Three US regulators, the Commodity Futures Trading Commission (CFTC), Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have filed and settled charges against Interactive Brokers and fined the firm $38 million, for failing to diligently supervise the handling of customer trading accounts, as well as failing to adequately implement procedures to detect and report suspicious transactions as required under federal anti-money laundering (AML) laws and regulations.
Brought in connection with CFTC’s Division of Enforcement’s Bank Secrecy Act Task Force, this case marks the first Commission enforcement action charging a violation of Regulation 42.2, which requires registrants to comply with the Bank Secrecy Act.
The Order relates to a previous enforcement action by the CFTC in 2018 against Haena Park, Nathan Schleifer and Hyun Joo Hong, along with two additional individuals against whom the Commission has not filed charges to date, in which they were found guilty of defrauding customers and were given a $23 million fine by a US court.
CFTC has fined Interactive Brokers $12.2 million and says its failure to provide sufficient oversight of its employees’ handling of these accounts contributed to its failure to maintain an adequate AML programme and to conduct appropriate customer monitoring.
The Commission adds that as a result, the firm’s employees failed to identify or adequately investigate certain indications of suspicious activity in the accounts at issue that, according to Interactive Brokers’ own compliance procedures and given its knowledge of each customer’s background and trading patterns, should have prompted the filing of Suspicious Activity Reports (SARs) with appropriate authorities. In each matter, Interactive Brokers failed to file a SAR when it had a duty to do so.
In three of the underlying matters, unbeknownst to Interactive Brokers, the account holders used their accounts at Interactive Brokers to defraud investors of millions of dollars, CFTC finds. Moreover, in several of the matters, the firm learned, through responding to a subpoena or other request from a government authority, that the account holder was under investigation by a regulator or law enforcement agency but did not adequately conduct its own investigation to determine whether to file a SAR.
As these failures reflect, CFTC says, while it maintained basic, written policies, Interactive Brokers failed to commit adequate resources to its AML programme and lacked a reasonably designed process for conducting investigations of account activity and making SAR determinations. It also failed to ensure that its officers, employees, and agents followed its established policies and procedures with respect to customer surveillance.
CFTC does note that in the Order, Interactive Brokers represented in its settlement offer that it has since engaged in substantial remedial measures, including the engagement of outside consultants to conduct various assessments, independent testing of its AML program, and the development and ongoing implementation of a new case management system. It has also continued to retain an independent consultant to report on the status of its implementation of previously-made recommendations and to make any additional proposals for improvements in internal controls, policies, procedures, systems, and training.
The SEC has fined the firm $11.5 million for the same offence of not providing SARs in share markets supervised by the agency, while FINRA has levied a $15 million fine for the AML breaches.
“Our regulatory regime requires certain intermediaries to monitor and report suspicious activity. These suspicious activity reports, or SARs, serve as key tools that we, together with our regulatory partners, use to identify fraud, manipulation, and other wrongdoing in our markets – often at the earliest stages,” says CFTC director of enforcement James McDonald. “This case marks the first time the CFTC has charged a violation of Regulation 42.2 and shows our commitment to ensuring these requirements are met.”
Marc Berger, director of SEC’s New York regional office, says, “SAR filings are an essential tool in assisting regulators and law enforcement to detect potential violations of the securities laws, particularly in the microcap space. Today’s multi-agency settlement reflects the seriousness we place on broker-dealers complying with their SAR reporting obligations and maintaining appropriate anti-money laundering controls.”
Meanwhile, Jessica Hopper, FINRA executive vice president and head of enforcement, says, “Today’s action is a reminder that member firms must tailor their AML programs to the firms’ business model and customer base, and also dedicate resources to programs commensurate with their growth and business lines. FINRA will continue to take steps to ensure that firms comply with their obligation to monitor for, detect and report suspicious activity.”