML surveillance program did not address the risks of its business model and could not adequately identify red flags for money laundering and fraud by correspondents and their customers, according to FINRA, which oversees more than a dozen clearing firms and nearly 4,200 securities firms.

The size of the penalty is among the largest FINRA has levied against a clearing firm. In January 2009, Finra penalized E*Trade Securities LLC and E*Trade Clearing LLC $1 million for AML program failures, including inadequate systems for detecting suspicious and possibly manipulative trading patterns.

The hefty penalty is not surprising, as examiners are frustrated when problems recur exam after exam, said Bao Nguyen, also a manager with Kaufman Rossin and a former FINRA AML auditor. He added that FINRA fines are calculated on the basis of a number of factors, including the revenue of the firm.