December 14, 2011 / 7:50 PM / 6 years ago

COMPLY: Sniffing out fraud made key role for advisers

*Advisers who ignore suspicious client activity risk fines

*Broker, supervisor overlooked client Ponzi scheme signs

By Suzanne Barlyn

NEW YORK, Dec 14 (Reuters) - Financial advisers take heed: Ignore troubling signs that a client may be committing fraud in a brokerage account and you could be in trouble too.

As a former adviser and his supervisor at a unit of Raymond James Financial Inc learned, it can lead to public rebuke and fines.

Their offense? Not alerting the firm’s anti-money laundering officers to suspicious activity in a client’s account.

They couldn’t have picked a worse situation to ignore. The client was running a Ponzi scheme and was later sentenced to 20 years in jail, according to settlements with the Financial Industry Regulatory Authority.

Financial advisers are key in helping a firm sniff out possible client financial crimes, from local frauds to funneling money to a terrorist operation.

The USA Patriot Act, Bank Secrecy Act, and other industry rules require employees of financial institutions -- from bank tellers to compliance officials -- take measures aimed at deterring those types of crimes. Those responsibilities often trickle down to employees who have the most direct contact with clients. A bank teller, for example, could be subject to potential civil or criminal penalties for ignoring when a customer tries to avoid tax paperwork.

Securities industry regulators only began emphasizing the role of advisers in those tasks about two years ago, mostly by calling out advisers who do not take the responsibility seriously, said Aaron Fox, managing director of IPSA International Inc., a New York-based risk advisory firm.

“This is part of the maturing of anti-money laundering regulation,” said Fox.

Sanctions against advisers were once unusual, even in cases where clients engaged in criminal behavior through brokerage accounts, she said.

“Now... there is front-line accountability,” said Fox.

A client’s nefarious activity isn’t always obvious. But discussing even small concerns with a supervisor can be a big step toward staying out of trouble.


Timothy E. Dixon, the former Raymond James adviser, learned that lesson the hard way. Dixon had a client with a large account who traded frequently, according to a FINRA settlement order. That client profile appeals to advisers because of the potential for big commissions.

But in this case, it signaled danger.

The client, Jerry Rose, pooled funds from about 200 investors in various brokerage and bank accounts, according to Ohio securities regulators. He used funds from new investors to pay earlier investors.

Rose owed investors about $25 million when he plead guilty to felony charges in 2008, according to state regulators. It is unclear whether other brokerages were involved.

Dixon ignored “red flags” in Rose’s accounts, according to a FINRA settlement.

Anti-money laundering officers at Raymond James, for example, asked Dixon to explain the “substantial flows of funds in and out of” Rose’s accounts. They also asked why he wrote checks in round-dollar amounts, according to the settlement. Dixon relied on a years-old explanation from when Rose opened the account, that he had “extensive dealings” in various businesses.

Other red flags went unreported, in violation of the firm’s policy. For one, an Ohio Grand Jury was investigating Rose.

An office supervisor, Harold D. Criswell, also didn’t report suspicious activity to the firm’s anti-money laundering officers, even after Rose told Criswell that he was expecting a prison sentence, according to a FINRA settlement.

Dixon agreed to a four-month suspension and $15,000 fine. Criswell agreed to a 30-day suspension from acting as a principal and a $10,000 fine, according to settlement documents. Neither admitted to nor denied FINRA’s findings.

A phone number listed for Dixon was not working. Criswell did not respond to a call and email requesting comment. A Raymond James spokesman declined to comment.


Advisers are a firm’s first line of defense in complying with federal laws designed to prevent fraud and other crimes, said Aaron Kahler, Director of Anti-Money Laundering Advisory Services at ICS Risk Advisors in New York. But they’re not alone in the task.

Compliance and anti-money laundering departments also monitor for problems, he said.

“Know-your-customer” questions, often developed by a firm’s compliance department, can establish a benchmark for advisers.

Questions can include how frequently clients plan to trade and whether they’ll use a check or wire transfer to deposit funds.

“You want to know what type of transactions will be put through,” said Kahler. “If all of sudden there was trading in way more money than usual, that is something the (adviser) and supervisor should take notice of.”

Each firm has its own policy for questioning and reporting suspicions about clients. Notifying a supervisor and asking the client for an explanation are typically first steps.

Questions should arise if funds flow in and out of a money market account when a client isn’t trading securities, or when a new client who wants to consolidate multiple accounts from other brokerages, said Alma Angotti, a director at Navigant Consulting Inc .

“It’s very tempting when you’re dealing with a lucrative client not to ask some of the questions that you could have -- or accept some answers that don’t make a lot of sense,” she said.

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