Broker Is the First Charged Under Money-Laundering ‘Red Flag’ Law

By Erik Larson and Bob Van Voris

Federal prosecutors in Manhattan filed the first criminal charge against a U.S. broker-dealer under a decades-old anti-money-laundering law, accusing a small Kansas firm of ignoring “red flags” about a shady payday lender.

Central States Capital Markets failed to file a suspicious-activity report related to former customer Scott Tucker, who’s serving a 16-year sentence for using Native American tribal entities to hide a massive payday-lending scheme, prosecutors in New York said Wednesday. The 1970 Bank Secrecy Act requires financial institutions to assist in detecting and preventing money laundering, such as reporting cash transactions above $10,000. A 1992 amendment required the suspicious-activity reports.

Central States, based in Prairie Village, Kansas, agreed to forfeit $400,000 and enhance its bank-secrecy and anti-money-laundering compliance program, prosecutors said. The suit stems from the company’s “willful failure” to alert authorities to Tucker’s behavior, even after the firm’s chief executive officer was tipped off to major elements of the scheme by Tucker himself.

Under the agreement, overseen by U.S. District Judge J. Paul Oetken, the case against Central States will be deferred for two years and then dismissed.

The 25-person firm failed to follow its own procedures for dealing with suspicious activities when it opened investment accounts for Native American tribal entities that Tucker was using to mask his illegal operation, the government said.

“CSCM’s anti-money-laundering program was operated with serious gaps in oversight, responsiveness and diligence,” U.S. Attorney Geoffrey Berman said in a statement. “As a result, CSCM failed to investigate and report suspicious transactions relating to a historically significant pay-day lending fraud.”

The company, in an emailed statement, said it was pleased to have resolved the case and that it “accepts full responsibility for the past deficiencies” in its anti-money-laundering program. The firm said it will hire a full-time chief compliance officer, step up training and hire a consultant to conduct annual reviews.

In October 2017, Tucker and his lawyer, Timothy Muir, were convicted after a trial in federal court in Manhattan for their roles in a “massive payday lending scheme” that targeted people across the U.S. with short-term, unsecured loans with interest rates as high as 700 percent, the U.S. said.

According to prosecutors, Tucker attempted to get around the numerous state usury laws he violated by entering into sham relationships with tribal entities to mask his control of the company and gain the protection of their tribal sovereign immunity. In 2012, he even alerted the chief executive officer of Central States of his plan for the tribal entities, but the company ignored the red flag, the U.S. said.

“Numerous suspicious transactions went undetected and unreported by CSCM,” the government said