Morgan Stanley is being probed by FINRA over its vetting of clients for risk of money laundering, the WSJ has just reported.
The agency is focusing on the US bank’s clients, risk ranking and other practices from October 2021 to September 2004, the report said, citing unidentified sources familiar with the matter. Morgan Stanley had already been facing potential fines from federal investigations into its anti-money-laundering practices, the report said.
FINRA has been asking for information on US and international clients in Morgan Stanley’s mammoth wealth-management business and the division that houses its trading desks, the sources said.
One of the agency’s requests has been for information on politically exposed clients, including senior foreign political figures, their relatives or close associates, and the Morgan Stanley representatives who were assigned to those accounts. FINRA also wants organizational charts, reporting structures, and details about Morgan Stanley’s internal client risk-scoring systems.
Politically exposed persons (PEPs) are individuals who hold or have held important public office and are therefore considered to pose a higher risk in terms of financial crime, as their influence and access to public funds may make them more susceptible to involvement in corruption, bribery, or money-laundering activities.
The probe covers both the bank’s massive wealth management division, which includes E*Trade, and its institutional securities unit that handles trading operations.
Risk controls
FINRA fined Morgan Stanley $10m in December 2018 for anti-money-laundering compliance failures over a five-year period.
And last year, FINRA fined Morgan Stanley $1m for failing to establish, document and maintain a system of risk management controls and supervisory procedures reasonably designed to manage the financial risks of its market access business activity, including controls designed to prevent the entry of erroneous orders.
As of last year, the agency described the widespread breakdowns in Morgan Stanley’s due-diligence reviews and its wooing of clients from countries known for financial corruption and drug trafficking. Thousands of accounts in its wealth-management unit displayed high-risk characteristics for money laundering, tax evasion or other potentially illegal behavior.
Some employees voiced concerns inside Morgan Stanley about the completeness and accuracy of the information being provided to FINRA, WSJ‘s sources said. The firm provided more data after the regulator found some of the bank’s responses lacking.
Some of the federal probes have found Morgan Stanley took on and kept clients despite easy-to-spot signs of risk, such as news reports alleging they were involved in illegal activities, according to people familiar with the matter.
“The existence of these supervisory exams and the back and forth with our regulators is not unique to Morgan Stanley, nor is it an indication of an issue in our business or controls,” a Morgan Stanley spokesman told the WSJ. Banks, especially large ones, are typically subject to routine and sometimes overlapping exams by several regulators.
“The existence of these supervisory exams and the back and forth with our regulators is not unique to Morgan Stanley, nor is it an indication of an issue in our business or controls,” the spokesperson added.
As part of its probe, FINRA has also asked for information on Morgan Stanley’s tool that scores clients on their riskiness and flags whether they should undergo a deeper review.
Related: AML Rule delay at FinCEN
The news about Morgan Stanley comes on the heels of the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) agency announcing it was issuing a two-year delay on a new anti-money-laundering (AML) rule focused on investment advisers (IAs) while the agency re-examines the scope of the regulation.
The new AML rule had been set to go into effect at the beginning of 2026, but the date has been pushed back to 2028.
A Treasury news release said the postponement was designed “to ensure efficient regulation that appropriately balances costs and benefits” and that it aims to ease the industry’s compliance costs and reduce regulatory uncertainty.
“The IA AML Rule seeks to address ongoing illicit finance risks, threats and vulnerabilities posed by criminals and foreign adversaries that exploit the US financial system and assets through investment advisers,” the release said. “FinCEN recognizes, however, that the rule must be effectively tailored to the diverse business models and risk profiles of the investment adviser sector.”
