The anti-money laundering and customer identification rules are important market policing tools monitored by the SEC, the Financial Crimes Enforcement Network or FinCEN and FINRA. Pinnacle Capital Markets LLC, a broker dealer whose customers are largely outside the United States, was sanctioned by each regulator for violating these rules. The Commission’s action also named as a respondent Michael Paciorek, Pinnacle’s President and Chief Compliance Officer. In the Matter of Pinnacle Capital Markets LLC, Adm. Proc. File No. 3-14026 (Sept. 1, 2010); FinCEN Release, Sept. 1, 2010, available here. Previously, FINRA sanctioned the firm for violations of its anti-money laundering rules.

Pinnacle is a broker dealer based in Raleigh, North Carolina. Over 99% of the firms customers are outside the U.S. Many of those customers hold both corporate and individual accounts. A large number of the corporate customer accounts that are foreign entities also have omnibus accounts. In some instances, the foreign entities have sub-accounts for their own corporate or retail customers. Most of the firm’s regular and omnibus sub-account holders use direct access software to enter trades in the U.S. markets through their computers. Trades can thus be routed to the New York Stock Exchange and the NASDAQ system without an intermediary.

As of 2004 the firm had a documented anti-money laundering program which included a customer identification section. Exchange Act Rule 17a-8 requires broker dealers to comply with the Currency and Foreign Transactions Reporting Act of 1970 known as the Bank Secrecy Act. This includes adherence to the customer identification rules which essentially require that the broker dealer establish, document and maintain procedures for identifying and verifying the identity of customers.

From 2003 through November 2009 Pinnacle collected identifying information for its regular account holders. The firm failed, however, to verify information for corporate accounts in accord with its procedures. It also failed to collect or verify all identifying information for most of its omnibus sub-account holders. Mr. Paciorek, as the firm’s president and chief compliance officer, directed all of the broker’s actions with respect to its customer identification procedures and the identification and verification of its customers.

As a result of the foregoing failures Pinnacle willfully violated Section 17(a) of the Exchange Act and Rule 17a-8, according to the Order for Proceedings. Mr. Paciorek was the cause of those violations, the Order notes.

Respondents resolved the matter by consenting to the entry of a cease and desist order from committing or causing any violations and any future violations of Section 17(a) and Rule 17a-8. The firm was also censured and ordered to pay a $25,000 civil fine. Mr. Paciorek was not directed to pay a fine.

FinCEN assessed a $50,000 fine against the firm. FINRA, in February 2010 (discussed here), imposed a $300,000 fine on the firm for violating its anti-money laundering rules based in part on the facts detailed in the Commission’s Order and a finding that the firm failed to detect and report suspicious activity. FINRA also censured the firm and ordered it to comply with certain undertakings.

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