The SEC announced on Monday that Interactive Brokers has been ordered to pay $38 million in penalties to settle charges it repeatedly failed to file Suspicious Activity Reports for U.S. microcap securities trades it executed on behalf of its customers.
The firm has settled with the SEC for $11.5 million, with Finra for $15 million and with the Commodity Futures Trading Commission for $11.5 million, according to the SEC.
The SEC notes that broker-dealers are required to file SARs for transactions suspected to involve fraud or a lack of an apparent lawful business purpose.
Over a one-year period, Interactive Brokers failed to file more than 150 SARs to flag potential manipulation of microcap securities in its customers’ account, according to the SEC. Some of the trading accounted for a significant portion of the daily volume in certain of the microcap issuers, the SEC says.
The SEC says Interactive Brokers failed to recognize red flags concerning these transactions, failed to properly investigate suspicious activity as required by its written supervisory procedures, and failed to file SARs in a timely fashion even when suspicious transactions were flagged by compliance personnel.
“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,” Marc Berger, director of the SEC’s New York Regional Office, says in a statement. “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.”
Failure despite growth and resources
Finra notes that 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, and it cleared transactions for more foreign financial institutions than any other broker-dealer in the United States.”
However, despite that growth, Interactive Brokers failed to dedicate the resources necessary to meet its AML obligations, Finra says.
“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,” Jessica Hopper, Finra’s head of the Department of Enforcement, says in a statement. “Finra will continue to take steps to ensure that firms comply with their obligation to monitor for, detect and report suspicious activity.”
Finra adds: “As a result of these failures, Interactive Brokers did not reasonably surveil, detect, and report many instances of suspicious activity that were Ponzi schemes, market manipulation schemes, and other misconduct.”
This originally ran as a breaking news article on Aug. 10, 2020.
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