On December 19, 2018, the United States Attorney’s Office for the Southern District of New York (the “USAO”) announced criminal charges against and entered into a deferred prosecution agreement (the “DPA”) with Central States Capital Markets, LLC (“CSCM”), a Kansas-based broker-dealer, under the Bank Secrecy Act (the “BSA”).[1]  The charge was for a felony violation of the BSA, which consisted of CSCM’s willful failure to file a suspicious activity report (“SAR”) regarding the illegal activities of one of its customers.  According to the USAO, this represents the first ever criminal BSA charge brought against a United States broker-dealer.  This case is another milestone in the recent trend towards stricter enforcement of the anti-money laundering (“AML”) regulatory requirements applicable to broker-dealers.

Broker-dealers are required to file SARs with respect to suspicious transactions relevant to possible violations of law, including transactions where the broker-dealer “knows, suspects, or has reason to suspect that the transaction . . . involves funds derived from illegal activity or is intended or conducted in order to hide or disguise funds or assets derived from illegal activity . . . [or] has no business or apparent lawful purpose.”[2]  The goal of SAR filings is to help the government identify individuals, groups and organizations involved in fraud, terrorist financing, money laundering, and other crimes, and to facilitate and assist law enforcement efforts to prosecute those crimes.  Information contained in SARs can provide critical elements to further investigations and build criminal cases.

The charge against CSCM stems from CSCM’s failure to file a SAR regarding the illicit activities of its client, Scott Tucker, who was convicted of racketeering, wire fraud and money laundering in October 2017.  Mr. Tucker was convicted for his role in a payday lending scheme that used relationships with Native American tribes in an attempt to obtain tribal sovereign immunity to evade state usury laws and conceal his ownership and control of the payday lending business.

As part of the DPA, CSCM agreed and stipulated to a statement of facts (the “Statement”) detailing the relationship between CSCM and Mr. Tucker between 2011 and 2017, and describing numerous instances where CSCM failed to act upon red flags suggesting illegal or suspicious activity.  Among other things, the Statement describes that:

  • CSCM was aware that Scott Tucker had previously been convicted of fraud in 1991, that news reports from as early as 2011 alleged that Scott Tucker was using tribal corporations to conceal his ownership and control of the payday lending business, and that the U.S. Federal Trade Commission had filed suit against Scott Tucker alleging that he was the true beneficiary of the payday lending business.
  • CSCM opened brokerage accounts (the “Tribal Accounts”) for the tribal companies and allowed Mr. Tucker control over the accounts even though CSCM only received documents granting Blaine Tucker, Scott Tucker’s brother, authorization over the accounts. In opening the Tribal Accounts, CSCM failed to verify statements made by Scott Tucker as to the reasons for opening the accounts and violated its written customer identification program, which broker-dealers must have under the BSA.[3]
  • CSCM failed to adequately monitor or report suspicious transactions involving Mr. Tucker and the related companies. For example, between 2012 and 2013, there were 18 wire transfers totaling over $40 million from accounts in the names of the tribal companies to Mr. Tucker’s personal accounts at CSCM.  The wire transfers were for even dollar amounts, and on several occasions, two of the tribal companies transferred the same dollar amounts on the same day to Scott Tucker’s accounts.  In addition, CSCM’s AML tool for monitoring transactions generated 103 alerts related to Mr. Tucker and the related companies from December 2011 to December 2015, but CSCM never investigated any of the alerts.
  • Despite becoming aware of the investigation and Mr. Tucker’s indictment, CSCM did not file any SARs until after Mr. Tucker’s conviction.

The USAO charged that the failure of CSCM to file suspicious activity reports under these circumstances constituted a criminal violation of the BSA.  Rather than disputing the charge, CSCM entered into a DPA under which it agreed to pay a $400,000 forfeiture penalty and enhance its anti-money-laundering compliance program.  CSCM concurrently settled with the Securities and Exchange Commission (the “SEC”), entering into a cease and desist order that included a censure for CSCM and the requirement to hire an independent AML consultant to evaluate its AML procedures and monitor compliance for two years.  Although entry into the cease and desist order ordinarily would automatically disqualify a broker-dealer from participation in certain private securities offerings under the “bad actor” provisions of the SEC’s Regulation D,[4] CSCM successfully obtained a waiver of those restrictions.

This is the first ever criminal enforcement action brought against a United States broker‑dealer under the BSA and it reflects a broader trend of increased scrutiny of broker‑dealers for compliance with AML requirements under the BSA and other relevant laws.  Civil enforcement actions involving AML compliance against broker-dealers have increased in frequency in recent years, as the Financial Industry Regulatory Authority (“FINRA”) and SEC have become increasingly active in bringing enforcement actions against broker-dealers for AML violations, sometimes in conjunction with the Financial Crimes Enforcement Network (“FinCEN”).  The SEC and FINRA also continue to highlight AML compliance in their annual examination priorities letters,[5] suggesting this heightened scrutiny is unlikely to dissipate in the near term.

[1] 12 U.S.C. § 1829b, 12 U.S.C. §§ 1951-59, and 31 U.S.C. §§ 5311-30.

[2] Broker-dealers must file SARs when the transaction involves or aggregates funds or other assets of at least $5,000 and the broker-dealer knows, suspects, or has reason to suspect that the transaction (or a pattern of transactions of which the transaction is a part) (a) involves funds derived from illegal activity or is intended or conducted in order to hide or disguise funds or assets derived from illegal activity (including, without limitation, the ownership, nature, source, location, or control of such funds or assets) as part of a plan to violate or evade any federal law or regulation or to avoid any transaction reporting requirement under federal law or regulation; (b) is designed, whether through structuring or other means, to evade any requirements of 31 C.F.R. Chapter X or of any other regulations promulgated under the Bank Secrecy Act; (c) has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the broker-dealer knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction; or (d) involves the use of the broker-dealer to facilitate criminal activity.  31 C.F.R. § 1023.320(a)(2).

[3] 31 C.F.R. § 1023.220(a)(1).

[4] 17 C.F.R. § 230.506(d).

[5] See SEC, Office of Compliance Inspections and Examinations, 2019 Examination Priorities (Dec. 20, 2018); FINRA, 2018 Regulatory and Examination Priorities Letter (Jan. 8, 2018).  See also FINRA, Report on FINRA Examination Findings (Dec. 7, 2018).