SpeedRoute is a registered broker-dealer that specializes in routing U.S. equities orders for broker-dealer clients to trading platforms for execution. Being a registered broker-dealer means that SpeedRoute has to comply with the Bank Secrecy Act. Among many other things, that requires SpeedRoute to file Suspicious Activity Reports for suspicious transactions that it knew, suspected, or had reason to suspect involved the use of these trading platforms to facilitate fraudulent activity or that had no business or apparent lawful purpose.
SpeedRoute has what seems like a good written set of AML policies and procedures, at least according to the Securities and Exchange Commission.
The firm’s AML Policies specifically mentioned “spoofing,” “layering,” and “wash trading” as types of market manipulation of particular concern to SpeedRoute. The AML Policies also incorporated each of the red flags listed in Section III of FINRA Regulatory Notice 19-18, which includes orders representing a substantial percentage of the daily trading volume in low-priced securities, pre-arranged trading (including wash trading), and spoofing. The AML Policies also outlined procedures for identifying (manually and through automated surveillance), investigating, and filing SARs for transactions indicative of suspicious activity.
The problem is that SpeedRoute’s surveillance system was not aligned with those policies and procedures. It was not programed to raise red flags for all of the items listed in the policies and procedures.
Even when the system flagged transactions, SpeedRoute did not review all of the suspicious activity identified by its surveillance systems. SpeedRoute’s compliance staff only reviewed a sampling of alerts. SpeedRoute’s AML Policies called for all alerts to be reviewed and documented.
By failing to review all of the red flags, SpeedRoute failed to file Suspicious Activity Reports.
Lessons:
- Make sure your surveillance system includes all the red flag items in your policies.
- Review ALL of the red flags, especially if your policy says that you will review all of them.
- File Suspicious Activity Reports
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