A small broker-dealer of fewer than 25 employees in suburban Kansas City, Missouri enabled a $3.5 billion payday-lending scheme by ignoring more than 100 alerts of potentially suspicious transactions and disregarding the concerns of the firm that cleared them.
Manhattan federal prosecutors said Wednesday that they have entered into a $400,000 settlement with the broker-dealer, Central States Capital Markets, for not complying with the Bank Secrecy Act in its relationship with Kansas race car driver Scott Tucker, who was convicted last year of racketeering, money laundering and wire fraud.
Tucker, who from the late 1990s through 2013 offered loans to more than 4 million people with interest rates as high as 700 percent, sought to shield himself from lawsuits by hiding behind the sovereign status of Native American legal entities under his control.
CSCM’s involvement in Tucker’s scheme began in March 2012, when, according to prosecutors, he told the broker-dealer’s then-chief executive of his payday-lending business and plans to use the sovereign immunity of Native American tribes to his advantage.
“Tucker further explained that … he was approaching CSCM because the business’s existing bank, a small bank based in Florida, had asked [him] to move excess accumulations of cash because of certain regulatory requirements it was unable to meet,” prosecutors said. “Neither the CEO, nor anyone at CSCM, attempted to verify this explanation.”
CSCM opened several investment accounts for Tucker-linked tribal companies in the weeks that followed, with onboarding documents featuring the signatures of Native American officials giving his brother, Blaine, sole authority to transact on their behalf.
His name kept out of the paperwork, Scott Tucker exercised control over the accounts and the funds within them by representing himself to CSCM as the tribes’ “consultant.” He and his brother opened their own accounts with CSCM that August, prosecutors claimed.
CSCM subsequently failed to investigate tens of millions of dollars-worth of wire transfers from the bank in Florida, including 18 payments totaling $40.5 million. The originating accounts all showed links to tribal entities but arrived into Tucker’s personal account.
Tucker’s transfer of $9 million from his personal account to an unspecified financial institution in March 2013 also failed to draw sufficient scrutiny, prosecutors claimed. Tucker told CSCM that he made the payment to cover tax obligations.
“CSCM employees were presented … with two AML [anti-money laundering] rule violations triggered by the transaction,” prosecutors wrote in an 8-page statement of facts attached to the case. “CSCM processed the wire without investigating the violations or reporting the wire to the appropriate authorities.”
The broker-dealer did not review any of the 103 alerts of potentially suspicious transactions over a four-year period, prosecutors claimed.
But the bank’s relationship with Tucker did not go unnoticed by CSCM’s clearing firm, which prosecutors did not identify by name.
In a March 2013 conference call with CSCM, the firm’s AML staff questioned why Tucker’s lending companies would use a small bank in Florida to keep more than $200 million in cash generated elsewhere. A relationship manager for the tribal accounts emailed Tucker afterwards, assuring him that CSCM gave the clearing firm “very generic” answers.
“Other than disclosing that these were tribal accounts we did not get into the nature of their business,” the relationship manager told Tucker. “Had they asked we would have been as brief as possible in our description.”
The clearing firm told CSCM after the call that staff would not clear any transactions linked to Tucker or the tribal accounts “until it had time to consider the AML concerns raised.” CSCM, whose chief executive also served as head of AML, appears to have ignored that decision, allowing roughly $82 million in additional transfers into the accounts in question.
“What really stands out is, to the extent that they did ask questions, they relied on self-serving statements without any independent verification,” Bao Nguyen, a former examiner for the Financial Industry Regulatory Authority, told ACAMS money laundering.com. “Broker-dealers are going to realize it’s not just regulatory risk they have.”
New developments raised the stakes for both firms.
Within a month of the conference call, the clearing firm informed CSCM that it was closing all accounts linked to Tucker after learning of his 1991 fraud conviction and the Federal Trade Commission’s then-ongoing lawsuit against him for tricking clients and charging exorbitant fees.
“CSCM, including its CEO, did not act upon these red flags,” prosecutors said Wednesday. “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.”
The company did not take long to find a new custodian for Tucker’s accounts, and continued working with the racecar driver until February 2016, the month of his indictment.
CSCM said in a statement Wednesday that it has worked for the past two years to improve its compliance program, including by hiring a full-time AML director.
The company filed a suspicious activity report related to Tucker’s scheme this month, more than a year after his conviction and more than six years after beginning the relationship.