FINRA/SEC/CFTC Fine Interactive Brokers $38 Million For Widespread AML Failures

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September 4, 2020
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October 7, 2020

Regulators hit Interactive Brokers with a triple punch for more than $38 million in fines and penalties in relation to ongoing failures of its anti-money laundering (AML) program. For its part, the Financial Industry Regulatory Authority issued $15 million in fines. On top of that, the Security and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) also announced disciplinary actions, fining Interactive Brokers $11.5 million for the same failures.

 

What happened to Interactive Brokers’ AML program?

Growth. Interactive Brokers has been a FINRA member firm since January 1995. It is headquartered in Greenwich, Connecticut. The firm offers online trading through self-directed accounts and also clears transactions for retail and institutional customers, as well as for customers introduced to it by approximately 610 foreign and domestic introducing firms. As of June 2020, Interactive Brokers and its affiliates employed more than 1,600 people, including approximately 327 registered individuals at approximately seven branch offices.

 

From January 2013 through September 2018, Interactive Brokers experienced dramatic growth. It became one of the largest electronic broker-dealers in the United States based on shares traded. It cleared transactions for more foreign financial institutions (FFIs) than any other broker-dealer in the United States, including those from high-risk jurisdictions.   However, despite or because of that growth, Interactive Brokers failed to dedicate the resources necessary to meet its AML obligations. In particular, FINRA determined that the firm fell short in the following areas:

 

  1. Failure to reasonably surveil wire transfers: The firm treated hundreds of millions of dollars of incoming wire transfers as first-party transfers even though those wires did not identify the names of the remitting persons or entities. It also failed to reasonably surveil thousands of third-party transfers to customers located in China, Hong Kong, and Macau; three jurisdictions deemed “high-risk” by domestic and international anti-money laundering agencies. Interactive Brokers also failed to surveil outgoing wire transfers identified as “first-party” transfers (i.e., transfers where the recipient was the customer itself). Instead, the firm accepted customers’ designations that they were first-party wire transfers, even when the firm learned that some purportedly “first-party” wires were, in fact, third-party wires.

 

  • Failure to develop and implement appropriate surveillance tools for securities trading and money movements. The firm used low-tech, not high-tech tools. Interactive Brokers used a blotter report requiring manual review and delivering only summary data that resulted in its failure to identify and flag suspicious activity in trading and money movements by FFIs customers, particularly in high-risk jurisdictions. The report, moreover, had programming errors, or “bugs,” which often resulted in the Interactive Brokers failing to review certain money transfers for potentially suspicious activity. Similarly, Interactive Brokers manually monitored its customers’ deposits and withdrawals of money using spreadsheets that did not automatically identify potentially suspicious activity for further review. Moreover, Interactive Brokers did not employ reasonably designed automated surveillance tools dedicated to identifying insider trading and manipulative microcap securities trading.

 

  • Failure to investigate potentially suspicious activity: Again, Interactive Brokers failed to reasonably investigate potentially suspicious activity because it failed to increase its AML compliance staff and lacked an effective case management system. Analysts could not readily learn information about prior AML investigations concerning the same customers or identify patterns and trends. Because of these failures, Interactive Brokers failed to reasonably investigate numerous instances of suspicious activity that appeared on its surveillance reports, and did not identify that some were Ponzi schemes, market manipulation schemes, and the like.

 

  • Failure to file Suspicious Activity Reports (SARs) after detecting customers’ suspicious activity: In one instance, Interactive Brokers failed to file a SAR even after a customer “contacted [the firm] to state they were scammed by” an introducing broker. Moreover, the firm did not file SARs when it learned about potentially suspicious conduct from regulators or law enforcement agencies because it incorrectly believed that it was not required nor useful to do so.

 

  • Inadequate AML testing: Interactive Brokers’ internal audit group reviewed its AML program but failed to question whether appropriate criteria to generate surveillance reports were applied or whether analysts reasonably reviewed surveillance reports and properly investigated potentially suspicious conduct.

 

Where was Interactive Brokers’ compliance team?

Understaffed and underfunded. And, that’s where Patrina can help. For more than 25 years, Patrina has been helping compliance professionals like you stay on the “straight and narrow” efficiently and cost-effectively. So, let’s talk. Call 212-233-1155 to ask about Patrina’s cost-effective, designated third-party services, our comprehensive, 8-module compliance solution, and compliant data capture, file storage, and records archiving specifically designed for the financial services community. Be smart. Be covered. Let’s talk. 

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