Interactive Brokers Fined Over $38 Million for AML Violations
See something, say something, is a popular slogan encouraging people to act if they observe something inappropriate. For regulated entities it is more than a popular notion. Those entities have a duty to “say something” if they “see something.” They also may have a duty to actually see something. Broker, for example, have a duty to “see something” by having policies and procedures in place to monitor for improper matters – to “see something”—and if they do, there is an obligation to do something which may be to file a suspicious activity report or a SAR. The failure to file such a report may constitute a violation of the federal securities laws This is the point of the Commission’s recently filed action, In the Matter of Interactive Brokers LLC, Adm. Proc. File No. 3-199-7 (August 10, 2020).
Interactive Brokers is a Greenwich, Connecticut Commission registered broker-dealer whose ultimate parent is a public company. The firm acts as a retail and clearing broker. The firm does not engage in proprietary trading.
Many of its customers trade shares of microcap issuers in the over-the-counter market. During a period for one year beginning July 1, 2016, the firm handled about 650,000 transactions per day and was involved with a significant portion of the U.S. microcap securities markets. In 2017 the firm ranked fifth among brokers for deposits of securities valued under $1.00 and fourth for receipt of deposits of securities valued at under $0.01.
Interactive Brokers accepted deposits for about 3,800 microcap securities during the period here. Yet the firm’s business in this area involved only a small number of customers. Ten customers, for example, had net sales of over 4.7 billion shares of U.S. microcap securities involving about $27.6 million.
Personnel at the firm were trained to monitor for “red flags” that might indicate money laundering or terrorists financing activities as part of its AML compliance program. Specifically, those policies and procedures noted that a red flag could be customers who engage in transactions involving certain types of securities for no apparent reason. There was no amplification of this point.
Interactive Brokers failed to investigate or file a SAR in connection with a number of suspicious transactions involving the deposit, sale and withdrawal of funds over a short period of time. The firm failed to investigate 78 such transactions even when they represented a substantial percentage of the daily trading volume for a particular security or the shares had been subject previously to a trading suspension. Yet these transactions involved at least $100,000 was involved.
The firm also ignored other red flags. For example, a sample of 309 issuers found 58 instances where customer sales represented at least 90% of the daily trading volume. In addition, 126 instances were identified where the customer sales constitute at least 70% of the daily trading volume. Interactive Brokers took no action.
Finally, in three instances during the period the broker failed to timely file a SAR where it identified red flags which included the fact that the customers had previously violated the securities or other criminal laws. While the firm did restrict the trading of those customers, no SAR was filed.
The Order concluded that the firm violated Section 17(a) of the Exchange Act and Rule 17a-8 which requires broker-dealers registered with the Commission to comply with the reporting, record-keeping requirements of the Bank Secrecy Act and the related regulations promulgated by the Financial Crimes Enforcement Network or FinCEN.
In resolving the action here Interactive Brokers took certain remedial steps. The firm consented to the entry of a cease and desist order based on the section and rule cited and to a censure. The firm also agreed to pay a civil penalty of $11.5 million. See also In the Matter of: Interactive Brokers LLC, CFTC Docket. 20-25 (August 10, 2020)(Interactive Brokers agreed to pay a penalty of $12 million for AML violations). The firm also agreed to pay $15 million to settle similar charges with FINRA.