Interactive Brokers fined $38M by 3 regulators for compliance lapses

The U.S. Securities and Exchange Commission (SEC) headquarters stands in Washington, D.C., U.S., on Wednesday, Oct. 26, 2011. The SEC approved a rule requiring hedge funds and private-equity funds to reveal internal information to U.S. regulators. Photographer: Andrew Harrer/Bloomberg
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Interactive Brokers will pay $38 million to three regulators for allegedly failing to detect fraudulent transactions by customers that cost more than 50 investors millions of dollars in losses.

Regulators took the firm to task for multiple alleged shortcomings in its compliance systems, missing “numerous red flags,” according to the SEC.

For instance, the agency says that over a one-year period Interactive Brokers failed to file more than 150 suspicious activity reports to flag potential manipulation of microcap securities in its customers’ accounts.

FINRA says the firm did not reasonably surveil hundreds of millions of dollars of its customers’ wire transfers for money laundering concerns, including deposits into customers’ accounts from countries deemed as “high risk” by the U.S.

And the Commodity Futures Trading Commission points to several instances in which, unbeknownst to Interactive Brokers, account holders used their accounts as part of fraud schemes. The agency says Interactive Brokers failed to identify and adequately flag suspicious activity in the accounts.

“In each matter, Interactive Brokers failed to file a [suspicious activity report] when it had a duty to do so,” the CFTC said in its order.

Interactive Brokers is one of the country’s largest electronic trading platforms by number of trades. As the firm experienced “dramatic growth” between January 2013 and September 2018, it “failed to dedicate the resources necessary to meet its [anti-money laundering] obligations,” FINRA said.

“Today’s multi-agency settlement reflects the seriousness we place on broker-dealers complying with their [suspicious activity report] reporting obligations and maintaining appropriate anti-money laundering controls,” Marc Berger, director of the SEC’s New York Regional Office, said in a statement.

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FINRA fined Interactive Brokers $15 million. The SEC and the CFTC each separately fined the firm $11.5 million. The penalties covered a host of lapses in the Bank Secrecy Act. Interactive Brokers also agreed to pay more than $706,000 in disgorgement to clients harmed by its failures in oversight, according to the CFTC.

The agency also said the case marks its first enforcement action charging a violation of Regulation 42.2, which requires registrants to comply with the Bank Secrecy Act.

Interactive Brokers agreed to pay the penalties and settle the cases brought against it, without admitting to any wrongdoing.

In a statement, the firm said it is continuously making enhancements to its compliance programs. “We cooperated fully with our regulators in these inquiries and the significant steps that we have taken to expand and enhance our program were taken into account in today’s settlements,” it said.

One of the former Interactive Brokers clients cited by the regulators, Haena Park, was convicted in 2017 of defrauding family members and former Harvard University classmates out of $23 million. Park, a psychology major at Harvard, ran commodity pools through Phaetra Capital Management and Argenta Group.

During the six years she ran her fraud, she was “repeating to myself constantly that, ‘I’ll turn the losses into gains and pay these people back,’ ” Reuters reported at the time.

Interactive Brokers served as Park’s futures commission merchant, the CFTC said. Most of her losses came in highly leveraged futures and foreign exchange transactions. She was sentenced to three years in prison.

While Interactive Brokers maintained basic written policies, it did not devote resources to monitor, detect, escalate and report suspicious activity, according to the CFTC.

“Interactive Brokers also had no mechanism to combine information generated by various reports to identify patterns and trends over time,” according to the commission. “Given the size and nature of Interactive Brokers’ business, the lack of these procedures limited the ability of its analysts to recognize the full scope of an individual customer’s activity. This resulted in the company overlooking red flags.”

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Securities fraud Financial crimes SEC enforcement SEC FINRA Penalties and fines Interactive Brokers