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Broker-Dealer Failed to File SARs for Pump-and-Dump Transactions

A broker-dealer was censured, fined, and ordered to retain an independent consultant in connection with failures to file Suspicious Activity Reports about pump-and-dump schemes. The SEC alleges that the firm neglected to file SARs even though it acknowledged several red flags including deposits of physical securities followed by rapid fund withdrawals, SEC investigations that led the firm to close accounts, trading away through other firms, questionable attorney opinions, and suspicious communications. The SEC acknowledges that the firm’s AML procedures identified certain red flags and how employees should report suspicious transactions, but the SEC faults the firm for failing to implement procedures, investigate red flags, and file SARs. The Bank Secrecy Act requires broker-dealers to file SARs when it suspects a transaction that has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage.

We think that FINRA and the SEC should take a hard look at the SAR filing regime. In this case, the broker-dealer appears to have facilitated several pump-and-dump schemes, and we don’t question that the SEC should have acted. What creates confusion is the leveraging of the Bank Secrecy Act and the SAR system, which was intended to combat anti-money laundering, as a catch-all reporting mechanism for any suspected regulatory violation whether or not it involved money laundering activity. Why should FinCen be involved in policing pump-and-dump schemes or other non-AML securities violations?

Broker/Custodian Failed to File SARs for Terminated Advisers

 

The SEC fined a large broker/custodian $500,000 for failing to file Suspicious Activity Reports for terminated advisers suspected of engaging in risky activity.  The firm would only file SARs when an individual employee referred the adviser to the Anti-Money Laundering Department. According to the SEC, the firm failed to supervise employees making such referrals, which resulted in inconsistent referrals based on a misunderstanding of regulatory requirements.  The firm failed to file SARs despite knowledge of potentially unlawful activity such as improperly shifting trade error losses to clients, charging questionable fees, and making false statements.  The SEC charges the broker/custodian with failing to file SARs with respect to activity that had “no business or apparent lawful purpose.”

OUR TAKE: The SEC is again using a broad reading of the Bank Secrecy Act and the SAR filing requirement to force broker/custodians to police all potential wrongdoing by advisers using their platforms.  The SEC does not contend that the misbehaving advisers were engaging in money laundering or that the broker/custodian in any way assisted such activity.  Nevertheless, the broker/custodian must file a SAR anytime it has reason to believe that any regulatory violation has occurred.  It is also noteworthy that the broker/custodian did not get much credit for ceasing business activities with the questionable advisers.

Compliance Officer Failed to File Suspicious Activity Reports

A compliance officer was fined, and faces further action, for failing to file Suspicious Activity Reports.  The SEC asserts that the respondent observed significant red flags indicating illegal activity including high trading volume in companies with little business activity.  He also received alerts about suspicious trading activity from the clearing firm.  The SEC faults the respondent for ignoring his own Written Supervisory Procedures by failing to file reports, investigate suspicious trading, or produce a written analysis demonstrating that he had considered filing SARs.  His firm was previously censured and fined.

OUR TAKE:  The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) maintains that a compliance officer is liable for up to $25,000 for every SAR not filed.  It’s not enough to have policies and procedures.  A compliance officer must implement those procedures and monitor and address potential violations.

 

Broker/Custodian Should Have Filed SARs to Report Advisers Act Violations

A large custodian/clearing firm agreed to pay $2.8 Million to settle charges that it failed to file Suspicious Activity Reports about the conduct of dozens of terminated advisors that the SEC claims violated the Advisers Act.  The SEC asserts that the Bank Secrecy Act required the custodian/clearing firm to file SARs when it suspected that advisers using its platform engaged in questionable fund transfers, charged excessive management fees, operated a cherry-picking scheme, or logged in as the client.  According to the SEC, such unlawful activities fall within the SAR rules because they had no lawful business purpose or facilitated criminal activity.

OUR TAKE: The SEC is leveraging the Bank Secrecy Act, adopted to combat money laundering, to require broker/custodians to police advisers on their platforms for violations of the Advisers Act.  It’s a novel legal theory to further the regulator’s enforcement goal of requiring large securities markets participants to serve in a gatekeeping role for the industry

CCO/AML Officer Barred and Fined for Failure to File SARs

The SEC fined and barred a CCO/AML Officer from the industry for failing to file Suspicious Activity Reports and otherwise ignoring his AML due diligence responsibilities.  The SEC accuses the CCO/AML Officer and his firm with ignoring clear red flags that suggested significant churning of penny stocks.  Red flags included questionable customer backgrounds, absence of a business purpose, multiple accounts with the same beneficial owners, rapid transactions, and law enforcement inquiries.  The firm sold over 12.5 billion shares of penny stocks over a 9-month period.  The SEC also charged the firm and its clearing firm.

OUR TAKE: While we certainly don’t condone the CCO’s inactions here, why is he the only executive officer charged?  Also, the respondent’s problems may have only just begun as FinCEN can impose a $25,000 fine on the CCO/AML Officer for each failure to file an SAR.

https://www.sec.gov/litigation/admin/2018/34-83252.pdf

FINRA Fines BD $550,000 for Weak AML Procedures Related to DVP Accounts

FINRA fined a broker-dealer $550,000 for failing to properly monitor and detect red flags related to small cap securities traded via delivery versus payment accounts.  According to FINRA, the respondent did not implement the same level of due diligence as it utilized with accounts held at the broker-dealer.  FINRA also alleges that the firm failed to enhance its compliance procedures even after warnings from the SEC and its clearing firm.  FINRA faults the firm for over-relying on branch managers to conduct surveillance and report red flags.

OUR TAKE: It’s never a good idea to rely on producers or their supervisors to monitor activities.  They are not regulatory professionals, and they often have a significant conflict of interest with respect to activities that affect their compensation.

 

SEC Prosecutes Current and Former Compliance Officers for AML Failures

The SEC fined and barred from the industry an anti-money laundering compliance officer for failing to file Suspicious Activity Reports.  The SEC asserts that the AML CO ignored red flags about heavy trading in low-priced securities including specific alerts provided by the clearing firm and warnings from the SEC OCIE staff.  The SEC also commenced proceedings against the previous AML CO for similar failures. The Bank Secrecy Act and the firm’s Written Supervisory Procedures specifically required filing of SARs for several transactions that the respondents ignored over a 2-year period.    The SEC also fined the firm and its CEO.

OUR TAKE: This firm did not have the requisite compliance “tone at the top” when 2 compliance officers and the CEO all ignored AML red flags, yet the SEC seeks to hold the compliance officers specifically accountable.  Also, compliance officers should take note that they don’t escape liability for past actions when they quit a job.  The SEC can still bring charges against former employees for misconduct that occurred while they acted in a compliance function.

http://www.sec.gov/litigation/admin/2018/34-82957.pdf

http://www.sec.gov/litigation/admin/2018/34-82958.pdf

Large BD Fined $3.5 Million for Curtailing SAR Filings

The SEC fined a large bank-affiliated broker-dealer $3.5 Million for failing to file anti-money laundering Suspicious Activity Reports (SARs).  According to the SEC, the firm had an effective AML Surveillance and Investigations group, but new management attempted to reduce the number of filed SARs, investigations, and related record-keeping.  During the 15 months under the new management, the number of SARs filed per month dropped 60%, from 57 to 22.  The SEC charges that the respondent failed to file at least 50 required SARs during that period.  An employee complaint triggered an internal investigation that uncovered the failures.   Broker-dealers are required by the Bank Secrecy Act to file SARs to report transactions that the BD suspects involved funds derived from illegal transactions, had no apparent lawful business purpose, or used the BD to facilitate criminal activity.

OUR TAKE: Given the SEC’s allegations that the broker-dealer’s management intentionally tried to reduce SAR filings, the respondent and its management is fortunate that they do not face more severe civil or criminal penalties under the Bank Secrecy Act.  There is no regulatory upside for choosing not to file SARs.  When in doubt, file and avoid second-guessing by the regulators.

 

BD Fined for Failed AML Compliance

A broker-dealer was censured, fined $200,000, and ordered to hire an independent compliance consultant for failing to file Suspicious Activity Reports.  The SEC argues that the firm should have further investigated millions of penny stock transactions whereby customers deposited large blocks of penny stocks, liquidated them, and transferred the cash proceeds.  The SEC faults the BD for blindly accepting customer representations that the shares were exempt from registration under Rule 144.  The firm’s policies and procedures required a reasonable investigation into money laundering red flags.  The firm’s CCO has also been charged with wrongdoing.

OUR TAKE: Anti-Money Laundering compliance and the timely filing of SARs remain priority issues for both the SEC and FINRA.  FinCEN may also weigh in with criminal penalties including huge fines and jail time.

 

Clearing Broker Charged with Failing to File SARs

The SEC instituted enforcement proceedings against a clearing broker for failing to file required Suspicious Activity Reports as required by the Bank Secrecy Act.  Although the broker-dealer had appropriate Written Supervisory Procedures, the firm failed in practice to implement its compliance program.  The firm filed nearly 2000 SARs that omitted necessary descriptive information, failed to file follow-up SARs with respect to another 1900 transactions, and did not file 250 SARs within the required time frames.  The SEC claims that the deficient SARs “facilitated illicit actors’ evasion of scrutiny by U.S. regulators and law enforcement.”

OUR TAKE: The BSA is no joke.  Failure to file SARs can result in crippling fines (up to $25,000 per failed SAR) and land you in jail.  It should be Chapter 1 of a broker-dealer’s compliance program.