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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

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.

 

SEC Charges CCO with AML Failures

see something say something

The SEC commenced an enforcement action against a broker-dealer’s chief compliance officer/anti-money laundering officer for failing to file Suspicious Activity Reports.  The SEC alleges that the CCO/AML Officer had actual knowledge of red flags of illegal penny stock trading and money laundering.  Such red flags included physical deposits of large blocks of penny stocks followed by rapid liquidation, simultaneous trading in two customer accounts, quick changes in issuer business plans, and clearly misleading company press releases.  Also, the SEC maintains that a quick Google search would have raised other red flags including prior enforcement actions and articles alleging pump and dump activity.  The SEC accuses the CCO/AML Officer for aiding and abetting and causing his firm’s violations of Rule 17a-8, which requires a broker-dealer to comply with the SAR requirements of the Bank Secrecy Act.

OUR TAKE: The regulators have been keen to impose personal liability on CCOs for violations of the Anti-Money Laundering rules including failures to file SARs.  In fact, FinCEN can impose a $25,000 fine on an AML Officer for each failure to file an SAR.