Law360 (May 20, 2020, 5:13 PM EDT) --
Regulators across the country have taken notice and are taking aggressive action. The attorney general has directed federal law enforcement to work with local law enforcement to identify and punish crime related to the pandemic. The U.S. Securities and Exchange Commission has opened investigations and suspended trading in numerous companies suspected of being involved in pump-and-dump schemes. State agencies have followed suit issuing cease-and-desist letters and other enforcement actions.
As always, regulatory efforts focus on crimes against the elderly because they are particularly vulnerable. Compared to the general population, the elderly hold a high concentration of wealth; so, they are valuable targets. In addition, the elderly are more likely to suffer from conditions — such as isolation, cognitive decline, physical disabilities, fear or bereavement — that can make them more vulnerable to manipulation. Moreover, the loss of a life's savings is much harder to bear when the victim is no longer capable of working.
Securities dealers and investment advisers are an important part of these efforts. Federal law has long required dealers and investment advisers to file Suspicious Activity Reports if they suspect fraudulent activity involving a client — either as a victim or a perpetrator.
To that end, the U.S. Department of the Treasury's Financial Crimes Enforcement Network in 2011 advised covered institutions to report suspected instances of financial exploitation of the elderly on suspicious activity reports, or SARs. FinCEN and the Consumer Financial Protection Bureau provided further guidance in 2017, instructing institutions to report suspected instances of elder financial abuse to law enforcement, via SARs, and local adult protective services agencies.
In addition to the federal requirements, a number of states have adopted the North American Securities Administrators Association's Model Act to Protect Vulnerable Adults from Financial Exploitation. Generally, the Model Act requires employees of investment advisers and broker dealers to notify both the state's adult protective services department and the state's securities regulator if they reasonably believe that an elderly or disabled person is being exploited. It also authorizes but does not require the broker dealer or adviser to place a temporary hold on a suspicious transfer.
Many states, such as Texas, have gone further to impose requirements not just on the employee but also on the firm. Under Texas law (article 45 of the Texas Securities Act), broker dealers and investment advisers are required to have programs in place to: identify exploitive transactions; investigate suspicious transactions identified by employees; and report to the state within five business days.
In addition, firms are required to hold suspected transactions at the request of the state Securities Commissioner, adult protective services or law enforcement agencies.
According to the CFPB's 2019 report, less than one-third of elder financial exploitation SARs submitted by financial institutions and only 1% of those submitted by money service businesses indicate that the activity was also reported to state adult protective services and law enforcement agencies.
Robust reporting to state authorities is an integral part of the regulatory response to elder financial exploitation. Failure to report to APS and other state authorities is not only a missed opportunity to strengthen prevention and response, but may also expose the SAR filer to liability for failing to fully satisfy its state law obligations.
As we move into a period of increasing fraud, it may be helpful to review some of the red flags of elder abuse previously identified by FinCEN and the U.S. Department of Justice. These red flags include:
- Frequent, large withdrawals;
- Sudden nonsufficient fund activity;
- Uncharacteristic attempts to wire large sums of money;
- Closing of accounts without regard to penalties or losses;
- A new caretaker, relative or friend's sudden control over financial transactions on behalf of the elder without proper documentation;
- A caregiver or other individual's excessive interest in the elder's finances or assets, preventing the elder to speak for himself, or reluctance to leave the elder's side during conversations;
- Sudden changes in the elderly individual's financial management, such as through a change of power of attorney, signature card or will to a new individual;
- The financial institution's inability to speak directly with the elder, despite repeated attempts to contact him or her;
- The elderly customer's lack of knowledge about his or her financial status, or shows a sudden reluctance to discuss financial matters; or
- Discovery of a forged signature for financial transactions or for the titles of the elder's possessions.
This list is merely examples. Regulators have identified numerous others. At base, financial institutions should be on the lookout for changes in their customers' behavior that suggest that something may not be right.
A word of caution: The pandemic has significantly disrupted peoples' lives. Many are liquidating investments because they need cash to pay bills or because they find the current market to be too risky for their comfort. Not only should firms be careful not to disrupt these appropriate transactions, they should also be aware that these sorts of changes across numerous accounts can make it harder to detect suspicious transactions.
Michael Napoli is a partner at Akerman LLP.
The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.
 The following states have adopted the Model Act: Alabama (2016); Alaska (2018), Arizona (2019), Arkansas (2017), California (2019), Colorado (2017), Delaware (2018), Florida (2020), Indiana (2017), Kentucky (2018), Louisiana (2016), Maine (2019), Maryland (2017), Minnesota (2018), Mississippi (2017), Montana (2017), New Hampshire (2019), New Jersey (2020), New Mexico (2017), North Dakota (2017), Oregon (2017), Tennessee (2017), Texas (2017), Utah (2018), Vermont (2016), Virginia (2019), West Virginia (2020). Securities professionals in West Virginia and New Jersey should take extra care as the Model Act became effective in their states earlier this year.
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