New York Securities Fraud Lawyers Blog
Every year, millions of elderly Americans fall victim to financial fraud due to their banks’ and brokerage firms’ failure to implement appropriate supervision over their client’s accounts and by their staff that are largely licensed. In 2023, there was a 14% increase in elder financial fraud complaints, with over $3.4 billion dollars in associated losses. The growing number of elder financial fraud cases calls on banks and other financial institutions to protect their consumers and increase the level of scrutiny on elder accounts.
Elder financial fraud is an act of deceit that specifically targets the funds, assets, and property of older adults. The frauds can take many forms, most commonly in investment scams, tech support scams, business email compromise scams, confidence/romance scams, and government impersonation scams.
Anti-Money Laundering (AML) measures play a vital role in hindering elder financial fraud because it equips financial institutions with the necessary tools to detect and prevent suspicious activities targeting older individuals. Financial Industry Regulatory Authority (FINRA) Rule 3310 requires that members develop and implement “a written anti-money laundering program reasonably designed to achieve and monitor the member’s compliance with the Bank Secrecy Act” and the implementation regulations issued by the Department of the Treasury. The AML programs must be able to reasonably detect and report suspicious transactions, comply with the Bank Secrecy Act, provide ongoing training for appropriate personnel, and include risk-based procedures for conducting customer due diligence. FINRA Rule 3310 establishes a comprehensive framework for brokerage firms to implement and closely manage to reduce older adults falling victim to financial fraud.
The Bank Secrecy Act (BSA), works to counteract money laundering of criminal enterprises through financial institutions by requiring the financial institutions to “keep records of cash purchases of negotiable instruments, file reports of cash transactions exceeding $10,000 (daily aggregate amount), and to report suspicious activity.” The financial institution must report suspicious activity that might signify money laundering, tax evasion, or other criminal activities through a report known as a suspicious activity report (SAR). The SAR is then used to alert government regulators and law enforcement of irregular activity and possible criminal activity. BSA can help mitigate elder financial fraud through mechanisms like SAR, giving financial institutions a standardized methodology to report suspicious activity they see in the older adults account.
Regulation Best Interest (Reg BI) requires broker-dealers to act in the best interest of their clients when recommending specific investments. Through this standard, the Securities and Exchange Commission (SEC) requires broker-dealers to recommend securities only if they are in their customers’ best interest, with the disclosure of any potential conflicts of interest and financial incentives. Requiring the disclosure of potential conflicts of interests to older clients reduces the likelihood of exploitation where brokers may push high-risk investment strategies that benefit the broker at the expense of the client.
There are many regulations in place, yet the supervisory procedures designed to enforce these regulations and actual implement them within financial institutions continues to fail to protect elderly investors that have spent their entire lives saving for their retirement. Typically, such procedures fail at the staff training and inter-department communications. For example, although the BSA works towards fighting financial fraud, financial institutions complain that “the burdens of collecting, producing, and maintaining the huge volume of data required by the BSA are weighing down financial institutions and law enforcement across the United States,” instead of hiring more staff to address those important issues.
Some instances of elder fraud have even stemmed from registered representatives that target elder clients, showing a clear lack of oversight on behalf of the supervising financial institution. Helen Caldwell, former Citi Vice President and barred broker, defrauded three elderly clients by soliciting them to invest in her own film production venture. Investment frauds, a common form of elder financial fraud, involve complex financial crimes, characterized to the client as low-risk investments with guaranteed returns. In 2023, there was a reported loss of over $1.2 billion to investment scams of individuals over the age of 60 years old. Helen Caldwell claimed that the investments were being allocated towards movie production and the profits of the venture would be shared with her client investors. Instead, it has been reported that she transferred hundreds of thousands of dollars of her victims’ film venture investments from the venture bank accounts into her own bank accounts to pay off parking tickets, book Airbnb rentals, repaint her home, and buy clothes for her own benefit. Caldwell apparently knew that her clients trusted her and used that to their detriment, scamming them of their life savings totaling $1.5 million. It is reported that she was reported by Citi to the Department of Aging’s Adult Protective Services division in March 2022. However, the scheme commenced in 2014, meaning, the report was eight years after the scheme had started and $1.5 million in fraud had already been committed. This seems to show a clear lack of oversight by Citi.
In addition to failing to hinder Caldwell’s investment scam, Citi and Wells Fargo apparently were unaware of her outside business activities, seemingly showing yet another clear lack of oversight on behalf of the financial institutions. Outside Business Activities (OBA) are businesses operated by registered representatives that are outside the scope of their primary employment at their member firm. Under FINRA Rule 3270, registered representatives are not permitted to partake in outside business activities unless they provide prior written notice to the member, in such form specified by the member. Upon notice, the member must consider whether the OBA will interfere with the registered person’s responsibilities to the member or its customers, or be viewed as part of the member’s business by the customers. In Caldwell’s FINRA disciplinary action, Citi disclosed that “its internal review had concluded that Caldwell did not adequately disclose her OBA and was soliciting firm clients to invest in her OBA, several of whom subsequently made investments.” Wells Fargo disclosed that “Caldwell had been discharged following an internal review concerning the accuracy of disclosures she made to the firm and her compliance with its Outside Activities and Outside Investment Policy.” The financial institutions should have had preventative measures in place to discover Caldwell’s noncompliance with OBA and prevented clients of the member firm investing in an employee’s OBA. The financial institutions’ failure to detect Caldwell’s outside business activities and prevent loss to clients seems to demonstrate their inadequate oversight.
The above story is merely just one example of elder financial fraud, with over 101,000 instances of elder financial fraud reported in 2023. The continuously growing volume of elder fraud cases and associated financial damage highlight the urgency for more comprehensive oversight within financial institutions to adequately protect elder individuals from being defrauded.
Anti-Money Laundering policies, the Bank Secrecy Act, and Regulation Best Interest are all measures that work towards mitigating elder financial fraud. Due to their significance, financial institutions are urged to strengthen the integration of these regulations into their implementation processes.
Contributions by Claire Sterin, New York Law School Securities Arbitration Seminar and Field Placement Extern.