Geoffrey S. Berman, the United States Attorney for the Southern District of New York, announced criminal charges against Central States Capital Markets, LLC (“CSCM”), consisting of one felony violation of the Bank Secrecy Act (“BSA”), based on CSCM’s willful failure to file a suspicious activity report (“SAR”) regarding the illegal activities of its customer Scott Tucker.  Today’s charge represents the first criminal BSA charge ever brought against a United States broker-dealer.  The case is assigned to United States District Judge Paul J. Oetken.  

Mr. Berman also announced an agreement (the “Agreement”) under which CSCM agreed to accept responsibility for its conduct by stipulating to the accuracy of an extensive Statement of Facts, pay a $400,000 penalty, and continue to enhance its BSA/Anti-Money Laundering (“AML”) compliance program.  Assuming CSCM’s continued compliance with the Agreement, the Government has agreed to defer prosecution for a period of two years, after which time the Government will seek to dismiss the charges.  The penalty shall be collected through CSCM’s forfeiture to the United States of $400,000 in a civil forfeiture action also filed today.

U.S. Attorney Geoffrey S. Berman stated:  “CSCM’s anti-money laundering program was operated with serious gaps in oversight, responsiveness, and diligence.  As a result, CSCM failed to investigate and report suspicious transactions relating to a historically significant pay-day lending fraud.  With today’s resolution, CSCM has accepted responsibility for its criminal conduct and committed to completing the reform of its anti-money laundering program.  Today’s charge makes clear that all actors governed by the Bank Secrecy Act – not only banks – must uphold their obligations to protect our economy from exploitation by fraudsters and thieves.”

According to the documents filed today in Manhattan federal court:

The Tucker Payday Lending Scheme

On October 13, 2017, Scott Tucker and his attorney, Timothy Muir, were convicted after trial in the United States District Court for the Southern District of New York of racketeering, wire fraud and money laundering for their roles in perpetrating a massive payday lending scheme.  As the jury found, from in or about the late 1990s through in or about 2013, through various companies that he owned and controlled (the “Tucker Payday Lenders”), Tucker extended short-term, high-interest, unsecured loans, commonly referred to as “payday loans,” to individuals around the country at interest rates as high as 700% or more and in violation of the usury laws of numerous states, including New York.  Tucker sought to inoculate himself against applicable usury laws by entering into a series of sham relationships with certain Native American tribes (the “Tribes”) in order to conceal his ownership and control of the Tucker Payday Lenders and gain the protection of tribal sovereign immunity – a legal doctrine that generally prevents states from enforcing their laws against Native American tribes.  To effectuate his scheme, Tucker assigned nominal ownership of his payday lending companies to certain corporations created under the laws of the tribes (the “Tribal Companies”).

CSCM’s Willful Failure to File a SAR in Violation of the BSA

CSCM failed to follow its written customer identification procedures and did not act upon red flags prior to opening investment accounts for the Tribal Companies, which were in fact controlled by Tucker.  CSCM discussed opening these accounts exclusively with Scott Tucker and his brother Blaine (the “Tuckers”).  Although CSCM received account opening documents signed by tribal officials granting only Blaine Tucker authorization over the accounts, CSCM routinely dealt with and took direction from Scott Tucker concerning the management of funds in the Tribal Companies’ accounts based solely on Scott Tucker’s oral assertions that he was a “consultant” to the Tribes.  At no point did CSCM obtain written verification of Tucker’s authority over the accounts.

CSCM also disregarded red flags that were known prior to opening the accounts.  In March 2012, Tucker explained to the CEO that he was involved in the payday lending business and that he had approached certain Native American tribes to operate the payday lending business in order to take advantage of the tribes’ sovereign immunity.  Tucker further explained that the payday lending business had generated large cash reserves and that he was approaching CSCM because the business’s existing bank, a small bank based in Florida (the “Florida Bank”), had asked Tucker to move excess accumulations of cash because of certain regulatory requirements it was unable to meet.  Neither the CEO, nor anyone at CSCM, attempted to verify this explanation.

Shortly thereafter, CSCM also became aware of additional red flags concerning the Tuckers and the Tribal Companies.  Specifically, CSCM learned that Tucker had been convicted of fraud in 1991 and, separately, found news reports from as early as 2011 alleging that the Tuckers were engaging in a “rent-a-tribe” scheme in which the Tribal Companies were used by the Tuckers to claim ownership and control over the payday lending businesses in order to exploit the Tribal Companies’ ability to assert sovereign immunity as a defense to charges that the payday lending business violated state usury laws.  CSCM also became aware of an action brought by the Federal Trade Commission (“FTC”) against the Tuckers and the Tribal Companies, among others, for engaging in unfair business practices, which included allegations that the Tribal Companies were not protected by sovereign immunity.  CSCM, including its CEO, did not act upon these red flags because 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.

In addition to ignoring these various warning signals, CSCM failed to monitor any transactions using Actimize, the AML tool provided to CSCM for that purpose.  Between December 2011 and December 2015, Actimize generated 103 alerts, but CSCM never checked any of the alerts, made any attempt to customize Actimize’s default parameters, or undertook a review to ensure that this tool was sufficient for its specific monitoring needs or was being appropriately utilized.  Further, although the Clearing Firm furnished CSCM with the ability to generate a report reflecting, among other things, the identities of third parties transferring funds via wire transactions to CSCM account holders, CSCM never generated such reports.

Numerous suspicious transactions went undetected and unreported by CSCM.  For example, between December 21, 2012, and March 13, 2013, 18 wire transfers totaling $40,518,000 were sent from accounts at the Florida Bank in the names of Tribal Companies to Tucker’s personal CSCM account.  The transfers were in even dollar amounts, and on several occasions two different Tribal Companies, associated with different tribes, transferred the same dollar amounts, on the same day, to Tucker’s personal CSCM account.  CSCM never asked Tucker or the Tribal Companies about any of these transactions.

Despite producing documents in connection with this Office’s criminal investigation and its awareness of the indictment against Tucker, CSCM did not file a SAR until long after Tucker was convicted at trial. 

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The Government intends to recommend that the amounts forfeited by CSCM be distributed to victims of Tucker’s scheme, consistent with the applicable Department of Justice regulations, through the ongoing remission process.

Mr. Berman praised the outstanding investigative work of the Special Agents at the United States Attorney’s Office and thanked the Securities and Exchange Commission for its assistance with the investigation.

The prosecution is being handled by the Office’s Money Laundering and Transnational Criminal Enterprises Unit.  Assistant U.S. Attorney Andrew C. Adams is in charge of the prosecution.