Interactive Brokers to pay $38M for SAR, AML failures

As part of the settlements, announced Monday, Interactive Brokers (IB) will pay an $11.5 million penalty to the Securities and Exchange Commission; $15 million to the Financial Industry Regulatory Authority (FINRA); and $11.5 million to the Commodity Futures Trading Commission (CFTC).

The SEC alleged IB repeatedly failed to file SARs for U.S. microcap securities trades it executed on behalf of its customers. Broker-dealers must file SARs for transactions suspected to involve fraud or a lack of an apparent lawful business purpose.

“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,” said Marc Berger, director of the SEC’s New York Regional Office, in a press release. “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.”

According to the SEC’s order, from at least July 2016 through June 2017, IB “ignored or failed to recognize numerous red flags, failed to properly investigate certain conduct as required by its written supervisory procedures, and ultimately failed to file SARs on suspicious activity.” The order described the following specific compliance weaknesses:

• IB’s AML policies and procedures were not reasonably tailored to the risks of its U.S. microcap securities business;
• Surveillance systems intended to monitor incoming stock transfers, trading activity, and monetary transactions to identify certain AML red flags were not designed to identify many of the suspicious U.S. microcap securities transactions detailed, despite the risks presented by such transactions;
• IB’s compliance function had insufficient resources to adequately review and/or address issues identified by its surveillance systems. For example, just one employee had responsibility to review all hits on the incoming stock transfer report, which included over 3,000 incoming transfers of U.S. microcap securities;
• IB did not maintain a reasonable system for recording the review and disposition of suspicious activity issues identified by the firm’s compliance personnel, failures that “undermined IB’s ability to fulfill its responsibilities to review suspicious transactions in U.S. microcap securities;” and
• IB did not systematically identify or review issues flagged by outside sources, such as through regulatory inquiries or trading suspension alerts.

The SEC’s order found IB violated the financial record-keeping and reporting provisions of the federal securities laws and a related SEC rule. Without admitting or denying the SEC’s findings, IB agreed to be censured, to cease and desist, and to pay the $11.5 million penalty.

CFTC action

In a parallel action, the CFTC charged IB with failing to “diligently supervise its officers,’ employees’, and agents’ handling of several commodity trading accounts and failing to adequately implement procedures to detect and report suspicious transactions.” Brought in connection with the Enforcement Division’s Bank Secrecy Act Task Force, the case is the first CFTC enforcement action charging a violation of Regulation 42.2, which requires registrants to comply with the Bank Secrecy Act.

The CFTC order requires IB to pay a civil monetary penalty of $11.5 million and disgorge $706,214 earned in part from its role as the futures commission merchant (FCM) carrying the accounts of Haena Park and her companies, which were the subject of a December 2018 CFTC enforcement action. In that case, Park and her companies paid more than $23 million in penalties and restitution for committing fraud and misappropriating investor funds. As Park’s FCM, IB failed to properly monitor her account activity, the CFTC said.

Many of the compliance failings described in the CFTC order echo the SEC order. Specifically, according to the CFTC, from June 2014 through November 2018, IB:

• Failed to ensure its employees followed established policies and procedures concerning the supervision of customer accounts;
• Lacked a reasonably designed process for conducting investigations of account activity and making SAR determinations, which contributed to its inability to maintain an adequate AML program;
• Failed to commit adequate resources “to ensure that its AML program was reasonably equipped to monitor, detect, escalate, and report suspicious activity in practice”; and
• Had no mechanism to combine information generated by various reports to identify patterns and trends over time.

“Given the size and nature of Interactive Brokers’ business, the lack of these procedures limited the ability of its analysts to recognize the full scope of an individual customer’s activity,” the CFTC said. “This resulted in the company overlooking red flags that indicated potentially suspicious activity.”

Additionally, IB did not put any procedures in place requiring compliance personnel to document steps taken and decisions made during the investigative and SAR consideration process, according to the CFTC. As a result of these deficiencies, IB failed in its duty to detect and report instances of suspicious activity.

According to the CFTC, IB 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.

FINRA action

As part of its settlement with FINRA, IB must certify that it will implement the recommendations of a third-party consultant to remedy the firm’s AML program failures. The FINRA action reiterates many of the same AML compliance failings as pointed out by the CFTC and SEC, including a lack of compliance resources.

For example, IB “did not reasonably investigate suspicious activity when it found it because it lacked sufficient personnel and a reasonably designed case management system,” FINRA stated. “Even after a compliance manager at the firm warned his supervisor that ‘we are chronically understaffed’ and ‘struggling to review reports in a timely manner,’ it took Interactive Brokers years to materially increase its AML staffing or augment its AML systems.”

FINRA, too, pointed to IB’s failure to establish and implement policies, procedures, and internal controls reasonably designed to cause the reporting of suspicious transactions. “In certain instances, the firm’s AML staff identified suspicious conduct, including manipulative trading and other fraudulent or criminal activity,” FINRA said. But the firm only filed SARs regarding that suspicious conduct after it was prompted to do so by FINRA’s investigation.

As a result of these failures, IB “did not reasonably surveil, detect, and report many instances of suspicious activity that were Ponzi schemes, market manipulation schemes, and other misconduct,” FINRA said.

“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,” stated FINRA Executive Vice President and Head of Enforcement Jessica Hopper. “FINRA will continue to take steps to ensure that firms comply with their obligation to monitor for, detect and report suspicious activity.”