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Record fine highlights need for continuous AML compliance by firms of all sizes

The U.S. Financial Industry Regulatory Authority (FINRA) recently issued its largest penalty ever against a financial firm for systemic and widespread anti-money laundering (AML) compliance failures.

FINRA’s action is but one of many as global regulators take stronger measures to fight money laundering and terrorist financing.

Organizations can prepare to stand up to this stricter scrutiny by giving employees the tools they need to recognize, avoid and/or address potential AML issues with Thomson Reuters’ online Anti-Money Laundering training course.

AML controls failed to match firm’s growth

In May, FINRA announced a $17 million penalty against a financial services firm for significant AML compliance failures, representing the largest FINRA penalty to date for AML violations.

In particular, the regulator found the firm did not update its AML compliance systems to correspond with the firm’s rapid growth between 2006 and 2014, leaving the firm unable to properly prevent or detect, investigate and report suspicious activity.

Insufficient AML controls led the firm to allow “red flags” of suspicious activity to go undetected, while minimally investigating those it did notice.

The firm also lacked the required customer identification program — thereby failing to perform adequate due diligence on customers and business partners — and did not perform periodic risk reviews of foreign financial institutions.

FINRA stressed these deficiencies were even more egregious because they follow previous AML violations in 2012.

Investments in compliance more cost-efficient than fines

The firm’s “other” noninterest expenses increased 43% in the last quarter of 2016 due to high legal costs associated with recent regulatory actions.

As a result, the firm responded proactively to this latest enforcement action by hiring a new chief AML officer and 50 new AML associates, enhancing its AML training and purchasing new monitoring software to better screen transactions for suspicious activity.

With the exception of Europe and Canada, the firms also initiated efforts to discontinue its third-party foreign correspondent activities.

Key Takeaways

  • Individuals remain subject to liability. FINRA made clear its continued willingness to hold individuals liable for compliance failures. The regulator fined the firm’s former compliance officer $25,000 and suspended her for three months for failing to fulfill her duty to review the firm’s AML program and ensure it adequately addressed the firm’s business risk. Regulators also held the officer responsible for not addressing AML issues or deficiencies, or bringing them to the attention of the appropriate corporate officers.
  • Small and mid-size firms can expect attention from regulators. The fact that FINRA targeted a mid-size firm also indicates that high-profile brokerages are no longer the only ones facing increased regulatory scrutiny of AML compliance efforts. Thus, while it may be difficult to direct resources to compliance, small and medium-size firms that neglect to do so not only increase their financial crime risk, but also their regulatory risk.
  • Compliance is a continuous process. Finally, this case highlights the importance of not only implementing adequate AML compliance measures, but also ensuring what is in place remains adequate over time. Firms that are unable to identify when a change in circumstances triggers a need to amend their AML program significantly increase their chance of running into trouble.

As one of the first lines of defense against money laundering, terrorist financing and other illegal and/or unethical activities, regulators have high compliance expectations for financial organizations.

They expect firms to adopt strong AML programs and allocate the necessary resources and staff to implement them effectively.

Thomson Reuters’ online Anti-Money Laundering training course offers an easy and effective way to train employees to spot, avoid and address AML issues and minimize AML risk.

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