In this post, Michael Gross complains — and rightly so — about the lack of any definitive guidance from FINRA regarding the appropriate range of fines to be imposed for AML violations. The bigger issue, however, at least in my view, is not necessarily the lack of guidance, but the fact that the fines FINRA metes out in AML cases are, simply, ridiculously high, as Michael notes. In my recent experience, it seems that the absolute minimum that FINRA will even consider discussing is $100,000. Why? Because in FINRA’s eyes, every AML case is “serious.” Even in the absence, of course, of any actual money laundering or any actual terrorist financing. This one-size-fits-all approach to AML cases is maddeningly oversimplistic, and fails to take into consideration that, at the heart of the AML rule, is a “reasonableness” standard, same as in supervision cases. – Alan
While at FINRA, I litigated and settled multiple anti-money laundering (AML) cases. I now find myself defending them. Despite my familiarity in these waters, I find the guidance provided on fines for AML violations to be unnecessarily murky.
The Commonplace Nature of AML Violations
Over 15 years ago, FINRA issued the first version of its AML rule: NASD Rule 3011 (n/k/a FINRA Rule 3310). Since that time, FINRA has:
- Created a “Topic Page” on its website dedicated to AML matters;
- Issued 13 notices regarding AML matters;
- Issued 25 AML-related press releases;
- Created a dedicated AML Investigative Unit (which has grown in number); and
- Brought countless disciplinary actions for AML violations, including two AWCs in 2016 where the fines exceeded $16 million.
One commentator estimated that FINRA doled out over $43 million in fines in 29 AML cases in 2016. These fines account for nearly a third of the $137 million in fines that FINRA levied in 2016.
No Sanction Guidelines for AML Violations
FINRA publishes Sanction Guidelines (Guidelines) in order to “provide direction for Adjudicators in imposing sanctions consistently and fairly.” The Guidelines “address some typical securities-industry violations,” such as unsuitable recommendations, selling away, and supervision violations. The Guidelines identify principal considerations in determining sanctions for these typical violations, and they also set forth a recommended range of sanctions for the violations. For example, the Guidelines recommend a range of fines for firms for various supervision violations: “Systemic Supervisory Failures” ($10,000 to $292,000), “Failure to Supervise” ($5,000 to $73,000), and “Deficient Written Supervisory Procedures” ($1,000 to $37,000.” The Guidelines provide a level of clarity to firms, registered reps, and their attorneys in determining whether to settle or litigate alleged violations.
Since the 2002 enactment of its AML rule, FINRA has revamped its Guidelines on multiple occasions. In May 2015, FINRA made wholesale revisions to the Guidelines. In April 2017, FINRA again made multiple revisions to the Guidelines, including the addition of three new guidelines for systemic supervisory failures, short interest reporting, and borrowing from/lending to customers. Despite the commonplace nature of actions for AML violations, FINRA did not add a specific guideline to address such violations. This is peculiar. FINRA is well aware that AML violations have been “typical securities-industry violations” for quite some time now.
It is no secret that AWCs for AML violations have resulted in higher fines than fines for most other violations, and it likewise is no secret that FINRA has been imposing increasing fines for AML violations. Given the significant amount of revenue that FINRA has generated from fines for settling AML cases, it seems that FINRA has chosen not to publish a guideline that puts a range (and constraint of sorts) on fines for AML violations.
FINRA Tribunals’ Decisions to Use the Supervision Guidelines for AML Violations
Although the Guidelines do not contain a specific section addressing AML violations, the Guidelines do provide that: “For violations that are not addressed specifically, Adjudicators are encouraged to look to the guidelines for analogous violations.” Until recently, FINRA tribunals have considered supervision violations to be analogous to AML violations, and thus looked to the specific guidelines for supervision violations in assessing sanctions for AML violations. For example, in Lek Securities, an OHO Panel concluded that:
There are no specific Sanction Guidelines applicable to the violation here, the failure to establish and implement an adequate AML program. The National Adjudicatory Council (“NAC”) has treated deficient written supervisory procedures as an analogous violation and applied the Sanction Guidelines for that type of violation to a case of deficient AML procedures. Other Hearing Panels have done likewise. The Hearing Panel in this case also looks to the Sanction Guidelines for deficient written supervisory procedures as an analogous violation.
This makes sense. AML compliance, like supervision, requires establishing and implementing written procedures, monitoring transactions for suspicious activity, and taking appropriate action, when necessary.
In a July 2016 Decision, the NAC affirmed the use of the supervision guidelines in assessing AML sanctions. In North Woodward, the NAC batched supervision and AML violations (i.e., imposed a unitary sanction for both sets of violations), and looked to the supervision guidelines to assess sanctions, citing multiple decisions in which other FINRA tribunals had done the same.
These holdings are good for firms. They provide guidance on AML sanctions, and they place a reasonable range on AML sanctions.
The NAC’s Decision Not to Use the Supervision Guidelines for AML Violations
Unfortunately, in October 2016 – less than three months after the NAC issued the North Woodward Decision that affirmed the use of the supervision guidelines for AML violations – the NAC did a complete about-face. In the appeal of the aforementioned Lek Securities case, the NAC rejected the notion of using the supervision guidelines for AML violations:
That guideline, however, was not crafted to address the violations here, a deficient AML program, including deficient policies and procedures. In fact, deficiencies in AML policies and procedures are far more serious than most deficiencies in written supervisory procedures.
This holding, in essence, means that there is no supervision or other section in the Guidelines that address violations analogous to AML violations, and consequently, no recommended range of fines for AML violations.
An OHO Panel’s Subsequent Decision to Use the Supervision Guidelines for AML Violations
Despite the NAC’s holding in Lek Securities, an OHO Panel recently aggregated fines for a firm’s AML and supervision violations in its March 2017 Decision in Spencer Edwards. In assessing the fine, the Panel used the guidelines for supervision violations because the supervision and AML violations “stemmed from a common problem at the firm.” That failure was assembling a checklist of materials to be reviewed that no one at the firm critically reviewed. More specifically, the Panel found that the firm failed to implement its supervision procedures on Section 5 and its related AML procedures.
It is time for FINRA to issue a sanction guideline on AML violations.
 The Office of Hearing Officers (OHO) is, in effect, FINRA’s trial court, and the National Adjudicatory Council (NAC) is, in effect, its appellate court.
 Lek Securities is on appeal to the SEC.
 Spencer Edwards is on appeal to the NAC.