I have been working in anti-money laundering (AML) for more than a decade and rarely have found public actions as interesting as two published by the Financial Industry Regulatory Authority (FINRA) in December 2011. Most enforcement actions that have been discussed within the industry have been multi-million dollar fines imposed against institutions. While these clearly show the impact of AML failures at institutions, they do not seem to have the same impact as the two that will be discussed in this article—at least not on the general audience for AML training. In FINRA’s actions, two employees of a brokerage firm were personally fined and given a temporary ban from employment in the securities industry for failing to report suspicious activity that they encountered relating to a man eventually convicted of running a multi-million dollar Ponzi scheme.
In December 2011, FINRA accepted Letters of Acceptance, Waiver and Consent (AWCs) from Harold David Criswell and Timothy Edward Dixon, whereby Criswell and Dixon accepted and consented, without admitting or denying the findings, to the entry of findings by FINRA detailed in the AWCs. Both consented that they violated National Association of Securities Dealers (NASD) Conduct Rule 3011(a), which requires FINRA members to implement policies and procedures that can be reasonably expected to detect and cause the reporting of transactions required by the Bank Secrecy Act and its implementing regulations. Violation of this rule also resulted in violations of NASD Conduct Rule 2110, addressing standards of commercial honor and principles of trade. Criswell and Dixon agreed to fines and suspensions from association with any FINRA member of $10,000 and 30 days and $15,000 and four months, respectively.
Details of the Cases
Both had been in the securities industry for more than a decade: Criswell since 1986, Dixon since 1994. Both were working for an Ohio branch of Raymond James Financial Services, Inc. (RJFS), Criswell as the branch manager and Dixon as a registered representative for several years.
RJFS’s AML program required employees who identify “any red flag or other activity that may be suspicious” to “notify the AML officer.” RJFS’s compliance manual required employees to communicate any unexplained red flags to the AML officer and “report to the Officer immediately any activity deemed to be suspicious in nature.”
Dixon had a client referred to as JR in the AWCs. According to the AWCs, “JR was a frequent trader who moved large sums of money in and out of his RJFS accounts,” including depositing $3.8 million in cash equivalents into his brokerage account and writing 1,302 checks from a linked money market account in one 10 and a half month period.
In 2005 and 2006, RJFS’s AML officers asked Dixon on three occasions for an explanation of the substantial flows of funds into and out of JR’s accounts and why checks were frequently written in round dollar amounts. Dixon apparently failed to follow up with JR on these specific requests, but rather relied on the general explanation JR provided when he opened up the account years earlier—that the frequent activity was the result of JR’s extensive dealings in real estate, motor vehicles and a successful insurance business.
Subsequently, Dixon learned of additional red flags: that JR had been named as a defendant in a civil complaint alleging that JR had converted funds from his deceased uncle and placed these into JR’s own account, that JR’s accounts at RJFS had been subpoenaed by the Ohio Division of Securities and that JR was under investigation by an Ohio Grand Jury. Dixon discussed these red flags with others at the firm, but did not report them to the AML officer, nor was he aware that someone else had referred these to the AML officer.
Dixon further learned of two additional red flags from JR: that JR had invested funds on behalf of others and was using the funds in his account to repay those investors and that JR had admitted to the State of Ohio that he had committed fraud and expected to go to prison. When the AML officer asked Dixon why a large amount of money had left JR’s accounts over a two week period, Dixon’s response failed to include any of these identified red flags, but rather indicated that JR’s accounts would continue to “dwindle down” because JR was going to go in a “different direction with the funds.”
Criswell, as a branch manager, had additional responsibilities under RJFS’s AML program, including “immediately reporting suspicious activity to the firm’s AML Officer as detected, identifying red flags, and cooperating with RJFS’s home office regarding related inquiries: and for “understanding the current AML Program and ensuring that all branch associates … are knowledgeable in detecting and reporting” unusual activity. Criswell was Dixon’s supervisor and he often interacted directly with JR when Dixon was not available. Criswell was aware of not only the same red flags as Dixon, but due to his personal interactions with JR, Criswell also knew that JR repeatedly asked him about the possibilities of investing on behalf of others using his account and that JR had deposited at least 66 third-party stock certificates to his account. Despite his additional responsibilities as the branch manager, Criswell did not inform RJFS’s AML officer of this information and had no reason to believe that the firm’s AML officer was aware of the red flags.
Ultimately, in July 2007, the Ohio Division of Securities filed a complaint to place JR’s assets into receivership after it determined JR was operating a Ponzi scheme. Later that month, JR pleaded guilty to first degree felonies for perjury, forgery and selling unregistered securities; he was sentenced to 20 years in prison and ordered to pay $17.8 million in restitution.
Whether these cases are the beginning of a trend or just an anomaly is yet to be seen, but we in the financial community should take some time to look at them and learn from them and to see what is catching the notice of the regulators. While most of the findings are no surprise, as the regulators are enforcing the rules that exist, it is often interesting to see what it is that they are citing and where their attention is directed. In these cases, both employees had exposure to indicators of JR’s illegal activity prior to the time that authorities shut down the Ponzi scheme. Had they acted in accordance with their firm’s policies, it is possible that the scheme could have been stopped earlier, saving some investors from further losses. This is one of the reasons that reporting suspicious activity is so important to all interested parties, including investors and law enforcement.
One other important reason to review new enforcement actions is to enable us to learn from the mistakes of others — at the very least, it is far less expensive and troublesome. We should look at the activity cited in the cases and see if the systems of internal controls in our institutions would pick up these same issues; if not, how could we improve our controls so that we are not the next case study for someone else to review and learn from.
Lastly, as AML professionals, we are charged with providing training to employees of financial institutions so that they may perform their roles. As part of that training, it is critical that we make the connection with employees on the importance of AML and of doing the right thing. One of the most important roles is that of detecting and reporting unusual activity that can lead to a law enforcement investigation into unlawful activity. The Financial Crimes Enforcement Network (FinCEN) in its annual report indicated that 86 percent of its customers confirmed that information provided by FinCEN contributed to the detection and deterrence of financial crime.
Training is one of the key means to provide employees with the knowledge they need to know to do their job. When providing training on reporting suspicious activity, traditionally, this has meant showing how reporting suspicious activity helps prevent crime and/or reduce crime in the neighborhoods where the institution works, as well as protecting the institution itself from regulatory scrutiny, reputational damage and/or fines and penalties. The concept that an employee could be found criminally liable for failing to report unusual activity was generally only in the context of a complicit insider who was aiding and abetting the criminal activity (and there have been a number of cases over the years showing employees abusing their positions).
Here is an excellent case study to illustrate the importance of reporting unusual activity and how it can impact the employees directly. They have more than just a duty to protect their institution and community; now they truly have something personally at stake. While scare tactics are not the preferred means of driving behavior (just ask any psychologist), they are often quite effective and can provide a different incentive to drive employee behavior. With some careful drafting of the facts of the cases, you can emphasize key points that you want to use to drive desired behavior, such as an increased awareness of potential indicators of unusual activity or the process to escalate unusual activity. If you decide to use these examples in your AML training, your institution should be prepared to address the increased reports of unusual activity potentially generated by these case studies.