Near the end of summer 2010, Pinnacle Capital Markets consented to a $50K civil penalty to settle FinCEN charges over its AML program deficiencies, CIP failures, and BSA reporting violations that occurred, in large part, between October 2002 and September 2009.  This assessment was just the second enforcement action taken by FinCEN against a broker-dealer in nearly 11 years, and first in over 5 years.  The earlier enforcement matter involved Oppenheimer & Co. and it was settled in late 2005. 

The Bank Secrecy Act ("BSA") empowers the Financial Crimes Enforcement Network to fine or otherwise sanction a broker-dealer or other financial institution for violating a reporting, recordkeeping or other requirement of the BSA. 

[C-I Note:  Before we take a high-level look at what may have gone wrong with Pinnacle's AML program, let's appreciate the fact that FinCEN is not a B/D's worst nightmare.  Of course, we're not trying to minimize the risk of being disciplined by FINRA, the SEC or another SRO for inadequate policies and procedures.  But at least it's somewhat comforting knowing that, most of the time, there's one less regulator peering into your firm's activities.]   For further details, go to:  [ FinCEN's Enforcement Action ]

    Pinnacle Capital Markets.     FinCEN found that Pinnacle's business model encompassed heightened AML risk due to concentrated exposure to high risk foreign jurisdictions.  The alleged violations Pinnacle engaged in were systemic: 

• lack of adequate internal controls combined with deficient training and independent testing, resulting in an ineffective AML compliance program not tailored to the risks of Pinnacle’s business;
• failure to verify the identity of customers by not obtaining required customer identification program (“CIP”) information for accountholders;  and
• deficiencies in the Firm’s procedures and monitoring for suspicious transactions leading to failure to file suspicious activity reports in accordance with the BSA.

    Violations re: Implementing an AML Program.   The Firm allegedly failed to implement 4 core elements of an adequate AML program to ensure compliance with the BSA and manage the risk of money laundering or other illicit activity:

• Policies, Procedures and Internal Controls to Detect and Cause Reporting of Suspicious Transactions.
• Pols, Procedures and Internal Controls to Achieve Compliance with the BSA and Implementing Regulations.
• Independent Testing for Compliance.
• Training for Appropriate Personnel

The Firm also failed to establish a due diligence program for correspondent accounts as part of the AML program.

    Violations of the Requirement to Implement a CIP.   Pinnacle allegedly failed to obtain required CIP information to verify the identity of Sub-account Owners who were foreign investors.  Since at least 2003, Pinnacle opened master accounts for foreign financial institutions (“Master Account Holders”) and these Master Account Holders or Pinnacle opened a few thousand sub-accounts.  Sub-account Owners could transmit orders directly to, or through, Pinnacle or its clearing broker using passwords and identification numbers that Pinnacle provided.  Thus, Sub-account Owners were “customers” of Pinnacle since they had direct control over how trades were made in their accounts and did not require the Master Account Holders to intermediate securities transactions on their behalf.

Between January 2004 and August 2006, Pinnacle also allegedly didn't verify the ID of its corporate customer account holders, based on FinCEN test samples.  Pinnacle either did not collect the required information, or it obtained documents in foreign languages without English translation.  Moreover, Pinnacle didn't use any non-documentary methods, such as checking references with other financial institutions or obtaining a financial statement to verify the identities of these corporate account holders.

    Violations of the Requirement to Implement a CIP.   The alleged absence of effective pols, procedures, and internal controls resulted in the Firm's alleged inability to timely report suspicious transactions - between October 2005 and March 2007, Pinnacle failed to report suspicious transactions involving millions of dollars. This represents a 29% failure to file rate for the firm.  

Making matters worse, credible publicly available information dated 3/7/07 indicated that foreign customers of Pinnacle were subjects of an international “pump and dump” investigation by the SEC.  Several of these customers resided in a country that was classified for heightened money laundering risk. Nevertheless, Pinnacle failed to identify the risks, implement risk-based monitoring for suspicious activity, and review transactions originating from these customers.

Pinnacle also allegedly failed to report suspicious transactions by an individual who utilized the Firm’s services through a fully disclosed account.  From late 2005 through early 2006, this customer received and subsequently sent wires in excess of $2.5 million through Pinnacle.  The account application for this individual reflected liquid and total net worth of less than $1 million.  Even though this customer was also located in a country classified for heightened money laundering risk, and apparently did not have net worth that could support the substantial account activity, Pinnacle failed to identify or review this customer’s account for suspicious transactions.

For further details, go to:   [FInCEN Asessment #2010-4, 9/1]