Morgan Stanley is currently facing an investigation by the Financial Industry Regulatory Authority (FINRA) concerning its wealth management client vetting processes related to potential money-laundering risks, as reported by the Wall Street Journal (WSJ).
The inquiry is examining the firm’s client risk assessments and related practices from October 2021 to September 2024.
This investigation adds to existing scrutiny from federal authorities regarding Morgan Stanley’s anti-money-laundering protocols. FINRA has sought extensive information about both domestic and international clients within the firm’s wealth-management sector and its trading operations.
Among the specific details requested by the regulator are records pertaining to politically exposed individuals, which include senior foreign political figures and their close associates, as well as the Morgan Stanley representatives managing these accounts.
The investigation is part of a comprehensive review by FINRA, which, while not a governmental body, oversees broker-dealers and has the authority to impose penalties for regulatory breaches.
Morgan Stanley has been addressing concerns raised by the Federal Reserve regarding its client-screening processes. The firm has reportedly closed numerous accounts, scaled back its operations in Venezuela and other Latin American countries, and tightened its criteria for accepting new clients.
Previous reports have highlighted significant deficiencies in Morgan Stanley’s due diligence, particularly in attracting clients from regions associated with financial misconduct and drug trafficking. A document from 2023 indicated that many accounts in its wealth-management division exhibited characteristics associated with money laundering and tax evasion.
A spokesperson for Morgan Stanley told the WSJ that the firm has invested heavily in its anti-money-laundering and client-vetting initiatives, which have had a positive impact on its operations.
The spokesperson also noted that the ongoing examinations by regulators are standard practice and do not necessarily reflect issues within the firm’s business operations.
FINRA’s investigation is particularly focused on the risk profiles of clients for whom Morgan Stanley has managed or executed trades, including inquiries about clients on its digital trading platform E*Trade, its private banking services, and its institutional securities group.
Morgan Stanley has received multiple requests from FINRA for large volumes of data, including recent requests for organisational charts related to its anti-money-laundering and financial-crimes teams.
Internal concerns have been raised regarding the completeness of the information provided to FINRA, prompting the firm to submit additional data following feedback from the regulator.
In addition to the FINRA investigation, the Justice Department and the Treasury Department’s Financial Crimes Enforcement Network are also looking into the bank’s anti-money-laundering practices, particularly within its wealth-management division.
Some federal investigations have reportedly found that Morgan Stanley retained clients despite clear indications of risk, such as media reports suggesting involvement in illegal activities.
On a more positive note, the Federal Reserve has reportedly approved the client identity verification processes of E*Trade and the deposit-taking arms of the digital trading platform.
However, the Office of the Comptroller of the Currency has identified that many wealth management accounts lacked sufficient enhanced due diligence.
By late last year, Morgan Stanley acknowledged having clients that did not conform to its internal risk-appetite guidelines.
As part of the ongoing FINRA investigation, information has also been requested regarding the firm’s risk-scoring tool for clients, which was not activated for E*Trade clients until early 2024, following a prior deactivation after the acquisition of the trading platform.
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