Audits of Securities Firms Should Account for International Growth, Political Events: Consultants

As investment firms look toward new markets to turn a profit, the individuals charged with auditing their compliance program should take note. Bad audits remain a common thread of costly regulatory penalties.

In recent years, failures related to independent testing have been “among our most commonly cited” anti-money laundering (AML) violations, according to Sarah Green, senior director of enforcement and Bank Secrecy Act policy at the Washington, D.C.-based Financial Industry Regulatory Authority (FINRA).

The self-regulatory organization has recently cited firms for allowing individuals to conduct audits of their own performance and for failing to look deeply enough at high-risk business practices, particularly with the use of sample data, said Green. While some securities firms conduct audits of their AML programs every two years, they should do so annually, she said.

Besides ensuring that a firm has drafted AML policies and is reporting suspicious activity—staples of any Bank Secrecy Act audit program—auditors of securities companies must be sensitive to specific risks of the industry, such as the potential exploitation of penny stocks, said Green.

In response to the 2008 recession, many firms have been investing in so-called BRIC countries: Brazil, Russia, India and China, according to Alma Angotti, a former senior counsel in the enforcement division at FINRA.

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Importantly, testers must go beyond the verbal assurances from compliance officers and business line managers when determining whether red flags have been overlooked, according to Nick Hartofilis, a director with Kaufman Rossin. who examined compliance programs of Florida broker-dealers for FINRA.

Large institutions aren’t immune from such problems either, said Hartofilis. Auditors of such companies have failed to note that the businesses maintained overly large backlogs of suspicious activity alerts or didn’t sufficiently press AML officers to analyze customer trading trends in weekly, monthly and quarterly increments, he said.

In one case, AML officers failed to note, and auditors failed to catch, when a client stated his net worth was $2 million but deposited more than $8 million within months, said Bao Nguyen, a manager with Kaufman Rossin., and a former FINRA AML auditor.

“The firm looked at each wire, but didn’t look at all of them over time from a holistic point of view,” he said.