US Brings First Criminal AML Case Against Broker-Dealer

Michael Volkov
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In a stark message, Justice Department prosecutors have brought the first criminal case for anti-money laundering violations against a broker-dealer.  Central States Capital Markets, LLC (Central States) agreed to pay a $400,000 penalty and entered into a deferred prosecution agreement (DPA) with the US Attorney’s Office for the Southern District of New York for violating the bank Secrecy Act.

As set forth in the court filings, Con December 10, 2018 (here) Central States failed to comply with its customer identification procedures (CIP), failed to investigate and file Suspicious Activity Reports (SARs) and failed to monitor and follow up on red flag transactions. 

Central States has a paper-based compliance program but failed to follow its requirements, ignoring its policies and procedures in place.  Central States agreed to remediate its AML compliance program.

Central States violations stem from a related criminal prosecution of Scott Tucker for illegal payday lending.  Tucker and his now-deceased brother used a series of tribal entities to effectuate a payday lending scheme.  Tucker approached Central States on behalf of the tribal companies to open brokerage accounts, falsely claiming that he had been asked to transfer tribal funds to Central States from the existing tribal banks because of the cost of compliance with certain regulatory requirements. 

Central States conducted due diligence of Mr. Tucker and learned he had a checkered past with a prior fraud conviction.  Tucker and his brother were carrying out a “ren-a-tribe” payday scheme to evade state usury laws, which do not apply to Native American tribes.  Central States also learned that in April 2012, the FTC initiated an investigation of Tucker and the tribal corporations for unfair business practices.

Despite these obvious red flags, Central States agreed to open brokerage accounts for the tribal corporations and for Tucker and his brother, individually.  Tucker and his brother represented to Central States that they were not subject to state usury laws because they were operating on tribal lands.

After opening the accounts, the tribal corporation sent 18 wire transfers totaling over $40 million to Tucker’s personal account.  The wires themselves raised red flags because they were even-dollar amounts, occurred on the same day and for the same amount, and came from different tribal corporations.  Despite these obvious red flags, Central States did not investigate the transactions nor file a SAR for any of these transactions.

Central States also ignored its own CIP requirements when opening the accounts.  Central States did not determine if Tucker was a consultant to the tribal corporations, as he initially claimed, and whether he had authority to direct management of funds. 

Central States also relied on AML tracking software, Actimize, which generated over 100 alerts regarding Tucker and the tribal corporation accounts.  Central States never checked or followed-up on the alerts.  Indeed, Central States never reviewed the monitoring tool to determine whether the tool was being used properly or the parameters were set correctly.

Tucker and his attorney were convicted in October 2017 of conducting an illegal payday loan scheme charging interest rates of up to 700 percent and earning illegal profits of $3.5 billion.  Central States failed to file any SARs until months after Tucker was tried and convicted in federal court.

Tucker sought to inoculate himself against usury laws by entering into a series of sham relationships with certain Native American tribes in order to conceal his ownership and control of the Tucker Payday Lenders and gain the protection of tribal sovereign immunity – a legal doctrine that generally prevents states from enforcing their laws against Native American tribes.  To effectuate his scheme, Tucker assigned nominal ownership of his payday lending companies to certain corporations created under the laws of the tribes. 

Central States’ failure to act was egregious and there is little doubt that Central States ignored AML requirements in order to earn lucrative fees.  Prosecutions of other broker-dealers are sure to follow, and the broker-dealer industry has to be mindful of its obligations to identify and resolve red flags, investigate suspicious transactions and file SARs when required. 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Michael Volkov, The Volkov Law Group | Attorney Advertising

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