by T. GormanPosted on Posted in SECActions

Money laundering compliance is a critical area for banks, broker-dealers and others in the financial world. The importance of this area was recently highlighted by the passage of the Corporate Transparency Act or CTA to bolster the requirements. Indeed, Kenneth Blanco, the Director of the Financial Crimes Enforcement Network or FinCEN recently hailed the Act as a “landmark piece of legislation that will bolster the Untied States’ national security and help better protect the communities and people of this great country.” Kenneth A. Blanco, Remarks at Florida International Bankers Association AML Compliance Conference (March 22, 2021)(here). FinCEN is preparing to write new regulations to implement the new legislation.

AML is also a focus for the Commission’s Division of Examinations or EXAMS. To assist registrants in preparing for examinations in this area EXAMS issued a new Risk Alert titled “Compliance Issues Related to Suspicious Activities Monitoring and Reporting at Broker-Dealers” (March 29, 2021)(here).

Background

Exchange Act Rule 17a-8 requires broker-dealers to comply with the reporting and record keeping dictates of the Bank Secrecy Act or BSA provisions regarding anti-money laundering. Under the BSA and Rule 17a-8 an AML program must be implemented which is keyed to the risks associated with the business of the firm. This means that the program should be designed by “taking into account factors such as a size, location, activities, customers, and other risks of (or vulnerabilities to) money laundering.” The firm must focus on what are called “red flags,” that is, indications of illegal activity, and be prepared to respond appropriately.

Central to broker-dealer compliance is the filing of a suspicious activity report or SAR for any possible violation of law or regulation. Accordingly, the firm “must file a SAR for any transaction involving funds or other assets of at least $5,000 that are conducted or attempted by, at, or through the broker-dealer and for which the broker-dealer knows, suspects, or has reason to suspect that, among other things, the transaction (or pattern of transactions of which the transaction is part) . . .” This occurs when a transaction involves: 1) funds from illegal activity or which conceal such actions; 2) is designed to evade the requirements of the BSA; 3) have no apparent lawful purpose; or 4) uses the firm in criminal activity. In view of these requirements the broker-dealer must conduct appropriate due diligence.

Staff Observations

Observations of the staff in this area are divided into four key areas below.

Monitoring: This area focuses on AML policies and internal controls. EXAMS concluded that a number of broker-dealers failed to design and implement policies and procedures reasonably designed to identify and report suspicious activity. Examples include:

· A number of firms failed to include red flags in their policies and procedures; others failed to properly design the red flags in view of their business and customers;

· Some firms with large volumes of transactions failed to install appropriate automated procedures and relied only on manual procedures;

· Some firms failed to set the limits for transactions involving low priced securities at the proper level which for penny stocks is $5 and under while others did not monitor exchange traded stocks;

· A number of firms set the dollar limit for a SAR at a level that exceeded the $5,000 minimum, thus failing to monitor and detect certain transactions; and

· A number of firms inappropriately deferred monitoring to their clearing firms or failed to

monitor high risk customer activity such as trading in low priced securities.

Failure to implement: A number of firms that reasonably designed their policies and procedures did not implement them and failed to conduct adequate due diligence or report suspicious activity in accord with their procedures. Examples include:

· At times firms were inconsistent, filing a SAR for a transaction and later failing to file a SAR for a transaction without distinguishing between the two;

· Some firms failed to use available transaction reports in monitoring transactions;

· Other firms failed to follow-up on suspicious activity; and

· In a number of instances there was a failure to comply with firm procedures regarding the acceptance of certain kinds of transactions or requirements to conduct due diligence.

Failure to respond: In some instances, EXAMS observed weak policies, procedures and internal controls or a failure to enforce or comply with existing procedures. In those instances, a SAR was not filed in accordance with the requirements. Examples include:

· Large deposits of low-priced securities followed by almost immediate liquidation;

· Patterns by a number of customers where low priced securities of multiple issuers are acquired;

· Customers with questionable backgrounds; or

· Trading in securities where there were warnings about the issuer’s compliance with requirements such as filing periodic reports.

Inadequate SAR: In a number of instances EXAMS observed significant numbers of inadequate SARs which lacked information about the transactions. In other instances the filings were simply boiler plate, again omitting key details. In many cases the omitted details were important. For example, in some cases the purchase of low-priced securities was reported while the sale information was omitted. In some cyber security cases the reports failed to include facts about the implementation of the scheme and other critical details.

Conclusion

As EXAMS makes clear, AML is a key area of concern. The recent passage of the CTA and the comments of the FinCEN director cited above emphasize this point. It is thus critical that each firm properly prepare, implement and enforce an appropriate AML policy carefully focused on the business and customers of the firm.

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by T. GormanPosted on Posted in SECActions

Sometimes no matter how hard the push is to move forward, things just don’t work out that way. Last week seems to be in that mode. For the last few weeks climate and ESG have been the key topics of conversation at the Commission.

Now, however, it is back to the future. The Commission adopted interim final amendments, subject to public comment, regarding certain issuers located in foreign jurisdictions for which the PCAOB cannot fulfill its SOX inspection obligations. Think China. Yet almost two decades ago SOX imposed obligations on all issuers and their auditors to cooperate with the inspection obligations of the PCAOB. Most do; at least one does not. Think China. Are two sets of overlapping regulations better or more effective than one?

Be careful, be safe this week

SEC

Audit oversight: Interim final amendments were adopted regarding certain foreign issuers, their auditors and the ability of the PCAOB to conduct inspections. Specifically, the agency issued interim final amendments to those identified by the agency who have filed an annual report on Forms 10-K, 20-F, 40-F or N-CSR with an audit report issued by a registered public accounting firm located in a foreign jurisdiction and for which the PCAOB has determined it cannot inspect the work. Before the Commission can require any registrant to comply with the interim final amendments public comment must be solicited (here).

SEC Enforcement – Filed and Settled Actions

The Commission filed 6 new civil injunctive actions and no administrative proceedings last week, excluding 12j, tag-along proceedings and other similar matters.

Unregistered brokers: SEC v. Wooten, Civil Action No. 2:21-cv-00482 (D. Az. Filed March 22, 2021) is an action which centers on investment funds managed by EquiAlt, a defendant in another Commission fraud action (here). In this case defendants James P. Wooten, Ronald Frank Stevenson and their firms – Family Tree Estate Planning, LLC and American Financial Security LLC — acted as brokers for the EquiAlt funds over a four-year period beginning in 2016. Specifically, Mr. Wooten and his firm, Family Tree, raised at least $32 million from over 300 investors and was paid approximately $3.7 million in transaction-based compensation. Mr. Stevenson and his firm, American Financial, raised about $19 million from about 250 investors and was paid about $1.7 million in sales commissions. Defendants were not registered brokers. The complaint alleges violations of Securities Act Sections 5(a) and 5(c) and Exchange Act Section 15(a)(1). The case is pending. See Lit. Rel. No. 25059 (March 23, 2021).

Unregistered broker: SEC v. Fisher, Civil Action No. 0:21-civ-60624 (S.D. Fla. Filed March 22, 2021) is an action centered on the sale of the securities of 1 Global Capital, LLC, a South Florida merchant cash advance company that is a defendant in a separate Commission fraud action. Defendant in this action, John W. Fisher, is alleged to have been one of the salesmen for the firm. Specifically, from March 2017 through June 2018 Defendant sold over $8.5 million of the firm’s securities to a number of investors. He was paid $329,000 in commissions despite the fact that he is not a registered broker. The complaint alleges violations of Exchange Act Section 15(a)(1) and Securities Act Sections 5(a) and 5(c). The case is pending. See Lit. Rel. No. 25057 (March 22, 2021).

Unregistered broker: SEC v. Mintbroker International Ltd., Civil Action No. 1:21-cv-21078 (S.D. Fla. Filed March 22, 2021) is an action which names as defendants the firm, also known as Suretrader, and its owner, Guy Gentile, who operates an offshore brokerage. As early as 2012 Defendants created a way to avoid FINRA’s Pattern Day Trading Rule which placed certain restrictions on those who repeatedly day trade in margin accounts. Specifically, the trades were being placed through Shuretrader which was off-shore. That firm did not require compliance with the FINRA rules. Shuretrader was not registered with the Commission. The complaint alleges violations of Exchange Act Sections 15(a)(1), 20(a) and 20(c). The case is pending. See Lit. Rel. No. 25058 (March 22, 2021).

Insider trading: SEC v. Jones, Civil Action No. 1:21-cv-00659 (S.D. Ind. Filed March 18, 2021). James Roland Jones trolled the Dark Web. In 2016 Mr. Jones discovered a site that claimed to provide material non-public information. Access to the site was not for everyone. To enter a potential user had to demonstrate that they had genuine inside information about a publicly traded stock. Mr. Jones, lacking actual inside information, created MNPI – a lie. He failed to gain entry. He tried again. He failed. He tried again, but only after carefully studying a stock. Success at last! His guess was right and won him entry. Moderators of the site were told the supposed illegal tip came from a friend. To stay in the club Mr. Jones and others had to provide a continuing stream of illegal tips. His membership was only for three months. Undeterred, Mr. Jones devised a new scheme. If he could not stay in the Dark Web Insider Trading Club he would create his own. In the spring of 2017 Mr. Jones listed “inside tips” for sale on one of the Dark Web marketplaces. Defendant claimed that his information came from the Dark Web Insider Trading Forum and/or corporate insiders. Mr. Jones’ information was typically general predictions that the shares would go up or down. Payments for the information were in bitcoin. The tips provided by Mr. Jones were false. In many instances they were vague enough that buyers might have questioned if the information was material. The complaint alleges violations of Exchange Act Section 10(b). The case is pending. The U.S. Attorney’s Office for the Middle District of Florida filed parallel criminal charges. U.S. v. Jones, No. 8:21-cr-33 (MD. Fla.).

Offering fraud: SEC v. Richmand, Civil Action No. 3:21-cv-01911 (N.D. Ca. Filed March 18, 2021) is an action which names as defendants Jessica Richmand and Zachary Apte, respectively, the CEO and CSO of medical testing firm uBiome. In 2018 Defendants raised about $60 million from investors for the firm. The sale pitch focused on convincing investors that the firm had a strong financial position and good testing that was utilized by doctors. The claims were false. While certain tests of the company were used, they had been adopted based on misrepresentations made to the physicians using them. The firm also did not have a strong track record of reliable revenue from health insurance companies as claimed. While Defendants took steps to conceal their fraud it was uncovered by an internal investigation ordered by the board of directors following an FBI raid on the firm to execute a search warrant. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. A parallel criminal action was brought by the U.S. Attorney for the Northern District of California. See Lit. Rel. No. 25056 (March 19, 2023).

Offering fraud: SEC v. Levine, Civil Action No. 2:21-cv-05719 (D.N.J. Filed March 18, 2021) is an action which names as a defendant Seth P. Levine, the founder and President of real estate development company Norse Holdings, LLC. Over a period of about ten years, beginning in 2009, Defendant raised about $20 million from investors by selling interest in the firm. In making the sales he claimed that the capital would be used to purchase apartment complexes and earn profits. In connection with the sales Investors were provided with fraudulent documentation and financial records. They also were not told that Mr. Levine was conducting an extensive mortgage fraud scheme using the same properties. That scheme was based on false operating agreements, member consents and rent rolls. By 2019 the scheme unraveled — the FBI executed a search warrant at the office of Norse Holdings. The complaint alleges violations of Securities Act Section 17(a) and Exchange Act Section 10(b). The case is pending. The U.S. Attorney’s Office for the District of New Jersey filed a parallel criminal action. See Lit. Rel. No. 25054 (March 19, 2021).

FinCEN

Report: The regulator issued a report on what it calls it Innovation Hours Program. The initiative, started two years ago, centers on shaping initiatives for the future to facilitate the goals of the Bank Secrecy Act regarding money laundering and to aid national security. It also provides an opportunity for dialogue with the regulator on new initiatives (here).

BaFin

Short positions: The regulator announced that ESMA, the European Securities Market Authority, will not continue its requirement that holders of net short positions in shares trading on a European Union regulated market notify the relevant national competent authority if the position reaches, exceeds or falls below 0.1% of the issued share capital (here).

MAS

Remarks: Jacqueline Loh, Deputy Managing Director, Monetary Authority of Singapore, delivered remarks titled Innovation in Central Banking – Seizing Opportunities, Securing Our Future at the BIS Innovation Summit (March 25, 2021)(here). Her remarks focused on the reasons central banks should embrace innovation and how they can lead while managing their risks.

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