The SEC Whistleblower Program & Foreign Corrupt Practices Act
The SEC Whistleblower Program provides monetary incentives for individuals to come forward and report possible violations of the federal securities laws to the SEC. The SEC Whistleblower Program also incorporates violations of the Foreign Corrupt Practices Act (“FCPA”) as reportable misconduct to the SEC.
The reason the SEC enforces violations of the FCPA in addition to securities laws is because, at its simplest, the FCPA prohibits two things: (1) bribery of foreign officials in return for business; and (2) failure to maintain adequate books and records.
In essence, the FCPA prohibits bribing foreign officials, but requires a company that does bribe to include those bribes in its financial records. Thus, it makes sense that the SEC would be able to prosecute violations of the FCPA because it also involves misleading financial statements and the failure to maintain adequate books and records.
Despite being able to prosecute under the Foreign Corrupt Practices Act in addition to federal securities laws, the SEC, through the Whistleblower Program or otherwise, does not have the direct authority to enforce any other laws.
Anti-Money Laundering & Whistleblower Complaints
Scrutiny of HSBC and other U.S. banks regarding their compliance with U.S. Anti-Money Laundering (“AML”) laws begs the question – will the SEC accept and act on a whistleblower complaint regarding violations of U.S. AML laws, including The Bank Secrecy Act of 1970, The Trading with the Enemy Act (“TWEA”), and The International Emergency Economic Powers Act (“IEEPA”)?
The simple answer is “no.” AML laws are not per se federal securities laws, and thus the SEC does not have authority to prosecute for violations of them. However, through a roundabout way, the SEC can, in certain instances, enforce certain provisions of the Bank Secrecy Act.
The Bank Secrecy Act & Anti-Money Laundering
The Bank Secrecy Act is amended by Title III of the PATRIOT Act, titled “International Money Laundering Abatement and Financial Anti-Terrorism Act of 2001,” which is intended to facilitate the prevention, detection, and prosecution of international money laundering and the financing of terrorism.
Section 17(a) of the Securities Exchange Act of 1934 and Rule 17a-8 require a broker-dealer (and other securities institutions like exchanges, advisors, and transfer agents) to comply with certain record-keeping requirements under the Bank Secrecy Act, as amended by the PATRIOT Act.
Thus, a broker-dealer or similar securities industry institution can be prosecuted by the SEC under Section 17(a) for failures in record keeping related to money laundering, which violates the anti-money laundering provisions of the BSA, as amended by the PATRIOT Act.
The SEC Has Prosecuted Broker-Dealers for Failing to Follow Money Laundering Policies
Under Section 17a, the SEC has prosecuted (1) Pinnacle Capital Markets, a North Carolina based broker-dealer, for failing to follow its established money laundering policies and procedures for its customer identification program, and (2) Crowell Weedon, a Los Angeles broker-dealer, for failing to properly verify the identities of customers who opened 2,900 new accounts.
The SEC Cannot Prosecute Under the PATRIOT Act
While companies themselves that violate the BSA, as amended by the PATRIOT Act cannot be prosecuted by the SEC under Section 17(a) for failures in record keeping related to money laundering because they are not broker-dealers or similar securities industry institutions, the SEC, acting on a formal whistleblower provision or otherwise, may be able to prosecute such companies for failure to maintain proper internal controls, maintaining inaccurate books and records, omissions and misrepresentations regarding its illegal conduct, and possibly for false financial statements that were made false and misleading by the illegal conduct.
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