On August 10, 2020, the Securities and Exchange Commission (“SEC”) announced that Interactive Brokers, LLC (“IB” or the “Firm”) had agreed to pay $11.5 million in fines for failure to file Suspicious Activity Reports (“SARs”) in conjunction with trading micro-cap securities on behalf of its clients.
The fine levied against IB by the SEC was in addition to corresponding fines, orders, and actions brought by the Commodity and Futures Trading Commission (“CFTC”) and the Financial Industry Regulatory Authority (“FINRA”). Under those IB agreed to pay separate fines of $11.5 million and $15 million. In total IB will be required to pay fines of $38 million for the SARs violations.
Each of the orders cites IB with failures to meet its requirements to file SARs under the Bank Secrecy Act (“BSA”), the Securities Exchange Act of 1934 (“the Exchange Act”), Regulation 42.2 (“Reg 42.2”), and FINRA Rule 3310 (“Rule 3310”).
Background on the Orders
Each of the orders describes widespread issues with IB’s compliance with its AML requirements to report SARS under the BSA, the Exchange Act, Reg 42.2, and Rule 3310.
The SEC’s order describes how IB failed to properly follow its AML policies and procedures with respect to its supervision of client accounts engaged in manipulative trading practices involving microcap securities, monitoring suspicious activity between client accounts, and documenting and failing to file over 150 SARs reports.
In addition to the failures cited in the SEC’s order, the CFTC’s order describes IB’s failure to allocate adequate resources for monitoring suspicious activities in client accounts and specifically describes a failure on the part of IB to properly monitor suspicious activities in the accounts of one Haena Park, who was the subject of a 2018 enforcement action and who was required to disgorge $23 million in penalties due to engaging in fraudulent activity and misappropriating investor funds. As a result, IB was required to disgorge profits of $706,214 in conjunction with its role as a futures commission merchant (“FCM”) and monitor her account in addition to the fines levied above.
Finally, FINRA’s action outlines similar failures in their order including IB’s failure to monitor hundreds of millions of dollars of its customers’ wire transfers for money laundering concerns, including third-party deposits into customers’ accounts from countries recognized as “high risk” by the U.S. and international AML agencies, and failure to properly investigate suspicious activity as required by its written supervisory procedures and file SARs even after the discovery of suspicious transactions.
What Should I Consider When Evaluating My Firm’s AML Policies and Procedures and SARs Requirements?
When reviewing your AML policies and procedures as a broker-dealer, FCM, or introducing a broker, be sure to consider AML requirements as they are outlined under the Exchange Act, Reg 42.2. and Rule 3310 and consult both FINRA’s AML template for small firms as well as FinCEN’s Guidance on Sharing of Suspicious Activity Reports by Securities Broker-Dealers, Futures Commission Merchants and Introducing Brokers in Commodities (1/20/2006) to determine if you have proper controls in place to report SARs.
Furthermore, broker-dealers, FCMs, and introducing brokers should ensure that proper periodic training is being provided to their employees and that adequate resources have been allotted by each firm to ensure compliance with AML requirements.
While investment advisers do not have specific AML requirements under the Advisers Act, they are still obligated to monitor and report suspicious activities.
Investment advisers should consider monitoring the AML procedures of their broker-dealers and custodians as part of their annual due diligence of service providers and, if the investment adviser is relying on its custodian to perform AML monitoring, investment advisers should consider having the custodian annually certify that it is continuing to monitor for money laundering activities and taking proper steps to report suspicious activities to the authorities. Moreover, investment advisers should also provide training to their employees about how to handle reporting suspicious activities when discovered.
Should your firm have questions regarding how to comply with AML requirements; review and update your AML policies and procedures; and/or, how best to test your AML procedures and perform AML audits, please contact us at (619) 278-0020 to schedule a consultation. Our compliance experts are standing by to help you.