CFTC Enforcement Actions and Decisions of Note: CFTC Begins AML Enforcement

Orrick, Herrington & Sutcliffe LLP

Orrick, Herrington & Sutcliffe LLP

The CFTC recently joined the host of other federal and state regulators who enforce anti-money laundering laws, by bringing three cases finding violations of CFTC Regulation 42.2. Regulation 42.2 requires futures commission merchants (FCMs) and introducing brokers (IBs) to comply with the Bank Secrecy Act (BSA), including by adopting BSA-compliant AML and Know Your Customer (KYC) programs. These cases should serve as a wake-up call to FCMs and IBs, as well as other futures registrants, such as commodity pool operators, commodity trading advisors, swap dealers, major swap participants, and retail foreign exchange dealers, that have certain AML-related reporting obligations under the existing currency transactions reporting regulations, foreign bank and financial account reporting regulations and international transportation of currency or monetary instrument regulations.

On August 10, 2020, in a coordinated resolution with cases brought against the firm by the SEC and FINRA, the CFTC found that Interactive Brokers, a registered FCM, failed to meet its obligations to monitor account activity and file suspicious activity reports (SARs) when appropriate. The CFTC found that these shortfalls caused Interactive Brokers to miss red flags that, if detected and appropriately escalated, would have alerted it to the fact that at least five of its account holders were subject to regulatory and criminal enforcement actions related to fraudulent trading activity.

In September, the CFTC filed and simultaneously settled charges against A&A Trading, Inc., a registered IB, for failing to file a SAR within thirty days of discovering information suggesting that just one of its business partners was engaged in unauthorized trading in customer accounts. The case was based on a single failure to file a SAR, as a follow-on to an action alleging unauthorized trading. The CFTC further found that A&A Trading failed to diligently supervise its employees to ensure that orders accepted from that business partner were authorized by customers.

On October 1, the CFTC filed a complaint against BitMEX, one of the largest cryptocurrency exchanges in the world, accusing executive officers and various BitMEX corporate entities of, among other things, illegally operating the exchange as an unregistered FCM, swap execution facility, and designated contract market, as well as failing to implement a BSA-compliant AML program. The complaint alleges a litany of violative conduct against the defendants, including deleting customer identification information, failing to establish rules to minimize conflicts of interest, failing to ensure that contracts offered on BitMEX are not readily susceptible to manipulation, and failing to report market participants who engage in misconduct. On the same day, the United States Attorney for the Southern District of New York unsealed an indictment charging BitMEX executives with deliberately failing to implement BSA-compliant AML and KYC programs.

These cases are discussed at greater length at Orrick’s Insights.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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