SEC Charges Charles Schwab With Failing to File Suspicious Activity Reports for Questionable Transactions

The Bank Secrecy Act (BSA) of 1970 requires U.S. financial institutions to cooperate with the U.S. government to report cases of suspected fraud, money laundering, and a range of other suspicious transactions not involving the outright misappropriation or misuse of client funds. This legislation requires broker-dealers to report any and all suspicious transactions through the filing of Suspicious Activity Reports (SARs) that occur during their firm's business activities. This month, we are reviewing the charges levied against Charles Schwab in late July, so that we can venture into key takeaways and lessons learned. In Litigation Release No. 24189, reported on July 9, 2018, the SEC reported a number of events whereby Charles Schwab allegedly failed to file SARs related to questionable activities. During 2012 and 2013, 83 independent investment advisers associated with Charles Schwab were dismissed. The terminated advisers were barred from using Schwab to custody client accounts for engaging in business activities that posed what they believed to be significant risks to the parent firm or to its investors. The U.S. Securities and Exchange Commission ("SEC") recently found that at least 47 of the advisers that were dismissed had not only engaged in suspicious activities, but Schwab allegedly had knowledge of, or had reason to believe that, such suspicious activities were taking place involving such advisers, whether or not the client involved filed a complaint with the firm. Worsening the situation, Schwab failed to file required SARS on questionable transactions by advisers who had been dismissed. The SEC found 37 counts of wrongdoing including:

• Conflicts of interest
• Charging inflated or excessive fees
• Fraudulent transactions under client accounts
• Falsely posing as the client to approve or confirm transactions
• Executing trades without the proper registration or licensure

The SEC has filed a formal complaint that Schwab violated Section 17(a) and Rule 17a-8 of the Securities Exchange Act of 1934 by failing to consistently apply policies and procedures involving the filing of SARs. According to an article published by Reuters on these events, suspicious activities included, "$295,000 wired to an adviser who soon afterward bought a home for himself, and trades by an adviser who used his clients' passwords instead of his own." Without admitting or denying the allegations, Schwab has subsequently agreed to settle the action by consenting to an order for settlement. The settlement includes a permanent injunction and a civil penalty amounting to $2.8 million.

Lessons Learned: The Importance of Suspicious Activity Reports

The lesson this particular case teaches is that it pays to be vigilant. This case highlights the extreme importance of reporting any and all suspicious activities by filing the federally mandated SARs. If you find yourself in a questionable situation involving possible fraud or wrongdoing, the best course of action is to file the appropriate SAR immediately. Jacko Law Group (JLG) provides legal consulting and strategy development services to help our clients establish effective written policies, procedures, and internal controls with a practical, systematic approach toward compliance, as well as ongoing legal support for any new issues that arise.