The Industrial and Commercial Bank of China Financial Services agreed to remit a fine of US $5.3 million to the Financial Industry Regulatory Authority in response to allegations that, from January 2013 through at least September 2015, it failed to maintain an anti-money laundering program “reasonably designed” to detect and cause the reporting of suspicions activities. ICBCFS also agreed to pay a fine of US $860,000 to the Securities and Exchange Commission for allegedly not filing suspicious activity reports with the Financial Crimes Enforcement Network of the US Department of Treasury despite referring information regarding numerous suspicious transactions involving penny stocks to one of its correspondent brokers, Chardan Capital Markets, LLC, from October 2013 through June 2014. The SEC additionally claimed that ICBCFS did not promptly produce required records when requested by the SEC, in connection with the Commission’s investigation into this matter.
According to FINRA, prior to January 2013, ICBCFS initiated a new business involving clearing and settling equity transactions. As a result, ICBCFS commenced carrying and clearing many correspondent broker-dealers, including Chardan, and “thousands of new introduced customers.” Many of these customers bought and sold penny stocks. From January 2013 through at least September 2015, ICBCFS cleared and settled the liquidation of in excess of 33 billion shares of penny stocks
Notwithstanding, said FINRA, prior t0 2014, ICBCFS did not have surveillance reports to monitor potentially suspicious low-priced stock liquidations, and where there were reports, the firm’s procedures did not require employees to document such review. As a result, claimed FINRA, during the relevant time, ICBCFS failed to identify many possibly suspicious penny stock liquidations that may have required SAR filings. The firm also failed to conduct “appropriate” independent testing of its AML program in violation of FINRA rules.
The SEC claimed that from at least October 2013 through June 2014, ICBCFS contacted Chardan regarding suspicious activities by its customers involving penny stocks. However, afterwards, ICBCFS never filed suspicious activity reports with FinCEN. Moreover, during the SEC’s investigations of Chardan, ICBCFS failed promptly to produce certain emails as requested, claimed the SEC.
As part of its settlement with FINRA, ICBCFS agreed to utilize an independent consultant to evaluate and make recommendations to upgrade its AML program related to monitoring transactions involving low-priced securities
Separately, the SEC brought and settled charges against Chardan for not conducing an adequate review of large-scale penny stock liquidations through seven customer accounts from at least October 2013 through June 2014 and for not investigating a number of red flags regarding such trading, including numerous regulatory inquiries after May 2014 regarding certain securities that certain of its customers traded. Likewise, the SEC commenced and resolved charges against Jerard Basmagy, Chardan’s chief compliance officer and AML officer from at least 2008 through early 2017, for aiding and abetting Chardan’s alleged violations. Chardan agreed to pay a fine of US $1 million to resolve the SEC’s charges, while Mr. Basmagy agreed to pay a fine of US $15,000.
Compliance Weeds: Applicable law and rules of the FinCEN require broker-dealers and other covered financial institutions (banks, Commodity Futures Trading Commission-registered futures commission merchants and introducing brokers, and SEC-registered mutual funds) to file a SAR with FinCEN in response to transactions or patterns of transactions involving at least US $5,000, which a covered entity “knows, suspects, or has reason to suspect” involve funds derived from illegal activity; have no business or apparent lawful purpose; are designed to evade applicable law; or utilize the institution for criminal activity.
According to FinCEN, SARs may also be required to be filed for certain cyber events. (Click here for background in the article “FinCEN Issues Advisory Saying Cyber Attacks May Be Required to Be Reported Through SARs” in the October 30, 2016 edition of Bridging the Week.)
In 2014, FINRA fined Brown Brothers Harriman & Co. US $8 million for failing to file SARs in connection with similar activity involving penny stocks as alleged to be at issue in the Meyers Associates administrative proceeding. In Brown Brothers, FINRA also fined and suspended the firm’s global anti-money laundering compliance officer for his alleged role in the firm’s alleged misconduct. (Click here for details in the article “FINRA Says Brown Brothers Harriman Had an Unsatisfactory Anti-Money Laundering Program; Sanctions Firm and Former Global AML Compliance Officer,” in the February 10, 2014 edition of Bridging the Week.)
More recently, Aegis Capital Corporation, a registered broker-dealer, agreed to resolve separate charges brought by the SEC and FINRA that, from at least January 2012 through April 2014, it failed to file suspicious activity reports with FinCEN in connection with transactions that potentially also involved market manipulation of low-priced securities. Aegis settled its SEC matter by agreeing to pay a fine of US $750,000 and its FINRA action by agreeing to pay a fine of US $550,000. Contemporaneously, Kevin McKenna, the firm’s anti-money laundering compliance officer from June 2012 through June 2013, also agreed to resolve SEC charges related to Aegis’s SEC enforcement action. Mr. McKenna consented to pay a penalty of US $20,000 and not serve as a compliance officer or an AML compliance officer of a broker-dealer or similar organization for at least 18 months. (Click here for background in the article “Broker-Dealer, CEO and AML Compliance Officer Settle SEC Charges for Not Filing Suspicious Activity Reports in Response to Red Flags” in the April 1, 2018 edition of Bridging the Week.)
Covered financial institutions should continually monitor transactions they facilitate; ensure they maintain and follow written procedures to identify and evaluate red flags of suspicious activities; and file SARs with FinCEN when appropriate. (Click here for a helpful overview of anti-money laundering requirements for broker-dealers, including SAR requirements. Click here for a similarly helpful compilation of AML resources for members of the National Futures Association.)