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U.S. brokerages have struggled to promptly detect and report suspicious activity associated with low-priced securities amid a rise in pump-and-dump and market manipulation schemes during the novel coronavirus pandemic, a senior securities regulator told ACAMS moneylaundering.com.

Examinations by the U.S. securities industry’s self-regulatory organization, the Financial Industry Regulatory Authority, or FINRA, found that fraudsters have also exploited the pandemic by opening trading accounts with fake identities and using them to steal government subsidies intended for financially imperiled firms and individuals.

FINRA has responded to the health and economic crisis by reorganizing itself to conduct exams, investigations and other operations remotely, launching an internal financial intelligence unit, issuing several guidance documents, and penalizing 19 firms a combined $17 million for failing to comply with anti-money laundering rules.

Jason Foye, FINRA’s senior director for AML, discussed the organization’s efforts and initiatives with moneylaundering.com senior reporter Valentina Pasquali.

An edited transcript of their conversation follows.

Did any specific qualitative trends emerge from last year’s enforcement actions?

Our AML-related actions in 2020 covered a range of violations. Within these actions we do see certain trends, especially in the detection and reporting of suspicious trading in low-priced securities. These cases included suspicious deposits and sales of low-priced securities, as well as low-priced securities trading that triggered red flags of manipulation.

Much like the industry, we continuously evaluate our programs and associated publications. This year, we felt it would be most beneficial to provide our member firms with a single, authoritative source that highlights what we are seeing from our examinations, and that provides guidance on topics where firms may wish to focus more attention.

So we issued our first-ever report on our exam and risk-monitoring program on Feb. 1. The hope here is that having the information from our examination program and associated guidance in one place will make it easier for members to evaluate and improve their compliance programs.

Which of last year’s AML-related actions did you find particularly interesting and instructive?

The enforcement action against Interactive Brokers springs to mind for a number of reasons. Among the deficiencies noted during the exam was the firm’s failure to reasonably staff its AML department despite warnings from compliance managers, and its failure to develop and implement reasonably designed surveillance tools for detecting and reporting suspicious money movements and securities trading.

What was the key lesson of the action?

It is critical that FINRA member firms ensure that as their business grows the policies, procedures and controls in the area of AML compliance remain reasonable.

The other notable aspect of this action was that Interactive Brokers simultaneously resolved AML cases with the SEC and CFTC, each of which had parallel investigations into various aspects of the firm’s AML program, including some activity not covered by FINRA’s examination.

What other notable enforcement actions did FINRA disclose last year?

The enforcement action against Hilltop Securities was also interesting in that it involved the firm’s failure to understand its SAR-filing obligations under the Bank Secrecy Act.

As the AWC [acceptance, waiver and consent agreement] noted, firms should not disregard “suspicions that a transaction involved unlawful activity or lacked an apparent lawful purpose.” The AWC also noted that in terms of filing SARs, “proof of actual fraud” is not required.

The case focused on the firm’s failures related to the detection and reporting of suspicious trading in low-priced securities, an area for which FINRA and other regulators have repeatedly provided guidance.

To what extent did FINRA review the AML strategies member firms adopted in response to the novel coronavirus pandemic? 

Fraudsters often take advantage of crises, and the COVID-pandemic is no different. We specifically noted in guidance that there is a long history of bad actors exploiting trends and major events—such as the growth in cannabis-related businesses or the COVID-19 pandemic—to perpetrate fraud.

We observed potential misrepresentations about low-priced securities issuers’ involvement with COVID-19 related products or services, such as vaccines, test kits, personal protective equipment and hand sanitizers. These misrepresentations appeared to have been part of potential pump-and-dump or market manipulation schemes that targeted unsuspecting investors.

Our exam and risk-monitoring program is risk-based, and where warranted during exams in 2020 and 2021 we have asked about AML and other supervisory controls in place to detect and investigate red flags associated with COVID-related fraud or suspicious activity.

Did the dramatic increase in work-from-home arrangements seriously delay or impede examination and enforcement last year?

While we have experienced some delays, the vast majority of examinations and investigations have been able to move forward in a remote setting. In other words, we continue to execute our regulatory responsibilities and expect our members to do the same as we work to protect investors and the markets.

As just one example, my colleagues in our enforcement department have taken on-the-record testimony remotely via Zoom on hundreds of occasions since the beginning of the COVID pandemic. We also enacted a temporary rule amendment allowing FINRA, when appropriate, to conduct hearings in disciplinary matters and other proceedings remotely.

Did any obstacles arise that may have challenged FINRA’s initial goals and priorities last year?

The convergence of AML, fraud and cyber risks continue to present complex challenges to our member firms, investors and the markets overall and something that has been aggravated in the era of COVID as so many of us have migrated to remote environments.

A particularly noteworthy section of guidance that we issued in May 2020 focuses on fraudulent account openings and money transfers. This is a complex risk that involves fraudsters using stolen or synthetic identities during the pandemic to establish accounts, then divert congressional stimulus funds or unemployment payments, or engage in ACH [automated clearing house] fraud.

Did FINRA take any other notable steps over the past year?

We created a financial intelligence unit, which is primarily tasked with using internal and external data sources to detect patterns and trends in the securities industry and stay ahead of areas where financial crime may be posing new or elevated risks.

The FIU is an intelligence function within FINRA to ensure that the right information reaches the correct stakeholders quickly and effectively so that appropriate action can be taken.

Contact Valentina Pasquali at vpasquali@acams.org