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In US capital markets, the wheels of justice turn slowly and grind out exceedingly small fines.
Late on Monday the Securities and Exchange Commission charged US broker-dealer OTC Link, one of the larger US alternative trading systems, with neglecting to file suspicious activity reports (SARs) over a three-year period beginning in March 2020.
OTC Link (whose parent company OTC Markets Group last week announced half-year gross revenues of $27.5mn) has agreed to pay a whopping $1.19mn to settle the charges, without admitting or denying the SEC’s findings.
Self-described “critic of inept regulators” Bill Singer was not impressed.
“There are very few forms more valid or potent than SARs,” the Wall Street legal, regulatory and compliance veteran told FTAV. “In the industry, they’re essentially referred to as CYAs, or cover-your-ass docs. And they may well be the single most important regulatory document we have.”
This would make OTC Link’s alleged oversights all the more impressive, Singer added.
The SEC’s order contains a few fun details:
OTC Link failed to surveil, investigate, or file SARs on numerous transactions that it had reason to suspect involved possible fraudulent activity or for which there was no business or apparent lawful purpose. In particular, during the Relevant Period, OTC Link failed to surveil for, recognize and investigate red flags of:
– (a) sell orders from subscribers representing a large volume of trading relative to the average daily trading volume in thinly-traded microcap issuers;
– (b) consistent one-sided trading by a subscriber in a particular thinly traded microcap issuer accompanied by a significant increase in stock price;
– (c) trading activity by subscribers involving apparent pre-arranged securities trading, including wash or cross trades, in thinly-traded microcap securities;
– or (d) transactions involving subscribers who were publicly known to be the subject of criminal, civil or regulatory actions for crime, corruption, or misuse of public funds.
“Broker-dealers are critical gatekeepers to the securities markets and must diligently monitor for suspicious transactions,” said Tejal D. Shah, Associate Regional Director of the SEC’s New York Regional Office. “When firms like OTC Link fail to file SARs, they deprive regulators and law enforcement of important information about suspicious activity.”
The SEC notes that to be held liable for not filing a SAR, broker-dealers like OTC Link — which handles tens of thousands of mostly high-risk microcap and penny stock securities transactions daily — must “know, suspect or have reason to suspect that a transaction looks suspicious”.
Until June 2023, OTC Link’s anti-money laundering surveillance program was basically non-existent, the SEC alleges. It singles out two employees’ apparent laissez-faire approach to monitoring compliance with AML obligations (highlights our own):
“During the Relevant Period, OTC Link’s AML department consisted of its Chief Compliance Officer, who was also designated as the Anti-Money Laundering Compliance Officer (the “AMLCO”), and a junior-level Compliance Associate. OTC Link’s AML Policies specified that the AMLCO was responsible for, among other things, monitoring the firm’s compliance with its AML obligations and for filing SARs. Between at least January 1, 2020 and June 30, 2021, the AMLCO allocated only approximately two hours per month to the oversight of OTC Link’s AML program”.
There’s more on this a few paragraphs on:
“Although OTC Link used automated surveillance to identify other forms of potentially suspicious trading activity conducted through the OTC Link ATS Platforms, it did not allocate sufficient compliance and operations resources to review the vast majority of these alerts generated from its automated surveillance system. 17. Specifically, OTC Link did not devote sufficient resources to review the alerts generated by its automated surveillance system.
For example, between January 1, 2020 and June 30, 2021, OTC Link’s automated surveillance system generated 1,862 alerts averaging 310 alerts per month. The AMLCO and Compliance Associate who were responsible for reviewing the trading alerts and devoted only approximately five hours per month towards this task, and none of these alerts resulted in further AML review or investigation by OTC Link…
For roughly 18 months, New York-based OTC Link received 14 alerts per trading session on average from its automated surveillance system, according to the SEC. Pity the overworked junior compliance officer all you like, but it’s pretty remarkable that not one of these alerts appears to have resulted in further action, Singer told FTAV.
“SARs give [compliance officials] a get out of jail free card — that’s something you get in the board game Monopoly — because these compliance officials are generally immune from being charged by a regulator as long as they timely report things that concern them,” he said.
“For a period of three years, the SEC has alleged that this brokerage firm knew it should have been filing numerous SARs and didn’t. It’s just dangerous.”
In scenarios like these, Singer said, the penalty amounts to “little more than the cost of doing business”.
https://www.ft.com/content/9b9e9b7b-d829-4211-b0af-5610b27ca5a8
