Oct 27 2009 Brett Wolf R
The Financial Industry Regulatory Authority has fined Scottrade Inc $600,000 for operating with anti-money laundering weaknesses between April 2003 and April 2008. The self-regulatory organization averred that the St Louis-based broker-dealer lacked appropriate systems to monitor accounts for suspicious activity during the period in question. Scottrade neither admitted nor denied the charges, but consented to the entry of FINRA's findings.
"Each firm's AML program must be tailored to its business model, including the technological environment in which the firm operates," Susan Merrill, FINRA's chief of enforcement, said when announcing the fine. "In this case, despite the large volume of on-line trading at Scottrade, the firm failed to establish any systematic or automated surveillance until 2005.
"Then, the automated system the firm implemented remained inadequate because it focused only on suspicious trading that was accompanied by suspicious money movement."
According to the Letter of Acceptance, Waiver and Consent filed in the case and the press release it issued to announce the fine, Scottrade's business model primarily consists of providing an online platform for customers trading in securities. Scottrade, which has more than 400 branch offices across the country, reportedly handled about 49,000 customer trades per day in 2003, and its volume grew to roughly 150,000 daily trades in 2007.
"Among the risks inherent to Scottrade's brokerage model and the firm's substantial trading volume are an increased risk of identity theft, account intrusions and the use of customer accounts to launder money using securities or other financial instruments, or to violate securities laws," FINRA noted in its press release.
Scottrade's reliance on a manual monitoring system was 'unreasonable'
Still, between April 2003 and January 2005, Scottrade lacked "systematic or automated processes to monitor for potentially suspicious transactions and generate referrals to the risk management department", the AWC stated. Instead, the firm reportedly relied on a manual system to monitor accounts for suspicious activities.
"FINRA has advised firms that in designing their AML program, they should consider factors such as their size, location, business activities, the types of accounts they maintain and the types of transactions in which their customers engage. FINRA also has instructed on-line firms such as Scottrade to consider conducting computerized surveillance of account activity to detect suspicious transactions," FINRA noted in its press release.
Scottrade's manual monitoring system relied on internal personnel, including branch, cashiering and margin employees, to identify and refer potentially suspicious activity to the firm's risk management department for further review, according to FINRA. The AWC added, however, that the firm "did not provide adequate written guidance to its employees as to how to detect or review for potentially suspicious activity".
The AWC also stated that Scottrade's AML compliance officer was the lone employee "specifically tasked" with investigating the referrals to determine whether activity was in fact suspicious and, therefore, reportable. In June 2004, the firm reportedly hired a risk management analyst to assist with this review.
"Neither the compliance officer, the analyst nor anyone else at Scottrade specifically monitored transactions for potentially suspicious trading activity," FINRA stated. "[We] found that the sheer volume of on-line trading, along with the firm's reliance on inadequate internal resources, rendered the lack of an automated system to detect suspicious activity unreasonable."
Manual system replaced by inadequate automated systems
In February 2005, Scottrade implemented a proprietary, automated filter-based system known as the CARS System to monitor for suspicious transactions, FINRA stated. Then, in September 2006, Scottrade reportedly added a proprietary volume report aimed at detecting pump-and-dump account intrusions and unauthorized trading activity resulting from such account intrusions.
When suspicious activity triggered one of the CARS System's filters (which happened about 1,300 times each month), it generated an alert to the AML analysts responsible for investigations, the AWC stated. The document added, however, that even with the CARS System and the volume report, Scottrade's AML policies, procedures and internal controls "still were not designed to detect and cause the reporting of suspicious trading activity, unless such activity was accompanied by money movement".
FINRA also noted that Scottrade did not use the volume report to detect suspicious trading activity by bona fide account holders.
"FINRA also found that Scottrade's AML procedures failed ... to provide adequate written guidance to its AML analysts for detecting and investigating potential suspicious trading," the press release stated.
Finally, the AWC averred that Scottrade's alleged failures to properly monitor trading activity transgressed NASD conduct rules 3011 and 2110.
It might be noted that in January, FINRA fined E*Trade $1m, claiming that its automated AML system focused on the review of suspicious money movement at the expense of suspicious trading activity. In that sense, the E*Trade and Scottrade cases are similar and send a clear message to broker-dealers.
Scottrade's response
A spokeswoman for Scottrade told Complinet the firm took this matter "very seriously" and added that it has made enhancements to its AML program. She added that firm personnel were glad to have this matter behind them.
Betty Santangelo, a partner at Schulte Roth & Zabel in New York, represented Scottrade in this matter. She told Complinet there was a lesson to be learned.
"FINRA has now made it clear that they want automated reviews of securities trading separate from money movements. It's not enough if you review securities trading and file SARS for that activity if you only review it in conjunction with money movements," Santangelo said.
"This is something that was not clear before, in my view."
