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FINRA Gives Broker-Dealers New Tips for Spotting Fraud and Money Laundering

V&E Government Investigations Update, May 22, 2019

On May 6, 2019, the Financial Industry Regulatory Authority (FINRA) issued Regulatory Notice 19-18 to help broker-dealers recognize and report potential fraud and money laundering. The notice does not alter the current reporting requirements for broker-dealers, but rather provides practical advice by citing 97 red flags that could signal suspicious trading activity.

Broker-dealers are presently obligated to monitor and report suspicious trading activity. FINRA Rule 3310 requires every member firm to develop and implement a written anti-money laundering compliance program in order to bring the firm into compliance with the requirements of the Bank Secrecy Act (BSA) and regulations promulgated by the Department of Treasury. Those regulations provide that broker-dealers must file a suspicious activity report (SAR) to the Financial Crimes Enforcement Network (FinCEN) if a transaction involves some illegal or suspected illegal activity and $5,000 or more in funds or other assets.

The list of red flags provided in Regulatory Notice 19-18 are designed to assist broker-dealers in identifying transactions that might trigger these reporting obligations. These red flags do not create new obligations, but are intended to provide examples or illustrations of the kind of behavior broker-dealers should look out for. The list of red flags also incorporates previous guidance listed in the Notice to Members 02-21, which was released back in 2002.

Regulatory Notice 19-18 contains a total of 97 examples of red flags that should tip off broker-dealers of potentially illegal activity. These are split into six broad categories:

  1. Potential Red Flags in Customer Due Diligence and Interactions with Customers;
  2. Potential Red Flags in Deposits of Securities;
  3. Potential Red Flags in Securities Trading;
  4. Potential Red Flags in Money Movements;
  5. Potential Red Flags in Insurance Products; and
  6. Other Potential Red Flags.

Some examples of red flag behavior that would notify a broker-dealer of potential wrongdoing are where the customer is reluctant to provide diligence information or provide the source of funding to the broker-dealer, or where a customer makes a large purchase or sale of a security shortly before a significant public announcement is made that affects the price of that security. The 97 red flag examples cover a broad variety of potential customer behaviors, and broker-dealers would be wise to study them carefully and keep them nearby when engaging with customers.

Additionally, Regulatory Notice 19-18 describes digital assets, which include cryptocurrencies like Bitcoin, as an “emerging area of risk.” Digital assets are distinguishable from traditional assets in that they are not tangible or physical items; a digital asset exists solely as digital code. The question of whether digital assets are technically securities is far from settled, but regardless, digital assets are still subject to the requirements of the BSA. FINRA’s warning regarding digital assets goes hand-in-hand with other organizations’ recognition of this emerging area of risk such as the American Bar Association’s recently issued guidance.

Broker-dealers should keep in mind that the list of red flags is not exhaustive and strict adherence to the warnings in the Notice does not guarantee compliance with responsibilities under the BSA and Treasury regulations. Broker-dealers should view the list as a new tool in their larger compliance tool box.

Visit our website to learn more about V&E’s Government Investigations & White Collar Criminal Defense practice. For more information, please contact Vinson & Elkins lawyers Casey Downing or Jennifer Freel.


Key Contacts

+1.713.758.2160
cdowning@velaw.com
+1.512.542.8538
jfreel@velaw.com

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This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.