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Catch of the Week: Interactive Brokers Pays $38 Million for Failures in Money-Laundering and Supervision

Posted  August 14, 2020

Brokerage firm Interactive Brokers LLC will pay $38 million in penalties to settle charges from multiple U.S. market regulators regarding its anti-money laundering practices, including alleged failures to file suspicious activity reports (SARs).  The discount broker has paid an $11.5 million penalty to settle charges with the Securities and Exchange Commission over the deficiencies in its internal controls that failed to spot suspicious trades involving microcap stocks, known as penny stocks. In parallel actions, the Commodity Futures Trading Commission (CFTC) and the Financial Industry Regulatory Authority (FINRA) hit Interactive Brokers with penalties of $11.5 million and $15 million, respectively.

The regulators’ orders describe weaknesses in IB’s systems to supervise trading accounts, as well as the failure to file SARs and enforce anti-money laundering controls that have been in place for years.

Settlements with SEC, CFTC, and FINRA

According to the SEC’s order, which focused on a one-year period ending in the middle of 2017, IB failed to file more than 150 SARs flagging potential manipulation of microcap securities. That trading accounted for a significant portion of the daily volume in certain U.S. microcap issuers , the SEC said.  In addition, the SEC found that IB failed to properly investigate suspicious activity, as its supervisory procedures required, and failed to file SARs in a timely fashion, even when compliance personnel flagged suspicious transactions.

The CFTC’s action, which focused on June 2014 to November 2018, pertained to IB’s failures to maintain an adequate anti-money-laundering program, required under the Bank Secrecy Act, and ensure its employees supervised customer accounts. As to the money-laundering charges, the CFTC’s action is the first to allege a violation of a regulation requiring futures commission merchants registered with the CFTC to comply with the Bank Secrecy Act. And as to the customer-supervision allegations, and separate from the $11.5 million penalty, IB agreed to return $706,214 in earnings from fraudulent transactions associated with Haena Park, who was charged and later sentenced to three years in prison and ordered to pay $23 million after pleading guilty to defrauding investors. IB allowed Park and her companies to trade in highly leveraged futures and FX transactions, ignoring numerous instances when the trading activity should have triggered IB to file SARs. At the time, Park touted herself as an experienced trader who had generated annual returns of as high as 50 percent; in fact, Park’s was consistently unsuccessful, losing $19.5 million of the $20 million she traded.

FINRA’s action focused on the period from January 2013 to September 2018, when IB became one of the largest electronic broker-dealers in the U.S. based on shares traded, clearing more transactions for foreign financial institutions than any other dealer. FINRA alleged that IB ignored warnings of suspicious activity when it found it. IB allegedly lacked sufficient compliance personnel.  IB ignored warnings from its compliance professionals that they were “chronically understaffed” and “struggling to review reports in a timely manner,” waiting years to meaningfully increase staffing or enhance its anti-money-laundering safeguards.

SEC and CFTC Enforcement of AML and BSA Violations

The regulators’ coordinated enforcement actions against IB reflects their continued interest in ensuring broker-dealer compliance with Bank Secrecy Act requirements.  While some accused fraudsters have challenged the authority of regulators like the SEC to pursue violations of the Bank Secrecy Act (largely unsuccessfully, so far), wrongdoers in the broker-dealer community would do well to assume the SEC or CFTC may soon come calling.  When it comes to the Bank Secrecy Act, regulators are watching, and the hits keep piling up.

If you know of misconduct related to the Bank Secrecy Act or other securities laws, you may be eligible for a whistleblower award.

These kinds of schemes can be difficult for regulators to detect without information from insiders or others with non-public knowledge of wrongdoing.  Depending on the facts, a whistleblower may be eligible for an award under a variety of whistleblower reward programs.  These include the SEC Whistleblower Reward Program and the CFTC Whistleblower Reward Program.  Under these programs, eligible whistleblowers can get an award of 10 percent to 30 percent of the monetary sanctions the government collects in enforcement actions brought or aided by a whistleblower’s information.




Tagged in: Catch of the Week, CFTC Whistleblower Reward Program, Financial and Investment Fraud, Financial Institution Fraud, Importance of Whistleblowers, Money Laundering, Regulatory Violations, SEC Whistleblower Reward Program,