By Rebecca Kahn, J.D.
Morgan Stanley Smith Barney LLC has agreed to pay $10 million to settle a FINRA probe that uncovered critical flaws in the firm’s anti-money laundering ("AML") program. FINRA found that the firm failed to monitor wire and foreign currency transfers, failed to investigate suspicious wire transfers to and from high-risk countries, and failed to monitor penny stock trades for AML issues. FINRA further found that Morgan Stanley’s program failed to comply with Bank Secrecy Act requirements and that the firm’s supervisory failures spanned a period of more than five years. Morgan Stanley has settled the matter without admitting or denying the findings (FINRA News Release, December 26, 2018).
In its letter of acceptance, waiver and consent, FINRA stated that Morgan Stanley’s automated AML surveillance system failed to receive critical data from several systems, undermining the firm’s surveillance of tens of billions of dollars of wire and foreign currency transfers, including transfers to and from high-risk countries.
FINRA also found that Morgan Stanley failed to devote sufficient resources to review alerts generated by its automated AML surveillance system. Consequently, Morgan Stanley analysts often closed alerts without adequately conducting and documenting their investigations of potentially suspicious wire transfers.
According to FINRA, Morgan Stanley’s AML department did not reasonably monitor customers’ deposits and trades in penny stock for potentially suspicious activity, despite the fact that, from January 2011 to December 2013, its customers deposited approximately 2.7 billion shares of penny stock, which resulted in subsequent sales totaling approximately $164 million during that time period.
FINRA also found that Morgan Stanley failed to establish and maintain a supervisory system reasonably designed to comply with Section 5 of the Securities Act of 1933. Specifically, Morgan Stanley divided responsibility for vetting its customers’ deposits and sales of penny stock among its branch management and two home office departments without reasonable coordination among them. The firm relied on customer representations that the penny stock they sought to deposit was not restricted from sale, and the representations of issuers’ counsel that the customers’ sales were exempt from registration requirements. As a result, Morgan Stanley failed to reasonably evaluate the customers’ penny stock transactions for red flags.
Moreover, FINRA found that Morgan Stanley failed to implement its policies, procedures, and controls to ensure that it conducted risk-based reviews on a periodic basis of the correspondent accounts it maintained for certain foreign financial institutions.
In determining the appropriate monetary sanction, FINRA considered that, since 2013, Morgan Stanley has taken "extraordinary" corrective measures to expand and enhance its AML-related programs, including substantial resources devoted to increase its staffing, improve its automated transaction monitoring system, and revise its policies and procedures.
Companies: Morgan Stanley Smith Barney LLC.
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