← Broker database 2024-09-16
FINRA Fines Colorado Financial Service Corporation for AML Surveillance Deficiencies
According to FINRA, Colorado Financial Service Corporation (CRD #104343), based in Centennial, Colorado, was censured, fined $50,000, and required to certify that it had remediated the issues and implemented a reasonably designed AML program. The firm consented to these sanctions without admitting or denying the findings. FINRA found that the firm's anti-money laundering (AML) procedures were not reasonably designed to detect and report suspicious transactions, including potentially manipulative activity such as prearranged trading. Although the firm's AML procedures stated that it would manually monitor a sufficient amount of account activity to identify unusual patterns, the procedures failed to specify the frequency of monitoring, what constituted a "sufficient amount" of activity to review, or what the firm considered suspicious or unusual. The procedures also referenced the use of exception reports that would track transaction size, location, type, and other factors, but the firm did not actually use any exception report designed to monitor for suspicious activity. Instead, the firm relied exclusively on a daily manual review of its trade blotter, which lacked sufficient information to identify suspicious transactions, such as order entry time, market trading volume, cross-account trading patterns, or potentially prearranged trading between accounts. These deficiencies had real consequences. FINRA found that the firm failed to detect or investigate red flags of suspicious trading in a low-priced, thinly traded security. Two customers executed corresponding buy and sell orders in a security at identical share amounts and prices on multiple occasions, and in one instance placed corresponding orders within two minutes of each other. The same two customers' trading activity accounted for up to 85 percent of the total daily market trading volume in the security. Even when the firm's clearing firm raised concerns about this activity, the firm failed to take any reasonable steps to investigate. For investors, this case demonstrates why robust AML surveillance is critical. Prearranged trading and manipulative activity in thinly traded securities can harm other investors by distorting prices and creating a false impression of market activity. Firms must have systems capable of detecting such patterns rather than relying on manual reviews that lack the necessary data to identify suspicious behavior.