Account Monitoring Lapses Cost California Brokerage

A securities broker in Southern California must pay a $50,000 penalty after neglecting to monitor four accounts tied to a series of potentially illicit transactions over a four-year period.

The Financial Industry Regulatory Authority disclosed the fine against JKR & Company in a 7-page enforcement action Tuesday, alleging that from November 2012 to December 2016 the Van Nuys-based firm did not spot, investigate and report indicia of suspicious activity in the accounts as required by its own anti-money laundering compliance policies and procedures.

During the onboarding process, JKR, which also acts as an investment advisor, failed to notice that the clients behind the four linked accounts had “questionable” backgrounds or no clear reason for seeking the firm’s services, and afterwards neglected to flag unusual or unjustified wire transfers tied to the accounts, according to FINRA.

“For example, the firm failed to identify that one of the accounts was opened seven months after the accountholder’s corporate president and the control person … had been barred by the SEC [Securities and Exchange Commission] from participating in any manner in any offering involving penny stocks,” FINRA noted in the enforcement action.

JKR entered into the relationships after two of the clients attested that one of the four accounts would handle sales of a particular low-priced security, while the other three would funnel and convert cash and leveraged investments into bonds, mutual funds and other vehicles.

The firm, however, failed to notice that transactions to, from and between the four accounts during those four years veered broadly from the clients’ original description of their business model.

One of the two clients used the first account to both buy and sell the same microcap stock, or penny stock.
Another account regularly wired profits from penny stocks to third parties immediately after selling them, according to FINRA. Wires of this type comprised roughly 20 percent of the total value of all outgoing wires from JKR clients during the period in question.

Broker-dealers help the securities industry meet a legitimate need by helping customers liquidate penny stocks, Bao Nguyen, a former examiner with FINRA, told ACAMS moneylaundering.com.

“[But] broker-dealers that do participate in such activities need to … have a robust AML compliance program in place to … ensure they are not used as a vehicle for potentially nefarious activities,” Nguyen, now principal at Kaufman Rossin in Boca Raton, Florida, wrote in an email.

The four accounts linked back to a murky, intertwined corporate structure, whereby one individual who ultimately controlled three of the accounts also acted as an investment advisor to the immediate owner of one of the accounts. The latter separately had power of attorney and effective control of trading through another of the former’s three accounts.

Two of them were opened for legal entities that had been established only a week earlier in the Seychelles, a known tax haven, but those circumstances allegedly did not arouse any suspicion at JKR.

“JKR also failed to identify that the legal address for one of the accounts was not a physical address, but instead, was a personal mailbox at a retail store,” FINRA claimed.

As part of its resolution with FINRA, JKR agreed to have a senior manager certify within 90 days that the firm has remediated the lapses and bolstered its AML controls.

Industry firms may view FINRA’s focus on the address discrepancy and improperly notarized copy of a passport that one of the customers allegedly submitted as proof of identity as a sort of “broken window” campaign against minor infractions, said Alison Jimenez, president of Dynamic Securities Analytics, a Florida-based consultancy.

“Other broker-dealers may end up scouring their customer records to see if they have similar documentary issues … and that could draw funds and attention away from priorities identified in the National Strategy for Combatting Terrorist and Other Illicit Financing such as healthcare fraud and corruption,” Jimenez wrote in an email.