SEC enforcement investigation
Haywood USA Failed to Act on AML Red Flags, SEC Finds
A broker-dealer saw warning signs involving criminal connections, frozen bank accounts, stock promotion and rapid sales of low-priced securities. The SEC found it repeatedly failed to investigate adequately or file required suspicious activity reports.
The transaction that captures the breakdown
Hundreds of millions in shares, tens of millions wired out, and no SAR
Before Haywood USA opened an account for a limited liability company identified as Customer A, its compliance staff already had a dense stack of warning signs.
The SEC said the firm knew that a publicly known convicted criminal had been an original member of Customer A and had created and funded a trust that beneficially owned the company. Compliance personnel also located a news report stating that one trustee had received a law enforcement subpoena concerning work for that individual.
The stated plan was unusually direct: deposit several hundred million dollars in shares of one issuer, then liquidate them immediately. Within a month, Customer A deposited some of the shares, sold all of those deposited shares and wired tens of millions of dollars to the trust’s recently opened United States bank account.
Haywood USA filed no SAR concerning the activity, according to the order. More than a year later, the firm received a criminal subpoena from United States authorities concerning Customer A, the trust, the convicted individual and associated people.
The order does not say the trades or transferred funds were proven illegal. It does establish the SEC’s finding that the information available to Haywood USA required scrutiny under its anti-money-laundering program and that the firm failed to make the required report.
How the safeguard is supposed to work
A SAR is a warning to regulators, not a finding of guilt
Broker-dealers registered with the SEC must comply with the Bank Secrecy Act’s reporting rules. When a transaction or pattern involves at least $5,000 and the broker knows, suspects or has reason to suspect specified forms of suspicious activity, it must file a SAR with the Treasury Department’s Financial Crimes Enforcement Network.
Covered warning signs can include funds connected to illegal activity, attempts to disguise assets, efforts to evade reporting requirements, transactions with no apparent lawful purpose, or use of a broker to facilitate criminal activity. The obligation applies to transactions conducted or attempted through the firm.
The SEC found breakdowns at multiple points
- Haywood USA failed to identify or investigate some account-opening red flags adequately.
- Some high-risk accounts were not placed into the heightened monitoring required by the firm’s policies.
- Other accounts were designated high risk but were not actually monitored for suspicious activity.
- Registered representatives did not receive adequate training on the SAR rule, contrary to the firm’s policies.
Four accounts, recurring patterns
The red flags changed. The reporting failure did not.
The SEC’s examples span alleged criminal connections, asset transfers during a fraud investigation, questionable business identities and low-priced-stock activity. The order says Haywood USA filed no SARs for the following activity.
A trust tied to a convicted individual
- Customer A had reportedly struggled to open an account at another United States broker.
- A convicted individual had been an original member of the company and had created and funded its beneficial-owner trust.
- The account liquidated deposited shares and sent tens of millions of dollars to the trust’s recently opened bank account.
- Haywood USA later received a criminal subpoena concerning the customer and associated parties.
A new structure formed during a fraud investigation
- The beneficial trust was established for the minor children of a foreign national whose bank accounts had been frozen during a fraud investigation.
- The company and trust were created within nine days amid transfers from the individual to a relative and then to the trust.
- Haywood USA put the account on a special high-risk spreadsheet but did not monitor it as required.
- The foreign national was arrested within days of the account opening.
An account created to sell one company’s shares
- Customer C said it would sell Company Z shares and then close the account.
- Another broker had not allowed the customer to sell its remaining shares.
- The newly formed company initially lacked verifiable contact information and had no internet presence.
- The shares were sold immediately, proceeds went to a newly opened external brokerage account within seven days, and the Haywood account closed four days later.
A promoter sold more than 80% of one day’s volume
- The customer opened an account using an unverifiable tax identification number.
- Haywood USA knew the customer was contracted to promote Company Y, a low-priced security.
- During the campaign, the customer deposited more than 800,000 Company Y shares.
- Four days later, it sold all the shares and wired out the proceeds. The sale exceeded 80% of that day’s trading volume.
Rejected business still carried an obligation
Declining an account did not erase the red flags
Haywood USA sometimes saw enough risk to refuse an account but still failed to make the report required by its policies, the SEC found. That matters because the SAR rule covers certain attempted transactions, not only completed trades.
A plan to liquidate more than 60 million shares
Customer E planned to deposit and sell more than 60 million shares of a low-priced security issued by Company X. The customer owned nearly half of the outstanding shares, and its position far exceeded the stock’s average daily trading volume. Haywood USA did not open the account and did not file a SAR.
Location, disciplinary and association warnings
The former registered representative sought to liquidate tens of thousands of dollars in low-priced shares. Haywood USA detected that the applicant appeared to be outside the United States despite providing United States addresses, and it noted disciplinary history and involvement with a person convicted of investment fraud. The firm declined the account but did not file a SAR.
What the record establishes, and what it does not
The proven failure was the loss of required financial intelligence
SARs give FinCEN and law enforcement standardized information about financial activity that may warrant further scrutiny. They do not prove a crime. A broker’s role is to investigate warning signs and report when the regulatory standard is met, rather than decide whether prosecutors could prove an offense.
Haywood USA’s failure meant required reports were not filed when the SEC found they were warranted. The order does not say whether earlier reports would have changed an investigation, prevented a transaction or produced a different result. It also does not identify investor losses, victims or a total dollar value for all unreported activity.
The documented institutional harm is narrower but significant: a regulated broker had written controls designed to identify suspicious activity, yet the SEC found those controls repeatedly failed in practice.
The settlement
A censure, a cease-and-desist order and a $750,000 penalty
The SEC found that Haywood USA willfully violated Section 17(a) of the Securities Exchange Act and Rule 17a-8. In this context, the order explains, willfully means the firm knew what it was doing. It does not require proof that the firm knew its conduct violated the law.
Haywood USA consented to the order without admitting the findings, apart from the SEC’s jurisdiction and the subject matter of the proceeding.
$750,000 penalty
The civil money penalty was due within 14 days and is designated for transfer to the United States Treasury’s general fund.
Formal censure
The order censures Haywood USA, an SEC-registered broker-dealer since 1997.
Cease and desist
The firm was ordered to stop committing or causing current and future violations of the cited recordkeeping and reporting rules.
Changes credited by the SEC
In accepting the settlement, the Commission considered remedial steps taken by Haywood USA. The firm revised its AML policies and procedures, increased compliance staffing, retained a third-party consultant to improve annual reviews and testing, and introduced new supervision and review protocols.
The order does not provide performance results showing how those controls have operated over time.
The larger lesson
Compliance on paper could not compensate for inaction
Haywood USA’s policies already required staff to review red flags, investigate them and determine whether a SAR was necessary. The examples in the SEC order did not depend on subtle signals available only in hindsight. They included a convicted criminal’s connections, frozen accounts, a fraud investigation, unverifiable identity information, stock promotion and plans to liquidate large blocks of low-priced shares rapidly.
The firm’s controls sometimes recognized those risks. An account could land on a high-risk spreadsheet or be rejected entirely. Yet the required reporting still did not happen. That gap between detecting danger and completing the compliance task is the central finding of the case.
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