Morgan Stanley Faces Deepening Regulatory Scrutiny Over AML Gaps in Wealth Management

Morgan Stanley’s wealth management division has come under heightened regulatory pressure as the Financial Industry Regulatory Authority (FINRA) and several U.S. federal agencies intensify investigations into the firm's anti-money laundering (AML) systems. The probes—spanning the past three years—are focusing on how effectively Morgan Stanley’s client onboarding procedures, risk assessment processes, and AML controls have prevented financial crime, particularly between October 2021 and September 2024. Both its wealth management unit and trading operations are under examination.

This ongoing case has pushed Morgan Stanley into the spotlight, drawing broader attention to the strength and structure of AML programs in the financial sector. Regulators across the U.S. and globally are ramping up pressure on financial institutions, especially those that serve high-risk clients, to modernize their systems and uphold rigorous due diligence standards.

At the heart of these efforts lies the U.S. regulatory regime shaped by key legislation including the Bank Secrecy Act, the USA PATRIOT Act, and the Anti-Money Laundering Act of 2020. These laws mandate financial institutions to implement customer due diligence (CDD), monitor transactions, identify beneficial owners, and report suspicious activity. In the case of broker-dealers like Morgan Stanley, FINRA’s Rule 3310 requires a written AML compliance program tailored to each firm’s specific business risks. This includes procedures for monitoring and reporting unusual or suspicious activity.

Additional oversight comes from other regulatory entities such as the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) and the Office of the Comptroller of the Currency (OCC), both of which are empowered to conduct their own investigations if there are indications of systemic noncompliance. Morgan Stanley, as a global institution, must also ensure it remains compliant with the Foreign Corrupt Practices Act (FCPA) and the sanctions regime administered by the Office of Foreign Assets Control (OFAC).

The wealth management sector, due to its focus on high-net-worth individuals, politically exposed persons (PEPs), and cross-border clientele, presents elevated financial crime risk. Regulators have increasingly flagged this area for more intensive scrutiny, demanding stronger onboarding protocols, continual client monitoring, and robust transaction surveillance.

According to current findings, regulators are concerned about several recurring weaknesses that have also emerged in similar investigations at other global financial firms. These include incomplete enhanced due diligence (EDD) for high-risk clients, insufficient vetting of PEPs, and inconsistent application of automated risk scoring tools. Notably, some risk monitoring systems were not fully deployed across all client segments at Morgan Stanley—particularly E*Trade customers—until 2024, despite being labeled as critical AML controls. Such delays are viewed severely by regulators and often result in enforcement actions, including fines and mandated corrective programs.

The effectiveness of AML controls also hinges on how institutions manage client onboarding and offboarding processes. Regulators expect clear decision-making criteria, thorough reviews throughout the customer lifecycle, and the ability to disengage from relationships that fall outside a firm’s risk tolerance.

Internally, Morgan Stanley and similar institutions face the challenge of aligning internal structures with ever-evolving regulatory expectations. Investigators have noted gaps in data quality and concerns over the timeliness of information shared during regulatory inquiries. Inaccurate reporting—caused by miscommunication or inadequate documentation—can further compound regulatory risk.

FINRA and federal regulators are also requiring clearer governance structures. Requests for detailed organization charts, reporting lines, and documentation outlining the responsibilities of AML, sanctions, and financial crime staff are now common. These are not just procedural requests but are viewed as tools to assess whether a firm can demonstrate real accountability.

The requirement for ongoing enhanced due diligence is another area where regulators are stepping up pressure. Initial onboarding checks are no longer enough; banks must show that they are reassessing high-risk clients at regular intervals. This expectation has been strongly reinforced by both the OCC and the Federal Reserve in recent years.

For Morgan Stanley, these issues have translated into the closure of thousands of accounts as part of a broader de-risking effort—an approach being mirrored across the industry. Financial institutions are now more willing to withdraw from jurisdictions considered too risky, such as Venezuela and segments of Latin America, in order to minimize exposure to financial crime and meet regulatory benchmarks.

In response to these challenges, the industry is leaning heavily into automation. Technologies for risk scoring and transaction monitoring are being implemented, but regulators emphasize that these tools must be regularly updated and integrated across all business units to be truly effective. The cross-border nature of wealth management adds further complexity, requiring firms to comply not only with U.S. regulations but also international AML standards, such as those set by the Financial Action Task Force (FATF).

The Morgan Stanley case offers a series of important takeaways for the broader financial sector. Institutions must commit to continuous risk evaluation, invest in both technology and skilled compliance staff, and engage openly with regulators to mitigate potential enforcement actions. “Continuous risk assessment,” “investment in people and technology,” and “regulatory engagement” are now seen not as best practices but as foundational requirements.

The cost of noncompliance is rising—not just in the form of monetary penalties, but in lasting reputational damage and constrained access to certain markets. The unfolding scrutiny at Morgan Stanley is likely to establish a new benchmark for what regulators expect from global financial institutions, particularly in the wealth management space.

As regulators around the world raise the bar, the message is clear: AML compliance must be more than a checkbox exercise—it is a defining component of a firm’s integrity, resilience, and long-term viability.

By fLEXI tEAM