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Overlapping Risks, Part 2: Anti-Money Laundering and Elder Exploitation

November 10, 2020

A broker-deal firm’s anti-money laundering efforts may overlap with any number of other regulatory concerns. On the last episode, we looked at the intersection of a firm’s AML and cybersecurity risks. On this episode, the second in a two-part series, we’re looking at how AML may overlap with a firm’s efforts to protect senior investors from exploitation and fraud.

Joining us on this episode are Jason Foye, a director with FINRA's Anti-Money Laundering Investigative Unit, and Brooke Hickman, a director with FINRA's Vulnerable Adults and Seniors Team (VAST), both with FINRA’s National Cause and Financial Crimes Detection Program.

Resources mentioned in this episode:

FinCEN February 2011 Advisory on Filing SARs Regarding Elder Financial Exploitation

SARs on Elder Financial Exploitations: Issues and Trends, CFPB

DOJ’s Elder Justice Initiative

FINRA Resources on Senior Investors

FINRA Securities Helpline for Seniors

FINRA Foundation – Aging and Financial Decision Making  

FINRA Investor Alerts

Virtual Conference Panel: Social Distancing and the Impact on Older Investors

Virtual Conference Panel: Financial Crimes, Trends and Responses In the Midst of the Pandemic

Episode 33: Money Laundering in the Securities Industry

Episode 34: AML Priorities and Best Practices  

Episode 71: Anti-Money Laundering and Cyber Security  

Listen and subscribe to our podcast on Apple PodcastsGoogle PlaySpotify or where ever you listen to your podcasts. Below is a transcript of the episode. Transcripts are generated using a combination of speech recognition software and human editors and may contain errors. Please check the corresponding audio before quoting in print. 


00:00 - 00:25

Kaitlyn Kiernan: A broker-dealer firm's anti money laundering efforts may overlap with any number of other regulatory concerns. On the last episode, we looked at the intersection of a firm's AML and cybersecurity risks. On this episode, we're taking it a step further. In this second part of a two-part series, we're looking at how AML may overlap with the firm's efforts to protect senior investors from exploitation and fraud.

00:25 – 00:35

Intro Music

00:35 - 01:07

Kaitlyn Kiernan: Welcome to FINRA Unscripted, I'm your host, Kaitlyn Kiernan, thanks for joining us for the second part of our series on overlapping regulatory risks and responsibilities, this time for a look at the intersection of a firm's AML and senior investor protection responsibilities. Today, we once again have with us Jason Foye, a director with FINRA's Anti-Money Laundering Investigative Unit. And we have Brooke Hickman, a director with FINRA's Vulnerable Adults and Seniors Team, or VAST. Brooke and Jason, welcome back to the show!

01:07 - 01:07

Jason Foye: Thanks.

01:07 - 01:08

Brooke Hickman: Thank you.

01:09 - 01:41

Kaitlyn Kiernan: As we learned on our last episode, Jason works with the AML Specialist Team under Member Supervision's National Cause and Financial Crimes Detection Program. Brooke and the VAST team, too, fall under the NCFC. Brooke, the last time we spoke, though, which was actually our last in-person episode before COVID sent us all home about eight months ago, you were the manager of the Senior Helpline, which is what we were talking about on that episode. But now it's the Vulnerable Adults and Seniors Team. What's changed?

01:42 - 02:45

Brooke Hickman: The team has definitely evolved over the last five years. And while operating FINRA's Securities Helpline for Seniors is definitely still an important function of the team, we wanted to rebrand this year in a way that indicated that we do more than even just operating the helpline. We do cause examinations to look for potential securities rules’ violations. We do state outreach to state securities administrators and we'll make referrals to them for issues that are outside the jurisdiction of FINRA. We also make referrals to law enforcement when necessary, adult protective services, and we've even become a resource for firms as well. So if they have concerns that a customer or a registered rep is showing signs of diminished capacity or customer is potentially being financially exploited, they will reach out to us and we're able to tell them some best practices that we have learned from other firms who have been in similar situations. And I also feel the name will really allow us to grow in the future as well.

02:46 - 02:52

Kaitlyn Kiernan: This is a bad joke, but so it recognizes the VAST responsibilities of the team?

02:52 - 02:54

Brooke Hickman: Bah-dum-ba, you nailed it.

02:55 - 03:07

Kaitlyn Kiernan: On our last episode, we talked about there's not necessarily an intuitive overlap between seniors and anti-money laundering or AML. How much do these topics overlap?

03:07 - 03:49

Brooke Hickman: I would agree that at first blush, it doesn't really seem that these topics would overlap. And I know that there's been a previous podcast discussing how fraud and AML overlap, but I think in this instance, it's helpful to think first about the risk of other financial exploitation in general. Older Americans obviously represent a high concentration of wealth as compared to the overall population. Some may be relying on others for their physical well-being and financial management duty, their cognitive or physical decline. And as a result, certain elderly individuals may be particularly vulnerable to financial crimes such as identity theft, embezzlement or other fraudulent schemes.

03:50 - 05:18

Jason Foye: Yeah, financial institutions, including FINRA member broker-dealers, play a critical role in addressing elder financial exploitation, both from a compliance and AML perspective. A big reason for that is just by the nature of the client relationship and information collected through AML rules and regulations. Financial institutions have a familiarity with their elder customers and what is expected in those accounts that can enable the financial institutions to identify red flags of suspected financial exploitation and to alert the appropriate authorities through, amongst other reporting obligations, the filing of suspicious activity reports, or SARs.

And we really can't overstate the usefulness of SAR information and the ability to generate leads for federal, state and local law enforcement in this area, as well as their ability to inform regulatory agencies such as the Consumer Financial Protection Bureau or CFPB, the SEC, and FINRA as well, where the analysis of these SARs can enable these agencies to really understand critical intelligence about the specific frauds or trends and typologies that are being used to target these vulnerable customers and to really address and mitigate this threat.

05:19 - 05:28

Kaitlyn Kiernan: So, speaking about seeing overall trends, Brooke, what are some of the common types of elder exploitation that we're seeing right now?

05:29 - 07:37

Brooke Hickman: We've received numerous calls into the Helpline regarding lottery scams. So, an individual will get an unexpected email or phone call or other type of communication, notifying them that they've won a large sum of money. But in order to get the claim, they have to pay an upfront fee for either quote "processing" or "taxes" or something. But after they pay the fee, they never actually receive the lottery payment. We've also received numerous calls about romance scams. A 2019 study by the FTC showed that people lost more money to romance scams in the previous two years than to any other fraud. And I think that we'll definitely see an uptick, unfortunately, in this pandemic environment where people are isolated, they're home, they're lonely, and they're more susceptible to scammers who create fake profiles on dating sites or apps. And they gain the trust of the target to the point that they think they're in an actual romantic relationship with them. And then they make up some kind of story about an illness or a financial hardship and they ask the target for money.

 We've also heard about something called money mules. And one form of the scam is targets are being recruited online for what they think is legitimate employment. And they'll receive a check from the scammer who tells them to deposit it in their brokerage account or their bank account and then transfer a portion of it to a third-party account but keep a small portion of the funds for their efforts. And ultimately, the victim isn't aware that the money was acquired illegally, and they've now become part of some type of money laundering operation.

And then just more generally, we hear about certain types of affinity frauds where fraudsters prey upon members of a community that's an identifiable group such as a religious or ethnic community, and they pretend to be a member of that group and then spread the word about a scheme and convince the other members in the group that it's legitimate and worthwhile. And then, unfortunately, most exploitation against the elderly is done by someone close to them, so whether it be a family member or a caretaker or someone else who is close to them.

07:39 - 07:50

Kaitlyn Kiernan: That's always horrible to hear. Why is it important for broker-dealers to think about their senior investor protection program and their AML program more holistically?

07:51 - 08:18

Brooke Hickman: So many of the red flags of an AML program are the same as the red flags of potential financial exploitation. So, whether it be excessive, unsuitable or unusual trading, uncharacteristic and repeated cash withdrawals or wire transfers, large atypical withdrawals, the closing of accounts or surrendering of annuities without regard to penalties, these are all things that could potentially flag in an AML program.

08:18 - 09:31

Jason Foye: And as a result, it's critical that financial institutions be aware of these overlapping risks and how the red flags can lead them to detecting and reporting on suspected elder financial exploitation. So what this means is if a firm is investigating potential elder financial exploitation through the compliance side of the firm, they need to make sure that they're also considering the AML aspects of their responsibilities in that space in terms of the review and potential filing of a SAR. Conversely, if a firm is reviewing red flags of suspicious activity and the activity involves an elderly customer of the firm, they also want to make sure that they're considering whether there is a risk that the activity is not just unusual or potentially suspicious, but also that it may involve potential elder financial exploitation.

And as with any suspicious activity review, no single red flag is necessarily going to be indicative of elicit or suspicious activity and financial institutions really should consider the full fact pattern specific to the individual customer and their historical transactions when reviewing the potential red flag to determine if a SAR is warranted.

09:32 - 10:41

Brooke Hickman: Financial institutions are really at the front line of defense against elder financial exploitation, and most financial institutions do routinely issue information about fraud to their clients. Financial institutions and their employees are really well positioned to educate their elder customers and caution them against potentially exploitative transaction, which we found really does go a long way in helping to prevent financial losses to elders, because if you're able to educate them and stop the money from leaving the account to begin with, that's most helpful because really, once it leaves, it's never coming back.

And the FINRA Investor Education Foundation has used data from the Rush Memory and Aging Project to create research studies that explore the relationship between the aging brain and important outcomes for financial decision making. That might be helpful for the listeners to take a look at. And FINRA has also issued Investor Alerts that provide helpful information about specific frauds and how to avoid being taken advantage of. And we found that firms have been able to use these Investor Alerts and put them in front of their clients to help prevent exploitation.

10:42 - 10:54

Kaitlyn Kiernan: And we'll link to those in our show notes. Jason, when should a firm file a SAR for an incident involving a senior investor or a vulnerable adult? Is there any general guidance you can provide?

10:55 - 13:11

Jason Foye: So FinCEN, similar to what we talked about in the last podcast regarding some guidance they issued in SAR filing in the cyber events space, they have issued some guidance in this area as well. They released an advisory in February of 2011 regarding the filing of suspicious activity reports on elder financial exploitation, specifically. Within the advisory, FinCEN detailed red flags that financial institutions should be aware of. And while there's a number of specific and detailed red flags in the advisory that the audience should take a look at, they tended to fall into two broader categories. The first being erratic or unusual withdrawal activity by the customer, or changes in the banking patterns that may indicate a loss of funds or a loss of access to funds. And the second being unusual interactions with the customer or the customer's caregiver during servicing of the accounts.

So, during conversations with the customer, you may get the sense that they're being coached to say certain things or other unusual interactions like that that are potential indicators that something unusual may be going on in the elder financial exploitation space.

So, if an institution, through the course of their compliance and AML reviews come across these red flags and determine that a SAR is warranted in a specific situation, FinCEN also requested that financial institutions do certain things within the SAR that make it easier for FinCEN to target the SAR filings, run analysis on them and so on. And those were one, making sure that the institutions select the appropriate characterization of suspicious activity within the suspicious activity information section of the SAR form itself, and then making sure to use the term "Elder Financial Exploitation" within the narrative so that when they're running keyword searches and so on, they can pull all of the SARs within this space for their own intelligence and vetting purposes. One thing FinCEN also noted that was important was that a potential victim of the elder financial exploitation to not be reported as the subject of the SAR but should instead be included in the narrative portion of the SAR filing.

13:13 - 13:21

Kaitlyn Kiernan: That's good to know. And why is it so important to file a SAR for an incident involving financial fraud?

13:21 - 16:07

Jason Foye: As we talked about before, these SARs play a critical role in helping law enforcement and other regulatory agencies to combat this threat. And this, for a lot of reasons already covered, this is a huge focus for law enforcement and other agencies and regulators right now. For example, in 2017, the CFPB and FinCEN issued a memorandum on financial institutions and law enforcement efforts to combat elder financial exploitation, which highlighted the really critical role that financial institutions play in detecting and responding and preventing elder financial exploitation, as well as the important role that SARs play in these efforts. They pointed out how SARs can and have been used to trigger investigations, support ongoing investigations and to identify previously unknown subjects and entities that are unfortunately targeting the vulnerable elder customers in the marketplace.

This isn’t the first time, or the last time, that FinCEN and the CFPB have got together to provide guidance or information to the industry in this way. They also put out a separate report in February 2019 that actually analyzed all the SARs, filed on elder financial exploitation from 2013 through 2019, when the report was published. And a summary of the issues and trends identified in that report noted some really critical takeaways. One, the volume of SARs related to elder financial exploitation quadrupled from 2013 to 2017. So this shows both the scale of the threat that these investors are facing and that the financial industry as a whole has really received the message from FinCEN and law enforcement and it really actively looking for and reporting on red flags of these issues, which definitely a trend that we want to make sure we continue to encourage and emphasize.

Some of the more common trends that were highlighted in the report involve romance scams, as Brooke pointed out previously, exploitation by a family member or fiduciary, and unfortunately, again, theft by a caregiver, as well as these money mules scams that are becoming more prevalent overall. Overall, over half of the SARs involve some type of unusual or suspicious money transfer, which I think is another space we need to emphasize where the overlapping AML risk comes into play as firms may detect some aspect of the unusual suspicious money transfer and notice that the account involved in that transfer is an elder customer and put the pieces together and think that this may be some type of red flag of elder financial abuse.

16:08 - 18:05

Brooke Hickman: Regulators and law enforcement are obviously very focused on this area. And the Department of Justice actually has an Elder Justice Initiative that is focused on supporting and coordinating efforts to combat elder abuse and financial fraud targeting seniors across the country. The DOJ website includes a section on elder financial exploitation that has a lot of really great information on red flags to be aware of, the types of scams targeting seniors and other resources that folks listening can use to educate themselves. They have also performed elder fraud sweeps across the country that have resulted in charges against hundreds of people on allegations of elder abuse and financial exploitation.

So, whether we're talking about the educational side of this initiative or law enforcement sweeps, as we've said, SAR filings are so important, and they can really assist the DOJ in its efforts. And protecting senior investors is also a huge focus for FINRA with VAST being the primary point of contact for these issues within the organization. There's a lot of great information on FINRA's website regarding our efforts to protect these investors from the time the Helpline started in 2015 to current. FINRA was even focused on that issue before 2015.

But we would encourage the audience to check out the information on FINRA's website and we would definitely encourage anyone listening who believes that they have identified red flags of potential elder financial abuse or exploitation to reach out to us at the Senior Helpline and for audience members in the industry who may have AML responsibilities, to the extent that a SAR is filed that involves potential elder financial exploitation involving a FINRA registered person or member, we would encourage you to reach out to the Helpline and let us know about the SAR so that we can quickly review the information and determine the appropriate next steps.

18:06 - 18:21

Kaitlyn Kiernan: And we'll link to those resources you just mentioned, Brooke, in our show notes. So outside of these SAR filings, what filing requirements might a firm have when they see red flags of elder exploitation?

18:21 - 19:28

Jason Foye: In the FinCEN notice that we talked about earlier, they actually made note of this important aspect of combating the threat in the industry as well. One, I think noting that elder financial exploitation is generally reported and investigated at the local level, the Adult Protective Services or attorneys’ offices, sheriff's offices and police departments taking the key roles, FinCEN emphasized that SAR filers should continue to report potential elder abuse according to the requirements of the state and local laws and regulations that they're subject to and noted how financial institutions may want to consider as part of these state and local reporting efforts how their AML programs can really complement the existing policies that they have on reporting elder financial exploitation at the state and local level. So, it really depends on the individual requirements where the customer are located. But I think the important takeaway that FinCEN was really trying to emphasize was how the AML program can be used as a way to complement and strengthen those existing policies and procedures that firms already have in place.

19:30 - 19:39

Kaitlyn Kiernan: How can firms ensure that they're collaborating effectively between the teams that might look at signs of financial exploitation and the teams looking at AML?

19:40 - 20:24

Brooke Hickman: While there are certain red flags in terms of activity in the customer's account that an AML department may be in the best position to detect, there is other red flags based on interactions with the customers that areas of the firm who are on the front line will likely be in the best position to detect. So, it's an area where effective communication throughout the organization is crucial to make sure that folks in compliance and in the business are aware of what red flags need to be escalated to AML for further review. And firms will also want to make sure that they're reasonably testing to ensure that the red flags they expect to be escalated are actually being escalated and the process is working as designed.

20:25 - 21:25

Jason Foye: This is similar to other areas we discussed on the previous podcast where AML may delegate certain front line reviews to other aspects or other areas of the firm, so red flags associated with trade surveillance and cyber events or other critical areas where we commonly see AML programs relying on other groups for at least some aspect of the detection of potentially suspicious activity. And while these structures can be really effective and reasonable, we do see problems sometimes that just kind of boil down to breakdowns in communication and delegation function, where we may see AML believes that another group is monitoring for red flags, but that other group does not really fully understand that they have these expectations. So, I think Brooke really covered some great best practices that the industry can follow in order to make sure that if you do have some of these delegated functions in place, that that delegation is working as designed to make sure that AML is getting the information they need to make SAR decisions.

21:27 - 21:36

Kaitlyn Kiernan: And, Brooke, you mentioned the VAST team will often talk with firms about how they can improve their programs. Are there any just general best practices you can share?

21:37 - 22:41

Brooke Hickman: A lot of it comes down to training management and staff to be aware of what the red flags are, to be aware of how in their particular role they would potentially see these red flags and then be aware of the escalation process and when they should loop in other departments as well. As we've mentioned, it's really important to report to relevant federal, state and local authorities, to file SARs, to develop a relationship with law enforcement and adult protective services who can really become partners with firms in protecting their elder customers. Educating older account holders and their caregivers is really important. And if there are trusted contact people on the account, to reach out to them as well. And FINRA allows a safe harbor for placing a dispersement hold if a firm feels that there is potential financial abuse or exploitation. So, firms can also consider using that safe harbor to place a hold on a disbursement request.

22:42 - 22:57

Kaitlyn Kiernan: It makes sense that training would make the difference. If you know that romance scams are big, you're probably less likely to fall for one. Same if a broker knows that they're big, it might be a red flag if they hear their customer mentioning a new love interest during a call.

22:58 - 23:07

Brooke Hickman: Exactly. Education is huge. And like I said before, preventing the money from leaving the account is the main goal, because once it leaves, it's not coming back.

23:08 - 23:13

Kaitlyn Kiernan: And are there any trends and concerns emerging from FINRA exams?

23:14 - 24:01

Brooke Hickman: So, we've seen that there are potential boiler rooms that are targeting older investors to invest in risky, low-price securities. We've also seen, especially more recently now that people are working from home, account intrusions, where fraudsters are gaining access to customers’ accounts online. And this can even take the form of technology scams, where someone gets a pop up on their computer saying that there's some type of security issue with their account. They click on the pop up and it allows someone to gain remote access to their computer, but then they also gain access to their financial accounts as well and are able to funnel money out of the accounts. So, I think that we've seen sort of an uptick in those concerns.

24:01 - 24:04

Kaitlyn Kiernan: Which is exactly why we just talked to Dave on the last episode.

24:05 - 25:16

Jason Foye: Yeah, definitely a lot of overlap in some of the things we talked about during the last podcast with the overlaps between AML and cyber risk. If you haven't to listened to that from an audience perspective, we would certainly encourage you to go back and check that one out. And I'd also point out that there's been some additional financial trend analysis done by different regulatory agencies recently that have indicated the elders are facing an increased threat right now, both from domestic and foreign actors. Some of the trends they noted in this space was the prevalence of elders falling victim to scams in which they sent money overseas, most often to third parties in either African or Asian countries based on the analysis conducted, as well as some separate findings that are really a continuation of a trend that had been previously noted, wherein, again, family members and caregivers are most often identified as being responsible for the theft from elders. But I think that with everyone being remote and being at home and separated from their families, in a lot of instances, you're seeing a little bit of uptick in the space because it's the most susceptible time.

25:16 - 25:30

Kaitlyn Kiernan: Yeah, it makes sense. I mean, it seems like, Brooke, that a couple of the scams that you mentioned, when you are in the current environment, they might just have more of an entryway with investors being isolated.

25:31 - 26:31

Brooke Hickman: Definitely, yeah. FINRA actually hosted a virtual conference panel called "Financial Crimes, Trends and Responses in the Midst of a Pandemic," and it discussed the various threats of financial crimes that are targeting seniors as well as other investors, especially in this pandemic environment and the necessity for financial institutions and regulators to shift their tactics. So, the listeners might find that virtual conference helpful as well.

The elderly are definitely more vulnerable than ever now, given the pandemic environment. It's increased their social isolation. They're more actively involved online and due to recent market volatility, they're potentially looking for ways to make up for investment losses. FINRA's Investor Education conducted a virtual panel called "Social Distancing and the Impact on Older Investors" that provides really helpful insight about how isolation has important implications for financial decision making, fraud, vulnerability and cognition among older adults.

26:32 - 26:39

Kaitlyn Kiernan: Between that and the other virtual conference panel, I think our listeners have a lot of good resources to check out.

26:39 - 26:40

Brooke Hickman: I hope so.

26:41 - 26:56

Kaitlyn Kiernan: So just to wrap up, Jason and Brooke, you both used to work in the Boca office. Now we're remote, but Jason, you also have moved up to the New York office. But how do your teams work together with the VAST and the AML specialist teams?

26:57 - 28:01

Jason Foye: So, I would say that we've definitely see an increase in collaboration throughout NCFC and even FINRA more broadly over the last 12+ months. This includes working jointly on examinations where risks relevant to our respective specialist programs overlap, sharing intelligence and information with each other and making sure that we're working together to educate the industry and investing public where possible.

These are risks that are always evolving and it's critical that we work together to make sure we're all staying on top of the risks in order to effectively detect, deter and counter misconduct in the securities industry. And really, what we try to focus on inside NCFC right now is practicing what we preach, setting up recurring discussions with each other, making sure that we're communicating with each other both when we have something specific that we need to ask another specialist group about, but even just on an ongoing basis to hear about what the other teams are doing, because it's through those conversations that we really get a sense of where we can overlap and help each other.

28:02 - 28:04

Brooke Hickman: One team, one fight, that's what we like to say.

28:06 - 28:35

Kaitlyn Kiernan: Well, that's it for the second part of our AML deep-dive series. Thanks, Brooke and Jason, for joining us today. I know AML is a complicated and interesting topic, so we only planned these two episodes, but I'm sure there's always room to expand the series. So, if our listeners have any ideas for other topics they want to look at with regard to AML, we definitely encourage you to let us know at [email protected]. Otherwise, until next time.

28:35 – 28:40

Outro Music

28:40 - 29:08

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29:08 – 29:13

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