Compliance Officers: Law Enforcement Partners or Targets?

Part One of this article examines key actions brought by U.S. regulators against compliance officers in 2017 based on their failures to ensure that their firms maintain effective compliance and AML programs. Part Two, next month, will provide reasons for why we believe regulators will continue to investigate and bring similar actions against compliance officers in 2018, and will conclude with suggestions for compliance officers to mitigate their criminal and regulatory personal liability risk.

Key Actions by U.S. Regulators Against Compliance Officers in 2017

In 2017, U.S. regulators brought several actions against compliance officers based on their failures to ensure that their firms' compliance and AML programs effectively detect and prevent money-laundering activity. In a potential bellwether case that illustrates the risk of personal liability facing compliance officers in the area of BSA/AML compliance, on May 4, 2017, the U.S. Attorney's Office for the Southern District of New York and the Financial Crimes Enforcement Network (FinCEN) announced the settlement of claims under the BSA against Thomas E. Haider, the former Chief Compliance Officer and head of the Fraud Department of MoneyGram International, Inc. See, Press Release, Department of Justice (DOJ), Acting Manhattan U.S. Attorney Announces Settlement of Bank Secrecy Act Suit Against Former Chief Compliance Officer at Moneygram for Failure to Implement and Maintain an Effective Anti-Money Laundering Program and File Timely SARS (May 4, 2017). Under the settlement, which resolved claims that Haider was liable under the BSA for failing to ensure that MoneyGram implemented and maintained an effective AML program and filed timely suspicious activity reports (SARs) with FinCEN, Haider agreed to a three-year injunction barring him from performing a compliance function for any money transmitter and a $250,000 penalty. Id.

MoneyGram operated a money transfer service that enabled its customers to transfer money from one MoneyGram outlet to another in the U.S. and abroad through the company's global network of agents and outlets. Id. The DOJ's and FinCEN's claims against Haider, personally, followed the DOJ's investigation into certain conduct engaged in by MoneyGram from 2003 to 2009 and allegations that during that time the company willfully failed to maintain an effective AML program, in violation of the BSA. On Nov. 9, 2012, MoneyGram entered into a deferred prosecution agreement with the DOJ on these charges. See, Press Release, DOJ, Moneygram International Inc. Admits Anti-Money Laundering and Wire Fraud Violations, Forfeits $100 Million in Deferred Prosecution (Nov. 9, 2012).

The factual basis of the DOJ's and FinCEN's settlement with Haider was not that he personally engaged in money-laundering activity while employed as MoneyGram's CCO; rather, Haider was held accountable for violations of the BSA rules requiring the establishment of effective AML programs for, among other things: 1) failing to implement a policy for terminating MoneyGram outlets that presented a high risk of fraud; 2) failing to terminate specific outlets after being presented with information that strongly indicated that the outlets were complicit in consumer fraud schemes; 3) structuring MoneyGram's AML program so that information related to the company's agents and outlets that was aggregated by the company's fraud department was generally not provided to MoneyGram analysts who were responsible for filing SARs or to MoneyGram's AML compliance department; and 4) failing to conduct adequate audits of several outlets that the company's fraud department identified as having accumulated a disproportionate number of consumer fraud reports. This action is also notable for the cooperation between the DOJ and FinCEN, which may be a sign of increased cooperation between the two agencies in the area of BSA/AML enforcement. In announcing the settlement, the then-Acting U.S. Attorney for the SDNY, Joon H. Kim, stated that the DOJ is “committed to working with FinCEN to enforce the requirements of the Bank Secrecy Act and to hold individuals like Haider accountable.”

On Feb. 14, 2017, in another action against a compliance officer based on his failure to ensure that his firm maintained an effective AML compliance program, the U.S. Federal Deposit Insurance Corporation (FDIC) resolved its investigation against Banamex USA's former CCO, Donald Noseworthy. Donald Noseworthy, FDIC-16-0148e, 2007 WL 1550287 (Feb. 14, 2014). The FDIC determined that Noseworthy's “actions or inactions caused” Banamex to violate the BSA and its implementing regulations. The agency therefore prohibited him from further participation in the conduct of the affairs of any financial institution and ordered him to pay a civil monetary penalty of $70,000. Id.

Banamex, a state-chartered bank based in Los Angeles, CA, provided U.S. dollar products and services to high-net-worth and commercial customers in Mexico. The FDIC's case against Noseworthy stemmed from the DOJ's investigation of Banamex's remittance practices, and allegations that the bank violated the BSA by willfully failing to maintain an effective AML compliance program and failing to file SARs. On May 22, 2017, the DOJ and Banamex entered into a non-prosecution agreement in which Banamex admitted that, from 2007 through 2012, while its monitoring system issued more than 18,000 alerts involving more than $142 million in potentially suspicious remittance transactions to Mexico, the bank conducted fewer than 10 investigations and filed only nine SARs in connection with these alerts. See, Press Release, DOJ, Banamex USA Agrees to Forfeit $97 Million in Connection with Bank Secrecy Act Violations (May 22, 2017). Banamex further admitted that, for several years, it recognized the need to enhance its monitoring of MSB remittances, but failed to do so. Id. Banamex employed only a limited and manual transaction-monitoring system that produced paper reports that were to be reviewed by hand by two employees assigned to perform the BSA functions of the bank while also assigned to other time-consuming non-BSA activities. Id. In addition, as Banamex began to expand its remittance practices in 2006, the bank again understood the need to enhance its AML efforts, but it again failed to make the necessary improvements to its transaction monitoring controls and failed to add staffing resources. Id.

The SEC brought several actions against compliance officers in 2017 as well, including an action based on a compliance officer's failure to ensure that his firm filed SARs in accordance with applicable BSA/AML rules. On Jan. 25, 2017, the SEC initiated proceedings against Meyers Associates, L.P. (now known as Windsor Street Capital, L.P.) and its former CCO and AML officer, John David Telfer, for, among other things, violations of Section 17(a) of the Securities Exchange Act and Rule 17a-8 thereunder, for failing to file SARs with FinCEN. Windsor Street Capital, L.P. (f/k/a Meyers Associates, L.P.), Securities Act Release No. 10293, 2017 WL 371865 (Jan. 25, 2017). According to the SEC's settled order as to Telfer, Meyers Associates failed to file SARs for approximately $24.8 million in suspicious transactions. Windsor Street Capital, L.P. (f/k/a Meyers Associates, L.P.), Exchange Act Release No. 80908, 2017 WL 2546616, at 2 (June 12, 2017). These transactions were marked by numerous red flags suggesting that certain of Meyers Associates' customers may be involved in fraudulent “pump and dump” schemes, including: 1) promotional activity; 2) trading into sudden spikes in price and volume; and 3) coordinated deposit and trading between one or more customers' accounts. Id. at 3.

The SEC's settled order stated that, as Meyers Associates' AML officer, Telfer “was personally responsible for ensuring the firm's compliance with SAR reporting requirements,” but he failed to fulfill these responsibilities, even though certain red flags were brought directly to his attention. Id. at 2-3. The settled order found that Telfer “willfully aided and abetted and caused Meyers Associates' violations of Section 17(a) of the Exchange Act and Rule 17a-8 thereunder.” Id. at 3. In resolving the matter, Telfer consented to an associational, industry, and penny stock bar, and a civil monetary penalty of $10,000. Id. at 4.

In addition to its action against Meyers Associates and Telfer, the SEC brought several other actions against compliance officers in 2017 for inaccurate or false regulatory filings and failure to maintain compliance programs required under the Investment Advisers Act. See, Consulting Services Group, LLC, Exchange Act Release No. 56612, 2007 WL 2875634 (Oct. 4, 2007) (permanently barring former CCO of investment adviser from employment in a compliance capacity in the securities industry and imposing $10,000 penalty, for, among other things, willfully aiding and abetting and causing his firm's failures to adopt a timely code of ethics and adopt and implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act and the rules thereunder by its supervised persons); David I. Osunkwo, Exchange Act Release No. 81405, 2017 WL 3485800 (Aug. 15, 2017) (barring former CCO of affiliated registered investment advisers from holding any position in the securities industry for one year and imposing $30,000 penalty for, among other things, filing a Form ADV that contained false information provided to him by the Chief Investment Officer without taking sufficient steps to verify the accuracy of the information); Susan M. Diamond, Exchange Act Release No. 79848, 2017 WL 218849 (Jan. 19, 2017) (permanently barring former CCO of exempt reporting adviser from employment in the securities industry in a compliance capacity and imposing a $15,000 penalty for preparing and filing Form ADVs that falsely represented that three private funds advised by the former CCO's firm had undergone annual audits, that audit reports were prepared in accordance with GAAP, and that audited financial statements would be distributed to investors).

In Part Two, we will discuss what we can expect from regulators as the year progresses, and we'll consider ways for compliance officers to potentially reduce their exposure to criminal and regulatory liability.

***** Jonathan B. New and Patrick T. Campbell are both partners in the New York office of BakerHostetler's White Collar, Investigations and Securities Enforcement and Litigation Team. Mr. New is also a member of the Board of Editors of this newsletter. The views expressed in this article are those of the authors and not necessarily those of BakerHostetler or its clients.