On January 8, 2018, FINRA issued its 2018 Annual Regulatory and Examination Priorities Letter (“2018 Priorities Letter”) and identified anti-money laundering (“AML”) as one of the topics that it will continue to focus on. FINRA has included AML in each of its annual regulatory and examination priorities letters since 2013.

The 2018 Priorities Letter states that FINRA will “assess the adequacy of firms’ anti-money laundering programs” and that it has concerns about “firms’ policies and procedures to detect and report suspicious transactions.”[1]  It appears that FINRA will continue in 2018 to closely examine  firms’ AML programs overall like it has done over the past several years and will not limit its review to discrete topics.  It is therefore critical that all material aspects of firms’ AML programs are reasonably designed as required by FINRA Rule 3010 to meet all regulatory requirements under the Bank Secrecy Act and its implementing regulations,[2] are adequately resourced and are operating effectively.     

FINRA also generally states that it is concerned about firms devoting sufficient resources to monitoring.   This general statement should be read in conjunction with the statements that FINRA made on monitoring resources in its Report on FINRA Examination Findings that was issued on December 6, 2017.[3]  In that report, FINRA highlighted that it observed anti-money laundering program deficiencies due to policies and procedures not being implemented because  firms failed to provide adequate resources to AML departments to carry out the responsibilities of the programs.  FINRA stated that this commonly occurred when a firm’s business experienced significant growth, but it did not grow its anti-money laundering program commensurately.  FINRA cautioned firms that the lack of resources can lead to deficient monitoring or inadequate investigations of potentially suspicious activity.  Based on these statements, firms should carefully analyze their monitoring programs and assess whether sufficient resources are devoted to alert handling and address any shortcomings.  Since it is clear that FINRA will be examining resources, firms should document the foregoing analysis and assessment carefully. Firms also should memorialize any decisions relating to any reduction in headcount associated with alert handling and should strive to avoid any alert backlogs which could be attributable to lack of resources.     

FINRA also cites independent testing of AML programs under FINRA Rule 3310(c) as an area of concern.  Although the 2018 Priorities Letter does not provide any further information relating to this particular concern, FINRA indicated in its Examination Findings Report that it had observed that some firms’ independent tests: (1)  failed to include a review of how the anti-money laundering program was implemented; (2) were not sufficiently independent; and/or (3) were not completed on an annual calendar year basis when such frequency was warranted.[4]  Each firm should review its AML independent tests and verify that the testing is sufficiently comprehensive and is performed by a truly independent third party at the appropriate frequency in light of the AML program risk.

The 2018 Priorities Letter highlighted two fact specific monitoring issues.  FINRA cautioned  firms relating to foreign affiliates using their accounts to conduct high-risk transactions, including microcap and dual currency securities, and said it had observed instances in which firms did not monitor or monitored less closely the accounts of affiliates.  FINRA also stated that firms’ monitoring should encompass accounts used in connection with securities-backed lines of credit and aggregate activity across accounts when customers use multiple accounts to receive and disburse funds in connection with such loans.  Firms should review their monitoring programs and ascertain whether they encompass the aforementioned activity and promptly make any required changes. 

In addition to topics that will be focused on, FINRA’s priorities letters cite regulations that it deems significant and which will become effective during the calendar year.  The 2018 Priorities Letter identifies the Financial Crimes Enforcement Networks (“FINCEN”) Customer Due Diligence Rule (“CDD Rule”) as a significant regulation with which firms must comply commencing on May 11, 2018.[5]  On November 21, 2017, FINRA issued Notice to Members 17-40 reminding firms of their obligation to comply with the CDD Rule by the deadline.  The CDD Rule is arguably one of the most significant AML regulatory changes in the last decade and the fact that FINRA referenced it in its 2018 Priorities Letter and issued a Notice to Members on it should put firms on notice that AML examinations will include a review of firms’ implementation of the requirements of the CDD Rule.

In sum, anti-money laundering compliance will continue to present a regulatory risk to firms in 2018.  The 2018 Priorities Letter demonstrates that FINRA will continue to vigorously review  firms’ AML programs for program deficiencies.  Over the past few years, FINRA has been bringing enforcement actions against firms for AML deficiencies.  Some of those enforcement actions include multi-million dollar civil penalties.  Given the high stakes associated with AML program deficiencies, firms should proactively review their programs against FINRA’s 2018 Priorities Letter and, if needed, take prompt remedial action.

[2] 31 U.S.C. §5311, et seq. and 31 CFR Chapter X

[4] See end note 3.

[5] FinCen Customer Due Diligence Requirements for Financial Institutions, 81 FR 29397 (May 11, 2016).

Practice Areas

Jump to Page