Compliance Officer Also Fined and Suspended
As one of the oldest and largest private banks in the United States, Brown Brothers Harriman should have known better. Formed as the result of a merger in 1931 between investment firms Brown Brothers & Co. and Harriman Brothers & Co., this assemblage united over a century of combined financial knowledge and experience. This resulted in creating an institution that has been around longer than many of today’s laws that govern it. With clients in the areas of investment banking, wealth management, commercial banking, investor services and more, it is critical that a company such as BBH maintain a fiduciary responsibly to hold itself to the highest standards of the financial industry.
Yet earlier this month, a FINRA investigation resulted in the assessment of an $8 million fine as a consequence of the poor anti-money laundering (AML) practices maintained by BBH, as well as other related violations. This is not the first time that BBH has been called on the carpet over such issues. In 2007, FINRA and the New York State Banking Department castigated BBH by imparting a formal order for the company to cultivate better internal operations, including the need to meet all AML regulatory requirements. Prior to the $8 million fine handed down to BBH, the highest AML-related fine ever levied was against Banc of America Investment Services in 2007, also for AML compliance offenses. Just as in that case, the BBH AML compliance failure pertains to penny stocks. In addition to this $8 million fine, Harold Crawford, the company’s former Global AML Compliance Officer, was also fined $25,000 and suspended from BBH for a month.
There is an inherent risk involved with penny stocks. Their low buy-in cost makes them an appealing target for those who are willing to commit fraud. In fact, FINRA’s investigation revealed that over the course of a 4½ year-period, BBH was involved in the commission or delivery of securities that involved over 6 billion shares of penny stocks. Some of these stock transactions were made through foreign banks that are considered shelters for banks who strive to maintain level of secrecy about such transactions, with little or no knowledge of the actual customers. Often BBH was unaware of any basic information about the stock’s owner, the relationship between the seller and the issuer, or even how the stock was obtained. This blind-eye approach resulted in at least $850 million in proceeds to the customers of BBH, and a major outcome of the investigation was in highlighting Brown Brothers Harriman’s failure to determine the legality of the stocks.
The current compliance insufficiencies also include BBH’s failure to have an AML program in place that acts in a supervisory capacity, a program which would detect fraudulent or otherwise suspicious activities pertaining to penny stocks, a particularly vulnerable area of investment. BBH also failed to thoroughly investigate penny stock activity, even after a red flag had been raised, nor did they properly file a Suspicious Activity Report. Additionally, Brown Brothers Harriman lacked a method to prevent the distribution of unregistered securities.
BBH stated that the activity for which it has been fined is only one small section of the services that they offer and excludes their investment management and private banking divisions. Neither the company nor Crawford admitted nor denied culpability for results of the investigation, yet both agreed to the entry of FINRA’s decision. However, in response to the findings of the investigation, a spokesperson for the firm stated, “As previously announced to its non-U.S. bank financial intermediary clients, BBH has made changes to its handling of low-priced securities, as well as to its surveillance of this activity, to mitigate a possible recurrence of this matter.”
BBH is entrusted with over $20 billion in assets. It is therefore it is imperative that they have practices in place that provide complete transparency and act in a supervisory capacity that ensures that they not only meet the needs of their clients, but those of regulatory agencies. If you feel that the actions of BBH have negatively impacted your financial interests, please give me a call at 1-877-STOCKLAW.