As I noted back in July 2008, the SEC settled charges against E*Trade Clearing and E*Trade Securities for AML (anti-money laundering) violations. In that action, the SEC found that E*Trade failed to comply with rules requiring securities firms to verify the identities of their customers and to document their procedures with complying with AML rule and regulations. More specifically, the SEC found that, from October 2003 to June 2005, E*Trade failed to verify the identity of over 65,000 customers, in violation of the USA PATRIOT act and SEC rules. Without admitting or denying anything, E*Trade settled the charges, and was to pay a $1 Million fine. The SEC noted that E*Trade personnel discovered, and then rediscovered, the deficiency in their CIP (customer identification program) but failed to take any corrective actions for nearly 2 years.
Now, FINRA has extracted their pound of flesh from E*Trade as well for AML issues. In a press release from FINRA on January 2, 2009, FINRA announced that it is fining E*Trade $1 million for an inadequate AML program. According to FINRA's release, the two E*Trade units were sanctioned "for failing to establish and implement anti-money laundering (AML) policies and procedures that could reasonably be expected to detect and cause the reporting of suspicious securities transactions" during the period from January 2003 to May 2007. (Note that this period overlaps the period from the SEC matter).
Lessons to Learn:
There are a couple of important points for firms to recognize here: First, E*Trade was hit with a total of $2 Million in fines not because money-laundering occurred on their watch, but because they allegedly had flaws in the systems and procedures. There have been no allegations that the two companies did not detect and report suspicious activity or that any substantive AML violations had occurred in accounts at the firms. Rather, the two actions are all about systems and procedures. E*Trade allegedly did not have the proper systems and procedures in place to satisfy the regulators.
Second, as the FINRA release points out, some of the controls in place were not appropriate for the business model that E*Trade operated. That's important, because firms have an obligation to tailor their procedures to its business model. What may work well for a face to face retail model may not work well for an online retail model. What may work well for firms with managers in each office may not work well for firms following the independent model.
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