Morgan Stanley’s wealth management division, which serves high net-worth individuals, families and institutions across the world, is a cornerstone of the global investment bank’s business, generating close to half of its overall revenue and playing a crucial role in its profitability.
However, a recent report by the Wall Street Journal revealed critical compliance oversights, as the financial institution experienced significant delays in its anti-money-laundering processes, resulting in a substantial backlog of account reviews. The firm’s due diligence department allegedly struggled to keep pace with its rapid growth, causing thousands of accounts to remain unvetted.
An investigation drawing from internal documentation—including emails, chat logs and official reports—along with interviews with approximately 20 current and former Morgan Stanley employees and executives, uncovered significant regulatory deficiencies within the bank’s operations.
The firm had reportedly reduced staff responsible for customer vetting while simultaneously acquiring global clients from other financial institutions. This led to a disparity in resources and expertise.
Despite Morgan Stanley’s emphasis on serving international clients, many employees tasked with assessing client risk lacked proficiency in necessary languages, resorting to Google Translate to interpret foreign documents. Basic due diligence procedures, such as conducting Google searches on client names to identify potential red flags or suspicious activities, were frequently overlooked or inadequately performed. When such searches were conducted, employees often failed to recognize or act upon the concerning information that surfaced, the report stated.
Compliance Failures At Morgan Stanley
In a startling revelation last year, Morgan Stanley uncovered that one of its longstanding brokerage clients had a criminal history involving deception about terrorism probes and connections to al Qaeda’s attacks on United States embassies. This individual had been found guilty in a U.S. court in 2005.
Upon this discovery, the bank promptly alerted law enforcement agencies and closed the associated accounts. However, by the time action was taken, a substantial sum—at least tens of thousands of dollars—had already been withdrawn from ATMs located in Pakistan.
Additionally, internal Morgan Stanley documents, reviewed by the WSJ, revealed a case where the bank engaged with a client who claimed to be a princess with over $5 billion in assets for several weeks without conducting essential background checks or completing proper due diligence.
The client provided multiple implausible explanations for her wealth, including assertions of royal Romanian lineage and ownership of a multi-billion-dollar pharmaceutical company. Eventually, Morgan Stanley’s global financial crimes unit intervened, urging the bank to terminate the relationship with this dubious client.
Other instances that reveal a pattern of high-risk management include a former Venezuelan client linked to an alleged global money-laundering scheme, who held approximately $100 million with the bank. Additionally, the bank maintained a relationship with a billionaire connected to Russia who has been sanctioned by the United Kingdom. Compounding these concerns are thousands of accounts belonging to clients domiciled in Russia. Furthermore, some individuals had been flagged and rejected by Morgan Stanley’s E*Trade division due to red flags, but were still retained as clients by the bank’s main operations.
According to a 2023 internal report, the bank identified a significant portion of its international wealth-management accounts as posing substantial money laundering risks. Specifically, 24% of these accounts—totaling 46,572—were classified as “High/High+” risk for potential money laundering activities. The firm flagged at least 25,000 international E*Trade accounts as being located in high-risk jurisdictions.
The U.S. government depends heavily on financial institutions, including banks and broker-dealers, to play a critical role in identifying and preventing financial crimes such as money laundering.
These entities are legally obligated to implement a comprehensive set of measures as part of their compliance responsibilities. They must verify the identities of their customers, conduct thorough background checks, investigate and confirm the legitimate sources of their clients’ wealth, ensure that their customers are not subject to U.S. sanctions and continuously monitor all transactions for any suspicious activities.
Unlike standard practices at other banks, Morgan Stanley’s alleged approach to client onboarding often prioritized speed and asset acquisition over thorough due diligence, particularly for high-net-worth individuals. Internal documents and interviews reveal that the firm frequently bypassed the conventional process of in-person meetings between financial advisers and prospective clients. These meetings typically serve to verify the legitimacy of clients’ fund sources.
Morgan Stanley’s Plans Moving Forward
The investment bank has reported progress in enhancing its anti-money laundering processes and other related procedures since unearthing its compliance failures.
“Over the past several years, one of our top priorities at Morgan Stanley has been to make significant investments in people, processes and technology relating to our AML, KYC and Enhanced Due Diligence program to keep pace with the growth of our industry-leading business,” Morgan Stanley said in an emailed statement. “We are now realizing material results from these efforts. Indeed, the prioritization and scale of our investments in our onboarding processes is rapidly transforming these functions into an organizational strength.”
Earlier this year, Jed Finn, the head of wealth management at Morgan Stanley, informed employees that he would focus on improving client vetting processes and back-office operations, according to the WSJ. Finn acknowledged the need to increase staffing levels and upgrade technology to support these operational changes.
In a June interview with Bank Automation News, the newly appointed head of firmwide artificial intelligence, Jeff McMillan, shared how he is focused on developing and implementing AI throughout Morgan Stanley’s operations.
“We are identifying near-term use cases that every business area can engage with, learn and deliver value,” McMillian stated.
He cited various use cases, including search capabilities and the ability to translate content into 53 languages, which could assist in interpreting foreign documents.
The firm’s wealth management division was among the first employees to test its advanced chatbot powered by OpenAI.
Source: Forbes
