A federal ruling against a Salt Lake City-based clearing broker has raised questions over whether the level of detail brokerages typically include in their suspicious activity reports, or SARs, will suffice going forward, sources told ACAMS moneylaundering.com.
Like other U.S. financial institutions and securities firms covered by the Bank Secrecy Act, broker-dealers must file SARs with narratives explaining why a particular transaction merits an investigation, including by identifying which client was involved, where the transfer of funds or other questionable financial event took place, and when.
Those rules were reinforced with more detail in December, when a Manhattan federal judge presiding over a legal dispute between the Securities and Exchange Commission, or SEC, and Alpine Securities Corporation ruled that hundreds of the firm’s SARs did not include red flags that staff had documented elsewhere.
“The duty of the [SAR] filer is not to weigh and balance the competing inferences … but to disclose ‘as much information as is known to’ the filer about the subjects of the filing,” U.S. District Judge Denise Cote wrote in a 100-page opinion issued Dec. 11.
The decision against Alpine, which executes trades on behalf of other companies, caught the eye of broker-dealers because many still file SARs without including clients’ past trading volumes or the number of shares involved, Bao Nguyen, a former examiner for the Financial Industry Regulatory Authority, or Finra, said.
“Our industry commonly looks at rulemaking by enforcement, and here’s an actual case saying the SEC is correct,” Nguyen, now principal at Kaufman Rossin in Boca Raton, Florida, said. “That sets a precedent for most people in our industry, that that’s what we should be doing.”
The ruling has also drawn attention from examiners in the field.
“I have already seen in my practice some regulators inquiring about the red flags that show up in this order,” a New York-based compliance attorney who declined to be identified told moneylaundering.com. “To have an opinion that goes into such painstaking detail about what broker-dealers should and shouldn’t include is something they can use.”
The legal dispute that led to the ruling began in June 2017, when the SEC accused Alpine in a 20-page civil complaint of using boilerplate language and leaving out critical details in more than 1,600 SARs filed on lowpriced security trades from 2011 to 2015.
Cote largely took the SEC’s view in the Dec. 11 opinion, concluding that Alpine should have taken care to include more of what it knew about the potentially illicit transactions.
The violations appear to have persisted over several years.
Cote’s opinion references Finra’s earlier finding that Alpine did not file any SARs over a six-month period in 2011, and filed more than 800 “substantively inadequate” SARs in 2011 and 2012 that did not explain why the transactions appeared suspicious.
According to the finding, all of the SARs in question used two basic templates, with the shorter template amounting to just one sentence: “On or around Dec. 9, 2011 ABC LLC deposited a large quantity (40,000,000 shares) of XYZ Corp, a low-priced ($0.0001/share) security.”
At least some of those issues appear to have persisted for at least the next two years. An examination by the SEC in July 2014 found that roughly half of a sample of 252 SARs were still written in boilerplate language and missing key details, such as a history of stock promotion or enforcement actions, that Alpine recorded in
The SEC followed with the lawsuit, focusing on nearly 1,600 SARs Alpine filed on just six customers—including nearly 800 on a single client, “Customer A.” Regulators argued that each of the 1,600 reports missed at least one of seven red flags that Alpine had documented internally.
Almost 700 of the SARs did not mention that the client had previously been the target of a fraud-related lawsuit by the SEC or some other form of litigation, while a second client’s prior conviction as a counterfeiter was not included in an unknown number of SARs.
In other reports, Alpine failed to note that a third client “had a history of being investigated.”
Alpine took a different view of those reports: an anti-money laundering compliance officer who started working for the firm in 2012 testified during the lawsuit that staff would only mention litigation in SARs if the case was “actually … relevant to the activity.”
But the firm never produced any records documenting that rationale, according to Cote.
“The duty to report related litigation extends not just to litigation that has been resolved, but also to ongoing litigation,” Cote wrote in her opinion. “So long as there is a connection between the litigation and the reported transaction, there is a duty to disclose the litigation.”
Cote noted other unreported red flags in detail. Seven-hundred SARs did not include a comparison of the client’s anticipated trading volume with the client’s actual trading volume, which in many cases more than tripled what Alpine expected.
Nearly 250 others did not mention the involvement of shell companies in a trade, including the issuer of the stock. Fifty-five did not include indicia of a “pump and dump” scheme, another 36 did not flag how stock issuers were working with expired licenses or non-functioning websites.
According to Cote and the SEC, Alpine had documented all of those red flags.
“Each SAR must, of course, be examined individually,” Cote wrote. “When that is done, Alpine’s defense evaporates.”
The lawsuit is ongoing, with further mediation scheduled this month.