Company Settles With The SEC For Allegedly Failing To File Required Suspicious Activity Reports
07/10/2018On July 2, 2018, the Securities and Exchange Commission (“SEC”) filed a one-count complaint in District Court for the Northern District of California against Charles Schwab Corp. (“Schwab” or the “Company”) for allegedly failing to file suspicious activity reports (“SARs”) on questionable transactions by its investment advisers. Securities and Exchange Commission v. Charles Schwab & Co, Inc., No. 18-cv-3942 (July 2, 2018). The same day, without admitting or denying the SEC’s findings, the Company consented to an entry of judgment through which agreed to pay the SEC a civil penalty of $2.8 million. Final Judgment, Securities and Exchange Commission v. Charles Schwab & Co, Inc., No. 18-cv-3942 (July 2, 2018).
Pursuant to the Bank Secrecy Act (“BSA”) and the rules promulgated thereunder, investment advisers are required to file SARs for transactions of at least $5,000 where they know or have reason to believe that the transaction (i) involves funds derived from illegal activity, (ii) was designed to evade BSA requirements, (iii) had no business or lawful purpose, or (iv) facilitated criminal activity. 31 C.F.R. § 1023.320.
The SEC alleged that in 2012 and 2013, the Company failed to file SARs for transactions that the Company suspected might be illegal or posed risks to it and its customers. Specifically, the SEC alleged that, in those two years, the Company ended business relationships with 83 independently contracted investment advisors after concluding that the advisors had violated the company’s internal policies and presented a risk to the Company or its customers. According to the SEC’s complaint, the Company had reason to believe that 47 of those advisors engaged in suspicious transactions; however, the Company filed SARs related to only 10 of them, and SARs for three of those ten were only filed after the SEC brought an enforcement action against the advisor. According to the SEC, the 37 advisors for which the Company did not file SARs represented a combined total of over $840 million in assets under management and at least 6,500 subaccounts at the Company.
It appears that the SEC’s complaint was prompted, at least in part, by its view that throughout the relevant period the Company inconsistently implemented internal policies and procedures for identifying and reporting transactions. Indeed, it appears that the SEC concluded that the Company did not merely make good faith errors in judgment in isolated instances but, rather, failed to have a systemic approach for determining when to file, and when not to file, SARs.
The case thus serves as a reminder to investment advisors, and broker-dealers, that anytime an employee is terminated or relationship severed over perceived suspicious activity, a thorough review must be undertaken to determine whether SAR filings are appropriate.CATEGORY: Regulatory Enforcement Matters