ANALYSIS: Interactive Brokers Sends AML Warnings New and Old
02 Sep 2020

Amid the current focus on pandemic-related issues in the financial industry and by its regulators, the SEC, CFTC, and FINRA announced a groundbreaking AML enforcement action against Interactive Brokers LLC (IB) on Aug. 10. This case is a first in several ways: the first CFTC enforcement action to charge a violation of its rule requiring registrants to comply with the Bank Secrecy Act (BSA); the first joint AML enforcement action by the SEC, CFTC, and FINRA; and the largest fine to date in an AML enforcement action involving the securities and futures industries, with monetary penalties totaling $38 million.

Beyond these novel developments, the IB case presents a familiar litany of failures to commit adequate resources to AML compliance, coupled with inadequate controls and a lack of strong management support. The consequences for such failures should be obvious to all financial institutions after years of AML enforcement actions with multi-million dollar penalties, but some firms continue to fail to heed this basic lesson. The IB enforcement action is a renewed warning to remember it. 

The Securities and Futures AML Enforcement Context

AML compliance is a perennial examination favorite for the SEC and FINRA, and each agency has concluded numerous AML enforcement actions against securities firms. In recent years, the SEC and FINRA have been more aggressive in handing down hefty fines. Another recent trend has been for the SEC and FINRA to conduct joint AML enforcement actions in significant cases. 

CFTC enforcement of AML compliance by futures firms has not followed these trends until recently. The CFTC did not fine a futures firm for AML compliance 

failures until 2019. The action, penalizing 1pool Ltd. and Patrick Brunner, was limited to findings of Customer Identification Program failures and a civil money penalty of $175,000.

The three-part joint action against IB by the SEC, the CFTC, and FINRA may set a new trend.

The $38 million in total monetary penalties—$11.5 million each from the SEC and the CFTC, $15 million from FINRA—establishes a new high for AML enforcement actions against securities or futures firms. For the first time, the CFTC has charged a violation of its rule requiring compliance with the BSA and assessed monetary penalties in the millions of dollars for a BSA violation. These new developments have occurred in a joint AML enforcement action with the SEC and FINRA, also a first for the CFTC. The regulators of the securities and futures trading industries appear to be harmonizing their approaches to AML compliance enforcement, while also escalating the potential penalties. 

Lessons of the Interactive Brokers Case

In the IB enforcement action, the SEC, CFTC, and FINRA sent clear messages in unison on common misunderstandings and AML compliance failures that firms should avoid.

No gaps exist in AML enforcement. AML compliance is essential throughout the securities and futures industries, and each agency will impose significant penalties for compliance failures by firms under its authority. Any impression, based on past enforcement history, that an agency is less concerned with AML compliance and enforcement is mistaken.

Risk assessment must change as business changes. Firms must periodically re-assess their AML risks as their businesses change. IB experienced dramatic growth in both the volume of its business and the number of high-risk countries among the domiciles of its clients, but did not reassess its money laundering risk profile, according to the enforcement action. This alleged failure was a key factor contributing to its AML compliance deficiencies.

By Robert Kim and Patty Tehrani, Bloomberg Law, 1 September 2020

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