Morgan Stanley under Federal Reserve scrutiny over anti-money laundering protocols

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Morgan Stanley under Federal Reserve scrutiny over anti-money laundering protocols
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Morgan Stanley's wealth management division, a crucial unit that accounts for half of the bank's total revenue, is currently under intense review by the Federal Reserve due to concerns over potential lapses in its dealings with wealthy foreign clients. The bank's due diligence and anti-money laundering protocols are being questioned.

The Federal Reserve initiated a standard audit to determine whether Morgan Stanley could effectively thwart money laundering attempts by its affluent overseas clients. However, the investigation intensified upon discovering that the bank's client screening processes and anti-money laundering measures were inadequate. This scrutiny by the Federal Reserve has been rigorous, particularly focusing on the bank's anti-money laundering controls and know-your-customer procedures.

Andy Saperstein, who leads the wealth division at Morgan Stanley, is actively engaged in discussions regarding risk mitigation strategies with Federal Reserve officials. According to an insider, Saperstein has committed to rectifying any pinpointed deficiencies. Despite these efforts, the Fed remains dissatisfied with the bank's actions and has privately reprimanded the firm several times for its inability to incorporate all demanded changes.

A range of issues identified within Morgan Stanley by the Fed in 2020 remained largely unresolved by 2021, with some persisting even a year later. To address these issues, Saperstein has proposed an 18-month corrective plan.

In October 2020, Morgan Stanley acquired E-Trade Financial which led to a surge of new accounts at the bank. This influx resulted in a due diligence backlog and subsequently led to the suspension or closure of thousands of international client accounts. This situation underscores the wider regulatory challenges that Wall Street banks are currently facing.

The ongoing problems have triggered an exodus of international brokers from Morgan Stanley at the start of this year. Despite the wealth management unit being a major revenue contributor, Saperstein was unsuccessful in the succession contest to replace outgoing CEO James Gorman.

Adding to the complexities, Morgan Stanley's wealth business is undergoing a leadership change. Ted Pick is set to replace James Gorman as CEO in January 2024. This transition happens amidst the ongoing scrutiny from the Federal Reserve, highlighting the challenges that lie ahead for the incoming leadership.

In parallel, Goldman Sachs Group Inc (NYSE: GS )., grappling with its own regulatory issues, intends to strengthen its compliance division by recruiting hundreds of new employees. The Federal Reserve's inquiry into Morgan Stanley's wealth management unit and its advocacy for stronger controls and systems further highlight the need for such measures across the banking industry.

InvestingPro Insights

Morgan Stanley, a prominent player in the Capital Markets industry, has been maintaining its dividend payments for an impressive 31 years straight, as per InvestingPro Tips. This is a noteworthy achievement considering the bank's current regulatory challenges. However, it's important to note that the company has also seen a declining trend in earnings per share and is quickly burning through cash.

Looking at the InvestingPro Data, Morgan Stanley has a market capitalization of 124.76 billion USD and a P/E ratio of 13.45. Despite some financial challenges, the company's liquid assets exceed its short-term obligations, offering some financial stability.

The company's revenue for the last twelve months as of Q3 2023 was 53.38 billion USD, though it showed a slight decline of 3.38%. The bank's gross profit for the same period was 46.2 billion USD, indicating a healthy profit margin of 86.54%.

InvestingPro offers a wealth of additional tips and data for those interested in a deeper analysis of Morgan Stanley and other companies. These insights can prove invaluable for both casual investors and financial professionals alike.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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