[ by Howard Haykin ] This FINRA case involves a firm and its staff what are much like a person who's "all dressed up, with nowhere to go."  The California broker-dealer, Manhattan Beach Trading Financial Services, Inc. - dba MB Trading - equipped its personnel with most of the tools and resources needed to conduct adequate customer identification program (CIP) reviews.  They forgot, however, to provide the necessary training. Background on Firm. MB Trading has been registered with FINRA since May 1993.  Based in El Segundo, CA, the firm has 30 registered reps and 51 non-registered persons. MB Trading is a direct access brokerage firm that develops and markets direct access trading technology to online investors, institutions, and qualified destinations. Overview of Firm Deficiencies. The apparent deficiencies would later come back to haunt the firm and others.  This is because, as FINRA found out, the firm was essentially defenseless against turning away prospective new retail customers who sported suspicious backgrounds.  The eyes and ears of the firm - the new account personnel - lacked proper training, and so were incapable of recognizing alerts and signals during customer identification program (CIP) reviews. As a result, the firm opened new retail accounts for individuals who, by all rights, should have be turned down.  The firm failed to file SARs to federal authorities about the suspicious individuals.  And, later, while the suspicious persons used their MB Trading accounts, and the firm's direct market access trading platform to conduct suspicious and criminal transactions. FINRA Findings and Allegations. From June 2010 to February 2011, MB Trading allegedly violated FINRA Rules 3310(a) and 3310(b) and 2010 by failing to establish and implement AML procedures that were adequately tailored to the Firm's business and reasonably designed to:  (i) verify customer ID;  and, (ii) detect and lead to submission of SARs (on suspicious transactions).  MB Trading had inadequate WSPs related to the opening of new accounts, and New Accounts personnel lacked adequate training to conduct BSA and CIP reviews. During the relevant period, the firm allegedly was unable to identify backgrounds of certain persons opening retail accounts, whose sole intent was to engage in fraudulent activity through the Firm's direct market access ("DMA") trading platform.

FINRA Rule 3310(b) requires firms to have procedures reasonably designed to achieve compliance with the BSA (Bank Secrecy Act) and to conduct a "Customer Identification Program" (CIP) for identifying and verifying account holders, that is risk-based and tailored to a firm's business and customer base.

Specifically, between May 2010 and September 2010, MB Trading opened accounts for at least 4 Kazakhstani persons who, after opening the Firm accounts, engaged in a pattern of fraudulent trading.  The Kazakhstanis, without permission, improperly accessed accounts of unsuspecting customers who held accounts at other online B/D's, which they used together with their MB Trading accounts to conduct a short sale transaction scheme.  The scheme generated large profits in their MB Trading accounts, and caused losses in the outside accounts of the unsuspecting customers. The Right Tools and Resources for CIP Reviews. Interestingly, the firm took significant steps to do the right thing!  It retained an outside vendor to provide "Identity Reports" that included account indicator codes reflecting search results by the vendor regarding verification of, or failure to verify, relevant information about the potential customer.   Vendor also provided the firm with an "Identity Score" - i.e., a proprietary quantitative score that was based on address verification, phone number verification, an OFAC (Office of Foreign Assets Control) match, and social security number validation. However, New Accounts personnel had not been trained to look beyond the Identity Score itself or to review the account indicator codes that were located on the same page as the Identity Score.  Had they done so when the Kazakhstanis were opening their accounts, staff reviews would have revealed numerous instances in which relevant account opening information for these individuals could not be verified.  This also exposed the Firm to more attendant risk as the Identity Score decreased. Further, when a new account received a low Identity Score, New Accounts personnel were supposed to, but never had been adequately trained or advised to, generate a "Credit Report" - a separate report from a consumer credit reporting agency to verify further the SSN of the potential customer.  And, they should have reviewed the more detailed explanatory info provided on the Credit Reports, beyond 3 possible general report results:  (i) Actual Account confirmation; (ii) Insufficient Activity to Generate Report;  or, (iii) No Record Found. Because the staff did not drill down or review the explanatory information that was on the same page of the Credit Report as the general result language, the Firm never learned that, significant issues related to the Kazakhstanis.  The Credit Report alerted the firm that if the social security number is not "a typo," then a "Social Security Number has never been issued" for these individuals. Deficiencies With Reviewing Trading Activity. MB trading allegedly failed to flag any trading activity on the accounts because the firm attributed withdrawals to profitability of trading in the account.  The firm conducted a "narrow focused" review, centering on profits and withdrawals, along with activity in thinly-traded securities within their customer accounts. The firm allegedly failed to review closely for sudden/short term increases in profit - instead, accounts were primarily examon situations where a willing contra-party was on the other side of the trade, which is what existed with each of the foreigners’ transactions.  As FINRA found, the firm never became aware that foreign persons were on both sides of the transactions, and thus failed to take significant preventive measures to identify adequately their violative activities. FINRA Sanctions. MB Trading agreed to a $125K fine to settle the FINRA charges. For further details, go to:   [FINRA Disc. Actions for July 2012] and [FINRA AWC #2010023995101].