Late last month, federal prosecutors announced the first criminal prosecution against a U.S. broker-dealer under the Bank Secrecy Act (“BSA”). Central States Capital Markets, LLC entered into a deferred prosecution agreement (“DPA”) with the U.S. Attorney’s Office for the Southern District of New York. The prosecution arose from various instances where Central States ignored red flags when opening brokerage accounts, failed to follow its written customer identification procedures, and failed to report suspicious transactions.
Federal prosecutors charged Central States with failing to file a suspicious activity report in violation of 31 U.S.C. § 5318. If Central States does not satisfy the terms of the DPA during the specified two-year term, the government says it will move forward with the prosecution.
The investigation into Central States’s behavior followed the prosecution of Scott Tucker in 2017. Tucker was prosecuted for illegally using a series of tribal entities to operate a payday lending scheme. He was found guilty in October 2017 of building a $3.5 billion payday loan scheme charging interest rates as high as 1,000 percent. Central States did not file a suspicious activity report regarding the activities of Tucker until several months after a jury convicted him.
In March 2012, Tucker went to Central States to open several brokerage accounts on behalf of the tribal entities. Tucker told Central States that the tribal entities’ current bank had them remove excess cash because Tucker failed to meet certain regulatory requirements. Central States also learned that Tucker had been convicted of fraud in 1991, that he was involved with illegal payday lending schemes, and that the Federal Trade Commission was investigating Tucker and the tribal entities for unfair business practices.
Despite the warning signs, Central States opened various brokerage accounts for the tribal entities and Tucker. Then, Central States failed to investigate or take action after its own transaction monitoring tool generated 103 alerts regarding potential suspicious activities.
Under the DPA, Central States accepted responsibility for its failure to follow its written customer identification procedures when opening the aforementioned brokerage accounts and for failing to investigate various suspicious transactions. Central States also agreed to pay $400,000 in forfeited funds and commit to enhancing its BSA and anti-money laundering controls.
The U.S. Securities and Exchange Commission also instituted a cease and desist proceeding against Central States. The SEC censured Central States and ordered it to hire a compliance consultant to monitor its BSA and anti-money laundering controls for two years.
This first prosecution is a reminder that broker-dealers should not only implement anti-money laundering controls, but also act when those controls raise red flags. Broker-dealers should seek guidance from counsel when they are unsure how to respond to questionable customer behavior.