According to FINRA, American Portfolios Financial Services, Inc., based in Holbrook, New York, was censured and fined $225,000 for failing to develop and implement an anti-money laundering (AML) compliance program reasonably designed to detect and cause the reporting of suspicious activity in low-priced securities. The firm was also found in violation of its obligations under Section 5 of the Securities Act of 1933 regarding potentially restricted securities.
Anti-money laundering programs are a critical line of defense against financial crimes. Under the Bank Secrecy Act, broker-dealers are required to establish AML programs that include procedures for detecting and reporting suspicious activity. This obligation is particularly important in the context of low-priced securities, commonly known as penny stocks, which are frequently exploited in money laundering, market manipulation, and fraud schemes.
The findings revealed that American Portfolios relied exclusively on an exception report prepared by its clearing firm that showed only basic information concerning deposits of low-priced securities. This report did not show historical or aggregated information and was not a reasonable tool to identify patterns of suspicious activity. Without the ability to view patterns and trends over time, the firm could not effectively detect the hallmarks of suspicious activity, such as repeated deposits of low-priced securities followed by liquidation and withdrawal of funds.
The firm also failed to reasonably investigate customers who engaged in suspicious patterns of depositing shares of low-priced securities, liquidating some or all of those shares, and withdrawing the funds shortly thereafter. This deposit-sell-withdraw pattern is a well-known red flag for money laundering and potential violations of securities laws. Additionally, the firm failed to establish a supervisory system reasonably designed to achieve compliance with Section 5 of the Securities Act, which prohibits the sale of unregistered securities that do not qualify for an exemption from registration.
For investors, this case serves as a reminder that AML compliance is not merely a regulatory checkbox but a vital safeguard that protects the integrity of the markets. When firms fail to detect and report suspicious activity, it can facilitate fraud and market manipulation that harm innocent investors. Investors should be aware that activity in low-priced securities is subject to heightened scrutiny by regulators, and they should ensure that any transactions in such securities comply with applicable laws. This case also underscores the importance of firms maintaining robust compliance systems rather than relying on minimal third-party reporting.
