Enforcement Roundup: Embezzling BSA officer, DOJ’s first-ever criminal AML charge against broker
Friday, December 21, 2018
Posted by: Brian Monroe
By Brian Monroe
December 21, 2018
In this ACFCS Enforcement Roundup, federal authorities sanction a financial crime compliance officer who wore too many hats for stealing nearly $500,000 over several years and handed down a first ever criminal anti-money large charge against a broker dealer for failing to file a suspicious activity report on individual later found to be part of a multi-billion payday loan scam.
On Wednesday, the Federal Reserve issued a prohibition order against Diane Ludwig, the Bank Secrecy Act (BSA)/anti-money laundering (AML) officer for the First Community Bank of Beemer, Nebraska, for embezzling $491,000 from the bank’s general ledger. Ludwig was also the bank’s cashier, IT Officer, and Lending Compliance Officer.
Also on Wednesday, the U.S. Department of Justice (DOJ) handed down its first-ever criminal BSA charge against Central States Capital Markets, LLC (CSCM), for failing to file a suspicious activity report (SAR) regarding the illicit actions of customer Scott Tucker, who a jury later found guilty of fraud, money laundering and other charges for his role in a $2 billion payday loan scheme.
CSCM will also pay $400,000 as part of a two-year deferred prosecution agreement, part of which includes engaging in extensive improvements of the operation’s AML program.
“CSCM’s anti-money laundering program was operated with serious gaps in oversight, responsiveness, and diligence,” U.S. Attorney Geoffrey Berman said in a statement.
“As a result, CSCM failed to investigate and report suspicious transactions relating to a historically significant pay-day lending fraud,” he said. “Today’s charge makes clear that all actors governed by the Bank Secrecy Act – not only banks – must uphold their obligations to protect our economy from exploitation by fraudsters and thieves.”
The actions evince a greater focus on the individual liability of AML compliance officers and on the securities sector and occur as other brokerages come under fire for compliance gaps.
In tandem, U.S. banking and securities regulators this week levied a nearly $15 million penalty against the securities arm of Switzerland’s largest bank for more than a decade of lax financial crime compliance, poor oversight of risky correspondent portals and missed filings of suspicious activity.
The Financial Crimes Enforcement Network (FinCEN) in an assessment Monday penalized the securities arm of UBS, UBS Financial Services, Inc. (UBSFS), for “willful violations” of anti-money laundering (AML) rules, chiefly for viewing trading and other transactions only through the lens of potential markets fraud and not by scrutinizing activity for possible money laundering. To read ACFCS coverage of the action, click here.
The FinCEN action, in a rare pairing, was done in concert with the Securities Exchange Commission (SEC) and Financial Industry Regulatory Authority (Finra), the government and self-regulatory bodies responsible for overseeing the country’s varied, complex and intermediated trading sector.
The pressure on securities firms to bolster their AML compliance programs is not likely to let up in 2019 either as the SEC Thursday issued its National Examination Priorities, with compliance, risk and financial crime compliance featured as top enforcement directives.
The priorities for next year virtually mirror 2018, with slight adjustments up and down, with the main difference being the addition of “digital assets” as the SEC further contends with the intersection of the virtual currency and securities worlds and the mushrooming addition if initial coin offerings (ICOs) – some of which are clearly fraudulent initiatives run by scammers attempting to take advantage of Bitcoin’s waning exuberance.
The SEC released its latest exam priorities Thursday. Here is how it compares with the prior year.
SEC 2019 Exam Priorities:
- (1) compliance and risk at registrants responsible for critical market infrastructure;
- (2) matters of importance to retail investors, including seniors and those saving for retirement; (3) FINRA and MSRB;
- (3) digital assets;
- (4) cybersecurity; and
- (5) anti-money laundering programs.
SEC 2018 Exam Priorities:
- (1) Matters of importance to retail investors, including seniors and those saving for retirement;
- (2) Compliance and risks in critical market infrastructure;
- (3) Financial Industry Regulatory Authority (FINRA) and Municipal Securities Rulemaking Board (MSRB);
- (4) Cybersecurity; and
- (5) Anti-Money laundering programs.
Missed red flags, transactions, alerts
For the CSCM settlement, investigators detailed that the broker’s lack of an AML program and disregarding of blatant in-person and transactional red flags allowed a massive payday lending scheme to continue by Scott Tucker that ran from the late 1990s to 2013.
In the scheme, Tucker “extended short-term, high-interest, unsecured loans, commonly referred to as ‘payday loans,’ to individuals 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 – but tried to insulate himself from these laws by using sham Native American partnerships as a shield.
These tribes typical gain sovereign immunity, a legal doctrine that generally prevents states from enforcing their laws against Native American tribes, something Tucker was attempting to take advantage to escape state payday lending laws – and something CSCM AML officers should have sniffed out in customer due diligence documents.
But 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,” according to DOJ, noting that the broker conversed with Tucker and his brother, Blaine, but then received documents signed by tribal officials.
Other CSCM missed red flags include Tucker teller the broker he had “approached” tribal elders in a bit to take advantage of sovereign immunity and that he was booted from his last bank due to excessive movements of cash.
The broker also disregarded material negative news it learned about related to Tucker, according to DOJ.
“Specifically, CSCM learned that Tucker had been convicted of fraud in 1991 and, separately, found news reports from as early as 2011 alleging that the Tuckers were engaging in a “rent-a-tribe” scheme” to evade claims he violated state usury laws, an issue also brought up in a Federal Trade Commission action.
CSCM, however, even after learning of these details, including its CEO, “did not act upon these red flags because Tucker assured CSCM that the FTC action would soon be resolved and all challenges brought by state regulators had been unsuccessful due to sovereign immunity.”
Apart from negative news and ownership stumbles, the broker also had extensive failures in its core AML program duties, including weak customer due diligence and issues in properly monitoring and reporting on transactions, dispositioning alerts and filing SARs.
Between December 2011 and December 2015, CSCM’s AML transaction monitoring system generated 103 alerts, which were never investigated. Further these alerts were never cross-referenced with the identities of third-parties provided by clearing firms transferring funds via wires to CSCM accountholders.
As a result, “numerous suspicious transactions went undetected and unreported by CSCM, according to DOJ.
For example, between December 21, 2012, and March 13, 2013, “18 wire transfers totaling $40,518,000 were sent from accounts at the Florida Bank in the names of Tribal Companies to Tucker’s personal CSCM account,” according to investigators.
“The transfers were in even dollar amounts, and on several occasions two different Tribal Companies, associated with different tribes, transferred the same dollar amounts, on the same day, to Tucker’s personal CSCM account,” according to penalty documents. But, due to lapses in AML systems, personnel and judgement, CSCM “never asked Tucker or the Tribal Companies about any of these transactions.”