On December 19, the United States Attorney for the Southern District of New York, Geoffrey S. Berman, announced that his office had filed criminal charges under the Bank Secrecy Act (“BSA”) against U.S. broker-dealer Central States Capital Markets, LLC (“CSCM”), based on CSCM’s willful failure to file a suspicious activity report (“SAR”) regarding the illegal activities of one of its customers. The announcement noted that the charges constitute the first criminal BSA charge ever brought against a U.S. broker-dealer.
The announcement also stated that CSCM had agreed to enter into a Deferred Prosecution Agreement (DPA) with CSCM. Under the terms of the DPA, CSCM stipulated to the accuracy of an extensive Statement of Facts, and agreed to pay a $400,000 penalty and continue to enhance its BSA/Anti-Money Laundering (“AML”) compliance program.
The criminal charges pertained to the activities of a CSCM customer, Scott Tucker, who had been convicted at trial in 2017 along with his attorney, Timothy Muir, of racketeering, wire fraud and money laundering for their roles in perpetrating a massive payday lending scheme. The jury found that from in or about the late 1990s through in or about 2013, through various payday-lending companies that he owned and controlled, Tucker extended short-term, high-interest and unsecured loans — commonly referred to as “payday loans” — to people around the country at interest rates as high as 700 percent or more and in violation of the usury laws of numerous states, including New York. Tucker reportedly sought to insulate himself from applicable usury laws by entering into a series of sham relationships with certain Native American tribes (“Tribes”) in order to conceal his ownership and control of the payday-lending companies and claim the protection of tribal sovereign immunity, which is a legal doctrine that generally prevents states from enforcing their laws against Native American tribes. In order to effectuate his scheme, Tucker assigned nominal ownership of his payday lending companies to certain corporations created under the laws of the tribes (the “Tribal Companies”).
According to the U.S. Attorney’s Office,
CSCM failed to follow its written customer identification procedures and did not act upon red flags prior to opening investment accounts for the Tribal Companies, which were in fact controlled by Tucker. CSCM discussed opening these accounts exclusively with Scott Tucker and his brother Blaine (the “Tuckers”). Although CSCM received account opening documents signed by tribal officials granting only Blaine Tucker authorization over the accounts, CSCM routinely dealt with and took direction from Scott Tucker concerning the management of funds in the Tribal Companies’ accounts based solely on Scott Tucker’s oral assertions that he was a “consultant” to the Tribes. At no point did CSCM obtain written verification of Tucker’s authority over the accounts.
CSCM also disregarded red flags that were known prior to opening the accounts, failed to act on additional red flags, and failed to monitor any transactions using the AML tool that had been provided to CSCM for that purpose. In addition, numerous suspicious transactions relating to Tucker – including 18 wire transfers totaling $40,518,000 to Tucker’s personal CSCM account — went undetected and unreported by CSCM. Finally, even though CSCM produced documents in connection with the U.S. Attorney’s Office’s criminal investigation and was aware of the indictment against Tucker, it did not file a SAR, according to that Office, “until long after Tucker was convicted at trial.”
Note: The financial penalty associated with the CSCM DPA is only a small fraction of the nine-figure penalties that Rabobank and U.S. Bancorp agreed to pay earlier this year in connection with their own DPAs for BSA violations. Even so, this case should provide chief compliance officers with broker-dealers with an opportunity to remind senior management that the BSA applies to more than just banks, and that their firms need to take BSA/AML obligations, including timely filing of BSA-related SARs, seriously.
The case also includes information that that reminder should convey to the Chief Executive Officer and other C-level executives. In CSCM’s case, the U.S. Attorney’s Office specifically noted that before CSCM opened the accounts for Tucker, Tucker gave CSCM’s CEO a false and misleading explanation of the reasons for opening the accounts, and neither the CEO nor anyone else at CSCM attempted to verify Tucker’s explanation. It also specifically stated that when CSCM was confronted with additional red flags, “CSCM, including its CEO, did not act upon these red flags” because Tucker assured CSCM that a then-pending FTC action against Tucker and the Tribal Companies for engaging in unfair business practices “would soon be resolved and all challenges brought by state regulators had been unsuccessful due to sovereign immunity.”