It appears that the SEC is beginning to use a new weapon—the Bank Secrecy Act (BSA)—against broker dealers and other financial institutions. In SEC v. Alpine Sec. Corp., the SEC filed suit against a broker-dealer, alleging that it “routinely and systematically” violated the BSA by failing to file Suspicious Activity Reports (SARs) for stock transactions it had flagged as suspicious, and by filing SARs that omitted critical information. SARs pertain to reports of transactions or patterns of transactions involving at least $5,000 and the filer “knows, suspects, or has reason to suspect” that the transaction involves funds representing ill-gotten gains; is intended to hide funds from illegal activities; is designed to evade the BSA; or has no business or apparent lawful purpose.
The SEC alleges that the broker-dealer violated Section 17(a) of the Securities Exchange Act of 1934, which generally prohibits fraud and misrepresentations in the offer or sale of securities, and Rule 17a-8, which specifically requires broker-dealers to comply with the recordkeeping, retention, and reporting obligations of the BSA. Although the broker-dealer had an Anti-Money Laundering (AML)/BSA compliance program (as required for broker-dealers by both the BSA and FINRA Rule 3310), the complaint alleges that the defendant did not properly implement the program, and that required SARs either were deficient or were not filed at all, despite an earlier warning from FINRA.
Under the BSA, broker-dealers and mutual funds must establish and implement written AML and customer identification programs, file SARs with the Financial Crimes Enforcement Network (FinCEN), and comply with other filing, due diligence and record keeping requirements. Further, the already broad reach of the BSA is expanding. In September 2015, FinCEN published a proposed rule that is expected to become a new regulation. It would require SEC-registered investment advisors to establish AML programs, file SARs, and comply with other filing and record-keeping requirements under the BSA.
Historically, AML and BSA enforcement has been pursued by the Department of Justice, FinCEN, federal bank examiners, the FBI, and the IRS. These agencies have extracted high-profile AML/BSA settlements from banks and other financial institutions. However, this recent action suggests that the SEC is going to bring BSA/AML cases against entities that have not typically faced this type of scrutiny.
This most recent complaint filed by the SEC is not an isolated event, but rather part of a trend. Earlier this year, another broker dealer was charged in a similar civil enforcement action with failing to file SARs. These enforcement actions – and others – are consistent with the public pronouncements of the former SEC Enforcement Director, who has stated that the SEC Broker-Dealer Task Force must “pursue standalone BSA violations to send a clear message about the need for compliance.”
Akin to the SEC’s now-established role in pursuing alleged violations of the Foreign Corrupt Practices Act, another statute that historically had been the province of other enforcement agencies, the SEC has confirmed its desire to stake its own claim in AML/BSA enforcement. The securities industry must anticipate and meet this emerging trend. As the SEC’s recent complaint reflects, a solid AML compliance plan is a must for any company covered by the BSA. Even more important is the effective real-world implementation of such a plan.
Peter D. Hardy is a partner at Ballard Spahr LLP where he advises corporations and individuals on allegations of financial fraud. A former federal prosecutor, he is the author of Criminal Tax, Money Laundering and Bank Secrecy Act Litigation, and he oversees the firm’s blog on financial corruption, Money Laundering Watch.
David L. Axelrod is a partner at Ballard Spahr LLP where he focuses on defending companies and individuals in government investigations. He is the former Supervisory Trial Counsel at the SEC’s Philadelphia Regional Office and a former federal prosecutor. At the SEC, he directed all aspects of litigation—leading complex, multi-agency investigations into a range of alleged securities law violations and serving as lead trial counsel in high-profile federal cases.
Brad Gershel is an associate at Ballard Spahr LLP where he focuses primarily on government inquiries and internal investigations. Mr. Gershel has experience in handling a wide range of criminal and regulatory matters, including those relating to fraud, foreign bribery, and public corruption.
Priya Roy is an associate at Ballard Spahr LLP where she focuses primarily on white collar defense and regulatory matters. She counsels clients in AML and BSA matters, as well as matters involving allegations of securities violations, tax fraud, violations of the False Claims Act and the Food, Drug, and Cosmetics Act, and other fraud and regulatory offenses.