Securities Regulation Daily Failure to report suspicious money-laundering activity exacts heavy price
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Wednesday, May 16, 2018

Failure to report suspicious money-laundering activity exacts heavy price

By Rebecca Kahn, J.D.

A registered broker, its AML officer, and a clearing bank have settled SEC charges of failing to report suspicious liquidations of billions of penny stocks for seven customers within a nine-month period. Charged with violating the anti-money laundering provision of the Exchange Act for failing to file Form SAR, the broker, officer, and bank have agreed to pay penalties of $1 million, $15,000, and $860,000 respectively (In the Matter of Chardan Capital Markets, LLCRelease No.34-83251, and In the Matter of Jerard BasmagyRelease No 34-83252In the Matter of Industrial and Commercial Bank of China Financial Services, LLCRelease No. 34-83253, May 16, 2018).

The SEC charged broker-dealer Chardan Capital Markets, LLC, its anti-money laundering (AML) officer, Jerard Basmagy, and Industrial and Commercial Bank of China Financial Services LLC (ICBC) with failing to file Suspicious Activity Reports (SARs). Broker-dealers are required to file SARs for transactions suspected to involve fraud or with no apparent lawful purpose. But Chardan failed to file any SARs after liquidating 12.5 billion penny stock shares for seven customers in the period from October 2013 to June 2014. These transactions raised red flags specifically listed in Chardan’s own AML policies, including "heavy trading in low-priced securities" and large-volume trading that should trigger internal reviews and SAR filings.

ICBC, the bank that cleared the transactions, raised multiple concerns with Chardan about customers trading in low-priced securities. In June 2014, ICBC ceased clearing penny stock trades, and Chardan withdrew from the penny stock business.

Chardan. The SEC found that Chardan knew or had reason to suspect that certain of the seven customers were engaged in fraudulent activity based on other red flags listed in their own anti-money laundering policies and procedures. These included the background and identity of the customers, trading suspensions in certain issuers that were the subject of prior trading by the customers, and numerous regulatory inquiries received after May 2014 regarding certain of the customer’s trading. Chardan therefore violated Exchange Act Section 17(a) and financial recordkeeping and reporting rules thereunder. Without admitting or denying these findings, Chardan agreed to settle with a censure and payment ofa $1 million penalty.

ICBC. The SEC found that ICBC failed to produce its documents promptly upon request and also failed to file any SARs for the transactions despite ultimately prohibiting trading in penny stocks by some of the seven customers. It was also found to have violated the Exchange Act Section 17(a) and its rules. Without admitting or denying these findings, ICBC agreed to settle with a censure and penalty payment of $860,000.

ICBC’s$5.3 million settlement with FINRA. The SEC’s investigation was conducted in conjunction with a broader inquiry by FINRA into ICBC’ santi-money laundering program and alleged financial, recordkeeping, and operational violations. FINRA charged that from January 2013 through September 2015, ICBC cleared and settled the liquidation of more than 33 billion penny stock shares, generating $210 million for its customers. FINRA has announced that ICBC agreed to pay a $5.3 million penalty and to retain an independent compliance consultant.

Basmagy. Chardan’s policies required its chief compliance/AML officer to investigate potential red flags, monitor trading for patterns of suspicious activity, and file SARs. The SEC found that Basmagy aided and abetted and caused the firm’s violations. Without admitting or denying the findings, he agreed to a $15,000 penalty as well as industry and penny stock bars for at least three years.

The releases are No. 34-83251 (Chardan), No. 34-83252 (Basmagy), No. 34-83253 (ICBC).

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