The latest guidelines issued in September 2022 by the Financial Industry Regulatory Authority (FINRA) have raised the fine ranges for mid- and large-size firms and created separate sanction guidelines for individuals and firms as well as separate fine ranges depending on a firms’ size. (Source: FINRA)
What are sanction guidelines?
The FINRA Sanction Guidelines is developed by the National Adjudicatory Council (NAC) for use by various bodies in adjudicating disciplinary decisions, including Hearing Panels and the NAC itself (collectively, Adjudicators), in determining appropriate remedial sanctions. However, sanctions guidelines do not prescribe fixed sanctions for particular violations and serve only to provide direction for Adjudicators in imposing sanctions consistently and fairly.
Application of sanction guidelines can vary on each case
The sanction guidelines are not intended to be absolute because Adjudicators may consider certain factors on a case by case basis with the penalty amount falling above or below the recommended range according to the facts and circumstances presented in each case. Therefore, Adjudicators may impose sanctions that fall outside the ranges recommended and may consider aggravating and mitigating factors in addition to those listed in these guidelines.
For instance, there was a record $70 million penalty levied against trading app Robinhood Financial in June 2021. The sanctions included $12.6 million in restitution and a $57 million fine that FINRA said represents the “widespread and significant harm suffered by customers.” The regulator also accused Robinhood of a laundry list of violations, including negligently misleading millions of customers on critical issues related to their account balances and margin trading, permitting thousands of customers to trade options who were not eligible, and failing to report thousands of customer complaints.
How does this affect corporate sanction guidelines from September 2022?
Previously, mid-size and large firms committing certain violations only faced a maximum fine of $310,000 for violating sanctions in the guidelines. Now, there is officially no upper limit or maximum fine that can be imposed. Furthermore, the guidelines have set a $5,000 minimum fine for all firm fines, including small firms.
What are the implications of these guidelines updates for corporate KYC?
Currently, Office of Foreign Assets Control (OFAC), the US body that administers and enforces economic sanctions programs primarily against countries and groups of individuals, such as terrorists and narcotics traffickers, has a list of Specially Designated Nationals and Blocked Persons (“SDN list”) which includes approximately 6,400 names of companies and individuals who are connected with the sanctions targets.
U.S. persons are prohibited from dealing with SDNs wherever they are located and all SDN assets are blocked. Entities that a person on the SDN List owns (defined as a direct or indirect ownership interest of 50% or more) are also blocked, regardless of whether that entity is separately named on the SDN List. To comply with the rule on entities, U.S. persons now need to check every individual that has a direct or indirect ownership interest of 50% or more in the entities they want to engage with against the SDN list.
The FINRA revisions on sanction guidelines mean that when a midsize or large company deals with anyone on the Specially Designated Nationals and Blocked Persons (“SDN list”), they commit a supervision violation, one of the nine violations which now has no upper limit or maximum fine that can be imposed.
It’s also important to note that the lack of an upper limit on monetary sanctions does not prevent non-monetary sanctions from occurring. Adjudicators may also design sanctions other than those specified in the guidelines including suspending or barring a respondent firm from engaging in a particular line of business or activity, which can have disastrous consequences for businesses.