SEC Charges Trading Platform for Failing to File Suspicious Activity Reports

The Case

The US Securities and Exchange Commission (SEC) has charged a trading platform operating in the over-the-counter (OTC) securities market for failing to comply with the Bank Secrecy Act (BSA) by not filing required Suspicious Activity Reports (SARs). 

The SEC’s order alleges that despite using an automated surveillance system to flag suspicious transactions,the platform did not allocate sufficient resources to investigate or report these transactions as mandated by law. Consequently, the SEC has imposed a $1.19 million fine and mandated additional reporting requirements.

Under the BSA, broker-dealers are required to file SARs for transactions involving $5,000 or more that meet certain criteria, such as involving funds derived from illegal activity, being designed to evade BSA requirements, lacking an apparent lawful purpose, or facilitating criminal activity. The Financial Industry Regulatory Authority (FINRA) has also provided a more detailed list of red flags to watch for, as outlined in FINRA Regulatory Notice 19-18.

Regulatory Implications

The SEC’s order reveals that the trading platform’s automated surveillance system flagged over 1,800 alerts for potentially suspicious transactions in the first six months of 2021—approximately 300 alerts per month. 

However, the platform’s compliance team only allocated about five hours per month to review these alerts. This insufficient oversight led to to a failure to investigate the flagged transactions and report them to the Financial Crimes Enforcement Network (FinCEN) as SARs.

According to the SEC, had the platform properly surveilled these transactions, it would have identified several concerning patterns, including:

1. High Volumes of Thinly-Traded, Low-Priced Securities: These securities are often associated with manipulative trading schemes.
   
   

2. Sudden Spikes in Investor Demand: Accompanied by a rising or falling price in thinly-traded, low-priced securities, such spikes can indicate manipulative activities.
   
   

3. Suspicious Trading Activity: This includes manipulative, pre-arranged, or wash trading activities designed to distort the market.
   
   

4. Subscribers with Known Criminal or Regulatory Histories: Some subscribers were publicly known to have been involved in criminal, civil, or regulatory actions related to crimes, corruption, or misuse of public funds.

These red flags, the SEC argues, could have been detected if the platform had a more robust compliance program.

Practical Guidance for Firms

The SEC’s enforcement action emphasizes the necessity of having adequate compliance resources and systems to effectively monitor for suspicious activity. To avoid similar regulatory scrutiny, firms should consider the following steps:

1. Allocate Adequate Compliance Resources: Having automated systems is only one part of the equation. Firms must allocate enough skilled staff to review and investigate alerts generated by these systems. 
   
   

2. Enhance Surveillance and Monitoring Programs: Firms should ensure that their surveillance systems are capable of detecting suspicious activities, from unusual trading patterns to customers with histories of criminal or regulatory issues. 
   
   

3. Regularly Review Compliance Programs and Provide Training: Firms should regularly review their compliance programs to identify and close gaps in their SAR reporting processes. 
   
   

4. Engage Third-Party Compliance Consultants: Following the SEC examination, the trading platform increased its compliance staff and hired a third-party consultant to review its AML program. 

InnReg has been a trusted partner for financial firms since 2013, helping them develop and enhance their Anti-Money Laundering (AML) compliance programs. Our compliance consulting services empower firms to establish internal controls, perform independent reviews, and provide continuous training and development for compliance teams.