Kathy Bazoian Phelps
Senior Counsel in Ponzi Scheme Litigation
and Bankruptcy Matters

Kathy is a senior business trial attorney with more than 30 years experience prosecuting and defending claims for high net worth clients involved in Ponzi scheme matters and in bankruptcy proceedings. Kathy’s practice includes recovering assets for clients in complex fraud cases under standard fee and alternative fee arrangements. She also handles SEC and CFTC whistleblower claims. Kathy also serves as a mediator in bankruptcy matters, in complex business disputes, and in matters requiring detailed knowledge about fraud or Ponzi schemes.

Kathy’s Clients in Ponzi Scheme Cases and Bankruptcy Matters
Equity Receivers
Bankruptcy Trustees
High Net Worth Investors
Debtors in Bankruptcy
Secured and Unsecured Creditors

Saturday, October 26, 2013

Banks, Please File Your Suspicious Activity Reports and Help Stop Ponzi Schemes!

Posted by Kathy Bazoian Phelps

   People are not supposed to launder money. Banks are not supposed to let people launder money. Yet, both things keep happening.

   With a number of recent high-profile mistakes made by financial institutions, the government is cracking down. It’s getting ugly out there. Fines, penalties, and possible prison sentences are all in play. Yet, is this enough to prompt banks into diligent action?

   In just the past month, several banks have been slapped with some sizable penalties, and criminal charges are being contemplated:

  • JPMorgan Chase is the target of an investigation right now where both civil monetary and criminal charges are being discussed as a result of the bank’s failure to detect and report the Bernard Madoff Ponzi scheme. JPMorgan Chase handled the banking for Madoff beginning in 1986 and, despite internal emails expressly stating concerns that Madoff was running a Ponzi scheme, JPMorgan did not file a report of suspicious activity until October 2008, only two months before Madoff confessed to the nearly $20 billion Ponzi scheme. It has been reported that JPMorgan is in discussions with the government to enter into a deferred prosecution agreement that would suspend criminal charges against JPMorgan in exchange for a large fine.
  • TD Bank was assessed a civil penalty in the amount of $37.5 million by the Financial Crimes Enforcement Network (FinCEN) and Office of Comptroller of the Currency (OCC) for its failure to file suspicious activity reports in connection with the handling of the bank accounts of Scott Rothstein and the Ponzi scheme run through Rothstein’s law firm. TD Bank also agreed to settle SEC charges in an administrative proceeding by paying another $15 million. FinCEN said TD Bank “did not do enough to prevent the pain and financial suffering of innocent investors.” OCC said, “The failures to file SARs were significant and egregious for a number of reasons.” Those reasons included the number of alerts generated on the accounts and the velocity of funds that flowed through them.
  • Saddle River Valley Bank was assessed a $4.1 million penalty by FinCEN and another $4.1 million penalty by the OCC, to be satisfied by a single payment of $4.1 million, and was also the subject of a civil asset forfeiture of $4.1 million by the U.S. Attorney’s Office for the District of New Jersey. The bank was charged with Bank Secrecy Act violations and had failed to timely file 190 SARs, most of which reported back to a single individual.

   The Bank Secrecy Act clearly requires banks to file suspicious activity reports (SARs) for, among other things, any transaction involving at least $5,000 and that the bank “knows, suspects, or has reason to suspect”:

  • “involves funds derived from illegal activities or is intended or conducted in order to hide or disguise funds or assets derived from illegal activities . . .”
  • “is designed to evade any regulations promulgated under the Bank Secrecy Act”; or
  • “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 institution knows of no reasonable explanation for the transaction after examining the available facts, including the background and possible purpose of the transaction.”

   Ponzi schemes, by definition, involve at least some, if not all, of this kind of activity. Once a suspicion arises, a SAR must be filed.

   The FinCEN website reports that 507,217 SARs were filed in 2003, and that number grew to 1,582,879 in 2012. Is that growth because more criminal activity is taking place, or because more financial institutions are complying with the Bank Secrecy Act requirements? Or has the number of filed SARs increased because of the threat of civil and criminal penalties for failure to file SARs? 

   FinCEN reports enforcement actions on its website at www.fincen.gov/news_room/ea/, making a public display of its enforcement actions. However, not all regulatory agencies make such information publicly available. 

   Given the ongoing failure of financial institutions to file SARs in what seem like obviously suspicious circumstances, one must question whether the existing threat of monetary penalties and criminal liability is enough to encourage banks into action to actively and aggressively comply with the Bank Secrecy Act and report suspicious activity.

   Some politicians don’t think so. Just this past week, House Financial Services Committee Ranking Democrat Maxine Waters (D-Calif.) introduced a bill in the House, entitled the Holding Individuals Accountable and Deterring Money Laundering Act (H.R. 3317), to toughen penalties for violation of anti-money laundering laws. For example, the legislation would raise the maximum prison sentence for willfully evading an institution’s Bank Secrecy Act program or controls to 20 years from the five year cap. It also includes a requirement that the Justice Department explain to Congress “why it did or did not pursue prison sentences” when it settles an anti-money laundering probe for a financial penalty. Additional provisions would give FinCEN the authority to litigate on its own and to establish a FinCEN whistleblower program similar to the SEC’s program.

   What is clear is that when a bank violates its duties to report fraud and file suspicious activity reports, there are negative consequences – both for the bank and for defrauded victims. The banks are paying fines and may find their officers serving prison time. But it is the investors who really suffer for a bank’s lack of diligence which, in some cases, can allow a Ponzi scheme run for decades right under its nose.

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