Enforcement News: Broker-Dealers Settle Charges for Filing Deficient SARs

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Posted on: Nov 25 2024

The Bank Secrecy Act (“BSA”) and implementing regulations promulgated by the U.S. Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) require that broker-dealers file a suspicious activity report (SAR”) with FinCEN to report a transaction (or a pattern of transactions of which the transaction is a part) conducted or attempted by, at, or through the broker-dealer involving or aggregating to at least $5,000 that the broker-dealer knows, suspects, or has reason to suspect: (1) involves funds derived from illegal activity or is intended or conducted to disguise funds derived from illegal activities; (2) is designed to evade any requirement of the BSA; (3) has no business or apparent lawful purpose or is not the sort in which the particular customer would normally be expected to engage, and the broker-dealer knows of no reasonable explanation of the transaction after examining the available facts, including the background and possible purpose of the transaction; or (4) involves use of the broker-dealer to facilitate criminal activity.[1] Broker-dealers are required to file a SAR no later than thirty (30) calendar days after the date of the initial detection of facts that may constitute a basis for filing a SAR under the SAR Rule.[2] In cases where the broker-dealer cannot identify a suspect on the date of initial detection, it must file the SAR within sixty (60) calendar days of the initial detection of facts that may constitute a basis for filing a SAR.[3]

FinCEN’s instructions for filing SARs require that the SAR narrative contain “a clear, complete, and concise description of the activity, including what was unusual or irregular that caused suspicion” and to “include any other information necessary to explain the nature and circumstances of the suspicious activity.”[4] As noted by FinCEN, to be effective tools and fulfill their intended purpose, SAR narratives must generally “identify the five essential elements of information—who? what? when? where? and why?—of the suspicious activity being reported” and must include a “summary of the ‘red flags’ and suspicious patterns of activity that initiated the SAR.”[5] Thus, when a SAR is filed “it must include information about each of the Five Essential Elements of the suspicious activity.”[6] When a SAR “lack[s] basic information regarding the Five Essential Elements … [the] SAR [i]s deficient as a matter of law.”[7]

Rule 17a-8 promulgated by the Securities and Exchange Commission (“SEC” or Commission”) under Section 17(a) of the Securities Exchange Act of 1934 (“Exchange Act”) requires broker-dealers registered with the Commission to comply with the reporting, recordkeeping, and record retention requirements of Chapter X of Title 31 of the Code of Federal Regulation, which contains the SAR Rule and other requirements. Failing to file complete and sufficient SAR narratives as required by the SAR Rule is a violation of Section 17(a) of the Exchange Act and Rule 17a-8 thereunder.[8]

[Eds. Note: This Blog examined enforcement actions involving SARs here, here, and here.]

On November 22, the SEC announced (here) that broker-dealers Webull Financial LLC, Lightspeed Financial Services Group LLC, and Paulson Investment Company, LLC agreed to settle charges that they filed with law enforcement SARs that failed to include important, required information. The three broker-dealers agreed to pay $275,000 combined in civil penalties to settle the SEC’s charges.

According to the SEC orders, each of the three broker-dealers filed multiple deficient SARs over a four-year period beginning in 2018 (here, here, and here).

Commenting on the enforcement actions and settlements, Jason Burt, Director of the SEC’s Denver Regional Office, stated: “Suspicious activity reports play a vital role in keeping our markets safe, and the failure of broker-dealers to include necessary information to explain suspicious transactions deprives law enforcement and regulatory agencies of valuable and timely intelligence, undermining the very purpose of the SARs. Today’s cases reinforce the importance of complying with the applicable regulations and guidance surrounding the filing of SARs.”

The SEC’s orders found that the broker-dealers violated Section 17(a) of the Exchange Act and Rule 17a-8 thereunder. Without admitting or denying the findings, the firms agreed to be censured, cease and desist from violating the charged provisions, and pay civil penalties totaling $275,000. Further, Webull Financial LLC and Paulson Investment Company, LLC agreed to undertake a review of their anti-money-laundering programs by compliance consultants. According to the SEC, the resolutions with each firm reflect their cooperation after being contacted by Commission staff, as well as certain remedial measures taken by Lightspeed.

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Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

[1] 31 C.F.R. § 1023.320(a)(2) (the “SAR Rule”).

[2] 31 C.F.R. § 1023.320(b)(3).

[3] Id.

[4] FinCEN Suspicious Activity Report Electronic Filing Requirements (October 2012 and August 2021).

[5] FinCEN Guidance on Preparing a Complete and Sufficient Suspicious Activity Report Narrative (November 2003).

[6] See SEC v. Alpine Sec. Corp., 308 F. Supp. 3d 775, 791, 804 (S.D.N.Y. 2018), aff’d, 982 F.3d 68 (2d Cir. 2020), cert. denied, Alpine Sec. Corp. v. SEC, 142 S. Ct. 461 (2021).

[7] Id. at 800.

[8] See Alpine Sec. Corp., 308 F. Supp. 3d at 798-807.