You are never too small for regulators to fine you!

EFG Capital International Corp. (EFG) is not exactly a small potato in the financial services business, but the company is no 800-lb. gorilla either. Founded in 1996, the FINRA-regulated broker-dealer has approximately 130 registered representatives operating out of five branches, three of which are in South America. Its primary business is retailing foreign sovereign debt, listed US equity securities, structured notes, and mutual funds. Nearly 90 percent of its clients are non-US citizens, from Latin America and 0 percent are high net worth individuals.

Is lack of oversight worth $800K?

Only you can answer that question. However, the firm, which is indirectly owned by Switzerland-based EFG international AG listed on the Swiss Stock Exchange apparently thought the risk was worth it. It had, until recently, no relevant disciplinary history in the securities industry. However, for more than five years (April 2010 through July 2015), EFG failed to establish and implement an adequate supervisory system, including written supervisory procedures (WSPs), or an anti-money laundering program to adequately assess, supervise or mitigate the business risks associated with:

• It’s payment of transaction-based compensation to non-registered individuals or entities; and
• Potentially suspicious outgoing wire transfer activity occurring in the accounts of dual customers of the firm and its Swiss bank affiliate.

That was a costly oversight. And guess who found out? The Financial Services Industry Regulatory Authority (FINRA), which issued an AWC censuring and fining EFG $800,000. FINRA also manded the firm adopt and implement supervisory systems and written procedures reasonably designed to achieve compliance with the requirements of FINRA Rule 3110.

How well should you know your “foreign introducer?”

Pretty well, according to FINRA. The Authority’s findings reported that as part of EFG’s international business model, the firm entered into transaction referral agreements under which a foreign individual or entity, called a “foreign introducer,” could refer specific transactions to the firm in exchange for a percentage of the firm’s mark-up or commission on the referred transactions.

However, EFG’s supervisory system failed to assess whether it had sufficient information about the foreign introducer, or its ability to legally satisfy its obligations under an agreement, to conclude that the firm’s payment of transaction-based compensation to the foreign introducer was permissible under U.S. law. In addition, the firm failed to follow its own WSPs regarding the referral agreement. Importantly, the firm failed to identify several red flags related to the ownership of the foreign introducer and failed to follow-up on red flags regarding the unexpectedly large number and size of the referred transactions.

EFG’AML systems did not identify whether the foreign introducers with which it did business were high-risk entities or engaged in high-risk activities and did not adequately review the foreign introducer’s referred transactions or wire transactions for red flags and patterns of suspicious activity. Separately, many of the firm’s high net worth customers were dual customers of the firm and its Swiss bank affiliate, where all of these customers’ money movement activity occurred and the activity was subjected to automated monitoring for Swiss AML purposes. The firm typically had operational involvement in outgoing money movements entered into by these customers and reviewed such transactions at the time they were made for potential AML red flags.

However, the firm’s overall AML program was insufficient to identify and investigate potentially suspicious patterns of outgoing wire transfer activity in the Swiss bank accounts of the firm’s dual customers that should have raised AML red flags requiring further investigation by it and potentially the filing of suspicious activity reports.

Was lack of oversight worth it?

Let’s see…hundreds or even a few thousand dollars to keep your firm on the straight and narrow? Or, an $800,000 hand smack? Hmmmm. Is it worth it the exposure, fines, and worse? That’s a question only you can answer. But that’s also where Patrina can help. We’ve built a business on helping organizations stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective and comprehensive, 8-module compliance solution, and compliant data capture, file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered.