written by Madeline Sheffield
The Financial Industry Regulatory Authority (FINRA) announced on December 26, 2018, that it has fined Morgan Stanley Smith Barney LCC (Morgan Stanley) ten million dollars due to failures with the large investment bank’s anti-money laundering (AML) program. Specifically, Morgan Stanley failed to comply with the Bank Secrecy Act over a period of five years. FINRA noted three specific failures of the program:
First, Morgan Stanley’s automated AML surveillance system did not 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 countries known for having high money-laundering risk. Second, Morgan Stanley failed to devote sufficient resources to review alerts generated by its automated AML surveillance system, and consequently, Morgan Stanley analysts often closed alerts without sufficiently conducting and/or documenting their investigations of potentially suspicious wire transfers. Third, Morgan Stanley’s AML Department did not reasonably monitor customers’ deposits and trades in penny stock for potentially suspicious activity, despite the fact that its customers deposited approximately 2.7 billion shares of penny stock, which resulted in subsequent sales totaling approximately $164 million during that time period.
Morgan Stanley agreed to the fine as part of a settlement and consented to the entry of the regulatory agency’s findings.
Bank Secrecy Act
FINRA requires that firms like Morgan Stanley comply with federal law. In this case, the federal law at issue is the Bank Secrecy Act. In 1970 Congress passed the Bank Secrecy Act to fight money laundering in the United States. The Act requires financial institutions to keep appropriate records and file reports pertaining to currency transactions and customer relationships. The Act further requires “certain transactions by and through financial institutions in excess of $10,000 into, out of, and within the U.S.,” be reported to the Treasury. Since the enactment of the Bank Secrecy Act, several laws and regulations have expanded the scope of anti-money laundering measures and counter-terrorist financing, most recently the USA Patriot Act. In response to the September 2001 terrorist attacks on the United States, Congress enacted the USA Patriot Act as a provision of the Bank Secrecy Act “to prevent, detect and prosecute those involved in money laundering and terrorist financing.”
The Effect of Failed Anti-Money Laundering Programs
The two following case studies illustrate situations where poor surveillance led to financing of drug and terror organizations. Six years ago, the United States Justice Department, the Office of the Comptroller of the Currency, the Federal Reserve, and the Treasury Department found HSBC Holdings Plc. to have ineffective money laundering programs and compliance monitoring. The U.S. Justice Department found that, working together, Mexico’s Sinaloa cartel and Colombia’s Norte Del Valle Cartel laundered $881 million through HSBC. At that time only one to four employees were responsible for reviewing alerts signaling suspicious wire transactions and one or two compliance officials monitored bulk cash transactions for approximately 600 customers. FINRA’s second finding against Morgan Stanley on December 26, 2018 specifying the failure to “devote sufficient resources to review alerts generated by its automated AML surveillance system” is not unlike HSBC’s failure to monitor due to inadequate staffing.
Prior to the September 2001 terrorist attacks, detecting terrorist financing was not a priority. The September 11 hijackers used U.S. financial institutions to move, hold, and retrieve their money, and primarily deposited money into U.S. accounts via wire transfer and deposits of cash. Because the money-laundering controls established at the time were focused on drug trafficking and large-scale financial fraud, the hijackers’ transactions went undetected. Since the attacks, bank officials are now alerted of suspicious deposits and transfers that may be involved with financing terrorist organizations.
Looking Forward
As noted from the two case studies above, both federal regulators and federal agencies have an interest in tracking money movement. Regulations set forth, such as the Bank Secrecy Act require financial institutions to do the monitoring and, if needed, provide federal agencies and regulators with pertinent information regarding laundering, fraud, and funding terrorist organizations. Morgan Stanley’s failure to comply with specific portions of the Bank Secrecy Act and the subsequent fine by FINRA exemplify the federal government’s continued interest in cutting off potential threats to the United States at the money source.
Sources
Aruna Viswanatha, Brett Wolf, HSBC to pay $1.9 billion U.S. fine in money-laundering case, REUTERS (Dec. 11, 2012, 12:45 AM).
FEDERAL DEPOSIT INSURANCE CORPORATION, DSC RISK MANAGEMENT MANUAL OF EXAMINATION POLICIES Section 8.1.
Finra fines Morgan Stanley $10 million for lapses in anti-money laundering program, INVESTMENTNEWS (Dec. 26, 2018, 12:43 PM).
NATIONAL COMMISSION ON TERRORIST ATTACKS UPON THE UNITED STATES, MONOGRAPH ON TERRORIST FINANCING.
News Release, Financial Industry Regulatory Authority, FINRA Fines Morgan Stanley $10 Million for AML Program and Supervisory Failures (Dec. 26, 2018).
Ross Snel, Morgan Stanley Fined Over Anti-Money Laundering Program, BARRON’S (Dec. 27, 2018, 5:44 PM).
Suzanne Barlyn, Morgan Stanley unit to pay $10 million fine for anti-money laundering violations, REUTERS (Dec. 26, 2018, 10:39 AM).
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