Alert September 07, 2010

Pinnacle Capital Markets, LLC Assessed Civil Money Penalty for AML Violations

The Financial Crimes Enforcement Network (“FinCEN”) announced the assessment of a $50,000 civil money against Pinnacle Capital Markets, LLC (“Pinnacle”), an SEC‑registered broker-dealer, for violations of the Bank Secrecy Act (“BSA”) and the regulations thereunder.  FinCEN assessed the civil money penalty based on what it determined were systemic violations of the anti-money laundering (“AML”) and suspicious activity reporting requirements of the BSA and its implementing regulations by Pinnacle between October 2002 and September 2009. 

Pinnacle’s core business consists of providing foreign individuals and institutions access to securities markets in the United States, allowing those customers, using market access software, to have direct control over accounts and direct access to U.S. securities markets through omnibus accounts.  FinCEN noted that Pinnacle’s business model and customer base present uncommon risks that needed to be identified and managed by Pinnacle for potential misuse by customers.  FinCEN determined that, although Pinnacle received AML procedures from a third party consultant, Pinnacle failed to appropriately modify the AML compliance program to reflect the risks presented by Pinnacle’s business model.

Pinnacle’s AML compliance deficiencies included the failure to properly apply its customer identification program (“CIP”) to certain foreign customers.  In particular, many foreign customers accessed Pinnacle’s services as sub-account holders to foreign financial institutions that held master accounts with Pinnacle.  Although FinCEN and the SEC have issued guidance which states that, in certain circumstances, broker-dealers do not need to look through omnibus accounts when applying their CIPs, FinCEN clarified that such guidance applies only when all transactions in the omnibus account are initiated by the financial intermediary and the beneficial owner has no direct control over the omnibus account.  By contrast, the sub-account holders in Pinnacle’s case were “customers’ of Pinnacle because they were able to directly transmit orders to Pinnacle.  Accordingly, FinCEN stated that Pinnacle must apply its CIP to these sub-account holders. 

In addition to these CIP violations, FinCEN concluded that Pinnacle failed to establish and implement risk-based due diligence procedures for correspondent accounts, despite the fact that, during the relevant period, nearly half of Pinnacle’s fully-disclosed customers resided in locations identified in the U.S. Department’s International Narcotics Control Strategy Report (“INCSR”) as Jurisdictions of Primary Concern and half resided in Jurisdictions of Concern.  Similarly, FinCEN’s order points out that of 92 foreign financial institutions with correspondent accounts at Pinnacle, nearly half were domiciled in Jurisdictions of Primary Concern and half were domiciled in Jurisdictions of Concern.  Jurisdictions of Primary Concern, according to the INCSR, are countries whose financial institutions engage in currency transactions involving significant amounts of proceeds from international narcotics trafficking.  Consequently, jurisdictions with high levels of financial activity are more likely to be Jurisdictions of Primary Concern.  The list includes Canada, Brazil, France, Germany, Spain, Switzerland, the U.K. and the U.S.  FinCEN also determined that the ineffectiveness of Pinnacle’s manual transaction monitoring system resulted in the failure to file suspicious activity reports (“SARs”) involving millions of dollars in transactions and a SAR failure to file rate of 29%.  More generally, Pinnacle failed to meet independent testing and AML training requirements at certain points during the relevant time period.

FinCEN conducted its investigation of Pinnacle in cooperation with the SEC and FINRA.  The $50,000 civil money penalty, which includes a concurrent assessment of $25,000 by the SEC for violations of Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8 thereunder, will be satisfied by two payments to the U.S. Treasury Department.