A bombshell report released by the Wall Street Journal last week brought to light staggering accusations of long-standing regulatory oversight issues on behalf of prominent American multinational banking and investment staple Morgan Stanley, issues that the firm had actively tried to sweep under the rug for years. A leak of internal company documents reveals that the compliance department of the financial services giant has been lacking for over a decade, fostering weak anti-money laundering (AML) and counter terrorism financing (CFT) controls and poor due-diligence into the activities of staff, as well as current and potential clients. These widespread shortcomings have reportedly opened the door for financial crime and illicit funds to pass through the bank unimpeded over a multi-year period, threatening the integrity of both the domestic and international financial system while also tarnishing Morgan Stanley’s once-sterling reputation.
In wake of the 2008 financial crisis, Morgan Stanley rebounded gracefully over the following decade under the leadership of its former CEO (and now current executive chairman) James Gorman – its strategy being aggressive expansion. The firm went on the offensive, acquiring Smith Barney and E*Trade and making Wealth Management the foundation of their institution. The goal was to obtain large enough assets to weather any future periods of major volatility in the market as seen during this aforementioned period. The strategy appeared to work wonders, and Morgan Stanley’s success – particularly with respect to its wealth management arm – exploded over the next several years. All told, the firm’s wealth unit has steadily developed into a behemoth, with its money management and investment exploits accounting for roughly half of the company’s total revenue at current while overseeing a whopping $6 trillion in total assets. However, this figure becomes rather troubling when considering that this very department is the one experiencing the greatest difficulties when it comes to enforcing basic compliance standards.
High Rate of High-Risk Clients
When analyzing Morgan Stanley’s successful expansion over the past several years, new questions have been posed regarding the integrity of the firm’s leadership, with their newfound revenue stream appearing to have shifted company priorities away from valuing regulatory compliance. In no area is this more apparent for the firm than in the customer vetting process for its wealth management operations. The recently exposed company documents – which include emails, internal chat logs and reports, as well as interviews with nearly 20 current and former employees and executives – illustrates the day-to-day operations of the bank that appeared to fall well short of regulatory standards.1 After examining these documents, to say that Morgan Stanley lacked discretion in skimping on their requirements in this regard would be an understatement.
Instructions from the top were essentially to target wealthy individuals with sizable assets first, and worry about source of wealth and areas of incorporation later. With this type of mentality, Morgan Stanley naturally drifted towards taking on rich international clients, often in high-risk jurisdictions that were trending towards being de-risked by other financial institutions. These areas came to include Russia, Venezuela, various Latin and South American countries, and others with direct government sanctions and ties to crime such as political corruption and the narcotics trade. This shift in catering towards international business would heavily increase any bank’s risk exposure, let alone one failing to maintain consistency with their formal regulatory compliance requirements. In 2022, a Morgan Stanley risk team found that approximately 60% of international accounts that financial advisers were trying to open had errors, including missing documents and overstated income. This rapid increase in risk and rampant regulatory failures landed the firm on the respective radar of both the U.S. Treasury Department and the Securities and Exchange Commission (SEC) who began to pay greater attention to the bank’s client base and their regulatory efforts (or lack thereof).
All told, Morgan Stanley’s client onboarding had become so reckless during this mass head-hunting period that a 2023 document obtained by the Wall Street Journal found that 24% (or 46,572 accounts) of the firm’s wealth management accounts were designated as “High/High+” risk for money laundering, with this figure not accounting for an additional 25,000 international E*Trade accounts being used in high-risk regions.1 The document further read that the bank considered its anti-money-laundering controls to be “weak,” a downgrade, because of “longstanding issues globally” with the enhanced due-diligence processes.1
Subpar Fund Allocation Leads to Lacking Controls
To make a precarious situation even worse, in spite of the warnings received from regulators, Morgan Stanley executives chose to keep profit margins their top priority. This lead to even greater cutting down on the resources available to an already overwhelmed compliance department. The staff trained to vet customers, who were at said time needed more than ever, were laid off while the firm continued to absorb high-risk international business. This regulatory bottleneck ultimately lead to improper or completely overlooked due diligence checks on thousands of client accounts, allowing their activities – some of which likely using illegitimate funds – to continue. To compound the problem, Morgan Stanley was also cutting corners by using antiquated anti-money laundering protocols, including their failure in adopting an automated, risk-based customer onboarding solution which had already become the industry standard over a significant portion of this period. Instead, the firm continued to rely almost strictly on manpower to meet their AML requirements, reducing both the accuracy and productivity of their responsibilities, and significantly hampering the operational efficiency of their already undermanned group. The lack of proper client screening, which often included even carrying out basic background checks on potential new customers, led to multiple instances where Morgan was caught in the cross-hairs of attempts by criminals to use their investment arm to house and launder ill-gotten funds.
Changes to Come?
The state of Morgan Stanley’s regulatory compliance remains a mess at current. With the firm’s internal documents now made public, regulators will be further breathing down the firm’s neck with severe consequences looming if drastic measures are not immediately taken to rectify their shortcomings. Nearly two decades late, they have now finally decided to overhaul their outdated compliance operations, while also finally reducing their ventures in South American markets and beyond due to the major ramifications of their actions. Jed Finn, Morgan Stanley’s head of wealth management, told employees in meetings earlier this year that fixing issues in wealth, which would include improvements in vetting clients and back-office procedures, increased staffing and upgraded technology, is his top priority.1 Nevertheless actions speak louder than words. The cost of overhauling the company’s long-standing protocols at this stage will be immense and places greater onus on the firm’s blatant failures to address their previous negligence. Like so many other large banks, their hubris allowed them to believe they could skirt the consequences of non-compliance. Now they must pay the price.
Citations
- Andriotis, AnnaMaria. “How Morgan Stanley Courted Dodgy Customers to Build a Wealth-Management Empire.” The Wall Street Journal, Dow Jones & Company, 25 Nov. 2024.
