Lessons Learned From Recent AML Enforcement Actions (AML) Thursday, May 18 9:00 a.m. 10:00 a.m.

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1 Lessons Learned From Recent AML Enforcement Actions (AML) Thursday, May 18 9:00 a.m. 10:00 a.m. Does your AML program meet evolving expectations and address emerging money laundering risks? Join FINRA staff and industry experts as they review legal cases and enforcement actions impacting AML programs. Panelists cover critical regulatory concerns, potential vulnerabilities, and how you can address any pitfalls in your AML program. Moderator: Laura Leigh Blackston Senior Regional Counsel FINRA Enforcement Panelists: Elizabeth Paige Baumann Senior Vice President, Chief Anti-Money Laundering Officer Fidelity Investments Emily Gordy Executive Vice President, Deputy General Counsel LPL Financial LLC Jeffery Horowitz Managing Director and Chief Compliance Officer Pershing LLC 2017 Financial Industry Regulatory Authority, Inc. All rights reserved. 1

2 Lessons Learned From Recent AML Enforcement Actions (AML) Panelist Bios: Moderator: Laura Leigh Blackston is Senior Regional Counsel with FINRA s Enforcement Department. Ms. Blackston joined FINRA as an attorney in Prior to joining FINRA, she was an associate and partner with the General Litigation group of the law firm Jones Walker. As Senior Regional Counsel, Ms. Blackston has handled key enforcement actions regarding anti-money laundering and has cotaught Anti-Money Laundering Regulation at FINRA s Institute at Wharton. Ms. Blackston graduated from the University of Mississippi in 1988 with honors and received her J.D. Degree from Washington and Lee University with honors in She is also a member of FINRA s Anti-Money Laundering Regulatory Expert Group and is Certified Anti-Money Laundering Specialist (CAMS). Panelists: Elizabeth Paige Baumann has been the Senior Vice President and Chief Anti-Money Laundering Officer at Fidelity Investments since June 1, Ms. Baumann has oversight responsibility for the AML programs of Fidelity s non-u.s. entities. She actively represents Fidelity from an AML perspective in various industry groups, including the Securities Industry and Financial Markets Association (SIFMA) and the Investment Company Institute (ICI). She has been a member of Fidelity's Enterprise Compliance Department since September Her first role was to support National Financial Services LLC's clearing business on a variety of compliance issues. Ms. Baumann has played a key role in the AML programs of all of Fidelity's U.S. financial institutions covered under the Bank Secrecy Act of 1970, as amended, and related regulations (collectively, the "BSA") since April of Ms. Baumann served as the co-chair of SIFMA's AML and Financial Crimes Committee January 2011 through December She also represented the ICI on several sub-committees of the Bank Secrecy Act Advisory Group (BSAAG), which consists of representatives from federal regulatory and law enforcement agencies, financial institutions, and trade groups with members subject to the BSA. Prior to Fidelity, Ms. Baumann worked at Charles Schwab in San Francisco for 6 years. She earned her J.D. from the Tulane School of Law and her B.A. from Trinity College in Hartford, Connecticut. Ms. Baumann is a member of both the California and Massachusetts bars. Emily P. Gordy is Executive Vice President, Deputy General Counsel at LPL Financial, with responsibility for regulatory affairs (Regulatory Investigations & Counseling and the Special Investigations Unit). Prior to joining LPL, Ms. Gordy was a partner at the law firm of Shulman Rogers. Ms. Gordy was a financial regulator for 27 years. As an SVP in FINRA s Enforcement Department, she held a variety of positions, including Deputy/Home Office Enforcement and Head of Regional Enforcement. Prior to joining Enforcement, she advised the District Offices on legal and policy issues impacting the examination program. Prior to joining FINRA, Ms. Gordy spent 13 years with the SEC, primarily with Enforcement, Office of Chief Counsel. At the time of her departure, she was serving as Deputy Chief Counsel. Ms. Gordy is a graduate of the Washington College of Law / American University and Gettysburg College. She was selected as one of The National Law Journal s 2015 Regulatory & Compliance Trailblazer honorees. Jeffrey Horowitz is Managing Director and Chief Compliance Officer for Pershing LLC, a BNY Mellon company, and is a member of BNY Mellon s Risk and Compliance Operating Committee. Mr. Horowitz previously served as the Chief Anti-Money Laundering (AML) and OFAC Officer for Pershing, where he was responsible for the development and implementation of the firm s global AML Program across the Pershing enterprise. Mr. Horowitz has represented Pershing as a securities industry representative to the U.S. Treasury Department s Bank Secrecy Act Advisory Group (BSAAG) and was also a past cochair of the Securities Industry and Financial Markets Association (SIFMA) Anti-Money Laundering Committee. He has also served as the BSAAG co-chair of the Securities and Futures Subcommittee. Mr. Horowitz is an active member of the International Council of Securities Association group on AML and the Foreign Account Tax Compliance Act (FATCA), and serves on the Florida International Bankers Association AML Compliance Conference Advisory Committee as well the Association of Certified Anti- Money Laundering Specialists Annual AML & Financial Crime Conference Task Force. Mr. Horowitz currently represents Pershing on SIFMA s Compliance and Regulatory Policy Committee. Prior to joining Pershing, Mr. Horowitz was a director and Head of AML Compliance for Citigroup s Corporate and Investment Banking Division in North America. His responsibilities included the 2017 Financial Industry Regulatory Authority, Inc. All rights reserved. 2

3 Institutional Sales and Trading Departments of Citigroup Global Markets Inc., Investment Banking, Global Relationship Banking and Global Transaction Services. Prior to joining Citigroup, Mr. Horowitz held several senior compliance roles at Lehman Brothers, Goldman Sachs and Salomon Brothers Inc. He began his career at the Federal Deposit Insurance Corporation (FDIC) in the Division of Resolutions. Mr. Horowitz earned a bachelor s degree in economics from Trenton State College. He has also completed the Securities Industry Institute program, sponsored by the Securities Industry and Financial Markets Association, at the Wharton School of the University of Pennsylvania Financial Industry Regulatory Authority, Inc. All rights reserved. 3

4 FINRA Annual Conference May 16-18, 2017 Washington, DC Lessons Learned From Recent AML Enforcement Actions (AML)

5 Panelists Moderator Laura Leigh Blackston, Senior Regional Counsel, FINRA Enforcement Panelists Elizabeth Paige Baumann, Senior Vice President, Chief Anti-Money Laundering Officer, Fidelity Investments Emily Gordy, Executive Vice President, Deputy General Counsel, LPL Financial LLC Jeffery Horowitz, Managing Director and Chief Compliance Officer, Pershing LLC 1

6 To Access Polling Under the Schedule icon on the home screen, Select the day, Choose the Lessons Learned From Recent AML Enforcement Actions session, Click on the polling icon: 2

7 Four Common Themes in Recent Enforcement Actions Systems Inadequate for Microcap Risks Technology Flawed Inadequate Resources Devoted to AML Foreign Financial Institution Accounts not Properly Monitored 3

8 Microcap Stocks Definition of penny stock in 17 CFR 240.3a51-1 Generally, not listed on an exchange (over-thecounter) Under $5 a share Should include foreign low-priced stocks as well Relevant Link Definition of penny stock in 17 CFR 240.3a51-1, 4

9 Polling Question 1 1. Does your firm handle microcap transactions? a. Yes, routinely b. Yes, but only as an accommodation to long-term customer c. Yes, but only if the microcaps were ACAT d in as part of larger account transfer d. No, we do not handle microcap transactions 5

10 Microcaps Does Your System Adequately Address the Risks? Shell Companies as Issuers Nominees or Intermediaries as Customer Pump and Dump Schemes Sale of Restricted Shares Prior to Expiration of Holding Period Self-serving Statements from Issuer, Customer, or Attorneys FFI s Enabling U.S. Citizen Tax-Evasion 6

11 Monitoring Microcap Business for Suspicious Activity Promotional Activity for Life-Cycle of Transaction Negative News Percentage of Daily Trading Volume Percentage of Customer Ownership of Total Outstanding Shares Price Spikes All Types of Deposits Followed by Immediate Liquidation Communication Between Sect. 5 Review Group and AML Group Avoid Overreliance on Broker Opening Account 7

12 In re Albert Fried & Company $300,000 fine Hundreds of Billions of Shares of penny stocks obtained from convertible debentures substantial percentage of daily market volumes in securities coupled with other red flags No SARs filed Written Procedures were reasonable overall, but not followed Extraordinary Level of Cooperation Corrective Measures that were prompt and complete Relevant Link In re Albert Fried & Company, LLC, SEC Administrative Proceeding (June 1, 2016), 8

13 Overlap Between AML and Sect. 5 Responsibilities Separate Sect. 5 Due Diligence Exemption in Face of Sect. 5 Red Flags (RN 09-05) Requires Searching Inquiry Filing a SAR does not Relieve Firm of Section 5 Obligation Rejecting Deposit does not Relieve Firm of SAR Determination Relevant Link FINRA Regulatory Notice, RN 09-05, 9

14 Question Your Assumptions Data Integrity Common Data Failures Failure of Reports to reflect data from related accounts collectively Time Period of Reports too short to detect activity Deposit and Liquidation not tracked (only purchase and liquidation) Alerts Closed as unremarkable or in-line with expected activity Missing Data for Calculating Risk Ranking Calibrating Thresholds too High Not using Available Scenarios 10

15 Avoiding Data and System Failures Importance of Testing Unified System as Opposed to Patchwork Work with System Provider to Calibrate System Look for Gaps of Data Collection Documented Reasons for non-use of Available Scenarios 11

16 Data Failure Next Steps Define Scope of Problem Document Corrective Action Determine whether to Conduct Retroactive Review File any Necessary SARs Determine whether Regulators Should be Notified 12

17 Recent Enforcement Actions re: Data Failures Citi International Financial Services, LLC, (AWC Dec. 20, 2016), Convergex Execution Solutions, LLC, (FINRA AWC Dec. 7, 2016), Credit Suisse Securities (USA) LLC, (FINRA AWC Dec. 5, 2016), Raymond James & Associates, Inc., (AWC May 18, 2016), 13

18 Resources Polling Question 2 2. Do you have enough resources, in particular, adequate headcount, to support your firm s AML program? a. Yes b. Yes, and we have capacity to absorb even more AML-related work (e.g., increased volumes of hits) c. No, but my firm is committing more resources, including adds to staff d. No, and I am concerned that my firm s AML program will be negatively impacted as a result e. I don t know 14

19 Findings of Recent Matters Regarding Resources Separate Finding in one Recent Case that Firm Failed to Devote Sufficient Resources to AML Overreliance on Traders, RR s Opening the account, or Affiliate to Conduct Due Diligence Manual Processes Require More Staff Staff and Processes Insufficient Automated Systems Require Staff to Review and to Calibrate Systems Determine Reasonable Load for Staff 15

20 Effect of New Business on Firm s AML Resources Important to Identify New Risks Determine Methods of Monitoring and Staff Needed Schedule Reevaluation of Needs after first 6 months Considerations for Microcap Business Correspondent Accounts for FFIs 16

21 Communication Enhances Resources Sharing Negative News Tracked by one Dept. with AML Dept. Sharing Regulatory Inquiries Regarding Customers with AML Dept. Clearing Firm Inquiries Subpoenas regarding Customers or Issuers Red Flags by Sec. 5 Review Team or Freezing of Trading 17

22 Foreign Financial Institutions Polling Question 3 3. As Part of Onboarding an FFI, Do you review the Firm s website? a. Yes, we want to know what services the FFI claims to offer b. No, it would all be puffery anyway c. No, we don t have FFIs as clients d. I have no idea 18

23 Actual language from Belize FFI website Rainbow Bright Financial FAQs What is a nominee Officer or Director? An appointed person who will act as an officer or director on your behalf, giving you an extra level of confidentiality as your name will not show up as an officer or director on your IBC. 19

24 FFI Correspondent Accounts Monitoring Correspondent Account receives deposits or makes payments for the FFI Perform a risk assessment that addresses five specific factors Conduct periodic review 20

25 Risks Associated with FFI Accounts Nominees Don t Know Who Beneficial Owner is Could be Complicit in Tax Evasion by U.S. Customers Popular Method for Liquidating Dubious Penny Stocks Issues with Currency Conversion Less Stringent AML Regimes in Home Jurisdiction 21

26 Oppenheimer Lessons re: FFI Business Know and follow your Procedures Pattern of Depositing Penny Stocks followed by Immediate Liquidation Suspicious If W8-BEN filed need to monitor for U.S. Customer acct. use Monitor for Firm Acting as Unregistered Broker 22

27 Appendix Recent Enforcement Matters Citi International Financial Services, LLC, (AWC Dec. 20, 2016), relevant to data failures, inadequate resources or new business $5.75 million fine and certification Convergex Execution Solutions, LLC,, (FINRA AWC Dec. 7, 2016), relevant to microcaps, data failures, foreign financial institutions $3 million fine ACAP Financial Inc., , (FINRA OFR, Dec. 6, 2016), relevant to microcaps, inadequate resources or new business firm expelled Credit Suisse Securities (USA) LLC, (FINRA AWC Dec. 5, 2016), relevant to microcaps, data failures, inadequate resources or new business, and foreign financial institutions $16.5 million fine and supervisory certification 23

28 Appendix -- Continued In re Albert Fried & Company, LLC, SEC Administrative Proceeding (June 1, 2016), relevant to microcaps $300,000 fine, Raymond James & Associates, Inc., (AWC May 18, 2016), relevant to microcaps, data failures, inadequate resources or new business, foreign financial institutions $17 million fine, supervisory certification, AMLCO suspended 3 months and fined $25,000, Cantor Fitzgerald & Co., (FINRA AWC Dec. 21, 2015), relevant to microcaps, lack of resources or new business fine of $7.3 million monetary penalty, Sect. 5 principal suspended 3 months and fined $35,000, trader suspended 2 months and fined $25,000 In re Oppenheimer & Co., Inc., SEC Administrative Proceeding (Jan. 27, 2015), relevant to microcaps and foreign financial institutions, $10 million monetary penalty and independent consultant 24

29 Lessons Learned From Recent AML Enforcement Actions (AML) Thursday, May 18 9:00 a.m. 10:00 a.m. Resources FINRA Notices FINRA Regulatory Notice Unregistered Resales of Restricted Securities: FINRA Reminds Firms of Their Obligations to Determine Whether Securities are Eligible for Public Sale (January 2009) FINRA Disciplinary Actions FINRA Disciplinary Actions Online Search Page (Search on the case number to find / download document) Citi International Financial Services, LLC, Case Number: (AWC Dec. 20, 2016), relevant to data failures, inadequate resources or new business $5.75 million fine and certification Convergex Execution Solutions, LLC, Case Number: (FINRA AWC Dec. 7, 2016), relevant to microcaps, data failures, foreign financial institutions $3 million fine ACAP Financial Inc., Case Number: , (FINRA OFR, Dec. 6, 2016), relevant to microcaps, inadequate resources or new business firm expelled Credit Suisse Securities (USA) LLC, Case Number: (FINRA AWC Dec. 5, 2016), relevant to microcaps, data failures, inadequate resources or new business, and foreign financial institutions $16.5 million fine and supervisory certification Raymond James & Associates, Inc., Case Number: (AWC May 18, 2016), relevant to microcaps, data failures, inadequate resources or new business, foreign financial institutions $17 million fine, supervisory certification, AMLCO suspended 3 months and fined $25,000 Cantor Fitzgerald & Co., Case Number: (FINRA AWC Dec. 21, 2015), relevant to microcaps, lack of resources or new business fine of $7.3 million monetary penalty, Sect. 5 principal suspended 3 months and fined $35,000, trader suspended 2 months and fined $25, Financial Industry Regulatory Authority, Inc. All rights reserved. 1

30 SEC Resources In re Oppenheimer & Co., Inc., SEC Administrative Proceeding (Jan. 27, 2015), relevant to microcaps and foreign financial institutions, $10 million monetary penalty and independent consultant In re Albert Fried & Company, LLC, SEC Administrative Proceeding (June 1, 2016), relevant to microcaps -- $300,000 fine Definition of penny stock in 17 CFR 240.3a Financial Industry Regulatory Authority, Inc. All rights reserved. 2