ITG, Inc. (NKA Virtu ITG LLC)
The findings stated that the firm’s AML procedures did not identify reasonable steps to monitor for, detect and investigate suspicious activity involving the liquidation of low-priced securities or how to identify red flags of potentially suspicious activity in connection with low-priced securities trading, such as identifying and investigating promotional activity potentially related to suspicious transactions.
In addition, the firm’s procedures did not reasonably set forth how, when and to whom red flags or other suspicious activity should be reported if detected, and did not identify the personnel with decision making authority with respect to Suspicious Activity Report (SAR) filing or circumstances under which an SAR should be filed.
The firm relied almost exclusively on a manual review of daily trade blotters to identify suspicious activity, which failed to detect patterns of activity over multi-day periods. The firm’s manual review was unreasonable given the volume and complexity of the trading by the firm’s customers.
The findings also stated that the firm failed to detect and review red flags of suspicious activity due to its failure to implement reasonable AML procedures regarding low-priced securities. Trading in various low-priced securities presented red flags for potential market manipulation, including pump and dump schemes, bid support and matched trading. The firm did not detect numerous red flags of suspicious activity presented by one customer who liquidated millions of shares of low-priced securities by engaging in bid support through active and matched trading of low-priced securities as part of potential pump and dump schemes.
The findings also included that the firm failed to establish and implement a system reasonably designed to comply with Bank Secrecy Act regulations requiring firms to have due diligence procedures for correspondent accounts of foreign financial institutions (FFIs). The firm’s AML procedures stated that specific enhanced due diligence and scrutiny must be applied to correspondent accounts for certain FFIs but failed to reasonably describe the due diligence or scrutiny required.
FINRA found that the firm failed to ensure reasonable or timely annual independent testing of its AML program. Although the firm engaged an outside law firm to perform its annual AML tests, the testing was not timely. In addition, the testing was not reasonable because it did not include critical areas such as the firm’s trade surveillance tools, monitoring practices, or procedures for escalating concerns about red flags of suspicious activity. The annual tests also failed to address the firm’s AML procedures related to the correspondent accounts of FFI customers.
For further guidance, please see the following resources:
SEC Bulletin: Risks Associated with Omnibus Accounts Transacting in Low-Priced Securities
FINRA Regulatory Notice 21-03: FINRA Urges Firms to Review Their Policies and Procedures Relating to Red Flags of Potential Securities Fraud Involving Low-Priced Securities
