Sanctuary Securities, Inc., a FINRA member since 1939, has found itself at the center of a regulatory settlement after a series of anti-money laundering (AML) program deficiencies were identified. The firm, which operates as an introducing broker-dealer, is headquartered in Indianapolis, Indiana, and serves retail customers across approximately 80 branch offices. However, from January 2022 to July 2024, Sanctuary Securities failed to design and implement an AML program that complied with the requirements set forth by the Bank Secrecy Act (BSA), specifically section 31 U.S.C. § 5311 et seq. As a result, the Financial Industry Regulatory Authority (FINRA) imposed a $150,000 fine on the firm, as part of a settlement agreement.

What Went Wrong: Deficiencies in the AML Program

From January 2022 to July 2024, the deficiencies in Sanctuary Securities’ AML program were widespread. One of the most significant failures was the firm’s inability to develop a reasonably designed AML program that could effectively ensure compliance with the Bank Secrecy Act. The BSA is a critical law in preventing financial crimes, especially money laundering and the financing of terrorism, and it sets forth several requirements for financial institutions. By failing to meet these standards, Sanctuary Securities exposed itself to substantial regulatory and reputational risks.

In addition to this, the firm also failed to conduct an adequate independent test of its AML program in 2022. Independent testing is a key component of any effective AML program, as it provides an unbiased evaluation of the firm’s policies, procedures, and controls. By neglecting to conduct this test, Sanctuary Securities failed to identify any weaknesses or deficiencies within its program in a timely manner, further exacerbating the firm’s non-compliance with FINRA regulations.

The Regulatory Consequences: FINRA’s Decision

As a result of these deficiencies, Sanctuary Securities violated two essential FINRA rules: Rule 3310, which pertains to the requirement for firms to establish and implement a written AML program, and Rule 2010, which requires members to observe high standards of commercial honor. In response, FINRA imposed several sanctions, including a censure, a fine of $150,000, and an undertaking for the firm to certify that it has remediated its AML policies and procedures.

This fine and censure serve as a reminder of the importance of maintaining a comprehensive, well-structured AML program, particularly for firms that operate in the securities industry. The regulatory environment for financial institutions is becoming increasingly stringent, with enforcement actions on the rise, especially for firms that fail to adequately address AML compliance.

How Sanctuary Securities is Responding: Remediation Measures

Following the settlement, Sanctuary Securities has agreed to take remedial steps to address the deficiencies in its AML program. The firm is required to certify that it has fully remediated its policies and procedures related to AML compliance. This includes taking steps to ensure that its program is designed in a way that meets the requirements of the BSA and that it conducts independent tests of the program moving forward.

By agreeing to these measures, Sanctuary Securities aims to prevent similar deficiencies from occurring in the future. The company is likely to invest in improving its AML training, internal controls, and testing processes to meet the high standards expected by FINRA and other regulatory bodies.

The Importance of Effective AML Programs in the Financial Industry

The case of Sanctuary Securities underscores the importance of maintaining an effective AML program in the financial industry. Money laundering is a significant global issue, and financial institutions are expected to play a key role in preventing illicit activities that can harm the economy, society, and the integrity of the financial system.

A strong AML program should include several key components, including:

1. Risk Assessment: Financial institutions should regularly assess the risks they face regarding money laundering and terrorist financing. This allows them to tailor their AML program to address the specific risks associated with their business activities and customers.
2. Customer Due Diligence (CDD): Financial institutions are required to verify the identity of their clients and conduct thorough background checks to ensure they are not involved in illegal activities. Enhanced due diligence may be required for high-risk customers.
3. Ongoing Monitoring: AML programs must include mechanisms to detect and report suspicious activities. This can include monitoring transactions, conducting internal audits, and leveraging software to identify red flags.
4. Employee Training: Staff members should be regularly trained on the importance of AML compliance and how to identify potential red flags. Training should also cover the firm’s internal policies and procedures to ensure that all employees understand their roles and responsibilities.

Consequences of Failing to Comply with AML Regulations

The consequences of failing to comply with AML regulations can be severe. In the case of Sanctuary Securities, the firm faced both reputational damage and a substantial fine. In addition to the financial penalty, firms that fail to implement effective AML programs may face heightened regulatory scrutiny, which can lead to increased compliance costs and a loss of trust from customers and investors.

Regulatory bodies like FINRA and the Securities and Exchange Commission (SEC) have the authority to enforce strict penalties for AML non-compliance, including fines, censures, and even the suspension or expulsion of a firm from the industry. Furthermore, firms that fail to comply with AML regulations can be exposed to the risk of facilitating money laundering activities, which can result in criminal liability for executives and employees.

The Bigger Picture: Industry-Wide Implications

Sanctuary Securities’ settlement with FINRA is part of a broader trend of increasing enforcement actions in the financial industry. Regulators around the world are placing a higher emphasis on AML compliance, recognizing that money laundering and terrorist financing are threats that must be addressed on a global scale. As financial crimes become more sophisticated, financial institutions must remain vigilant and proactive in implementing effective measures to combat these risks.

In this environment, firms that fail to comply with AML regulations risk facing significant legal and financial consequences. As such, it is critical for all financial institutions, regardless of size, to prioritize AML compliance and invest in robust programs that can detect, prevent, and report suspicious activities.

Conclusion: Lessons Learned from Sanctuary Securities’ Settlement

The case of Sanctuary Securities highlights several important lessons for financial institutions, particularly in the context of AML compliance. First and foremost, firms must ensure that their AML programs are designed to meet the requirements of the Bank Secrecy Act and that they conduct independent testing to identify any weaknesses. Additionally, firms should be prepared to take immediate action to remediate deficiencies when they are identified.

Firms like Sanctuary Securities that fail to meet AML standards may face serious consequences, including substantial fines and reputational damage. Therefore, it is crucial for firms to invest in the necessary resources to maintain a comprehensive AML program that protects against money laundering and terrorist financing. By doing so, they can not only avoid costly penalties but also contribute to the integrity and stability of the global financial system.

Related Links

• Financial Industry Regulatory Authority (FINRA)
• Bank Secrecy Act Overview
• Securities and Exchange Commission (SEC) on AML Compliance
• Anti-Money Laundering Compliance for Small Firms

Other FinCrime Central News Reports about FINRA’s Actions

• FINRA Slaps Redbridge Securities with $475,000 Fine for AML Program Deficiencies
• Groundhog Day: Robinhood Fined $29.75M for AML Violations and Compliance Failures

Source: FNG