Firms Failed To Adequately Monitor For Suspicious Trading Activity
Washington, D.C. — The Financial Industry Regulatory Authority (FINRA) announced today that it has imposed a $1 million fine against E*Trade Securities, LLC and E*Trade Clearing, LLC, collectively, for failing to establish and implement anti-money laundering (AML) policies and procedures that could reasonably be expected to detect and cause the reporting of suspicious securities transactions.
"Brokerage firms' AML programs must be tailored to their business models," said Susan L. Merrill, Executive Vice President and Chief of Enforcement. "In this case, while E*Trade provides its customers with on-line, self-directed electronic access to the securities markets, its AML program lacked automated electronic systems specifically designed to detect potentially manipulative trading activity in customer accounts."
FINRA requires brokerage firms to establish and implement AML procedures that address a number of areas, including monitoring the trading in customer accounts as well as the flow of money into and out of these accounts. Firms are required to monitor trading in customers' accounts for certain types of suspicious trading activity and file with Department of Treasury's Financial Crimes Enforcement Network (FinCEN) "a report of any suspicious transaction relevant to a possible violation of law or regulation."
FINRA has further instructed each broker/dealer that its AML program must be tailored to its business. A firm needs to consider factors such as its size, location, business activities, the types of accounts it maintains and the types of transactions in which its customers engage. One of the factors that brokerage firms are instructed to consider generally is the technological environment in which the firm operates. On-line firms such as E*Trade specifically have been instructed to "consider conducting computerized surveillance of account activity to detect suspicious transactions and activity."
FINRA found that between Jan.1, 2003 and May 31, 2007, E*Trade did not have an adequate AML program based upon its business model. Because E*Trade did not have separate and distinct monitoring procedures for suspicious trading activity in the absence of money movement, its AML policies and procedures could not reasonably be expected to detect and cause the reporting of suspicious securities transactions. The firm relied on its analysts and other employees to manually monitor for and detect suspicious trading activity without providing them with sufficient automated tools. FINRA determined that this approach to suspicious activity detection was unreasonable given E*Trade's business model.
In concluding this settlement, E*Trade neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
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