Morgan Stanley Under Investigation for Anti-Money Laundering Compliance

Morgan Stanley is currently facing an investigation by the Financial Industry Regulatory Authority (FINRA) regarding potential shortcomings in its anti-money-laundering (AML) practices. This inquiry, reported by The Wall Street Journal, is focused on whether the financial institution adequately assessed the risks associated with its affluent clientele and adhered to proper AML protocols.

The scope of the investigation encompasses both Morgan Stanley's domestic and international client management from October 2021 to September 2024. Key divisions under scrutiny include Morgan Stanley Wealth Management, its institutional securities division, and E*Trade, the digital trading platform acquired by Morgan Stanley in 2020.

Previously, in August 2023, FINRA charged Morgan Stanley for inaccuracies in its record-keeping. The regulator discovered over 535,000 municipal and debt securities transactions that had not been reported from May 2018 to July 2022.

According to sources familiar with the situation, FINRA has requested data regarding politically exposed persons (PEPs), which include senior foreign officials and their associates. The regulator is particularly interested in identifying which Morgan Stanley employees were involved in managing clients with political ties that may elevate their risk of exposure to money laundering.

While FINRA operates as a self-regulatory organisation rather than a government body, it is endowed with the authority to impose penalties on brokerage firms that violate regulatory guidelines.

In April 2024, The Wall Street Journal reported that Morgan Stanley is also subject to investigations by other federal entities, including the Department of Justice, the Securities and Exchange Commission (SEC), the Office of Foreign Assets Control (OFAC), and the Financial Crimes Enforcement Network (FinCEN). These investigations allegedly focus on the firm’s wealth management operations concerning the onboarding of clients linked to corruption and drug trafficking.

As part of the investigation, FINRA has sought organizational charts and reporting structures related to teams responsible for AML, sanctions compliance, and financial crime detection. Furthermore, the regulator has instructed Morgan Stanley to detail its processes for assessing client risk profiles, especially regarding its E*Trade platform and other private banking services.

Morgan Stanley has acknowledged the need to enhance its AML measures, following criticism from the Federal Reserve regarding its risk management practices, labelled as “weak.” The firm claims to have implemented various reforms, including the closure of numerous accounts and a scaling back of operations in specific regions of Latin America.

Despite these efforts, internal documents reviewed by The Wall Street Journal in 2023 suggested troubling patterns within Morgan Stanley’s wealth management segment. Approximately 24% of over 46,500 clients with international accounts had been flagged for potential money laundering activity or tax evasion.

Reports indicate that employees within Morgan Stanley are experiencing unease concerning the requests for data from FINRA. The bank is reported to have received at least six information requests, with the most recent occurring in recent weeks. In some cases, regulators determined that the initial data submitted by Morgan Stanley was insufficient, prompting the firm to provide additional information.

A spokesperson for Morgan Stanley commented to The Wall Street Journal that the institution has invested heavily in compliance initiatives across its operations. “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 noted.

Although the Office of the Comptroller of the Currency (OCC) had reported that E*Trade's customer-vetting processes were satisfactory, some regulators remain doubtful regarding Morgan Stanley's overall customer protection strategies. The OCC found that thousands of wealth management accounts did not undergo necessary enhanced due diligence (EDD), which is critical for high-risk clients. EDD is a more intensive review process initiated when a client presents a heightened risk of financial crime and is meant to occur regularly.

As the investigation unfolds, further developments are anticipated, with regulatory bodies closely monitoring Morgan Stanley’s adherence to financial compliance standards.