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SDNY Unveils First Criminal Prosecution of Broker-Dealer for Violating BSA

Government Alleges that Broker-Dealer Ignored Major Red Flags Raised by Pay Day Lending Scheme

For the first time, a broker-dealer, Central States Capital Markets, LLC (Central States), has been prosecuted for violating the Bank Secrecy Act (BSA). Central States stipulated to the accuracy of a deferred prosecution agreement‘s (DPA) Statement of Facts, which detailed significant failures to comply with its customer identification procedures (CIP), failures to investigate and file Suspicious Activity Reports (SARs), and failures to monitor red flag transactions.

The government’s prosecution of Central States is not surprising given its recent heightened interest in ensuring that financial gatekeepers like broker-dealers are complying with the AML/BSA laws. Indeed, the allegations show that Central States failed to take basic steps to comply with their AML/BSA obligations despite having procedures and processes in place.

Per the DPA, executed on December 10, 2018, with the U.S. Attorney’s Office for the Southern District of New York (SDNY), Central States accepted responsibility for its conduct, agreed to enhance its Anti-Money Laundering (AML) program, and pay a penalty of $400,000. The prosecution is deferred for a period of two years after which the government will seek to dismiss the charges. On the same date, the Securities and Exchange Commission (SEC) instituted a cease-and-desist proceeding pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934 and Section 203(e) of the Investment Advisers Act of 1940.

The prosecution against Central States springs from the SDNY’s 2017 successful prosecution for illegal payday lending against Scott Tucker. Mr. Tucker, along with his now-deceased brother, Blaine Tucker, allegedly used a series of tribal entities (Tribal Corporations) to effectuate their payday lending schemes. According to the Statement of Facts, in March 2012, Tucker approached Central States, purportedly on behalf of the Tribal Corporations, to open several brokerage accounts, stating that he worked as a consultant for the corporations. At that time, Mr. Tucker told Central States that the Tribal Corporations’ existing bank had asked him to remove excess cash from the bank because of Mr. Tucker’s failure to meet certain regulatory requirements. Mr. Tucker explained to Central States that the Tribal Corporations had refused to meet those obligations because of the cost associated with compliance.

The Statement of Facts further alleges that Central States conducted due diligence and learned that Mr. Tucker had been convicted of fraud in 1991 and found news reports that the Tuckers were engaged in what is commonly referred to as a “rent-a-tribe” payday lending scheme, to avoid running afoul of state usury laws. Central States also discovered that in April 2012, the Federal Trade Commission began an investigation alleging that Mr. Tucker and the Tribal Corporations had engaged in unfair business practices. Despite these significant red flags, Central States agreed to open brokerage accounts for the Tribal Corporations, and Scott and Blaine Tucker, personally. In defending this decision, Central States said that the Tuckers assured its CEO that they were unrestrained by state usury limits due to the sovereign immunity associated with operating from tribal lands.

Between December 21, 2012, and March 13, 2013, the Tribal Corporations made 18 wire transfers totaling $40,518,000 from accounts at another financial institution to Scott Tucker’s personal Central States account. The wires themselves raised significant red flags. Many of these transactions were even-dollar amounts and a number of transfers occurred on the same day and in the same amount, but came from different Tribal Corporations. Central States did not investigate, ask questions or file a SAR on any of these transactions despite the transactions indicating further investigation was needed.

In accordance with the terms of the DPA, Central States accepted responsibility for its violations—specifically failing to follow its own written CIP when opening the various accounts. For instance, Central States did not investigate whether Mr. Tucker was indeed a consultant of Central States and whether he had authority to direct the management of funds. Nor did Central States investigate the December 2012 to March 2013 suspicious transactions, which, given the pattern and amounts, should have raised red flags as per Central States’ own written supervisory procedures. Compounding this problem was the fact that Central States used an AML tracking software, Actimize, which generated 103 alerts regarding Mr. Tucker and the Tribal Corporations activity. Central States never checked the alerts or reviewed the monitoring tool to determine whether the tool was being utilized or was set with the proper parameters for the particular client.

In October 2017, Tucker was found guilty of building a $3.5 billion payday loan scheme charging interest rates up to 700% to borrowers. Despite having received requests for documents in connection with the DOJ’s investigation and indictment, Central States never filed a SAR about this activity until several months after Mr. Tucker’s trial and conviction.

There is no doubt according to the Statement of Facts that Central States turned a blind eye to conduct that was obvious and egregious. But with the government’s interest in ensuring that financial gatekeepers are minding the store, prosecutions for less severe conduct are likely to follow. The lessons are, as always, that written supervisory procedures are not enough to stave off scrutiny from the regulators—broker-dealers should ensure that their compliance staff is paying attention to customer activity and reporting suspicious activity when they see it.

Copyright © by Ballard Spahr LLPNational Law Review, Volume IX, Number 4


About this Author

David Axelrod Investigation Lawyer Philadelphia Ballard Spahr

David L. Axelrod is a former Supervisory Trial Counsel at the U.S. Securities and Exchange Commission's (SEC) 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. He also led nationwide insider trading training for SEC enforcement staff.

Mr. Axelrod's practice focuses on representing companies and individuals under investigation by government agencies, including the U...

Priya Roy, Attorney, Ballard Spahr

Ms. Roy focuses her practice on white collar defense, regulatory compliance and complex civil litigation. She conducts internal investigations and advises and defends companies and individuals facing criminal and civil investigation, and has participated in negotiations with the U.S. Department of Justice and federal regulatory authorities. Ms. Roy's practice includes counseling clients in Anti-Money Laundering and Bank Secrecy Act matters, as well as matters involving allegations of tax fraud, violations of the False Claims Act and Anti-Kickback Statute, violations of the Food, Drug and Cosmetics Act, securities violations, and other fraud and regulatory offenses. Ms. Roy is a frequent contributor to Money Laundering Watch, Ballard Spahr's blog focused exclusively on money laundering issues.