Client Alert
The Financial Crimes Enforcement Network (FinCEN) has issued a Consent Order (“Order”) imposing an $80 million civil money penalty against Canaccord Genuity LLC (“Canaccord” or the “Firm”) for willful violations of the Bank Secrecy Act (BSA) and its implementing regulations. The violations spanned from March 2018 through June 2024 and centered on Canaccord’s failure to implement and maintain an effective anti-money laundering (AML) program, including deficiencies in customer due diligence (CDD), failures to report suspicious activity, and misstatements to regulators during supervisory exams.
Background
Canaccord, a broker-dealer headquartered in New York, operated high-risk lines of business, including OTC market making in microcap and penny stocks. Despite repeated promises to remediate findings in exams conducted by the Financial Industry Regulatory Authority (FINRA), Canaccord failed to devote adequate resources to its AML program, relied on ineffective trade surveillance reports, and employed untrained compliance personnel. Notably, two compliance employees falsified records to mislead regulators regarding the review of trade surveillance reports.
Key Violations
- AML Program Deficiencies: Canaccord failed to implement policies, procedures, and internal controls reasonably designed to detect and report suspicious activity, particularly in its high-risk OTC trading business. Trade surveillance reports on high-risk trading in low-priced securities, potential pump and dump trading and wash trading were often unreviewed, were intentionally narrowed in order to reduce the number of flagged transactions and omitted critical data elements. Compliance staff also lacked necessary guidance, training, and experience to review the reports effectively. Canaccord and its BSA Officer also failed to allocate the resources necessary to ensure compliance with the BSA.
- Customer Due Diligence Failures: The Firm’s onboarding and ongoing CDD processes were inadequate, failing to assess customer risk profiles, verify beneficial ownership, and conduct ongoing monitoring. Giving specific examples of characteristics indicating when customers require enhanced due diligence (EDD) or enhanced monitoring, the Order sets out a series of red flags that Canaccord should have identified—including rapid increases in value or volume traded, addition of accountholders to sanctions lists, and adverse media reports regarding ties to Russia and Venezuela. As a result of its AML failures, Canaccord accountholders were able to access the US financial system without appropriate oversight.
- Suspicious Activity Reporting: Canaccord failed to file at least 160 Suspicious Activity Reports (SARs) relating to dozens of OTC securities, depriving law enforcement of critical financial intelligence and enabling bad actors to continue doing business within the US financial system.
- Misrepresentations to Regulators: Employees falsified records and backdated policies to mislead FINRA and other regulators.
Enforcement Factors and Penalty
FinCEN considered the nature and seriousness of the violations, harm to the public, management’s knowledge, and the Firm’s history of regulatory actions. Canaccord’s failures allowed illicit actors to perpetrate and profit from fraud schemes, causing significant harm to investors and the market. The Consent Order imposes an $80 million penalty, with $40 million credited for payments Canaccord has made to the SEC and FINRA, and $5 million suspended pending compliance with a SAR Lookback Undertaking. Canaccord must pay $35 million to the Department of the Treasury.
Takeaways and Implications
- Regulatory Expectations: Broker-dealers and other entities subject to the requirements of the BSA must ensure AML programs are robust, risk-based, and tailored to their business lines, especially those involving high-risk products, geographies, and customer account values and volumes.
- Resource Allocation: Adequate staffing, training, budget, resources, and oversight are critical for effective compliance.
- Transparency and Integrity: Falsifying records or misrepresenting compliance activities to regulators can result in severe penalties based on willful failures to comply. Failing to voluntarily disclose compliance failures to regulators and serial missed remediation opportunities will lead examiners to refer cases to FinCEN and even potentially the Department of Justice.
- Ongoing Remediation: Canaccord’s remediation efforts—including a SAR Lookback and enhanced compliance measures—were considered but weighed less due to their delayed implementation.
