PODCAST
Encore | Beyond Hollywood: Money Laundering in the Securities Industry
This episode originally aired in April 2019.
When three hapless employees inadvertently embezzle a bunch of cash in the movie “Office Space,” they decide the best way to cover it up is to launder it. But the thing is, they don’t even really know what money laundering is and they learned that even the dictionary couldn’t fill them in.
If you want to understand what money laundering is, and more specifically, the efforts brokerage firms must take to prevent and detect it, stay tuned. We have something better than the dictionary: we have Blake Snyder and Jason Foye, two members of FINRA’s Anti-Money Laundering Investigative Unit.
On this episode of FINRA Unscripted, the first of a two-part series, Blake and Jason explain what money laundering is, how it looks different in the securities industry, how that makes regulation different for the securities industry, what FINRA’s Anti-Money Laundering Investigative Unit does and more.
Continue the conversation with part II.
Resources mentioned in this episode:
Listen and subscribe to our podcast on Apple Podcasts, Google Play, Spotify 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.
FULL TRANSCRIPT
00:01 - 00:16
Kaitlyn Kiernan: We're kicking off the month of August with a look back at one of our all-time favorite episodes on anti-money laundering in the securities industry. This episode originally aired in April 2019. We hope our listeners are staying healthy and enjoying the summer.
00:17 - 00:50
Kaitlyn Kiernan: When three hapless employees inadvertently embezzle a bunch of cash in the movie Office Space, they decide the best way to cover it up is to launder it. But the thing is they don't really know what money laundering is. So, they turn to the dictionary. But that proved less than helpful. If you want to understand what money laundering is and more specifically the efforts brokerage firms must take to prevent and detect it. Stay tuned on this episode of FINRA Unscripted. We have something much better than the dictionary. We have two members of FINRA's Anti-Money Laundering Investigative Unit here to tell us more.
00:50 – 01:00
Intro Music
01:00 - 01:31
Kaitlyn Kiernan: Welcome to FINRA Unscripted, from FINRA's Boca Raton district office, I'm your host Kaitlyn Kiernan. I'm pleased to be joined today by Blake Snyder, a senior director, and Jason Foy, a director, with FINRA's AML Investigative Unit--a specialized team of examination staff that conducts complex anti-money laundering examinations. But the AML investigative unit does far more than just that. Today, Blake and Jason are here to tell us more in the first of what will be a two-part series on FINRA's AML program. Blake and Jason. Welcome to the show.
01:31 - 01:31
Blake Snyder: Thank you.
01:31 - 01:33
Jason Foye: Thanks. Thanks for having us.
01:33 - 01:41
Kaitlyn Kiernan: So, before we dig in to FINRA as AML program, I wanted to start with the very basics. What is money laundering?
01:41 - 02:25
Blake Snyder: A simplified explanation of money laundering is the movement of funds intended for or derived from criminal activities. Money laundering generally occurs in three stages. There is the placement stage, which is the introduction of illicit funds into the financial system. The layering stage, which is a process whereby transactions are done to disguise either the origin of those funds or the destination of those funds, and then the integration phase is the phase where the funds are reintegrated into the legitimate economy. Sometimes you hear about this in the news and see it on TV where the funds will be used to purchase luxury assets such as real estate and expensive cars and things like that.
02:26 - 02:42
Jason Foye: One unique aspect of money laundering in the securities industry is that you can actually generate illicit proceeds directly in your account through things like insider trading or market manipulation or other securities frauds. And that's something that you don't see in every industry that has money laundering risk.
02:42 - 02:55
Kaitlyn Kiernan: OK. So like bank criminal activity they're trying to put the money into the legitimate system at the bank. But in the securities industry the illicit money is actually being generated in the account.
02:55 - 03:21
Jason Foye: It can be, I think is the answer. Certainly a brokerage industry could be used as a conduit in the same way a bank account could to process suspicious money movements or payments that are used in maybe the layering phase, as Blake described of a money laundering scheme. But I think it's important to point out that because of the unique aspect of the securities industry and brokerage accounts, you can actually generate the illicit proceeds right in your account as well.
03:21 - 03:29
Kaitlyn Kiernan: That's interesting to know. So how does that make regulation different for the securities industry versus banking?
03:29 - 04:34
Blake Snyder: So, the brokerage industry only became subjected to anti-money laundering requirements with the implementation of the Patriot Act in 2001. The banking industry had been subject to anti-money laundering requirements for decades before that. So, they are very far ahead of us in terms of how long they've been implementing it and in terms of what their expectations are. The brokerage industry is catching up quickly.
As Jason alluded to, there are some different risks that banking institutions and brokers institutions are exposed to. In the brokerage world, we don't see really hardly any physical cash being deposited as compared to what you see with banks where that's a relatively frequent occurrence. So, when we talk about the placement stage in the brokerage industry, we don't see illicit cash being deposited. I think more of the concern is related to what Jason referred to earlier are situations where illicit funds can be generated within a brokerage account itself through tactics such as market manipulation or insider trading or Ponzi schemes.
04:34 - 05:12
Jason Foye: And then specific to the layering phase, you may get some similarities between what you would see in the banking industry and what you would see in the securities industry through a brokerage account because in a lot of instances you can do everything you can do in a bank account in a brokerage account. You can send wire transfers to third parties, you can get a debit card or a credit card this attached to your account, you can write checks depending on the services provided. So, there's a lot of different controls that firms have in place to try to handle the risk, but I think it's first and foremost important just to understand where the risk lies inside the industry. And then you can go about talking about the controls.
05:12 - 05:22
Kaitlyn Kiernan: Make sense. So why is it so important for banks, broker-dealers and other financial institutions to have strong AML programs?
05:23 - 06:28
Blake Snyder: Really the ultimate goal is to protect the integrity of the financial system. We can't allow bad actors to take advantage of the open markets and the open systems that we have. In addition to that, it helps the institutions protect their reputations. They don't want to see their names out in the paper as being used in some sort of criminal scheme or some sort of terrorist-type operation. So really it benefits everyone, including the institutions and the public, whether they're customers or not, that financial institutions banks and brokerages all alike have strong AML programs. And really I think one of the key functions of a strong AML program is providing prompt information regarding suspected criminal activities and suspected crimes to the criminal authorities through the filing of Suspicious Activity Reports, which are all financial institutions have the ability to do electronically through a division of the U.S. Treasury called the Financial Crimes Enforcement Network, otherwise known as FinCEN.
06:28 - 07:41
Jason Foye: And that's really at the heart of a lot of these rules and regulations and if you kind of break down the AML rules and regulations in general they kind of fall into a couple of buckets. One is making sure that firms know their customers are, know who they're doing business with and that comes into play whether it's with the CIP rules, the Customer Information Program, or comes into play with the CDD rules, the Customer Due Diligence program, really making sure the firms understand who they're doing business with.
And then I think the second big chunk is the Suspicious Activity Reporting that Blake mentioned, where firms have to be monitoring activity that's occurring by, at or through the firm, looking for red flags, investigating those red flags, where appropriate, filing SARs on activity that they think is suspicious, and that gets used by law enforcement and other regulators and other agencies for a lot of different purposes. So really understanding what is the point of all this. Why do we expect, in our case broker-dealers, but in the US AML regime financial institutions at large, to do all the things that we ask them to do is to accomplish these two main goals and ultimately help protect our financial markets from being used inappropriately by bad actors.
07:41 - 07:46
Kaitlyn Kiernan: Can you explain how securities trading might be part of a money laundering scheme?
07:46 - 09:04
Blake Snyder: We get that question quite a bit, because I think traditionally you think of money laundering and you think of people bringing in bags of cash into a bank and trying to deposit it. But really, as we mentioned, the illicit funds can be generated in the account and there's a number of ways that we've seen this being done. We've seen it be done through market manipulation schemes, such as a pump and dump scheme where there are manipulative trading techniques that customers or firms may use or a firm itself may use to create fictitious volume and security or help inflate the price of a particular security with, on the back end of that, investors being harmed.
We've seen it in situations where securities can be used to convert currency. We had a case a couple of years ago where customers of a broker dealer living in a foreign country wanted to exchange their local currency for U.S. dollars. And we're doing so by buying shares of stock on their local market, transferring the shares into the US having them packaged into what's called an American Depository Receipt, or ADR, and then that ADR would be sold into the U.S. market, thereby effectively changing currency from their local currency into U.S. dollars.
09:04 - 09:13
Kaitlyn Kiernan: So, in these instances is it money laundering as soon as the illicit profits are generated or when those profits are moved?
09:13 - 11:34
Jason Foye: That's a good question. And where that line is, is sometimes difficult to tell. But for example, if you engage in insider trading or market manipulation scheme or you do something inside your brokerage account that is illegal, as soon as you move that money you've also laundered it. So not only have you engaged in kind of the underlying illicit act of say market manipulation scheme, but once you've moved it, particularly if you're using ways to try to hide what you did or ways to hide where it's going things like that, you're trying to complicate a paper trail, you're also likely engaging in a money laundering scheme now as well.
And I think to add on a little bit to what Blake was mentioning, where do securities trading come into play and why is it important in the money laundering world or the AML world? Broker-dealers do have an obligation to report any suspicious activity that occurs by, at or through the firm and that comes from the regulations, that buy, at or through line. And that includes the securities trading, right. I think a couple of years ago, maybe a little bit longer, it wasn't as clear that securities trading was part of this world. I think the industry has evolved a lot since then. We do see a lot more emphasis on trade surveillance and reporting of suspicious activities.
The other thing to keep in mind is that law enforcement expects these things to be reported by the industry. If you actually look on the SAR forum, you'll see checkboxes under the categories for suspicious activity for market manipulation, insider trading, securities fraud. So, these are things that law enforcement expects the industry to be looking out for and detecting and reporting where appropriate.
And then I think the last thing, this gets into some specific nuances of the risk, but you can actually move assets around by engaging in securities trading rather than by say sending a wire transfer or writing a check. For example, if you engage in a prearranged trade in a thinly traded security that causes a gain in one account and a corresponding loss in another, you're moving the assets from one account to another in a way that's harder to detect for the industry. It's not as clear that you're moving the money between the accounts. You have to match up the trading and figure out what they're doing, so it can get complicated. But there's a lot of reasons that I think securities trading is a really important topic to consider when you're thinking about AML programs in the industry.
11:34 - 11:47
Kaitlyn Kiernan: Yeah that's really interesting and not really intuitive when you're first thinking about it, since I think a lot of people's familiarity with money laundering is from movies, so you see the Scarface side of things not the securities account side
11:47 - 12:03
Jason Foye: Yeah. And I think it makes sense. You hear the term money laundering and you think of money. You don't necessarily think of securities trading as a default. And that's something that we through training efforts and so on and the cases we work on we've tried to raise awareness of.
12:03 - 12:15
Kaitlyn Kiernan: So, one of the ways you do this is FINRA has a specialized team for money laundering which is what you guys do. So how did that team get started and what does it do exactly?
12:15 -13:44
Blake Snyder: The group started in 2013, and was really a result of some findings that a couple of us that were based here in the Florida office along with some staff around the country and findings in terms of really concerning AML issues that we're finding at a variety of types of firms. So, what we thought at the time was why don't we create this group that solely focuses on AML issues and develops significant expertise in that field and have it be a national group that can be deployed wherever there's an issue or concern at firms across the country. And because they have that expertise they're able to--and we've seen this come true--we're able to jump into situations quickly have an understanding of what the industry standard is and what is expected from all institutions across the board whether they're banks or broker-dealers, know what documents to ask for to most quickly get at the heart of an issue, and really not have to recreate the wheel every time we do an exam and have to relearn the process of how firms system should be structured or what certain types of activity would look like. We know that going in. And that was the thought process when we started the group. And we've seen that come to fruition now. We've expanded over time as the demand for our group has grown. We started with just five of us and now we're up to 13 people located in six different offices.
13:44 - 14:09
Jason Foye: I think one thing that we're able to also do based on our structure is take all of the expertise that gets developed over time and get it to other folks, get it to other district offices, make sure that other people are able to benefit from the expertise that we are generating by complementing and supplementing the work that's being done more broadly inside FINRA.
14:09 - 14:24
Kaitlyn Kiernan: So, with this team of 13 people how does that work with FINRA's exam team more broadly? What if exam team is going into a firm, do you staff it with an AML specialist when needed or how does that work?
14:24 - 15:48
Blake Snyder: It varies depending on the need and depending on the level of expertise. So, we're not the only people within FINRA that conduct exams for AML compliance. A lot of that work is done through FINRA's firm examination program, where they'll go in usually on some sort of cycle that's risk-based and they may conduct a review for AML, or they may not. But in the instances where they do decide to conduct an AML review the firm may not be that complex and may be relatively easy to examine for AML compliance, or maybe the staff doing the exam has some level of expertise and experience with that.
Where we get called in is really in situations where we identify the firm upfront through our own industry-wide surveillance that we do, usually at the beginning of every year, where we look to try to find unmitigated or trending AML risk that we're seeing in the brokerage industry or in situations where it may be a firm exam is being conducted the exam staff find some initial inclinations or indications that there may be some concerns. They may not have necessarily the resources or the experience to really delve into the issue and figure out whether there is or isn't a concern. So, they'll either refer their preliminary findings to us or ask us to step in and help them out and take a look at what they've developed so far.
15:48 - 16:49
Jason Foye: And we do a good amount of work in that area, even on a smaller scale, where exam staff from around the country will reach out contact us through what we call our consultation program, and they'll just tell us what they're seeing we're at a firm. This is what we're seeing and the activity or this is what we're seeing in the data. This is what we understand about the controls in place. Do you think that there's an issue here? Or do you think that there's a risk that we're not covering? Or if we think that there might be a potential violation, do you agree that this is an unreasonable system? And it goes both ways. Sometimes we say we've seen this. Based on what we've seen in other parts of the industry this is probably reasonable.
And of course, sometimes there are cases where we say “yes, we do agree with you.” This is probably unreasonable, worth a citation, and then we may weigh in on what we would recommend as a potential disposition because of what we've seen across the country. So, we're able to kind of normalize things a little bit through different parts and make sure that the same types of fact patterns are being handled in similar ways regardless of whether it's a district out in the West Coast or a district in the east coast.
16:50 - 17:19
Blake Snyder: Having people located in six different offices gives the staff and those offices the opportunity to just walk by somebody's desk and ask a random question or "Hey I'm seeing this, what do you think?" And we get some really interesting questions that are brought up as a result of that where maybe the Examiner asking the question doesn't think it's a significant an issue, but one of our staff will take a look at it and say. "Wow you've really got a problem on your hands here," and is able to escalate that up and make sure we have the appropriate resources applied to it.
17:19 - 17:39
Kaitlyn Kiernan: So that's a good look at how you work with other exam staff, but you were mentioning when you were describing how money laundering in the securities industry works that there is market manipulation and are market regulation team also monitors for stuff like that. Do you work with them on matters as well?
17:39 - 18:01
Blake Snyder: We have and we've also provided training not only to Market Regulation staff, but to Member Supervision and sometimes even Enforcement staff on what types of AML issues to keep an eye out for how to handle it when you see it, where there could be an intersection between trading activities they're seeing and what might be reportable on a SAR filing.
18:02 - 18:16
Kaitlyn Kiernan: So FINRA is not the only regulator looking at AML. So, we have to work with others not just within FINRA, but other regulators. How does your team interact with these other governmental agencies both in the US and abroad?
18:17 - 20:01
Blake Snyder: So, I think one of the benefits we've realized from having a specialized group of expert level examination staff is that we can really serve as the point people when interacting with other regulators who have interest in AML issues. So the SEC, just in the security space, banking regulators of course review for AML, as well, at the banking institutions, but in the security space we have the Securities and Exchange Commission, of course, which is vigorous primary regulator, but also conducts its own exams of broker dealers to review for compliance with AML rules, and then FinCEN serves as sort of an umbrella over everything making sure that, in general, the AML rules and laws that are in place are being examined for and enforced within the securities industry and other industries. So, we have very good relationships with both of those agencies.
In terms of the SEC, we meet quarterly with their AML policy staff and discuss trending issues, policy issues. We also talk to them on an ad hoc basis. When interpretive issues arise, we'll get together on a call and discuss different viewpoints and how we might best respond or resources we might point the person to that's requesting the information. And also, with FinCEN, as well, we have very close relationships in terms of providing information to them that they need from us. And also we speak at a lot of conferences, whether it's put on as part of the FINRA Annual Conference or other FINRA preventive compliance programs, and also industry conferences and we're frequently on panels with our counterparts at the SEC and with FinCEN, and I think I as a result of all of that have developed really good working relationships.
20:01 - 20:05
Kaitlyn Kiernan: So, do you work with any international agencies on AML as well?
20:06 - 21:11
Blake Snyder: We along with the other regulatory agencies in the United States provide information to what's called the Financial Action Task Force, or FATF, which is an intergovernmental organization that was created to develop policies and really standards internationally that countries that are FATF members, of which the United States is one of the members, need to comply with as a sort of baseline level of compliance. And as part of that, the FATF will issue reports at least once every 10 years about every country's compliance and practices the report on the United States was issued, I think, at the end of 2016, when they issue reports about all the member countries, they helped develop guidance--there was just guidance that the FATF issued that FINRA had input on along with the SEC and a number of other regulators--that provided guidance to the securities industry globally about AML-related best practices in terms of developing and implementing a risk based approach to anti-money laundering compliance.
21:11 - 21:25
Kaitlyn Kiernan: So now I wanted to move over to the firm side. We talked about how you work with others within FINRA and other regulators, but how does the FINRA AML teamwork within the industry to help ensure adequate compliance?
21:25 - 24:28
Jason Foye: Well Blake mentioned some of the panels that we sit on where we try to serve as subject matter experts and give people real practical, actionable advice about what we're seeing out there in terms of the challenges they may be facing some of the risks and how they're revolving, because one of the things about the money laundering space is that the risk is always changing, the tactics change. What's known as money laundering typologies, or the way that people launder money, those are always changing.
So, we try to get that information out there when we sit on these panels, but a few years ago we started a new program, we call them AML Seminars. These are a little bit longer than what I think FINRA traditionally put out, which was the AML Bootcamps that were more basic knowledge. We decided to put out a program where we would try to just share all the information and expertise we'd been developing with interested personnel in the industry from compliance or AML departments or even just registered personnel that want to dive into the subject matter that want to learn about the rules and regulations, of course, but also the big picture why are we all doing this. And then at a granular level, what are some examples of activity that people should be looking for. Sometimes I think it's hard.
The saying is you don't know what you don't know. So if you've never seen what market manipulation or red flags of market manipulation looks like in a blotter or you've never seen what potentially suspicious money movements look like or the way the different typologies may manifest themselves in data that you're reviewing as a compliance professional, it's much harder to find it because you just don't know what you're looking for. So in order to address that problem we take real life examples, we normalize all the data so there's no indication about what firm it came from or what the customer's names were or anything like that, and we show it to folks and we say this is an example of what this looks like. If you see things like this, you want to dig in deeper. These are examples of alert reviews from surveillance programs whether it's using programs that may use automated systems that generate alerts or firms that are just reviewing blotters manually or firms that are using exceptional reports or some combination. We show them these are good examples of when we see alerts and reports and reviews being done effectively. And these are examples where we see problems and where we see common deficiencies and we just show them the information in the same way that we would train a FINRA examiner.
And we've got a lot of really positive feedback on that both in terms of showing folks what these different red flags look like, but also giving them some tools to help them analyze data in the way that we analyze data, the way that we look for red flags. So that's a program that we're doing again this year. There's information that'll be on FINRA's website that folks in the industry can find if they want to participate. I think we're going to four different cities this year, we've been doing three in the last two years, so we're going to try to do one more. And we encourage people to join because we've changed the curriculum every year. We try to evolve it as things evolve and we'll continue to do so as long as there's an interest out there.
24:28 - 24:59
Kaitlyn Kiernan: Great. We'll include a link to that in our show notes. So that's all we have time for on this episode but we're going to dig in more on some of the best practices for firms and what you can learn from recent cases on the second part of this two-part series. But for now, thanks, Blake and Jason, for joining us today. From Boca, I'm your host Kaitlyn Kiernan. If you have any questions for future guests or ideas for future episodes let us know. You can email us at [email protected]. Until next time.
24:59 – 25:04
Outro Music
25:05 – 25:33
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25:33 – 25:38
Music Fades Out